In three days, on 5th April, one of the most radical pieces of tax legislation will come into effect, the loan charge power. The law was passed in the Finance Act (No.2) Act 2017, but was delayed to come into effect until this year to give individuals time to come forward and arrange a settlement with HMRC.
To date 25,500 individuals have come forward, but there remains some 24,500 who are affected, but have done nothing. HMRC estimates that it could recoup £3.2 billion in lost taxation through this legislation.
In January, Britain’s public finances hit their ‘largest January budget surplus on record’ smashing City Expectations. January is always a ‘bumper month’ for the Exchequer because of the deadline for payment of self-assessed tax. Even so, the increase in the surplus from £9.3 billion, last year to £14.9 billion was unexpected. It has been attributed in part, due to rising wages and increased consumer spending, but not an insubstantial part of this bumper year is attributed to the zero-tolerance, aggressive stance adopted by HMRC.
So, what exactly is going on?
In the nineties, tax avoidance schemes were common place. I had my own scheme, the ‘Double Trust Scheme’ to save inheritance tax on your home, and it was selling like hot cakes – so much so, that the Treasury wanted it stopped. I had top QCs opinion stating that it was robust and could not be attacked – that was until 2004. The Treasury introduced Pre-Owned Asset Tax – an income tax charge on a capital arrangement. It was considered unfair, many of the people who had bought the scheme were capital rich, but income poor.
Governments can change laws as it sees fit to stop abuse – we know that, but it was its zero-tolerance attitude which shocked me and continues to cause me alarm.
We lobbied to have a let-out clause in the legislation, so that people could unravel their arrangements and pay the tax as and when they died, but our pleas fell on deaf ears. The attitude of the Treasury was that anyone who tried to avoid tax would pay the consequences, regardless of how unfair or uncomfortable that may be.
We are now seeing this attitude applied again in this loan charge legislation due to come into effect on 5th April.
In the nineties accountants were peddling income tax schemes; film partnerships, employee benefit trusts (EBTs) Employer-Financed Retirement Benefit Schemes (EFRBS) contractor loan schemes and so on. Each was backed by a robust legal opinion and was confident that the Treasury would not introduce retrospective taxation. This confidence was misplaced.
The most popular scheme was the EBT which worked as follows
· Alan seconds his services to a personal service company (APSC Ltd)
· Alan’s employer wants to pay Alan £3,000 for the work he has done during the month
· Alan’s employer sets up an Employee Benefit Trust, and pays the £3,000, not to Alan, but to this trust offshore
· The trust then loans APSC Ltd £3,000 for Alan’s work during that month
· The trust and Alan’s company have an agreement that this loan will not be called in or written off
· Since Alan received the payment as a loan and not income, he does not have to pay income tax or National Insurance Contributions.
Many employees who are now caught were told that this was a legitimate way to be paid and that there was no alternative option. Get paid in this manner or find another job. They now face a tax bill going back 20 years, as if on the 5th April they had received all their income in one hit.
HMRC expects to retrieve £3.2 billion, in tax. But most of these people simply do not have the money to pay this tax and are looking at having to sell their homes or worse. They have used this money, over the last 20 years to live off.
Tax authorities around the world simply do not care about their tax payers, which is why I fear for the future of most offshore trust arrangements set up by wealthy international families to protect their wealth. Not only are they being targeted by tax authorities, which see up to £8.6 trillion in lost tax but are controlled by professional trustees which have little or no responsibility for the decisions they make. Up the Swannie, without a paddle
But there is a silver lining – all is not lost – but you need to act now, which will be the topic of next week’s blog.
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