The announcement of the ‘enablers of defeated tax avoidance’ rules in the Summer created a high degree of consternation in the professional community. The announcement first took the form of a briefing to financial journalists (prompting the maximum gnashing of teeth) before a consultation doc was published much later for the professions.
One had to read between the lines quite heavily in order to come to conclusion as to the scope of the rules namely that they would address the worst excesses of the ‘tax market’ and would be forward facing rather than retrospective. We set out our views in earlier notes published around the time of the release.
Thankfully, our general view of the proposals proved to me about right. Generally, if one accepted that these rules were going to come in (and anyone thinking that they weren’t was overly optimistic bordering on delusional) then the current proposals are probably as good as they were going to get. Some of the troubling issues – such as commencement date and the types of advice that might be within its cross hair have been ironed out and largely in a favourable manner.
Part one of the ‘enablers of defeated tax avoidance rules’ sets out the type of scheme at which the legislation is aimed.
It shows us that the rules are aimed at those who have ‘enabled’ arrangements and those arrangements are ‘abusive tax arrangements.’ If such a scheme suffers a ‘defeat’ then the enabler might find himself with a penalty to pay.
What are tax arrangements? Well, they are arrangements to which the obtaining of a tax advantage is at least one of the main purposes. Therefore, transactions that are entered in to for commercial purposes or to achieve some overarching personal goal where any tax benefit is incidental should not find themselves in the referee’s black book.
If we have tax arrangements then when do they become abusive? The legislation asks us to look at what is going on ‘in the round’. To help(!) us they give us some things to ponder:
- Are the relevant tax provisions based on any explicit or implicit principles? If so, are the arrangements undertaken consistent with those principles? This could be re-phrased as the ‘Spirt of Parliament test’
- Do the arrangements seek to exploit any (perceived) shortcomings in those provisions? (‘loophole’ test’).
- Do the arrangements include a contrived or abnormal step? (“Abnormal test”)
It is noted that these are circumstances that one MUST have regard to. It does not seem to me to be an exhaustive list.
Extending the helping hand, the legislation then goes on to states some “examples of something” that might indicate a tax abuse:
- There is a disparity between the level of income and / or profit received and the tax payable. For example, this might include a self-employed contractor receives the payments for his services in to a ‘vehicle’. The vehicle then advances sums to him in a capital form that is not taxable or pays minimal tax.
- Losses or deductions are created which do not reflect the economic position. For example, historically, a person has £20 cash and borrows £80. The full £100 is invested in an LLP. The LLP invests in a magic beans trading activity. There is a write down in the value of the bean trading LLP under UK accounting principles. This creates a large trading loss – though the loan is non-recourse and does not need to be paid back. As such, the tax loss does not reflect the economic position of the investor;
- Another example would be where the arrangements result in a claim for the repayment or crediting of tax that has not been paid.
However, as stated above, this is not an exhaustive list.
So is there anything that would be in our own corner? Or to avoid mixing metaphors, our own dug out. Well yes. Firstly, where one could reasonably assume that the result mentioned above was anticipated under the provisions then that is fine. As such, a 230% credit for R&D expenditure is fine even though it does not reflect the economic reality. However, there may be one or two investors in BPRA schemes who might be slightly wary of this approach!
Secondly, if an arrangement accorded with HMRC’s established practice at the time then this MIGHT (not MUST) be an example of something that was not abusive.
It is worth stating that the definition of what is an abusive arrangement is the same as set out for the General Anti-Abuse Rule (“GAAR”). It is therefore clear that one is not looking at tax planning nor indeed mere avoidance. One is looking for ‘tax abuse’.
When have abusive tax arrangements been defeated?
Defeat is a game of two halves. Or two conditions anyway. One must meet either of these conditions to be looking defeat squarely in the eye.
Firstly we consider Condition A. This will apply where a tax return was submitted on the basis that a tax advantage arose from the scheme. Additionally, that advantage must have been counteracted by HMRC and that counteraction must be final. In other words, it may no longer be appealed.
Where Condition A is not relevant, one is left to look at whether HMRC has made an assessment to tax and this assessment counteracts a tax advantage it is reasonable to assume the taxpayer expected to obtain from the arrangements and that counteraction is final.
So we know that the equation is broadly TAX ARRANGEMENTS + ABUSE + DEFEATED = PENALTIES.
In the second half we will look at the team sheet, in other words who is the enabler in relation to the ‘enablers of defeated tax avoidance rules’ and who might be on the hook for these penalties. Finally, what might the quantum of any penalties be?
So grab a half time orange and see you for the second half of ‘enablers of defeated tax avoidance’…
If you or your clients have any queries about the enablers of defeated tax avoidance rules then please get in touch.