FT: Tax avoidance industry gets call to arms


K

Kuacou

Tax avoidance industry gets call to arms
Sarah Ross reports

Financial Times
Published: December 3 2004 17:54

Gordon Brown continued his crusade against tax avoidance in this week's
pre-Budget report. But the extent and tone of the measures announced on
Thursday dismayed even forewarned observers.

The chancellor gave little detail in his pre-Budget speech, but the small
print of the report, as well as a technical note issued by the Inland
Revenue on the same day, spell out a significant clampdown on a range of
schemes used to reduce tax bills.

As well as abolishing various types of film and partnership tax reliefs, and
schemes to exploit double taxation treaties between the UK and other
countries, the Treasury and Revenue launched a broadside against employers
who reduce tax on bonuses paid to employees, particularly bonuses in the
form of shares and other securities.

The crackdown is expected to affect £2bn of bonuses paid this year.
³Employers are using these schemes to avoid paying the proper amount of
income tax and national insurance contributions, particularly in relation to
large bonuses in the City,² the Treasury said. ³[The government] will
introduce legislation to close them down, where necessary from today.²

Dawn Primarolo, the paymaster general, went even further. ³Experience has
taught us that we are not always able to anticipate the ingenuity and
inventiveness of the avoidance industry,² she said. ³Nor should we have to.
Our objective is clear and the time has come to close this activity
permanently.²

Simon Philip, tax partner at accountants Deloitte, said the new measures
were a clear declaration of intent. ³We're approaching the end game,² he
said. ³This comes very close to a general anti-avoidance rule.²

Thursday's salvo was the latest in a campaign to stop people avoiding tax by
exploiting loopholes in current legislation, for example in inheritance tax
or trust rules. Accountants agreed that the new measures were designed to
encourage employers to pay bonuses in a straightforward and transparent way.

³The clear implication is that, if you are going to get £100 in bonus and
are a higher-rate taxpayer, you will pay £40 in income tax, your employer
will pay £12.80 in NICs and you will pay £1 in NICs,² said John Whiting, tax
partner at PwC, the professional services firm.

Whiting said he believed the new measures were designed to stop the practice
of not paying any tax on bonuses rather than as a broader anti-avoidance
measure.

Over the years, employers have come up with imaginative ways to reduce the
tax bill on bonuses, from paying them in gold bullion, diamonds and fine
wines, to more complex arrangements. Primarolo said the Revenue had learnt
of a number of sophisticated schemes in the past year, such as payment of a
bonus in the form of dividends on shares in a specially constructed company.

³For the last 20 years companies and advisers have been working out ways of
paying bonuses tax-efficiently,² said Deloitte's Philip. ³Each time the
government has attended to the latest wheeze, something else has been
thought up.²

Thursday's measures were a combined attempt by the Treasury and Revenue to
put an end to this cycle, although one that experts said was doomed to
failure.

³The tax avoidance industry will regard this as a call to arms,² said an
accountant, ³because there are a lot of very bright people whose careers
depend on it.²

While the Treasury made clear that what it regards as ³genuine employee
share schemes and share option plans² would not be affected by the new
rules, tax advisers bemoaned the lack of clarity about their scope, and the
government's threat to apply them retrospectively.

³This is going against one of the fundamental rules of tax, which is that
you need certainty,² said Stephen Woodhouse, a partner in Deloitte's
employer solutions department.

Whiting said that, while the new rules would not affect sensible business
planning, the ³sniff of retrospection² did cause concern. ³It breaches the
way we do things,² he said. ³A lot of legislation has been rushed through
without full consultation which isn't working as intended, and we can't have
the sword of Damocles of retrospection hanging over us.²

³The announcement that potentially retrospective legislation will be
introduced is without precedent, and introduces a huge area of uncertainty
for employers as they construct competitive pay packages,² said Loughlin
Hickey, UK head of tax at KPMG. ³This could set back the constructive
dialogue which was beginning to happen again between business and the tax
authorities.²

Aidan O'Carroll, head of tax at Ernst & Young, said the government had once
again not made its true intentions clear. Tax advisers also argued that
there was no need for the new measures because the 2004 Finance Act already
required tax-avoidance schemes to be disclosed to the Revenue within five
days of being set up.

But the government said on Thursday that the disclosure rules had allowed it
to identify specific arrangements to abolish. It said it would no longer
allow people to avoid tax on debt securities by manipulating ³repo² and
stock lending arrangements or by using schemes to avoid income tax involving
corporate bonds which have had their interest payments removed.

Deloitte said the number of its wealthy clients using this strategy in which
the coupon is stripped from floating rate corporate loan notes to create in
effect a tax-free return was ³significant².

While some tax-reducing remuneration arrangements would still be allowed for
example, forms of salary sacrifice such as pension contributions, the
government's own childcare voucher scheme, and giving employees assets like
computers accountants argued that the new measures might encourage more
sophisticated tax avoidance schemes.

Rather than encouraging employers to pay cash bonuses on which tax and NIC
payments would be clearly due, Woodhouse argued that accountants would
design more bespoke schemes for individual clients.

³You could argue that the changes have helped the tax avoidance industry
because if you close one loophole you open another,² he said. ³The law has
become more complex, and the more complex the law the more advice people
need.²


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