This helpsheet is for ICAEW Chartered Accountants in both business and public practice.

Transcription

1 HELPSHEET July 2012 AGGRESSIVE TAX AVOIDANCE SCHEMES WHAT YOU NEED TO BEAR IN MIND Introduction This helpsheet is for ICAEW Chartered Accountants in both business and public practice. It is about aggressive tax avoidance schemes, particularly artificial tax avoidance schemes that HMRC is likely to challenge. It is not about legitimate use of tax reliefs. Background ICAEW believes that everyone should pay the right tax at the right time. Businesses and individuals have a legal right and obligation to pay the correct level of tax imposed by the law. Although taxpayers are entitled to plan their affairs to minimise their tax, there s a difference between tax avoidance and tax evasion. Tax evasion is illegal and involves breaking the law; for example, hiding income or assets by failing to disclose information to the tax authorities, or attempting to take advantage of tax deductions for which the taxpayer is not eligible. ICAEW Chartered Accountants should never be involved with tax evasion. Tax avoidance is legal. Tax is a question of law and it s the Government s job to decide what legal tax planning arrangements it wishes to prevent. The scope for tax avoidance is increased by extremely complex tax systems that unintentionally create legal loopholes and potential anomalies in the tax law. Although tax avoidance may be legal, whether something is within the law isn t the only thing that matters. You are under a duty to take into consideration the public interest and at all times to comply with ICAEW s Code of Ethics. This includes the requirements to uphold the reputation of the profession and do nothing to bring it into disrepute. You should act with considerable care when you advise clients in this area, particularly where tax avoidance schemes are involved. Beware of the potential reputational damage to the profession and the likelihood of problems developing further down the line. The boundary between legal tax avoidance and illegal tax evasion is not always clear and there s a danger that what starts out as legal tax avoidance may slip into illegal tax evasion. Identifying aggressive tax avoidance schemes Although it s unlikely that you ll become involved in devising and promoting aggressive tax avoidance schemes, you may become involved in such schemes indirectly. This often happens when the promoter of a tax scheme actively markets a scheme to ICAEW members or their clients. Promoters of such schemes often pay commission to introducers. If a third party promotes a tax scheme to one of your clients, you remain under an obligation to comply with ICAEW s regulations and Code of Ethics. As a starting point, you should check whether the scheme has been disclosed to HMRC under the Disclosure of Tax Avoidance Scheme rules and, if so, whether it has a scheme reference number.

2 You should also check whether it s a scheme highlighted by HMRC on the spotlights page at Over the years, the courts have been asked to decide whether particular tax schemes work. In recent years most (but not all) of the courts decisions have been that the particular tax avoidance scheme didn t work. A recent example is the Court of Appeal s decision in Schofield v HMRC [2012] EWCA Civ 927 on 11 July This was a CGT loss scheme and the judges applied the Ramsay principle to strike it down; visit The facts of each avoidance scheme are different and you need to understand the various decisions and the principles they established. See also the guidance in paragraph 7.6 of Professional conduct in relation to taxation (Appendix A). The characteristics of aggressive and, some might say, artificial tax avoidance schemes are usually obvious. HMRC s spotlights page sets out a number of typical characteristics of a tax avoidance scheme that taxpayers and their advisers should be wary of. There are no real surprises! It sounds too good to be true. It involves artificial or contrived arrangements. It seems very complex for what you want to do. There are guaranteed returns with apparently no risk. There are secrecy or confidentiality agreements. Upfront fees are payable or the arrangement is on a no-win-no-fee basis. The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided. The scheme is said to be approved by HMRC (it doesn t follow that this is true). Taxation of income is delayed or tax deductions accelerated. Tax benefits are disproportionate to the commercial activity. Offshore companies or trusts are involved for no sound commercial reason. The involvement of professional trustees is claimed to guarantee success. A tax haven or banking secrecy country is involved for no sound commercial reason. Tax exempt entities such as pension funds are involved inappropriately. It contains exit arrangements designed to side-step tax consequences. It involves money going in a circle back to where it started. It involves low-risk loans to be paid off by future earnings. The scheme promoter lends the funding needed. There s a requirement to take out insurance against the failure of the tax planning to deliver the tax benefits. You should form a judgment about any particular arrangements and consider whether it could be a tax avoidance scheme that may fail when challenged. Although you may not agree with all the characteristics identified by HMRC above (for example, reasonable tax planning may well result in the taxation of income being delayed or tax deductions accelerated), the presence of one (and often more than one) of these characteristics usually highlights the potential risks involved in the tax scheme and alerts you to act with caution. If you have any concerns, make sure you work within ICAEW s professional conduct requirements and the ethical framework set out below. Your duty to the client You are obliged to provide a competent professional service that complies with legislation, technical and professional standards. You also have a professional duty to serve your clients' interests within the relevant legal and regulatory framework and give them appropriate advice on managing their tax affairs. 2

3 Under case law (see, for example, Hurlingham Estates Ltd v Wilde [1997] STC 627), a tax adviser who fails to inform clients on how to structure their affairs in a tax efficient manner could be liable for damages for the excess taxes the client pays. This can be a difficult area. In the Hurlingham case, the adviser s approach to a conveyancing transaction resulted in a tax liability arising which would not have arisen if the transaction had been structured differently. It was not, however, concerned with advising on the creation of artificial structures to aggressively exploit tax reliefs. If a client enters into a tax avoidance scheme promoted by a third party, you must still exercise the normal standards of due care and skill. If you don t understand or can t explain the scheme, it s highly unlikely that the client will have understood it; this raises the question whether you properly advised your client. If problems arise later, you ll bear the brunt of the client s concerns and you ll have to manage the continuing relationship with the client. You should therefore exercise considerable caution before you recommend a client to enter into aggressive tax avoidance schemes promoted by third parties. This is especially the case if you have some sort of business arrangement (such as a commission agreement) with the promoter. Your professional conduct obligations You must operate within ICAEW s professional conduct requirements. These include: the Code of Ethics (the code) (Appendix A); and Professional conduct in relation to taxation, which has been published jointly with a number of other tax-related professional bodies. Code of Ethics The code is available at icaew.com/en/members/regulations-standards-and-guidance/ethics and was last updated on 1 January It follows the ethics standards prepared by the International Ethics Standards Board for Accountants. The introductory paragraphs state that one of the principal objects of the Royal Charter is to maintain a high standard of efficiency and professional conduct by members of ICAEW. The code applies to all ICAEW members and member firms including staff working for ICAEW members. It makes clear that members and firms have a responsibility to take into consideration the public interest and to maintain the reputation of the accountancy profession. Professional conduct in relation to taxation Professional conduct in relation to taxation (the guidance) interprets the code in relation to taxation matters. It was last updated on 4 January 2011 and can be found at icaew.com/en/members/regulations-standards-and-guidance/tax. It s essential reading for all members involved in the provision of tax services. Money Laundering Regulations 2007 You must also comply with the Money Laundering Regulations Conclusion In any tax planning, taxpayers and their advisers have a duty to make proper disclosure and not to attempt to mislead revenue authorities. Refer to the law, act within it and follow best practice. Be honest and open in any dealings with HMRC. Exercise caution and undertake due diligence, not just to establish whether a scheme works but also to protect the wider interests of the client, the public interest and the reputation of the accounting profession. Tell clients that entering into any arrangements could result in litigation, cost and uncertainty over a long period of time and could also lead to wider reputational damage. Remember the reputational risks involved, not just to yourself, your firm and your client but also to the wider profession and the good standing of chartered accountants. 3

4 Appendix A Extract from the Code of Ethics The public interest is considered in more detail in paragraph A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Acting in the public interest involves having regard to the legitimate interests of clients, government, financial institutions, employers, employees, investors, the business and financial community and others who rely upon the objectivity and integrity of the accounting profession to support the propriety and orderly functioning of commerce. This reliance imposes a public interest responsibility on the profession. Professional accountants shall take into consideration the public interest and reasonable and informed public perception in deciding whether to accept or continue with an engagement or appointment, bearing in mind that the level of the public interest will be greater in larger entities and entities which are in the public eye. Therefore, a professional accountant s responsibility is not exclusively to satisfy the needs of an individual client or employer. In acting in the public interest, a professional accountant shall observe and comply with this Code. If a professional accountant is prohibited from complying with certain parts of this Code by law or regulation, the professional accountant shall comply with all other parts of this Code. You should also consider Paragraph The principle of professional behaviour imposes an obligation on all professional accountants to comply with relevant laws and regulations and avoid any action that the professional accountant knows or should know may discredit the profession. This includes actions that a reasonable and informed third party, weighing all the specific facts and circumstances available to the professional accountant at that time, would be likely to conclude adversely affects the good reputation of the profession. Extract from the guidance on Professional conduct in relation to taxation Paragraph 2.1 sets out the five fundamental principles. Professional behaviour To comply with relevant laws and regulations and avoid any action that discredits the profession. 2.1 A member shall comply with the following fundamental principles: Integrity To be straightforward and honest in all professional and business relationships. Objectivity To not allow bias, conflict of interest or undue influence of others to override professional or business judgements. Professional competence and due care To maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards. 4

5 Confidentiality To respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the member or third parties. Standards of professional behaviour are set out in paragraphs 2.13 to Professional behaviour 2.13 A member should comply with all relevant legal obligations when dealing with a client's tax affairs and assist his clients to do the same. Even if there is no legal duty to act in a particular way, the member should always act in a way that will not bring his professional body into disrepute A member should behave with courtesy and consideration towards all with whom he comes into contact in a professional capacity Serving the interests of his clients will, on occasion, bring a member into disagreement or conflict with HMRC. A member should manage such disagreements or conflicts in an open, constructive and professional manner. However, a member should serve his clients' interests within these constraints as robustly as circumstances warrant A member's own tax affairs should be kept up to date. Neglect of the member's own affairs could raise doubts within HMRC as to the standard of the member's professional work and could bring his professional body into disrepute. Tax avoidance and tax avoidance schemes Tax avoidance is discussed at section 7 of the guidance and is set out in full below. Introduction 7.1 Tax avoidance is legal and is to be distinguished from evasion, which is illegal. All taxpayers have the right to arrange their affairs under the law to minimise their liability to tax. 7.2 Where a member is considering arrangements which may be viewed as artificial by the tax authorities, he should consider carefully the risks and merits. He should do this in the light of the client's wider interests because of the risk that the arrangements may be challenged by the tax authorities. Borderline between avoidance and evasion 7.3 For a helpful exploration of HMRC attitudes, a member may like to refer to an article in HMRC Tax Bulletin 49 at: issued in October The article is concerned with section 144 of the Finance Act 2000, which introduced a new criminal offence aimed at tax fraud and includes the following passage: "The borderline between avoidance and evasion "In the same [parliamentary] debate at least one member raised the subject of the impact of the new offence on tax advisers, especially those involved in advising on arrangements which could be characterised as tax avoidance. We do not consider that the new offence has led to any change in the law in this area. "Where a scheme labelled as 'avoidance' by its participants and their advisers admittedly fails, the 5

6 key issue as a matter of criminal law would be whether they have been dishonest in the unsuccessful effort to reduce the relevant tax liability. It would be for the courts to decide as a question of fact whether that is the case. "Concern has been expressed in some quarters that as a result the decision will not normally be taken by those with professional experience of tax matters and, given the highly technical nature of much tax law, that state of affairs may lead to injustice. That is an issue well beyond the scope of this article, but it may be helpful to remember that possible dishonesty becomes a consideration in this context only in certain circumstances. That is where there is some suggestion that the participants in an avoidance scheme are not merely relying on the intrinsic technical soundness of the arrangements actually put in place to reduce the liability but also on concealment of the facts from the inspector. If so, then, if the scheme fails, it is perfectly possible that the criminal courts may find there has been an offence. But conversely, where there is no trace of any concealment of the true facts of arrangements for which there is a respectable technical case, it is hard to imagine how a criminal offence can have been committed". 7.4 An intention not to pay the tax, if it is ultimately shown to be lawfully due or wilful disregard as to how the tax would be paid can, in certain circumstances, be indicative of tax fraud. Arrangements which may be considered to be artificial 7.5 Members should ensure that clients are fully aware of the risks of undertaking transactions that HMRC may regard as 'unacceptable' and that such transactions may be subject to litigation or possible changes in law. 7.6 HMRC may object to arrangements which they consider are set up for no purpose other than to avoid tax. They see such artificial arrangements as fundamentally different from choosing one commercial approach which generates a lower tax bill than another, or the mere organisation of a taxpayer's affairs in such a way as to minimise the tax liability. This is a difficult and controversial area, where the approach of the courts has changed over time. Members may find it helpful to bear in mind the dicta of Lord Hoffman in MacNiven (HMIT) v Westmoreland Investments Limited 3 [2001] STC 237 at page 257: "If the question is whether a given transaction is such as to attract a statutory benefit, such as a grant or assistance like legal aid, or a statutory burden, such as income tax, I do not think it promotes clarity of thought to use terms like stratagem or device. The question is simply whether upon its true construction, the statute applies to the transaction. Tax avoidance schemes are perhaps the best example. They either work (HMRC Commissioners v. Duke of Westminster [1936] A.C. 1) or they do not (Furniss v. Dawson [1984] A.C. 474). If they do not work, the reason, as my noble and learned friend, Lord Steyn, pointed out in HMRC Commissioners v. McGuckian [1997] 1 W.L.R. 991, 1000, is simply that upon the true construction of the statute, the transaction which was designed to avoid the charge to tax actually comes within it. It is not that the statute has a penumbral spirit which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes." 7.7 The government has indicated it will consider introducing retrospective legislation to counteract what it considers to be unacceptable tax avoidance, if necessary. In particular, in December 2004, the Paymaster General gave notice of the government's intention to: "...deal with any arrangements that emerge in future designed to frustrate our intention that employers and employees should pay the proper amount of tax and NICs on the rewards of employment. Where we become aware of arrangements which attempt to frustrate this intention we will introduce legislation to close them down, where necessary from today." 6