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.²Thursday'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.²While 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.²Aidan 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