As the FT reports this morning:
Lawyers are scrambling to file compensation claims against advisers who sold tax-saving schemes that have backfired to leave an estimated £5bn bill for individuals.
It would seem that some of those who have been sold abusive tax schemes that may not work are not happy. And when the rich aren't happy it's the writs that fly.
I have to say that I suspect those issuing these writs may have little more hope of them succeeding than their dodgy tax schemes did, because the lawyers and advisers involved in these arrangements almost certainly covered their backsides rather well, but that's not the point. There are three points to this.
The first is that there has been mis-selling, even if backed by learned counsel's opinion.
The second is that there were advisers willing to do that mis-selling.
The third is that at least some of those mis-sold too might have genuinely believed they were not taking any real risk.
So, what to do about it. Mazars would have us believe that a 'trusted tax adviser' scheme should be enough to protect the public from such schemes. I do not agree, not least because compliance with the rules of existing professional bodies is clearly insufficient to prevent tax abuse (as I consider exists) occurring.
In that case any case scheme has to be tougher. Back in 2007 I wrote a Code of Conduct for Taxation. It read as follows:
A Code of Conduct for Taxation
Objective
This Code of Conduct relates to the payment of taxes due to a State or other appropriate authority designated by it.
Scope
This Code applies to:
- Governments and their agencies in their role as tax legislators, assessors and collectors;
- Taxpayers, whether individuals, corporate bodies or otherwise;
- Tax agents, whether they are undertaking tax planning or assisting with tax compliance.
Application
It is intended that this Code be voluntarily adopted by States and should be used to guide the conduct of taxpayers and their agents who choose to comply with it whether or not they reside in a State which has adopted the Code.
The Code
The Code is divided under six sections, each of which includes three statements of principle.
1. Government
a. The intention of legislation is clear and a General Anti-Avoidance Principle (‘Gantip') is in use;
b. No incentives are offered to encourage the artificial relocation of international or interstate transactions;
c. Full support is given to other countries and taxation authorities to assist the collection of tax due to them.
2. Accounting
a. Transparent recording of the structure of all taxable entities is available on public record;
b. The accounts of all material entities are available on public record;
c. Taxable transactions are recorded where their economic benefit can be best determined to arise.
3. Planning
a. Tax planning seeks to comply with the spirit as well as the letter of the law;
b. Tax planning seeks to reflect the economic substance of the transactions undertaken;
c. No steps are put into a transaction solely or mainly to secure a tax advantage.
4. Reporting
a. Tax planning will be consistently disclosed to all tax authorities affected by it;
b. Data on a transaction will be consistently reported to all tax authorities affected by it;
c. Taxation reporting will reflect the whole economic substance and not just the form of transactions.
5. Management
a. Taxpayers shall not suffer discrimination for reason of their race, ethnicity, nationality, national origin, gender, sexual orientation, disability, legal structure or taxation residence; and nor shall discrimination occur for reason of income, age, marital or family status unless social policy shall suggest it appropriate.
b. All parties shall act in good faith at all times with regard to the management of taxation liabilities;
c. Taxpayers will settle all obligations due by them at the time they are due for payment.
6. Accountability
a. Governments shall publish budgets setting out their expenditure plans in advance of them being incurred, and they shall require parliamentary approval;
b. Governments shall account on a regular and timely basis for the taxation revenues it has raised:
c. Governments shall account for the expenditure of funds under its command on a regular and timely basis.
Enforcement
States seeking to comply with the Code will voluntarily submit themselves to annual appraisal of their Conduct. These appraisals will in turn be reviewed by a committee of independent experts appointed by participating States. Differences of opinion will be resolved by binding arbitration.
Any taxpayer or agent wishing to comply with the Code may do so. A State should presume that a person professing compliance with the Code has done so when dealing with any tax return they submit. In consequence the administrative burdens imposed upon that person should be reduced. In the event of evidence of non-compliance being found any consequential penalty imposed should be doubled.
Note that this Code does not just cover advisers: HMRC has to play its part too as do taxpayers themselves.
The time to revisit such a Code that requires real commitment over and above the norm so that taxpayers know they are dealing with honest firms would seem to have arrived.
The report that accompanied the Code is here.
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So choosing an ISA (with say a 2% interest rate) rather than a regular savings account (with say a 2.1% interest rate) would presumably be OK under 3a but perhaps not 3c?
An ISA can never be tax abuse
It is within the spirit of the law
But if steps were put into a transaction solely or mainly to secure a tax advantage then would that still not be abusive (it would fall foul of your code) merely because it is within the spirit of the law?
Perhaps you need to put an addendum into 3c, to be clear? “No steps are put into a transaction solely or mainly to secure a tax advantage unless that advantage is intended by Parliament”, perhaps?
Should there be a matching requirement for Government to be fair about dealing with taxpayers, and not seek to create artifical tax disadvantages?
The immediate issue that springs to mind is the Apollo Fuels case, where the Tribunal quite rightly found that there is no benefit if an employee pays full market value for their car, but HMRC have since decided that FB14 should bring in an artificial tax charge which bears no relation to the economic facts simply because there is a car involved.
Good points
Where would transfers of assets between spouses fit into your view above?
An asset own by a wife and pregnant with £20k gain could be transferred to 50% ownership husband/wife & then sold saving CGT. Artificial and done only to save tax and yet obviously envisaged by parliament and accepted. If in the past you’d never advised clients to do such basic planning I’d be amazed yet clearly falling foul of 3b and 3c
I have not advised it that I can ever recall
And I would also legislate against it – requiring a wait of at least two years before the transfer was considered valid for tax purposes
But without a change of law, it would seem to highlight conflict between 3a and 3c
I think you need to read the notes
But I have noted what you say
What happens if the spirit of the law and the letter of the law conflict? Which trumps which? And how do you decide that?
Since the spirit of the law expresses its purpose it is an exceptional case where this might happen
Find one
Bar Ships 2
If you have never advised a husband & wife regarding the CGT advantages of transferring assets into joint ownership before sale I can only conclude one of two things;
Either you really weren’t involved in giving tax advice when you were in practice or you will have a lot of ex-clients with decent grounds to sue you for failing in your duty of care to give tax advice at what is a most basic level.
But (as so often) you didn’t comment on the actual question. Where would such perfectly legal planning fit into your views above? Planning not only perfectly legal but also an area where the ramifications would have been so obvious to the legislators that you couldn’t even argue such transfers were against your mythical ‘spirit of the law’ since the outcomes must have ben anticipated and accepted by them.
I am pleased to say of 800 or more clients and former clients there has never, to date, been even the merest hint of a claim.
I have always made it clear to clients I will never advise anything I think artificial, and they were welcome to go elsewhere if that was what they wanted.
There is, you might be surprised to know, a very large market for tax advice that does not involve risk. It is ignored by many practitioners who think tax minimisation is the only skill they have to sell, quite probably correctly. In practice a good accountant should be able to add considerably more added-value for their clients using other skills, but too few seem to have them or want to sell them.
“There is, you might be surprised to know, a very large market for tax advice that does not involve risk.”
Indeed there is and transferring assets between spouses on a no gain/no loss CGT basis is expressly provided for in law and carries not even the tiniest risk and was quite clearly the intention and therefore the spirit of the legislators.
If you did not at least point this out to your clients, they have been ill-served.
There are no CGs on transfers between spouses
That is a very long way from ‘expressly provided for in law’
Your time here really is up if you have such little understanding
“There are no CGs on transfers between spouses. That is a very long way from ‘expressly provided for in law’”
There is a no gain/no loss position because of the express provision of S58(1) TCGA 1992.
To accuse me of ‘little understanding’ while you don’t know that the no gain/no loss position is indeed a direct result of an express provision of the law shows an astonishing lack of understanding of tax law.
See my comment to Andrew Jackson
What I said was your interpretation was entirely incorrect
Section 58 TCGA 92 provides that transfers between spouses are treated as if the disposal were for such consideration as would create neither a gain nor a loss.
Technically it’s a gain of nil, although I admit most people look through it and say it’s not a gain.
However, it is quite clearly ‘expressly provided for in law’ – s58 has no other function.
That is not true
It does not say that in that case assets should be transferred just before disposal, as has been claimed
That simply cannot be read into the legislation
You yourself have said that you would require a two year gap before a transfer was considered valid for tax purposes. An easy enough change to make and yet one the legislators chose not to insert at the time and have chosen not to make since.
The legislation sets no time gap and so quite clearly the legislators accept that assets can be transferred just before disposal. It is absurd to suggest otherwise.
And, as Andrew Jackson rightly points out, there CAN be CG between spouses as otherwise the exclusions to s58(1) that are contained in S58(2) wouldn’t be necessary.
And so we differ in our opinions
No surprise
Of course the law doesn’t say that you should transfer assets between spouses. The law doesn’t say you should put money into an ISA, either. Tax law never says (and never could sensibly say) you must do X: what it does is say that *if* you do X, then these are the tax consequences.
As Chris says, the draughtsman could have put in some anti-avoidance, or HMRC could have released an interpretation or statement of practice, if they thought such transfers were objectionable. They haven’t, and therefore the only conclusion is that they are perfectly acceptable.
That is your interpretation
But it is not mine
I require economic substance to be considered too
Interesting. So although Parliament and HMRC agree that such a transfer is not taxable, and given the annual exemption does actually save tax, you wouldn’t advise a client to do it?
How would you prepare the return for someone who’d already made an inter-spouse pre-sale transfer with the express intention of making use of two annual exemptions? Would you follow the HMRC-approved interpretation, or would you do something to nullify the tax effect of the transfer?
Or would you not take on such a client?
I genuinely can’t remember this being an issue, ever, but my practice memory now spreads for 30 years and I have been very selective indeed in recent years – and all seek to be very compliant
If someone wanted to do this in a way I considered artificial of course they could, but we would part company
How do you feel about the new surrender of personal allowance rules?
One interpretation of the CGT rule is that all you are doing is recognising that capital assets are almost always beneficially owned by the couple, so using both annual exemptions is fair enough. The PA surrender is (half-heartedly) heading in the same direction.
I consider it a sop to the wealthy and an encouragement to the idea that tax is best not paid
Everything about it is politically motivated miscalculation
What is s.58 for then if not to allow spouses to transfer assets tax free? I’m genuinely confused as to the purpose of this section.
This question has been answered already
The underlying point of s58, so far as I understand it, is to prevent a tax charge arising when assets move around between spouses; I have always sassumed that this is because in a large number of cases you have assets which the couple regard as being shared which are for one reason or another only in one spouse’s name.
Historically, of course, it was very common for asset to be in the husband’s name alone, simply because the wife had no involvement in financial matters; this is less true these days, but these things take generations to work through.
So s58 means that, for example, where a property is in the husband’s name but really belongs to them equally, you can rectify the position by transferring half to the wife immediately before the sale. That way you get to use her annual exempt amount, and any 18% band, to reduce the tax bill to what it would have been had legal ownership followed the beneficial ownership.
As with any relieving provision it is possble to abuse it. The abuse would consist of an asset which really belongs only to one spouse being partly transferred to the other, to reduce the tax liability below what it would be if we just looked at beneficial ownership. To make this work you would of course have to have the spouse transfer the proceeds back to the original spouse after the sale, as otherwise the owner has given away the whole of an asset to save (at best) 28% of it. Where finances are so closely linked as to allow that, of course, there has to be at least some suspicion that the asset was shared anyway.
I am slightly surprised to find that someone with 800 clients has never come across a situation where legal title and beneficial ownership have not mirrored one another, though. It happens all the time (it sometimes seems to be the norm, in fact) in my client base, although admittedly that is rather larger than 800.
It is clear you understand the abuse to which I object
The surprise as to my clients is all yours
I think if you spoke to most tax advisors they’d be slightly surprised that you’ve never come across a couple where the assets are all in the husband’s name because the way finance used to work meant that there was no need, desire or ability to have the wife’s name on them.
Never mind the messier cases, such as where a couple each have their own property in their own name, move into one and let the other out, and never get round to squaring up the legal title because, well, it makes no difference day to day, does it?
Most of the time the difference between legal and beneficial ownership arises because people don’t appreciate that there is a difference, much less that their situation could lead to one. Even lawyers often seem to be oblivious to the issue, and it often takes some digging to establish the true facts. If you’ve never spotted a situation where it could be an issue, you may have been missing something.
Andrew
Very politely, you are getting tedious
If you’re seeking to prove that I do not know what I’m talking about, or that I was a bad tax practitioner, say so. The fact that I built a very successful practice suggests otherwise. I did, and do, know what I was doing – and precisely for whom I wished to act, who also knew what I was up to. If only more accountants did precisely that then the world would be a much better place, and the amount of tax abuse that went on would be very much lower, to the benefit of a great many people who now find themselves caught in a trap by tax advisers who thought they were clever, but were anything but.
You are beginning to look very much like one of those who posts here purely to waste my time.
Richard
If you’re happy that you know everything about all your clients, then fine. I’m just surprised that yours have all been so clear and straightforward.
It must be nice 🙂
Andrew
You have proved my point
Please do not waste my time
Richard
Eurobond wht exemption maybe? Spirit of the law is to exempt from wht widely traded listed bonds. Letter of the law allows non traded bonds to qualify?
What are you trying to say?
Sorry, I was trying to give an example of where the spirit of the law and letter of the law diverge
Wouldn’t the spirit of the law and the letter of the law diverge on any scheme/planning that relies on a literal rather than a purposive interpretation of the legislation?
Which would account for many schemes (see income/capital loss generators for example).
Which schemes are unacceptable then
Indeed. However, the difficulty that I always see is how do you ascertain the spirit of the law/purpose of what parliament intended when the reality is usually that the particular tax planning scheme in question hadn’t been considered when the relevant law was implemented (if it had then presumably it would be explicitly blocked) and it’s more a case of what parliament might have intended with the benefit of hindsight
If it hadn’t been intended then it is obviously not in the spirit of the law
perhaps in the case of whether or not a relief/exemption is in point but what about where the crux of a particular tax planning scheme is whether or not something is within the scope of the tax in the first place? By that same reasoning, if it hadn’t been intended to be taxed then that would be within the spirit of the law
I think you are missing the point
This nit picking is almost invariably contrary to the spirit of the law
If you have to fine detail as you are then you’re almost certainly in the wrong
You might consider it nit picking. I’m illustrating the flaw in your concept of the spirit of the law.
No, that’s exactly what you failed to do
perhaps you could provide an explanation other than nit picking?
Nit picking is what you seem to be doing
That is precisely what those who abuse the spirit of the law do
A financial adviser I know has always shied away from getting involved in any of the schemes — e.g. I recall him mentioning employee benefit trusts – not so much from moral grounds but because his perspective was that these deals are from certain (even if there is counsel’s opinion etc.) and clients never properly appreciate the risk they’re taking and don’t really take responsibility to understand that what they are doing is ‘dodgy’. They always look at the positive and assume it’s 100% safe however much you try to tell them otherwise. So a battle will ensue if the scheme fails and they’ll always blame the adviser. Too much hassle in his opinion.
So it’s not surprising based on his experience that the ‘abusers’ then look to sue the advisers. I am sure there is mis-selling too, but I suspect there are a lot of cases where the clients have simply not been willing to take on board the potential negatives the advisers have told them.