Helen is a Partner in the Joseph Hage Aaronson contentious tax team specialising in UK and international tax disputes. She is a Solicitor and Chartered Tax Adviser, a member of the Society of Tax and Estate Practitioners and is a CEDR accredited mediator. She has recently been included in the City Wealth Leaders List Top 100 Private Client lawyers, is included in the Private Client Global Elite Directory 2023 and appears the Tatler Address Book 2023. Helen writes prolifically for numerous tax publications and is an active committee member at the Chartered Institute of Tax and the Worshipful Company of Tax Advisers.
Helen advises both individuals and corporates either engaged directly or as a consultant to an extensive network of professional firms and financial institutions who repeatedly call upon her expertise.
Helen has trained under both Ray McCann and also Peter Vaines when she was the lead associate in R (on the application of Gaines-Cooper) v Commissioners for Her Majesty's Revenue and Customs. She has successfully run numerous residence and domicile cases but will also turn her hand to a wide variety of contentious and advisory tax matters. Helen is an industry leading specialist at running highly technical COP9 investigations where she has a proven track record of successfully negotiating very favourable settlements.
Helen frequently writes for Tax Adviser, Tax Journal and other tax publications. She also edits chapters for the acclaimed Bloomsbury Professional publication Revenue Law: Principles and Practice.
Clients say of her:
Her judgement is razor sharp. Under immense time pressure and navigating complex rules, she speedily formed her opinion, liaised with hostile opposition, and closed the deal in a smart and flexible manner.
The advice Helen provided me with on my technical international tax issues was unbelievably thorough. It put my mind at rest that she did not leave any stone unturned. HMRC interviews were never stressful as Helen was always completely in control.
Admitted as a solicitor in England and Wales, 2009
Chartered Tax Adviser, 2012
Society of Trusts and Estates Practitioner, 2015
CEDR Accredited Mediator, 2016
Cardiff Law School – LPC (Distinction)
University of Maastricht – International Law and European Contract Law
University of Reading – LLB
Paragraph 5, Schedule 9 of the Finance Act 2025 inserted the emboldened wording to section 809P(12) ITA 2007 concerning the ‘re-remittance’ of foreign income and gains:
“if the amount remitted (taken together with any amount previously remitted that has been charged to tax) would otherwise exceed the amount of the income or chargeable gains, the amount remitted is limited to the amount which (when taken together with any amount previously remitted that has been charged to tax) is equal to the amount of the income or chargeable gains.”
The legislation refers to the treatment of remittances to the UK where the relevant foreign income and/or gains (“FIGs”) had previously been remitted to the UK, but not charged to tax- usually because the taxpayer was not UK resident in the remittance year and did not subsequently fall within the temporary non-residence rules.
The wording of s.809P(12) ITA 2007 prior to the FA 2025 tweak was widely accepted by the tax profession to mean that FIGs could be remitted to the UK at a time when this remittance was not taxable and that would ‘cleanse’ those FIGs such that they could be used freely in the UK thereafter- for example when the taxpayer resumed UK residence having been away for 6 years.
The addition of the emboldened wording now seems to mean that such cleansing will no longer be effective and if these income and gains are subsequently re-remitted to the UK, this later remittance may be charged to UK tax.
Of some concern is that HMRC set out their view on the FA 2025 amends in written correspondence with the CIOT stating that the amends to the legislation in fact simply reinforce/ clarify what has always been the HMRC view- that second/ subsequent remittances are only ever relieved from tax if the first occasion of the remittance had been charged to tax.
Perhaps as a result of this confusion/ conflicting views between industry experts and HMRC, a relief was introduced at Amendment 24 (“Relief for amounts remitted again on becoming UK resident”) to the Finance Act 2025 to limit the impact of the insertion of the new wording to future action only. The relief operates by treating the original remittance as having been taxed so that future re-remittances are not charged to tax. The wording of Amendment 24 possibly adds further uncertainty but the intention is to limit the retrospective impact of the FA 2025 wording.
In short going forward, relief should be available to individuals who cleansed and re-remitted funds prior to 6 April 2025. It will not help:
· Individuals who remitted FIGs to the UK in a non-UK resident period but have not yet re-remitted the FIGs to the UK;
· Individuals who have not been UK resident in 2024/25 or 2025/26;
· Individuals who have made a claim for split year treatment in either 2024/25 or 2025/26;
· Taxpayers who have previously ‘cleansed’ their FIGs by remitting these at a time when they were not subject to tax, for a reason other than a period of long term non-residence. This includes those with a period of non-residence of less than 5 years but where the temporary non-residence rules do not apply (for instance because they were UK resident for fewer than 4 of the 7 years before becoming non-resident) and those who have made a remittance of FIGs which were not subject to tax due to the availability of their personal allowance/ annual exempt amount.
Action Points
Some taxpayers may need to regularise their tax position with HMRC where the re-remittances of perceived cleansed funds have been treated as taxable.
Individuals who had been advised that FIGs were cleansed (but may in fact not be) and could be treated as clean capital may have ceased to operate account segregation meaning clean capital is now be buried deep beneath the affected FIGs. A mixed fund analysis may be required.
Anyone affected should take professional advice.
The latest Finance Bill amendments correct some technical errors and include a few helpful changes to the Temporary Repatriation Relief.
The Finance Bill 2025 Report Stage amendments were published mid-afternoon on Tuesday 25 February. The Committee Stage amendments had been somewhat lacklustre – but following inviting comments around the Temporary Repatriation Relief (TRF) made by the Chancellor at the World Economic Forum at Davos, hopes were high for some softening of the changes to the taxation of non-UK domiciled individuals to stem the surge of wealth leaving the UK.
The relevant Report Stage amendments can be found at: Gov 5 to Gov 17 (13 in total) and then Gov 21 to Gov 66 (46 amendments). There is no substantive change in policy, the adjustments instead largely correct technical drafting oversights.
Mercifully, the changes made in Sch 9 para 5 to the definition of ‘remitted to the UK’ will no longer render cash in an offshore bank account ‘remitted’ to the UK by default! In addition, it seems that capital payments/benefits from any TCGA 1992 s 89 so-called migrant settlements will be able to benefit from the TRF where matching is to pre-6 April 2025 income or gains.
Meaning of ‘remitted to the UK’: The Report Stage amendments fortunately alleviate concerns that money in non-UK bank accounts will result in inadvertent remittances, however, there is still significant concern with respect to the other extensions to the meaning of ‘remitted to the UK’. The ICAEW and CIOT both called for Sch 9 para 5 to be withdrawn in full, but this has not happened. In the absence of clearly drafted legislation, it seems inevitable that the impending issued HMRC guidance will come to be heavily relied on in this arena which in turn creates significant uncertainty and difficulty for those affected who are trying to structure their affairs.
Trust legislation: Various technical amendments (Gov 50 to Gov 55) have been made to Sch 12 which governs the treatment of trust income/gains under the new rules. The technical adjustments hopefully ensure that trust pooling works as intended.
TRF amends: The TRF amendments are contained at Gov 28 to 49 (22 in total). The changes make helpful changes to the way that the TRF will operate. Specifically:
Conclusion: The great speed with which the Government is acting to abolish a long-established set of tax rules will inevitably mean that errors will be made. It is hoped that the changes on the horizon in relation to the personal offshore anti-avoidance legislation (the call for evidence having closed on 19 February) receive adequate consultation and are not also enacted with such haste.
Original article can be found here: Finance Bill Report Stage amendments to the non-dom reforms (taxjournal.com)
Introduction
The run up to a Budget is always a time when rumours and uncertainty abound. When it is the first Budget of a new party in Government this chatter can be multiplied tenfold. Chancellor Reeve’s first Budget looks unlikely to disappoint given the frenzied and rampant speculation evident in the various recent public pronouncements by members of the government such as:
In addition to press coverage around areas where the Chancellor may look to raise further tax, there has also been talk of potential row backs from policies previously announced for fear they may backfire. Including in relation to:
Potential changes to the taxation of non-doms
We have posted a number of insight pieces about the announced seismic changes to the taxation UK resident foreign domiciled individuals (see A regime ripe for reform – but not like this and Changes to the UK’s Special Tax Regime for Foreign Income and Gains).
There has been a flurry of articles in the last month or so suggesting the government could be considering softening the proposals, adopting something of a compromise but still delivering on “the spirit of the manifesto without going as far as previously suggested.” There might be some movement in relation to:
Nothing specific has been said by the Chancellor or any government ministers with a Treasury spokesman referring to the reports as “speculation not government policy”. All we do know is that the government is now refusing to commit to a figure in terms of how much the changes will raise, stating we must now wait for the Budget.
It seems clear that the figures the government (and the previous Conservative administration) were working with were inaccurate. Specifically, more foreign domiciled individuals have left the UK or are planning to leave because of the proposed changes than was anticipated. In addition, the UK appears to have plummeted down the league table in terms of jurisdictions of choice for rich foreign domiciled individuals.
The question that has plagued advisers over the past few months has been whether UK resident foreign domiciled individuals should/can do anything prior to 30 October. It would be surely be inequitable for the Chancellor to announce any changes in the Budget that would disadvantage individuals that had been dissuaded from taking an action because of clear comments made by Labour previously (prior to any row back) and it is very much hoped that there will not be anything that has a 30 October cut-off date.
Grandfathering of excluded property trusts
The Conservatives said they would have a transitional provision grandfathering for IHT purposes, trusts created prior to 6 April 2025. This meant that qualifying trusts (settled by a foreign domiciliary at a time when they were not deemed UK domiciled) would remain sheltered from IHT with respect to excluded property (broadly foreign situs assets).
The Conservative proposals were far from ideal (for the reasons summarised in A regime ripe for reform – but not like this) and were in any event quickly superseded by Labour’s April comments coming so soon after. From an IHT perspective this meant there would be no grandfathering of excluded property trusts and fatally undermined the all important IHT protection that high and ultra-high net worth UK resident foreign domiciled individuals had hoped for.
If Labour does change its policy and announces on 30 October that there will after all be grandfathering this would of course be very welcome. As stated, given the circumstances a 30 October 2024 (Budget Day) cut off would be wrong. Labour was previously clear that there would be no grandfathering. Individuals who would otherwise have set up such settlements will have refrained from doing so because of the clear statements made given the penal tax provisions (both the relevant property regime and for settlor interested trusts the gift with reservation of benefit anti-avoidance provisions) that would apply. Any grandfathering should apply to all trusts set up prior to 6 April 2025.
If a UK resident foreign domiciled and not deemed domiciled individual wants to establish a trust even if there is no grandfathering, then going ahead and getting the trust in place with all the property settled prior to 30 October might be felt prudent just in case. It would be critical to not rush and make a mistake that will cause a significant non-UK tax issue. Where there is a US settlor and/or beneficiaries, for example, it will be vital that detailed US tax advice has been taken and that the American advisers have signed off on the trust as well as the UK advisers. Getting it wrong leaves an individual with a complex structure which cannot be easily collapsed.
IHT – the ten-year tail
The proposal that an individual who comes within the scope of worldwide UK IHT can only break free from UK IHT after ten complete tax years of non-UK residence is ridiculous. No other jurisdiction has a provision which so unfair, disproportionate, theoretically draconian and unenforceable.
There was discussion with respect to extending the current IHT tail in the 2017 changes but enforcement was considered a huge hurdle, hence we have our current tail which is broken if the foreign domiciled individual is not UK resident in the fourth year and the three preceding years were years of non-UK residence. It is hoped that sense prevails in 2024 as it did in 2017, and the current tail is not extended.
The dropped transitional provision - 50% relief on foreign income received in 2025/26
There has been speculation that Labour might bring back the 50% transitional relief with respect to foreign income received in 2025/26 (the first year of the new regime).
This might happen as part of a compromise package but realistically it is not a key issue for those affected. It only lasts for one year. UK resident foreign domiciliary concerns focus on:
It is these issues that the government needs to address to stem the flow of those leaving and to increase the attractiveness of the UK for rich foreign domiciled individuals that are potential new arrivers.
Any other changes?
Labour itself (in its April 2024 comments) announced that it might introduce some type of relief for investing in the UK. Nothing further has been said and it may be that this will feature on 30 October.
Transitional provisions needed to prevent the changes being retrospective/retroactive
As the saying goes the devil is in the detail and the detail is crucial with respect to these changes. It is understood that there is no intention that individuals who have left (or who are not UK resident in 2025/26) will be caught because of the changes. Careful examination of the legislation will be needed though particularly in relation to the IHT tail.
Scrutinising draft legislation
It may be that on 30 October we get the details of the new regime but must wait for any draft legislation which could be released in tranches. There could be very tight timetables that have to be worked to by the professional bodies and other interested parties for comment. Nothing has been said to indicate that there will be a much-needed delay before implementation.
There is a great deal of support for abolishing domicile as a fiscal connecting factor for tax purposes and replacing the remittance basis of taxation with a much-simplified residence-based regime. In principle, everyone can agree with Labour that the tax system should be made fairer: “If you make your home and do your business in Britain, then you should pay your taxes here too”.
However, any changes to the system need to strike a balance between “fairness” and maintaining the attractiveness of the UK to the super rich (and their incoming capital) and highly skilled individuals that the UK wants to attract for their contribution to the UK economy.
The importance of non-doms to the UK
UK resident foreign domiciled individuals pay a huge amount of tax in the UK, even if they pay their taxes on a different basis. HMRC recently estimated that at the end of the 2023 tax year there were 74,000 non-doms in the UK paying a total of £8.9 billion in tax, which is likely to be an understatement, since not all deemed domiciled taxpayers have to indicate their deemed domiciled status on their tax return.
Non-doms also contribute to the UK economy (and tax yield) in other ways: they pay VAT on expenditure, invest in UK businesses and property, employ people in the UK (PAYE and NICs), send their children to UK schools, and donate to UK cultural institutions, often through their own charitable foundations. The Rausing family alone is associated with the Arcadia Fund, the Lund Trust, The Julia and Hans Rausing Trust, the Sigrid Rausing Trust and The Alborada Trust. Migrants represent a significant percentage of the super-rich generally and also those in high income, high productivity occupations in financial and professional services in banks/hospitals alike. Research from the University of Warwick and the LSE found that 97% of non-doms were either born abroad or had lived abroad for a substantial period of time and that 23% of non-doms worked in finance. Given the importance of the financial sector to the UK, no one wants these people to leave.
Sensitivity to tax policy
Although some academics believe that tax reforms have minimal impact on migration and preferential regimes can be safely abolished without causing an exodus of HNW individuals, data from Switzerland shows that high net worth (“HNW”) individuals are in fact highly sensitive to changes in tax policy.
Between 2010 and 2014 some Swiss cantons abolished expenditure-based taxation whilst others chose to retain it (referendums were held). In a 8 February 2023 study entitled “Behavioural Responses to Special Tax Regimes for the Super-Rich: Insights from Swiss Rich Lists”, published as EU Tax Observatory Working Papers No 12, Enea Baselgia and
Isabel Z. Martinez conclude that the abolition of expenditure-based taxation resulted in a medium to long-term decline of about 30% in the stock of super-rich in reform cantons while the number of Swiss born super-rich remined the same. In addition, they concluded that their study showed for the first-time evidence of how sensitive super-rich foreigners are to tax policy when it comes to choosing where in Switzerland to reside and that the 30% decline in the cantons that abolished the preferential tax treatment was mainly driven by the new arrivals who chose to move to those cantons still offering them tax privileges.
Other studies show that tax policy drives international migration among top footballers and athletes and acts as a ‘pull’ factor to bring highly skilled expatriates back to their countries of origin. It is therefore concerning that the UK’s current proposed replacement regime offers only very short-term benefits and that the projected yields fail to account for the economic impact of those HNW individuals who will either not now come to the UK or who will leave as a result of these seismic tax changes. UK tax advisers have seen enquiries from clients wanting to come to the UK dry up. The UK will lose not only individuals’ income tax and wealth contribution, but also the indirect taxes and the taxes paid in the UK by related companies.
Non-dom telecoms entrepreneur Bassim Haidar, a Lebanese citizen, told The Guardian in May, “I am moving – that is it” and said that ‘he had formed a working group of 29 non-doms, who mostly planned to leave the UK before September so that they could secure places for their children in private schools in their new countries before the start of the academic year’. He has also cancelled his plan to list financial services company Optasia on the London Stock Exchange and pointed out he would have to make his household staff redundant on his departure. Another loss would be businessman Wafic Saïd, who we understand plans to leave for Abu Dhabi if the changes go through as proposed. His position is that it would be reasonable to charge a large forfait along Italian lines, but that the current proposals are absurd.
Approach to reform
When it comes to reforming the tax system, the government must bear in mind:
a. There is a finite tolerance level for paying more tax, but perhaps more importantly the lack of certainty and the frequent rule-changes have given rise to distrust and suspicion. According to Jon Elphick, international tax adviser at Mark Davies & Associates, “The mood among clients is disillusionment. We’ve experienced a significant uplift in clients asking about relocations – and what their tax positions would look like if they were to move.” Jon Shankland, private wealth partner and tax lawyer from national law firm Weightmans, said, “This is putting the financial best interests of our country at risk needlessly. Wealth is already leaving the country. Part of that is genuine fear that Labour’s approach will be very hard line, but for many it’s not knowing where they stand that’s causing nervousness.”
b. Extrapolations cannot be drawn safely from previous changes to the non-dom regime in the UK, because the changes now proposed are so radical. The 2017 UK changes were deliberately designed not to cause an exodus. This was why an individual could benefit from the remittance basis for 15 years, there were trust protections for income tax and CGT and the excluded property regime for trusts was retained.
c. Inheritance tax exposure is crucial to the super-rich. In the US, academic research has shown a positive correlation between a state imposing federal estate duties and a taxpayer leaving that state. One European non-dom businessman recently told the Financial Times: “The UK’s inheritance tax of 40 per cent on your global assets is a real problem. It’s the overall instability that has been the nail in the coffin for me. If there was a more balanced, less punitive inheritance tax I might have considered staying.” Instead, he is moving his family from London to Switzerland after more than a decade in the UK. Subjecting an individual with no other links to the UK to worldwide inheritance tax after being resident in the UK for just 10 years is both unfair and unworkable. The lack of grandfathering for existing excluded property trusts has caused extreme disappointment.
The UK government, before introducing changes to reform an ineffective system, needs to understand all sectors of society that the changes will impact. These changes are too important to the UK’s global economic prosperity to be used for political point scoring, especially since a new government elected with a large majority should be in a strong position to take its time to get this right.
Against a backdrop of Brexit and increasingly less favourable immigration rules, the UK tax system is fast earning a global reputation for being uncertain and unwieldy and too easily and often used as a political weapon.
A new tax regime that an individual can only benefit from for four years (at best) is not going to be attractive to the super-rich and the high-level decision makers within multinationals. For those looking for an attractive tax regime who want to stay for a reasonable period of time (to not disrupt their children’s schooling for example) the UK is no longer attractive. Other jurisdictions will be more attractive, meaning that their capital and that of the businesses they are connected with will go elsewhere too.
Given that it is UK government policy to welcome and encourage foreign direct investment, proposing a new tax regime that discourages wealthy foreigners from coming to the UK suggests a lack of joined-up government. Can the UK really be ‘the best place in the world for international investors’ (the stated ambition of the government’s Office for Investment) when international investors are “petrified” and “jumping on planes right now and leaving”? Similarly Christopher Groves, a partner at Withers, quotes a non-dom client who describes the proposals as “Arrogant and short-termist and very damaging to the UK’s image as a good place for international wealth creators” and who is now questioning their decision to expand their international business in the UK.
Global competitiveness
We need to remember that UK tax policy does not exist in a vacuum. There is active global competition to attract the wealthy, skilled and highly mobile individuals.
In Italy, super-rich migrants need only pay a flat tax of €100,000 per annum (expected to rise to €200,000 from next year – indicative of how popular the scheme has proven) to shelter foreign income, gains and assets from all Italian taxes, provided a simple one-page compliance form is filed on time and the tax paid for each year (a qualifying individual can benefit for a maximum of 15 years).
JHA clients have expressed interest in moving to jurisdictions including Monaco, the UAE and the Bahamas where they will not be subject to income tax, wealth tax, capital gains tax or inheritance tax.
Some Swiss cantons still offer an expenditure-based regime explicitly aimed to attract the super-rich). Our nearest neighbour Ireland has a remittance basis regime (applying to foreign income and gains) very similar to what the UK had prior to the April 2008 changes. Israel, Malta, Greece (where non-doms are required to invest a minimum of €500,000 into Greek real estate, bonds or stock) and Thailand also have special regimes designed to attract the wealthy.
The regimes available in other jurisdictions are more competitive – and these countries are perceived to be more politically predictable, financially appealing and above all welcoming.
Recommendations
Our firm recommendation is therefore that the proposed legislative changes should not be effective until at least 2028/29 to allow time for extensive consultations on: (i) policy, with far more consideration of the wider economic impact than has so far taken place; and (ii) the technical details of the legislation. Swiftly drafted legislation by a draftsman operating in a vacuum is not desirable.
In our opinion a system like the Italian system would be desirable. However, we feel that the UK could look to charge: £200,000 per annum in the first 5 years, £300,000 per annum in the second five years and then £500,000 per annum for the last 5 years.
We also think that to avoid the cliff edge in the Italian system where the super-rich leave after 15 years, for a charge of £1 million per annum individuals should be able to benefit indefinitely from the current trust protections with respect to income tax and CGT and for IHT excluded property status on trusts.
These individuals would therefore be paying significant UK tax but, from the research to date, not so much that they would leave. There would be a significant tax increase and the UK’s economic competitiveness would be maintained.
Joseph Hage Aaronson LLP
September 2024
To discuss this report further please contact:
Helen McGhee: HMcGhee@jha.com
Lynnette Bober: Lynnette.Bober@jha.com
With much uncertainty surrounding the end to the non-domicile regime, Helen McGhee and Lynnette Bober provide a helpful summary of the (currently) anticipated changes.
Current Regime
Budget March 2024 (Conservatives)
April 2024 Labour
Policy Paper 29 July 2024 (Labour)
Who can benefit from the special regime –for income tax and CGT.
UK residents with a common law foreign domicile who are not deemed UK domiciled.
New arrivers - those who have been non-UK resident for a continuous 10-year period - in their first 4 tax years of residence.
Labour supported the changes announced at Spring Budget.
No change.
Special regime for foreign income and gains (FIG).
The remittance basis (“RB”). Foreign domiciled UK residents can claim the RB such that they are only taxable on foreign income and gains when remittances are made.
Where a claim is made the individual cannot benefit from the personal allowance or CGT annual exemption.
After specified periods of UK residence a Remittance Basis Charge – the amount determined by years of prior residence – will be payable.
The 4-year FIG regime.
Where a claim is made foreign income, and gains are exempt from UK tax regardless of whether they are remitted to the UK or not.
No charge payable to benefit from the regime. However, an individual benefitting from the regime cannot also benefit from the personal allowance and CGT annual exemption.
After the 4 years the individual is subject to worldwide tax on income and gains.
Again Labour supported the changes announced at Spring Budget.
Said they would consider a specific incentive for UK investment within the 4- year period.
Broadly, no change with respect to support for 4- year FIG regime.
Nothing further said about the incentive for investment in the UK within the 4-year period.
Did say that the government would review some other key areas of the previously announced reforms to ensure that “the new regime is both fair and as competitive as possible”.
Overseas Workday Relief (OWR)
Special regime for the first three years of residence such that an individual carrying out employment duties in the UK and overseas can claim the RB on the overseas portion of the income.
Complex rules that are poorly understood in general.
Further consultation promised. Broadly, from 2025/26 to benefit the individual would have to also be eligible for the new 4-year FIG regime.
OWR will only be available for the first three tax years. For that period OWR will provide a complete exemption from UK tax for the portion of the employment income that can be attributed to overseas duties.
Silent.
States that a form of OWR will be retained and that officials will engage with stakeholders on the design principles for this tax relief. Engagement to happen in August with an announcement in the 30 October 2024 Budget.
Budget March 2024 (Conservatives)
April 2024 Labour
Policy Paper 29 July 2024 (Labour)
Transitionalprovision1: Income tax reduction
Specific relief announced for UK resident foreign domiciled individuals who had been eligible for the RB and would be subject to tax on the worldwide basis from 2025/26.
For tax year 2025/26 only the amount of foreign income taxable was to be reduced by 50%.
Labour does not support this proposal and will not introduce it.
No change to the earlier decision to not introduce this transitional provision.
Transitionalprovision2: CGT rebasing
Available to individuals who have claimed the RB and are neither UK domiciled, nor UK deemed domiciled by 5 April 2025.
Rebasing to the 5 April 2019 value announced for assets held personally by such individuals.
Silent.
Support for rebasing for current and past RB users.
The rebasing date may not be 5 April 2019. What date would be appropriate is being considered and will be announced at the 30 October 2024 Budget.
Transitionalprovision3: Temporary Repatriation Facility (TRF)
Available to individuals where the foreign income or gains arose/accrued in a tax year when the individual was taxed on the RB and the individual was UK resident in the relevant year.
A fixed 12% rate would apply to all sums brought to the UK under this facility in tax years 2025/26 and 2026/27.
It was understood that:
a. there would be no regard paid to what the amounts traced to;
b. no credit given for any foreign tax credit; and
c. the TRF would not apply to pre-6 April 2025 FIG generated within trusts and trust structures.
Concern expressed that the two tax year period will not be long enough and that there will remain sizable, stockpiled FIG overseas and a huge disincentive to bring it to the UK.
Commitment to explore ways to encourage people to remit stockpiled FIG to the UK, so that the legacy of the RB rules can be ended.
Commitment to the TRF again made clear.
Stated that the reduced rate and length of time that the TRF will be available for will be set to make use as attractive as possible.
Commitment to consider ways to expand the scope of the TRF, such as including stockpiled income and gains within overseas structures within the remit. Details to be confirmed in the 30 October 2024 Budget.
Current Regime
Budget March 2024 (Conservatives)
April 2024 Labour
Policy Paper 29 July 2024 (Labour)
Non-UK resident trusts – the trust protections.
Provided additions are not made to the trusts, UK resident foreign domiciled settlors who could benefit from non-resident trusts are only subject to tax if they receive distributions or benefits from the trust. As such, they are not subject to the UK anti-avoidance provisions in the same way they UK resident and UK domiciled individuals are. These favourable provisions are referred to as the “trust protections”.
For income and gains arising/accruing after 5 April 2025 the trust protections will not apply.
Anyone who comes within the 4-year FIG regime will not be taxed under the anti- avoidance provisions on foreign income or any gains arising within the trust structure whilst the 4-year FIG regime applies. Equally they will not be taxed on income or capital distributions received from the non-UK resident trust in that period.
After that, or for those who do not qualify for the 4-year FIG regime, they will be subject to the full rigour of the anti- avoidance provisions. If they can benefit from the trust this means being subject to tax on all trust income on the worldwide basis and on the net trust gains each tax year.
Labour will follow the Conservative government plans.
No changes to the plans announced.
What is the IHT regime for individuals based on?
Domicile based system.
Move to a residence-based system.
Labour will follow the Conservative government plans.
No change.
What is the special IHT regime for foreign assets owned directly by individuals?
Foreign domiciled individuals – provided they are not deemed domiciled – are not subject to UK IHT with respect to their foreign situs assets.
An individual will be subject to UK IHT on foreign situs assets after ten years of UK residence.
In addition, a ten-year tail was announced. This means that any individual caught within the UK IHT net will have to be non-UK resident for ten- years to be free of its clutches.
Labour will follow the Conservative government plans.
No changes to the plans announced.
Stated that there will be further engagement with stakeholders in August.
What is the IHT system for trusts based on?
Domicile based system.
Move to a residence-based system.
Labour will follow the Conservative government plans.
No change.
Current Regime
Budget March 2024 (Conservatives)
April 2024 Labour
Policy Paper 29 July 2024 (Labour)
What is the special IHT regime for trusts?
The excluded property regime. Trust property settled whilst an individual has a foreign common law domicile and is not deemed UK domiciled is outside the scope of UK IHT provided it is foreign situs.
For trusts settled after 6 April 2025 the end of the use of excluded property trusts to keep property outside of the UK IHT net.
The IHT position of trusts under the new regime will mirror the position of the settlor. That is, it seems that when the settlor is outside the scope of IHT so is the trust and when the settlor is within the scope to IHT (including the ten-year tail period) the trust will be too.
This means that the IHT relevant property regime will apply to most trusts.
In addition the Gift with Reservation of Benefit (GROB) IHT anti-avoidance provisions will apply where the settlor is a beneficiary of the trust. This means that, if the situation continues, the value of the trust property will also be subject to tax on the death of the taxpayer.
Labour appeared to support the plans for trusts created after 5 April 2025.
The policy paper says: “The government intends to change the way IHT is charged on non-UK assets which are held in such trusts, so that everyone who is in scope of UK IHT pays their taxes here.
IHT and pre- 6 April 2025 excluded property trusts
Outside the scope of UK IHT provided it is foreign situs.
All trusts set up prior to 6 April 2025 by foreign domiciled individuals who are not UK deemed domiciled will be grandfathered for IHT purposes. That is, they would be outside the scope of UK IHT provided that when a chargeable event takes place the trust only includes excluded property. This also means that GROB will not apply, as well as the trust IHT relevant property regime - when the settlor can benefit from the trust.
Labour will include all foreign assets held in a trust within the scope of UK IHT, whenever they were settled, so that nobody living here for longer than ten years can avoid paying UK inheritance on trust property settled.
Grandfathering still appears to be ruled out. However, there is a recognition that trusts were established and structured to reflect the current rules. Stated that the government “is considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements, while ensuring that the treatment of all long-term residents of the UK is the same for IHT purposes.”
As such, there will be transitional arrangements for affected settlors. Consultation in August and the detail will be published at the 30 October 2024 Budget.
Current Regime
Budget March 2024 (Conservatives)
April 2024 Labour
Policy Paper 29 July 2024 (Labour)
Review of anti-avoidance legislation
Not applicable.
Review of offshore anti- avoidance legislation announced.
Seems to apply to income tax and CGT anti-avoidance legislation. However, specific mention made of the Transfer of Assets Abroad and Settlements legislation.
Said to be to modernise the rules and ensure they are fit for purpose. The following are stated intentions:
a. Remove ambiguity and uncertainty in the legislation.
b. Make the rules simpler to apply in practice.
c. Ensure these anti-avoidance provisions are effective.
Not expected to result in any changes before the 2026/27 tax year.
Just when we thought we would have to wait for the 30 October Budget for more detail around the new non-dom tax rules, the new government published a policy paper on the changes to the taxation of UK resident foreign domiciled individuals on 29 July giving additional insight. This article is divided into two parts. The first looks at the policy paper itself and the how it adds to what we knew previously. The second part provides an overview of the anticipated new regime incorporating our newly acquired knowledge.
Some of us were clinging to the hope that a new government, without the same political forces driving it as existed at Spring Budget 2024, would take the necessary time with such important legislation and not rush to legislate. To be clear the changes announced in 2014 were not legislated until 2017 and those were less far reaching. Any such hopes were immediately crushed as this policy paper makes it clear that the changes will be effective from 6 April 2025. That is:
Whilst this feels like an unnecessary haste to legislate, it seems clear that there will be no delay.
The policy paper refers to the new regime as being ‘internationally competitive and focused on attracting the best talent and investment to the UK’. The regime will be welcome to short term secondees but not the high and ultra-high net worth individuals that the UK has historically looked to
attract. The new proposed regime seems refreshingly simple but so is the Italian regime – to name but one jurisdiction with a more favourable special regime – with the Italians offering a ten-year grace period albeit with a €100k annual fee.
The policy paper generally repeats what we already knew of the changes from the Spring Budget 2024, the April 2024 Labour announcement and the June 2024 Labour Election Manifesto. There is, however, some clarification and some new details.
Inevitably the new narrative leads to further questions that we will have to wait until the Budget to have answered. In terms of advising clients now we need to go with what we have to date (see below).
The formal consultation that the previous government promised on the IHT changes has been set aside to be replaced by a review of stakeholder feedback and further external engagement over the summer. Dropping the formal consultation suggests that the government has made its mind up. The IHT aspects of the changes are causing more concern than anything else (the ten-year tail in particular), so this is especially concerning.
The government also uses the policy paper to announce that it intends to conduct a review of the offshore income tax and CGT anti-avoidance legislation, specifically the Transfer of Assets Abroad (ToAA) and Settlements legislation. The purpose of the review is said to be to modernise the rules and ensure they are fit for purpose. The following are stated intentions:
This could be an opportunity to simplify this highly complex legislation; however, the last sentence with respect to this announcement is somewhat concerning: ‘It is not anticipated that this review will result in any changes before the start of the 2026/27 tax year’. In addition to each regime being complex in and of itself there are a myriad of interlocking offshore anti-avoidance provisions. To review them adequately and come up with appropriately thought through amendments would take significantly longer than the year to 18 months envisaged if the review is working to a 2026/27 effective date.
Note that the current Economic Secretary to the Treasury, Tulip Siddiq MP, when she was Shadow Economic Secretary to the Treasury earlier this year, had echoed professional body concerns with the amendments made to the ToAA legislation in the light of the Supreme Court decision in HMRC v Fisher [2023] UKSC44. The concern is that any review will be more akin to a consultation on specific proposals rather than an in-depth holistic review with full consultation and any removal of ambiguity.
The new regime
The four-year FIG regime
The current tax year (2024/25) is the last year for which a remittance basis claim can be made. From tax year 2025/26 onwards a much-simplified regime based on residency will be put in place for considering whether foreign income and realised foreign capital gains will fall to be taxed in the UK. This much-simplified regime is referred to as the four-year FIG regime. The following categories of taxpayer will be eligible for the new regime:
The statutory residence test will be used to determine tax-residence for a tax year. Crucially, and to the considerable disadvantage of taxpayers, the following will be counted as complete tax years:
We will not know for certain until we see the draft legislation, but it appears that it is a continuous four-year period that is looked at (rather than the first four tax years of UK residence after an absence from the UK of at least 10 years). This would mean that if the individual is not UK resident for part of the four-year period the time frame when they can benefit is reduced even more.
Provided they make the claim, qualifying individuals will not be subject to tax on FIG arising/accruing in the first four years of tax residence, regardless of what they do with the FIG. This means that individuals can remit the FIG to the UK without paying tax on the remitted funds. In addition, they will not pay tax on income distributions from non-UK resident trusts in this period and the anti-avoidance provisions attributing FIG to such individuals will be switched off.
Making the claim results in the loss of entitlement to the personal allowance and the CGT annual exemption. However, depending on the quantum of their income the individual might lose that anyway and the CGT annual exemption is now only £3,000. The choice to make the claim is on a year-by-year basis.
After the four-tax year period qualifying individuals will be taxed on income and gains on a worldwide basis in the same way as a UK resident individual domiciled in one of the three UK jurisdictions.
Transitional provisions
The government is committed to two transitional provisions for individuals.
The first is CGT rebasing for current and past remittance basis users. There will be specific qualifying conditions within the draft legislation. It is likely that a qualifying asset will be defined as an asset that was situated outside the UK at a specified date.
Where eligible individuals dispose of a personally held qualifying foreign asset on or after 6 April 2025, they will be able to elect to rebase the value of that asset to its value as at whatever date is specified at the time of the Budget (this was originally said to be 5 April 2019, but the current government is reconsidering).
The second transitional provision is the TRF. The TRF was announced as an attempt to deal with the legacy of unremitted FIGs that have over the years been kept out of the UK and sheltered by the remittance basis. At Spring Budget 2024, the reduced fixed rate was announced as 12% and the facility was to exist for two tax years (2025/26 and 2026/27). The policy paper states that the reduced tax rate and length of time that the TRF will be available for will be set to make use as attractive as possible. It may be, therefore, that the length of time will be longer than the original two years. As stated in the policy document the government gave a commitment to explore ways to expand the TRF to include stockpiled income and gains within overseas structures. Further details of the reduced tax rate, TRF period and scope will be provided at the time of the Budget.
Overseas Workday Relief (OWR)
Eligibility for OWR is expected to be reformed in line with the new regime. Only individuals arriving in the UK from 2025/26 onwards who are eligible for the new four-year FIG regime will be able to access OWR. OWR will only be available for the first three tax years. For that period, OWR will continue to provide income tax relief for earnings relating to overseas duties where there is a mixed UK/overseas employment contract. In contrast to the current regime, these earnings will be able to be remitted to the UK without any tax charge.
It may be that OWR is reformed more fundamentally given the comment in the policy paper that officials will consult on the design principles for this tax relief. Consultation will take place in stakeholder meetings over the summer with an announcement in the Budget.
Trusts
FIGs that arose in protected non-UK resident trusts before 6 April 2025 will not be taxed unless matched to distributions or benefits (whether UK or foreign) paid to UK residents. The new four-year FIG regime will prevent a tax charge arising in such circumstances. However, in this circumstance, the legislation will not view the payment/benefit as giving rise to a matching event so the trust income and/or gains pools will not be reduced. The onwards gifts rules are to be modified.
For income and gains arising/accruing after 5 April 2025, the trust protections will not apply. Anyone who comes within the four-year FIG regime will not be taxed on distributions or benefits in the tax years to which the four-year FIG regime applies. After that or for those who do not qualify for the four-year FIG regime, they will be subject to the full rigour of the anti-avoidance provisions. If they can benefit from the trust, this means being subject to tax on all trust income on the worldwide basis (the settlements regime) and on the net trust gains each tax year (TCGA 1992 s 86).
The trust protections, when coupled with the IHT protection for foreign situs property within excluded property trusts, were the main reason why the changes in 2017 did not result in significant numbers of UK resident foreign domiciled individuals leaving the UK. However, removing the trust protections at the same time as reducing the favourable tax period and (most drastically) removing IHT protection is a very different proposition.
Settlors could avoid being subject to the income tax and CGT anti-avoidance provisions by having trust deeds amended prior to 6 April 2025 to exclude individuals that would trigger attribution of income and/or gains. This is easier with the income tax provisions as just the settlor and their spouse/civil partner need to be excluded from benefitting (though the spouse/civil partner only has to be irrevocably excluded whilst the settlor is alive and can be added after the settlor is dead).
The CGT anti-avoidance provisions ensure that the range of beneficiary that will result in attribution of gains to the settlor is so wide as to include all immediate family members (i.e. virtually everyone that most settlors would want to benefit). Amending the trust deed such that the provisions would not be applicable is unlikely to be palatable in most cases.
It has long been anomalous that the CGT settlor charge is wide in its scope. Aligning it with the income tax anti-avoidance provisions for trusts (the settlements regime) would be sensible, such that:
No rebasing is proposed with respect to pregnant gains within trusts which is somewhat incongruous and ideally this will be re-visited as trust rebasing for the purposes of the CGT settlor charge could be introduced for all assets within trust structures. In 2008, there was such similar rebasing with respect to the CGT beneficiary charge when it was extended to UK resident foreign domiciled individuals and extending the CGT settlor charge to UK resident foreign domiciled individuals is more significant in terms of the penal nature of the provisions.
IHT: individuals
From 2025/26, the UK will move to a residence-based regime for IHT. An individual will be subject to UK IHT on foreign situs assets after ten years of UK residence. In addition, once an individual is caught within the UK IHT net, unless an Estate Treaty provides relief, they will have to be non-UK resident for ten-years to be free of its clutches. This ten-year tail is particularly contentious and will result in many individuals leaving the UK earlier than they might otherwise have done.
IHT: trusts
Although not entirely clear, it is understood that, regardless of when the trust was created, the UK IHT treatment will mirror that of the settlor. That is, when the settlor is outside the scope of IHT so is the trust and when the settlor is within the scope of IHT (including the ten-year tail period) the trust will be too. There is no grandfathering for current excluded property trusts.
We do not have the details, but as mentioned above the policy paper states that the government recognises that these trusts ‘will already have been established and structured to reflect the existing rules’. Consideration is being given to how the changes can be introduced in a way that allows for appropriate adjustment of current structures and transitional arrangements for affected settlors. There is to be external engagement over the summer and details will again be published in the Budget.
What next?
There are to be ‘engagement sessions’ on IHT and OWR over the summer (August/September). These would seem very similar to the ‘listening events’ that happened earlier in the year, so they are likely to be a chance to express views rather than find out anything new. Details of these will go up on the Gov.uk website in the same way as the May listening events were. Decisions will be published as part of the Budget on 30 October.
There is an intention to release the draft legislation for scrutiny. Details will again be published on the gov.uk website in due course.
Original article can be found here: Much ado about non-doms: the new policy paper (taxjournal.com)
In this decision, the First-tier Tribunal (Tax Chamber) (“FTT”) dismissed an appeal against discovery assessments which disallowed amortisation relief claimed by the Appellant company for three types of goodwill acquired from a partnership. The decision examined the applicability of each of the circumstances set out in s882 CTA 2009 before concluding none of them had been satisfied. It also provided guidance on the meaning of carrying on a business pursuant to s884 CTA 2009. In rejecting the appeal, the FTT reached a number of key conclusions:
What are the practical implications of this case?
This decision should be a warning to partners when changing profit sharing ratios/acquiring additional businesses and companies acquiring partnerships. The key to successfully obtaining amortisation relief for goodwill is strong and independent contemporaneous evidence to support its valuation. In this case, such evidence was lacking:
What was the background?
The key issue the First-tier Tax Tribunal (“FTT”) were asked to determine was whether each of the following goodwill elements (collectively the “3 Goodwills”) fell within the provisions of the intangible fixed assets rules in Part 8 of the CTA 2009 (the “Intangibles Regime”):
A secondary issue of whether the discovery assessments for APEs 26 Jan 2015 and 26 July 2015 were valid was also determined by the FTT.
What did the tribunal decide?
The circumstances in which the Intangibles Regime will apply are set out in s882 CTA 2009 (cited at paragraph 86 of the decision). The FTT held that none of those circumstances applied to any of the 3 Goodwills.
The majority of the decision focused on the DCS Alexander Goodwill, and the FTT found:
In relation to Case B the FTT noted that “we have not seen nor has the Appellant satisfied us that there was any agreement in place between Mr Hewitt and Mr Alexander … to displace the analysis of the goodwill being partnership property”. It is therefore implied that partners can rebut the presumption that individual partners do not own the goodwill of the business by recording the same in a partnership agreement.
The FTT’s other conclusions
Original article can be found here: Warning for partnership personnel changes? (Armour Veterinary Group v HMRC) – Lexis Nexis
What’s keeping you busy at work?
As I am sure is the same for everyone in tax, the furore in the run up to 4 July. Specifically, sifting through and decoding manifesto policies combined with health checks of existing structures to try to gage the impact for clients of what we understand will be introduced.
If you could make one change to tax, what would it be?
It’s difficult to choose just one! Particularly topical is the constant tinkering of/adding to HMRC powers which has found its way into manifesto promises. Until HMRC use their existing powers more effectively (see recent £14m ball drop re our friend Baxendale Walker [P Baxendale-Walker v HMRC [2024] UKUT 154 (TCC)]), we ought not to be adding more pages to the legislation in this area.
Another perennial gripe, highlighted in recent years in the context of the IR35 regime, is what I think the economists call horizontal equity. It just doesn’t feel right that that an individual who operates as a sole trader is taxed in an entirely different way with a significantly different fiscal outcome to the same individual, operating the same business who chooses to incorporate.
Has a recent change in HMRC practice impacted your work?
The ever-evolving methodology for resolving disputes adopted by HMRC has a big impact on my day-to-day job. The current mechanism can be prohibitively linear (the matter goes from A to B to C), rather than what might be considered a more efficient strategy with A, B and C all reaching a cohesive agreement (as happens in the High-Risk Wealth Programme cohort). The length of time it takes to resolve anything is becoming very protracted.
The Failure to Correct 200% penalties are not helping with some dead lock positions. These penalty levels are giving people a reason to fight which is obstructing settlement. The rationale and driver for these penalties was great in the context of Requirement To Correct but it was perhaps only appropriate in that short time window. Maybe a new government will deliver us a neatly wrapped new disclosure facility (akin to the pragmatism we had with the Liechtenstein Disclosure Facility) with a shiny bow on top.
What do you know now that you wish you’d known at the start of your career?
Be patient. It will come. I wanted to know everything all at once and it is not until you have a few grey hairs (covered in blond!) that you appreciate that learning and building is a lifelong endeavour so enjoy the journey, don’t worry about the destination.
Are there any new rules that are causing a particular problem in practice?
The reform of the non-dom legislation is going to be seismic; one can only hope that the relevant people take their time and consult those with boots on the ground to get it right and to not squash the global competitiveness of the UK as a destination of choice for wealth and talent. The TOAA legislation (particularly the application of the motive defence) is going to take on a new dimension as a direct result of these changes.
What are clients currently asking about?
There are many questions around the future of Excluded Property Trusts and grandfathering and the ten year IHT tail which is set to drive HNWs from the UK. Oh and how to become non-UK resident.
Finally, you might not know this about me but...
I am the best lawyer and tax adviser I can be when I am given the flexibility to be the best mum I can be. I do a lot of work around retaining talent and navigating the motherhood penalty. It is something I feel very passionate about.
Helen McGhee is a Partner in the Joseph Hage Aaronson contentious tax team specialising in UK and international tax disputes. Her specialism is the taxation of nondoms but she advises on a wide range of tax issues. Helen is a member of STEP and is a CEDR accredited mediator.
Email:hmcghee@jha.com; tel: 020 7851 8879
Original article can be found here: One minute with... Helen McGhee (taxjournal.com)
In recent months, the First-tier Tax Tribunal has presided over 3 headline grabbing domicile cases which, whilst offering little precedential value, set out some useful commentary on the multi factorial approach taken by HMRC and ultimately the tribunal in determining an individual’s domicile status. This note reviews the decisions made in Shah v HMRC [2023] UK FTT 539 (TC), Strachan v HMRC [2023] UKFTT 00617 (TC) and Coller v HMRC [2023] UKFTT 212 (TC).
This case concerned an appeal against an IHT assessment raised by HMRC concerning the estate of Mr Shah. Mr Shah was born in Karachi in 1929, travelled back and forth to Tanzania to some extent over the years and then moved to the UK in 1973 where he lived until his death in 2016.
As the party asserting the change in domicile, HMRC had to prove their case (based on the balance of probabilities) that Mr Shah had acquired a domicile of choice in the UK contrary to what his executors claimed that Mr Shah had always been intent to return to India upon retirement.
The tribunal concluded that Mr Shah had settled and had the intention to remain in England permanently – he had acquired a domicile of choice here and any intention of moving back to India was described as “at best vague”.
Many factors contributed to this decision, including (but not limited to):
This case is particularly relevant for long-term UK resident individuals who may hope to take advantage of a UK estate tax treaty (such as with Pakistan or India) to potentially limit their exposure to UK inheritance tax by virtue of non-UK domicile status.
Mr Strachan completed his self-assessment tax returns for the tax years 2011-12 to 2015-16 on the basis that he had abandoned his UK domicile of origin and had acquired a domicile of choice in Massachusetts. HMRC disagreed, and issued discovery assessments for the first four years, and a closure notice and amendment for the fifth year.
The judge held that: “Where a person has two homes (Mr Strachan still maintained his London residence), a domicile of choice can only be established in a jurisdiction if the person has his ‘chief’ or ‘principal’ home in that jurisdiction.”
Mr Strachan’s US home did not constitute his chief residence as it was used almost exclusively for holidays, and he did not move to Massachusetts until he was diagnosed with Alzheimer’s in 2020. HMRC asserted that he had stronger ties to the UK both through work and socially.
Importantly, it was further found that Mr Strachan had been “careless” as he had not taken any professional advice on his domicile status since 1987, and had assumed that he was domiciled in Massachusetts, when a reasonable taxpayer in his position would have taken new advice given the significant changes to his position during that time. It is vital to keep a domicile status under constant review. HMRC were unable to prove that Mr Strachan’s carelessness had caused a loss of tax thus his appeals were successful in part.
The four main issues considered in this case were:
The tribunal underwent a detailed forensic review of many years of Mr Coller’s family history before concluding that his father must have acquired an English domicile of choice prior to his son’s birth thus Jeremy also had an English domicile of origin. Thereafter the mother’s domicile was irrelevant albeit the tribunal commented upon such extensively.
Mr Coller had been educated in the UK and maintained strong social and philanthropic ties here. The tribunal considered that in the context of his wider circumstances his intention to ultimately relocate and settle in Israel upon his divorce in 2012 (despite significant real estate investments there) was not consistent with his life in London where his children were at school.
The cases provide useful commentary and insight into the approach the courts will take and certainly highlight that those seeking to maintain or establish any non-UK domicile status must ensure they have consistent evidence to support this. Vague statements of intent to settle elsewhere are of insufficient evidential value.
The issue of maintaining a non-UK domicile as a matter of law remains of vital importance to many still benefiting from trust protections. Any domicile enquiry can be protracted and emotionally and financially draining (expert advice is pivotal in managing the flow of information) and early and up to date advice is pivotal.
If you wish to discuss domicile or require assistance with HMRC enquiries, please contact Helen McGhee or Daisy Oliver at HMcGhee@jha.com DOliver@jha.com.
The so-called non-dom regime that has played a significant role in the UK’s tax framework for decades may be on its way out. This perhaps somewhat antiquated and arguably no longer fit for purpose regime has for many years allowed wealthy “foreigners” living in the UK to benefit from favourable tax treatment on their foreign income. The approximately 70,000 non-UK domiciled individuals currently claiming such tax status on their UK tax returns (broadly speaking those who reside here for a fixed period and ultimately intend to leave the UK) are only liable for UK taxes on UK source income and gains; their foreign income and gains are subject to the remittance basis of taxation meaning they are taxed only to the extent that they bring this wealth to the UK. A system which encourages wealthy individuals to accumulate wealth outside of the UK and punitively taxes them for bringing funds to the UK seems counterintuitive (leaving aside a discussion around the complex Business Investment Relief rules introduced in April 2012).
Recent public scrutiny around Akshata Murphy (Mrs Sunak) has called the effectiveness of this regime once again to the forefront (there were significant attempts at reform back in 2008 fervently opposed by Greek shipowners and again sweeping changes came in in 2017) with political promises to enhance transparency and equality in the tax system an undeniably challenging objective to achieve whilst also importantly not compromising the attractiveness of the UK (London primarily) as a well positioned and well established global financial hub. Migrants represent a significant percentage of high income, high productivity occupations in financial and professional services in banks/ hospitals alike and there is no desire to haemorrhage worker bees. Reportedly wealthy individuals are already leaving the UK in favour of establishing domicile status in tax havens like Monaco, Switzerland, and Dubai. Migration consultancy Henley & Partners and data firm New World Wealth say more than 12,000 rich individuals have left the UK since 2017. The 2017 reforms significantly limited the tax advantages for long-term non-doms by introducing the concept of deemed domicile for income tax and capital gains tax so once UK resident for more than 15 of the previous 20 tax years, individuals could no longer shelter wealth from these taxes. The changes to the taxation of excluded property trusts (beyond the scope of this article) also further eroded the benefits for some long-term UK resident non-UK domiciled individuals.
It must be that we have moved away from a tax system pinned to an archaic concept of “foreignness” (the idea of “domicile” could easily just be put back into an area of law distinct from tax where Dicey originally did not intend for it to live!) and when we consider the two Chelsea bankers living next door to each other, one originally from Germany and one with strong ancestral roots in the UK, they ought to be taxed on the same basis. But what if one plans only to stay here for 5 years- should he be treated differently to the other? It is also true that we want wealth creation and investment in the UK and there is a balance to be struck.
Will abolishing the non-dom regime prompt a significant mobility response? And what ought we to replace it with some kind of unwieldy (particularly when considering double tax treaty benefits) US style citizenship regime? A Canadian style exit tax on departure? Or a Swiss style arbitrary annual charge to benefit from a more favourable tax regime?
There are many questions to engage with before significant steps are taken and considering the context of the regime and where it sits as part of a wider fiscal policy is vital. When raising questions around the future of the non-dom regime one might consider its long-term usefulness as a potential mechanism to tax and encourage wealth re-distribution in this country? Any reform of the non-dom rules ought to interrelate to the proposed review of IHT- a tax on the transfer of wealth. What will no question cause a non-dom to flee the UK would be a 40% tax on death on his worldwide estate not long after he arrives here!
What about an all-round more effective system of taxation around accumulated wealth rather than income creation. That would prompt serious consideration around trust protections even since 2017 it is still possible for well advised non-UK doms to shelter significant wealth in trust wrappers. The non-dom regime should not be reviewed or reformed in a vacuum there is a wider conversation to be had and the atmosphere is as ripe as it ever has been for whole scale long lasting reform. It must be that to protect the future of our position on the global stage there needs to be serious political and economic certainty.
Striking the right balance between maintaining competitiveness on the global stage (keeping a keen eye on regimes promoted in competing jurisdictions) and amending a somewhat broken non-dom regime to make it fit for purpose in the modern world will require careful consideration and even more careful drafting of any new rules with the correct amount of attention paid to any transitional period. What is needed is a cross party consensus and not faux attempts at lazily drafted legislative reform carrying a distinct whiff of vote winning by simply saying what the often-ill-informed populace want to hear.
Full magazine can be read here.
On 14 June 2023, HMRC published a substantially rewritten Code of Practice 9 (“COP9”). Set out below are the key changes implemented as a result of this publication.
What is COP9?
COP9 is a process whereby a person whom HMRC suspects is guilty of tax fraud is given the opportunity to make a disclosure setting out the background/reasons for any non-compliance and make good any potentially unpaid tax. In exchange, subject to the exceptions listed under “Key Change 2” below, HMRC will formally agree not to open a criminal investigation. This agreement is called the Contractual Disclosure Facility or “CDF”.
Key Change 1 – Broadening the Definition of Tax Fraud
Previously, tax fraud was defined as “dishonest behaviour that led to or was intended to lead to a loss of tax”. Under the new COP9 however, this has been extended to “dishonest behaviour that led to or was intended to lead to a risk of loss of tax”. It further confirms that an individual will still fall within this definition even if the fraud is in respect of tax owed by another, even if the individual does not personally make any gain.
Key Change 2 – New Guidance on Circumstances When HMRC Can Escalate to Criminal Investigation
Pursuant to the new COP9, HMRC may still conduct a criminal investigation under the following circumstances:
Key Change 3 – Personal Attendance at Meetings
The new COP9 guidance emphasises the importance HMRC now places on the individual attending meetings, stating “we view your attendance and your cooperation at meetings if we ask you to attend them as a strong indication of your engagement with the investigation.” Whilst an advisor may accompany the individual, under the updated COP9 procedure, it is clear that personal attendance by the individual is expected.
Key Change 4 – Payment to HMRC
Included within the new terms of the CDF is an expectation that the individual will make a payment on account of any arrears of tax or duty. This obligation arises at the stage of making the Outline Disclosure but there is also an expectation that the individual will make payments on account throughout the investigation as well as upon completion of the Formal Disclosure.
For further advice on COP9, please contact Helen McGhee hmcghee@jha.com
HMRC sends 'one to many' letters to those named in the Pandora Papers haul.
The Pandora Papers leak of almost 12m documents back in 2021 purportedly exposed the secret accounts and dealings (including potential tax evasion/ avoidance and money laundering) of 35 world leaders (including the late HM Elizabeth II), as well as many politicians and billionaires. The data was obtained by the International Consortium of Investigative Journalists in Washington DC and led to one of the biggest ever global financial investigations.
International cooperation: Increased tax compliance has now very much earned its place on the global stage and strengthening international cooperation is critical to addressing the challenges posed by the Pandora Papers. Tax authorities worldwide have established a network of shared intelligence, joint investigations, and combined efforts of gathering evidence, to uncover complex financial arrangements and identify taxpayers involved in tax evasion.
HMRC activity: Off the back of the scandal, HMRC pledged to take swift action to tackle offshore tax evasion and their reactively appointed dedicated taskforce has presumably been very busy for a couple of years poring over the apparent treasure trove of information, investigating those individuals, corporations, and institutions implicated in the leaked data. The sophisticated technology now available to HMRC enables them to identify patterns, cross-reference data, and detect discrepancies that may pinpoint tax irregularities.
HMRC’s powers to deter and hold accountable those taxpayers found to be delinquent in their tax obligations have been steadily increasing in recent times and penalties can be imposed of up to 200% of potential lost revenue as well as HMRC having the option to initiate criminal proceedings and ultimately impose custodial sentences for deliberate non-compliance.
Nudge letters: HMRC is now actively contacting (via a scattergun approach) those it believes have additional tax liabilities to disclose, giving them 30 days to check and take steps to correct their tax position. It may be that Code of Practice 9/ contractual disclosure facility (as recently updated) route to disclosure may be appropriate in certain high profile or high risk cases as a means to afford the taxpayer protection (many structures that have prompted investigation will have been entirely legitimately established) from criminal prosecution when HMRC may assert dishonest behaviour. Making disclosures to HMRC, particularly of tax fraud and deliberate behaviour, is a specialist area.
The Pandora Papers exposé has increased public awareness of the ongoing global battle for fair and transparent worldwide taxation. HMRC is now finally taking positive enforcement action (commensurate of their strained resources) and capitalising on the opportunity to boost the public coffers, but fair and proper taxpayer representation should never be compromised.
Advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. To compound the issue, the Russian invasion of Ukraine and the corresponding economic fallout prompted domestic governments to increase transparency in relation to investments held by wealthy foreign individuals (with a focus on oligarchs).
In the UK, in the context of the cost-of-living crisis, public opinion certainly seems to be in favour of increased accountability for high-net-worth individuals (eg, on 9 October 2022, 63% of Britons surveyed thought that “the rich are not paying enough and their taxes should be increased”).1
HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work; they are well placed to take advantage of new international efforts to increase tax compliance, particularly considering the already extensive network of 130 bilateral tax treaties in the UK (the largest in the world).2 The UK was also a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and personal tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
It should be noted that a somewhat piecemeal approach, with constant tinkering makes compliance difficult for the taxpayer and is often criticised for lacking the certainty that a stable tax system needs to thrive.
Register of Overseas Entities
The ECA was fast-tracked through Parliament in March 2022 in response to the Russian invasion of Ukraine. It introduced the Register of Overseas Entities, which requires foreign entities that own or acquire property in the UK to register with Companies House and provide details of their beneficial ownership. The legislation received royal assent on 15 March 2022 and the register came into force on 1 August 2022.
Affected non-UK entities have to register the details of beneficial owners within six months from that date (ie, on or before 31 January 2023) and the obligation to register new acquisitions and to update changes in existing registrations will be ongoing.
Broadly, the ECA requires non-UK entities that own or buy UK land to disclose details of beneficial owners with significant control (eg, participants owning more than 25% of the shares) before they may receive an ID number which, in turn, is needed to complete the property title registration.
The information provided will be verified and updated annually. An application to the register will also require details about any disposition made since 28 February 2022, or a declaration saying that no disposition has been made.
Unexplained Wealth Orders
The ECA has also made some significant changes to the operation of unexplained wealth orders (UWOs), which were first introduced by the Criminal Finances Act 2017 to extend the powers available under the Proceeds of Crime Act 2002 (POCA 2002).
This requires individuals to declare the nature and extent of their interest in certain assets and to explain how they obtained such an interest or face seizure of such assets. UWOs have to date been used sparingly but the changes introduced by the ECA may allow cheaper and easier access to them as a tool available to enforcement agencies.
Under the ECA, UWOs can now be directed at a responsible officer as a means of “piercing the corporate veil” and stopping complex ownership structures from obscuring a source of wealth. The ECA also extends the time period for an authority to act or decide on the next steps in relation to the UWO and, importantly, curtails any application for costs against the authority.
To supplement the ECA, the Economic Crime and Corporate Transparency Bill is currently passing through Parliament. Part 1 of the bill will purportedly constitute the “biggest upgrade to Companies House” since the UK introduced a register of companies in 1844, by requiring all directors as well as persons with significant control and those delivering documents to have their identities verified. Part 2 seeks more information about partners in limited partnerships and requires limited partnerships to update the Registrar of changes and submit annual statements confirming that certain information held is correct.
Trust Registration Service (TRS)
The Trust Registration Service (TRS) is a register of the beneficial ownership of trusts. It was set up in 2017 as part of an EU anti-money laundering directive aimed at combating money laundering, serious crime, and terrorist financing.
Each EU member state has a similar register, and the UK agreed to maintain the TRS as part of the Brexit Withdrawal Agreement. The Retained EU Law (Revocation and Reform) Bill, presented to the House of Commons for its first reading on 22 September 2022, should not have an impact on the existence of the TRS. The TRS is maintained by HMRC and mandates that trustees of certain trusts must provide HMRC with specific information within a given time period. Trusts with a UK tax obligation have been required to register since 2017, and non-taxable trusts since 2020.
Broadly, the following two categories of trusts must be registered:
The primary registration deadline was 1 September 2022, but it varies depending on the type of trust (taxable or non-taxable) and date of creation. Currently, trusts are generally required to register within 90 days of any event that causes the trust to be liable to register, eg, becoming liable for UK tax or entering into a “business relationship” within the UK. Taxable trusts must declare that the TRS is up to date by 31 January each year.
Person of Significant Control (PSC) Register
The PSC Register has been relevant for most UK companies and LLPs since April 2016. Companies House maintains the Central PSC Register but entities must also keep their own individual register.
A PSC meets one of the following conditions as someone who:
The entity's register must include the information within 14 days of being confirmed and any update must be recorded at Companies House within an additional period of 14 days.
Mandatory Disclosure Rules (MDR) for Common Reporting Standards (CRS)
The implementation of the MDR marks the UK’s commitment to a global approach to tax transparency following its EU departure. The hope is that adopting a global MDR will further promote country-by-country consistency in the application of disclosure and transparency so that aggressive tax planning can be tackled globally.
When the UK left the EU, it was no longer bound to implement the widely criticised and unduly onerous EU directive on administrative co-operation (known as DAC6), designed to give EU tax authorities early warning of new cross-border tax schemes. DAC6 required intermediaries, such as law firms, accountants and tax advisers, to file reports where arrangements met one of several "hallmarks".
DAC6 was implemented in the UK in January 2020 but following Brexit was quickly replaced by the draft MDR regulations which reflect and implement the OECD model rules. After a lengthy consultation which finished on 8 February 2022, the new MDR regulations were expected to come into force last summer. However, so far nothing has been said about its enactment.
It should be noted that while SI 2020/25, which implemented DAC6 in the UK, will be replaced and repealed; those regulations will still affect arrangements entered into before the MDR regulations come into force.
While the two regimes are broadly similar, under MDR there will be a reporting exemption, where disclosing the information would require the intermediary to breach legal professional privilege. There is also a very welcome de minimis exemption that applies to reporting a potential CRS avoidance arrangement where the value of the financial account is less than USD 1 million.
Conclusion
Attempting to maintain some fiscal oversight on a global scale may be commendable and apparently consistent with current public opinion.
But there will always be a challenge where there is continued opportunity for tax arbitrage, as each sovereign state is entirely at liberty to levy taxes at a rate and in the manner most economically suited to local economic conditions. In addition, these measures are always subject to political will.
The vast network of tax treaties and information-sharing initiatives will nonetheless discourage any activity that seeks to exploit tax arbitrage beyond healthy competition, and with the now extensive raft of anti-avoidance, increased tax-compliance initiatives, there should no longer be any opportunity to hide wealth or assets beyond the reach of at least one tax authority.
On a more personal level, the message to clients as regards tax transparency is very firmly to get ahead of it. Get used to increased scrutiny from a larger and more varied group of stakeholders. Proactive rather than reactive mitigation is the future. If the questions is privacy versus the greater good of prevention of financial crime then opt for integrity. As a society we must advocate respect and responsibility towards the financial ecosystem which might mean to sacrifice some form of control over confidentiality.
21 October 2022
Helen McGhee CTA TEP
Nahuel Acevedo-Pena
1 YouGov (2022) “Are taxes on the rich too high or low in Britain?”, accessed 18 October 2022.
2 The Tax Foundation (2022) “International Tax Competitiveness Index 2022”, p 30, accessed 19 October 2022.
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
The legislation is contained in Section 87I-M TCGA 1992 in relation to potential capital gains tax (CGT) charges (the stockpiled gains legislation), Section 643I-N ITTOIA 2005 (the settlements code) and Section 733B-E ITA 2007 (the transfer of assets abroad or TOAA code) to capture income tax charges.
Going forward, where a distribution has been made (or a benefit provided) to a non-UK resident (or remittance basis user) from a non-UK trust or structure within the TOAA code which would theoretically be outside the charge to UK tax, then any gift or benefit deriving from that initial gift that is subsequently passed on to a UK resident within three years is treated as made to that UK recipient directly from the non-UK trust or structure. The ultimate UK recipient of the gift is then liable to income tax or CGT where the gift can be matched to offshore income or gains.
Although the legislation requires that there is an intention from the outset by the offshore recipient of the gift to pass it on, the prospect of using lack of intention to defeat any tax charge is scant given that Section 87I(8) TCGA 1992 creates a presumption of intention when an onward gift is made.
The burden of proof is therefore firmly on the donee to evidence that there was no intention at the time of receipt of the funds to pass them on; it is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.
In addition to taxing these “onward gifts” the new FA 2018 rules also operate to treat payments made to the “close family” (spouse/civil partner – or the unmarried equivalent – or minor child or step child) of a settlor as made to a UK-resident settlor in the event that there is income in the trust structure and the family member is either non-UK resident in the year of the payment or is a remittance basis user who keeps the payment outside the UK. The settlor then has an exercisable right to recover the tax paid from the beneficiary – it would be wise to obtain a certificate from HMRC to confirm the amount of tax paid.
Note that the settlor will not be taxed twice on the payment (although it may be that the settlor is taxed by virtue of another provision elsewhere).
The rules for determining the amount or value of the gift upon which tax becomes due varies slightly depending on which part of the legislation is invoked, ie, stockpiled gains, settlements legislation or TOAA code. For CGT purposes, complicated rules set out how a gift is split into “slices” of taxed, potentially taxed and untaxed funds which are attributed in a particular order.
The operation of the technical detail of the legislation can produce some curious results; for example, if the ultimate recipient of an onward gift is a remittance basis user then depending upon which “slice” is attributed to them, they may either not be taxed at all, or be taxed only if funds are remitted in the tax year of receipt but they may not be taxable if the funds are brought to the UK in the following tax year. Similar oddities exist for income tax purposes.
“There is no limit to the length of any chain of gifts that the rules can apply to where there are multiple gifts among many parties.”
The interaction with the TOAA code adds an additional layer of complexity to already complex legislation. Some onward gifts are taxable by the TOAA code in priority to and without the need to engage the new onward gifts rules. The consequence of this is that there may be situations where the original recipient (a remittance basis user) receives an income distribution from a trust (potentially taxable – but not actually taxed – on them directly) and makes an onward gift, but the onward gift rules are not actually triggered because they give way to the TOAA code.
Note that as an additional tool in their armoury, in circumstances where these targeted anti-avoidance rules might be invoked, HMRC could also seek to apply the General Anti-Abuse Rule where arrangements “cannot reasonably be regarded as a reasonable course of action, having regard to all the circumstances”.
There is no limit to the length of any chain of gifts that the rules can apply to where there are multiple gifts among many parties. In theory, this means that a UK recipient may have a tax obligation that they know nothing about and about which they have very little power to obtain the necessary information; namely, whether any gifted funds have been provided out of funds received from trusts or offshore structures within the last three years and the residence and tax status of every individual through whom the funds have passed.
HMRC is now looking at the third year of taxpayers’ returns filed since these new rules were introduced (the 2021 returns filed in January 2022) and advisers and taxpayers can expect intense HMRC scrutiny. The rules are complicated, broadly drafted, difficult to understand and apply, and operate on the assumption that the taxpayer has perfect information, which will not match reality for most taxpayers.
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
The ECA introduced the Register of Overseas Entities, which requires foreign entities that own or acquire property in the UK to register with Companies House and provide details of their beneficial ownership. The legislation received royal assent on 15 March 2022 and the launch of the register is scheduled for 1 August 2022.
Going forward, affected non-UK entities will have to register the details of beneficial owners within six months from that date and the obligation to register new acquisitions and to update changes in existing registrations will be ongoing.
Broadly, the ECA requires non-UK entities that own or buy UK land to disclose details of beneficial owners with significant control (eg, participants owning more than 25% of the shares) before they may receive an ID number which, in turn, is needed to complete the property title registration.
The information provided will be verified and updated annually. An application to the register will also require details about any disposition made since February 2022, or a declaration saying that no disposition has been made.
The ECA has also made some significant changes to the operation of unexplained wealth orders (UWOs), which were first introduced by the Criminal Finances Act 2017 to extend the powers available under the Proceeds of Crime Act 2002 (POCA 2002).
This requires individuals to declare the nature and extent of their interest in certain assets and to explain how they obtained such an interest or face seizure of such assets. UWOs have to date been used sparingly but the changes introduced by the ECA may allow cheaper and easier access to them as a tool available to enforcement agencies.
Under the ECA, UWOs can now be directed at a responsible officer as a means of “piercing the corporate veil” and stopping complex ownership structures from obscuring a source of wealth. The ECA also extends the time period for an authority to act or decide on the next steps in relation to the UWO and, importantly, curtails any application for costs against the authority.
"This requires individuals to declare the nature and extent of their interest in certain assets and to explain how they obtained such an interest or face seizure of such assets."
The Trust Registration Service (TRS) is a register of the beneficial ownership of trusts. It was set up in 2017 as part of an EU anti-money laundering directive aimed at combating money laundering, serious crime, and terrorist financing.
Each EU member state has a similar register, and the UK agreed to maintain the TRS as part of the Brexit Withdrawal Agreement. The TRS is maintained by HMRC and mandates that trustees of certain trusts must provide HMRC with specific information within a given time period. Trusts with a UK tax obligation have been required to register since 2017, and non-taxable trusts since 2020.
Broadly, the following two categories of trusts must be registered:
The primary registration deadline is 1 September 2022, but it varies depending on the type of trust (taxable or non-taxable) and date of creation. After the 1 September deadline, trusts will generally be required to register within 90 days of any event that causes the trust to be liable to register, eg, becoming liable for UK tax or entering into a “business relationship” within the UK. Taxable trusts must declare that the TRS is up to date by 31 January each year.
The PSC Register has been relevant for most UK companies and LLPs since April 2016. Companies House maintains the Central PSC Register but entities must also keep their own individual register.
A PSC meets one of the following conditions as someone who:
The entity's register must include the information within 14 days of being confirmed and any update must be recorded at Companies House within an additional period of 14 days.
The implementation of the MDR marks the UK’s commitment to a global approach to tax transparency following its EU departure. The hope is that adopting a global MDR will further promote country-by-country consistency in the application of disclosure and transparency so that aggressive tax planning can be tackled globally.
“There should no longer be any opportunity to hide wealth or assets beyond the reach of at least one tax authority.”
When the UK left the EU, it was no longer bound to implement the widely criticised and unduly onerous EU directive on administrative co-operation (known as DAC6), designed to give EU tax authorities early warning of new cross-border tax schemes. DAC6 required intermediaries, such as law firms, accountants and tax advisers, to file reports where arrangements met one of several "hallmarks".
DAC6 was implemented in the UK in January 2020 but following Brexit was quickly replaced by the draft MDR regulations which reflect and implement the OECD model rules. After lengthy consultation, the new MDR regulations are expected to come into force in the summer of 2022. It should be noted that while SI 2020/25, which implemented DAC6 in the UK, will be replaced and repealed; those regulations will still affect arrangements entered into before the MDR regulations come into force.
While the two regimes are broadly similar, under MDR there will be a reporting exemption, where disclosing the information would require the intermediary to breach legal professional privilege. There is also a very welcome de minimis exemption that applies to reporting a potential CRS avoidance arrangement where the value of the financial account is less than USD1 million.
Attempting to maintain some fiscal oversight on a global scale may be commendable and apparently consistent with public opinion. But there will always be a challenge where there is continued opportunity for tax arbitrage as each independent state is entirely at liberty to levy taxes at a rate and in a manner most economically suited to local economic conditions and subject to political will.
The vast network of tax treaties and information-sharing initiatives will nonetheless discourage any activity that seeks to exploit tax arbitrage beyond just healthy competition and with the now extensive raft of anti-avoidance, increased tax-compliance initiatives, there should no longer be any opportunity to hide wealth or assets beyond the reach of at least one tax authority.
Video below is an exploration who might be vulnerable to an HMRC enquiry on domicile and how best to deal with such enquiries.
The types of non-doms most vulnerable to scrutiny:
Non-doms can protect themselves:
Finally, information requests under Schedule 36 to the Finance Act 2008:
The invasion of Ukraine has prompted the UK government to speedily publish the draft legislation for the Economic Crime (Transparency and Enforcement) Bill 2022 which requires foreign entities that acquire UK property (freehold interests or leases granted for more than 7 years) to register with Companies House and declare details of their beneficial ownership. Implementation will proceed at record pace following royal assent and ultimately the register could be open for public inspection (albeit with restricted access to date of birth and residential addresses of beneficial owners).
The objective of the Bill is to crack down on foreign criminals using UK property to launder proceeds of corruption.
Any non-UK entity that already owns (and indeed acquired at any time in the previous 20 years) or going forward buys UK land will be required by the new rules to disclose to Companies House details of its beneficial owners/individuals with significant control (broadly those owning more than 25% of the shares/voting rights or otherwise exercising significant control) in exchange for the issue of an ID number necessary to complete title registration. Information provided will need to be verified and updated annually. Sanctions for non-compliance of course will include restrictions on an ability to create charges over or dispose of the land as well as daily fines of £500 and/or criminal sanctions including prison sentences of up to 5 years. At present those who already own land will have a grace period of 18 months to register.
The effects of the new legislation will be felt not only by the Russian oligarchs and kleptocrats it is aimed at but also by those families who have historically favoured holding UK land through offshore entities as a means of asset protection or to safeguard privacy for other reasons. The new rules when read alongside the expanded scope of the UK Trust Register are a significant step towards global transparency.
HMRC has published a consultation on draft regulations to implement the Organisation for Economic Cooperation and Development (OECD) rules on mandatory disclosure of certain avoidance arrangements. Helen McGhee and Nahuel Acevedo-Peña explain the background to the new rules and their implications.
What is the history of the UK’s current disclosable arrangements regulations?
The OECD published the Model Mandatory Disclosure Rules (MDR) for CRS Avoidance Arrangements and Opaque Offshore Structures back in March 2018. The EU engineered its own version of these rules in parallel to the OECD, and these are set out in an amendment to the Directive on Administrative Cooperation, known as DAC 6.
DAC 6 was designed to give EU tax authorities early warning of new cross-border tax schemes by requiring intermediaries (including law firms, accountants and tax advisers) to file reports where arrangements met one of a number of hallmarks (in Categories A to E) that could be used to avoid or evade tax. As the UK was, at that time, an EU Member State, DAC 6 was implemented in the UK in January 2020 in the form of the International Tax Enforcement (Disclosable Arrangements) Regulations 2020, SI 2020/25 (for the purposes of this News Analysis the UK implementing regulations are simply referred to as DAC 6). It will not have gone unnoticed that the UK has now left the EU and the government has made the decision to implement the OECD model rules to replace the somewhat controversial EU version of the rules.
Why is the government proposing to introduce new regulations?
DAC 6 prompted some concern among the professional services industry regarding the onerous level of reporting required and the increased administrative burden placed on advisers. Perhaps as a result of the uproar and certainly to reflect the UK’s more global approach to tax transparency following its EU departure, the government amended the UK regulations (to ensure they remained operative from 1 January 2021) and introduced significant modifications to achieve closer alignment with the OECD MDR.
The hope is that adoption of a global MDR further promotes country by country consistency in the application of disclosure and transparency so that aggressive tax planning can be tackled at a global level.
What is the effect of the new regulations, and what differences are there from the existing rules?
The new regulations seek to achieve the same objectives as DAC 6 in requiring the disclosure and reporting of any aggressive cross-border tax arrangements (designed to facilitate non-compliance through the use of CRS avoidance arrangements and opaque offshore structures) in order to allow tax authorities to react promptly to tackle harmful tax practices.
MDR sets out broadly similar reporting requirements for intermediaries (including promoters who design or market the arrangement, service providers who assist or aid the implementation of the arrangement and sometimes taxpayers) as DAC 6 but with some discernible differences and important exemptions.
Many of the differences between the two regimes are minor nuances in the definitions (including a reference to reportable taxpayer in the MDR as opposed to a relevant taxpayer) but importantly HMRC proposes to take a similar approach to the interpretation of these terms in the context of the MDR as it took for DAC 6.
The key differences are the exemptions: see below.
Are there any exemptions from the requirement to report?
The exemptions represent a welcome relief for many tax professionals.
The consultation document states that the regulations are intended to avoid duplicate reporting where possible. Therefore a person may be exempted from reporting where the information has already been reported to HMRC or to a tax authority in a partner jurisdiction. Of real significance (following vehement discussions with the Law Society surrounding DAC 6), there is an exemption from reporting where disclosing the information would require the person to breach legal professional privilege.
For arrangements entered into during the period between 29 October 2014 and the date the regulations come into effect, the regulations will only require reporting of CRS avoidance arrangements, and not opaque offshore structures. Additionally in this period, the reporting requirement will only apply to promoters and not to service providers or taxpayers.
There is also a very welcome de minimis exemption that applies to exempt from reporting a potential CRS avoidance arrangement where the value of the financial account is less than US$1m.
Do historic arrangements need to be reported?
CRS avoidance arrangements entered into between the publication of the CRS (29 October 2014) and the date the MDR regulations come into force will need to be reported subject to the preceding exemptions.
Are we expecting revised HMRC guidance?
HMRC intends to publish guidance on MDR once the regulations are finalised and before the rules come into effect. We can expect that the guidance will be broadly consistent with the existing guidance at HMRC International Exchange of Information Manual IEIM 600000 except where there will be tweaks to reflect the OECD model or to address any gaps in the existing guidance.
When are the new regulations expected to come into force?
The new regulations are expected to come into force in summer 2022. It should be noted that while SI 2020/25, which implemented DAC 6 in the UK, will be replaced and repealed, those regulations will still have effect in relation to arrangements entered into before the MDR regulations come into force.
Should lawyers be advising their clients to do anything now to prepare?
As with DAC 6, there will potentially need to be an audit to ensure any necessary reporting of historic arrangements. The government has acknowledged that this retrospective reporting requirement is likely to create an onerous obligation on businesses and the exemptions outlined above are designed to ease this burden. Where HMRC has previously been informed of an arrangement there is no requirement to notify again. Going forward, when reporting is required, the client must comply with its disclosure obligations within 30 days of the first step of the arrangement being implemented.
Clients ought to be aware of the differences between MDR and DAC 6 where they had previously prepared for the implementation of DAC 6.
The narrative surrounding legal professional privilege is important to note. Lawyers who are unable to report as a consequence of legal professional privilege are still required to ‘notify their client in writing of the client’s disclosure obligations (regardless of whether the client is another intermediary or a reportable taxpayer) within 30 days of the arrangement being made available or the assistance or advice being given’.
KEY POINTS
What is the issue?
On 6 October 2021, the Court of Appeal handed down its hotly anticipated judgment in HMRC v Fisher and others [2021] EWCA Civ 1438. The case considers various aspects of the application of the complex transfer of assets abroad legislation, and how the rules applied to the transfer of a UK telebetting business to a company in Gibraltar.
What does it mean to me?
The Court of Appeal decided that the transfer of assets abroad rules may be invoked where the transfer is procured by a minority shareholder voting in favour of a course of action. It is also clear from the judgment that the motive defence is lost if any commercial rationale is too closely linked to a tax mitigation objective.
What can I take away?
If practitioners are actively pursuing any of the arguments which were the subject of discussion in the Court of Appeal in Fisher, they might be well advised to pause and await an almost inevitable appeal to the Supreme Court. This might offer some much needed finality and clear limits to the scope of the potentially very far reaching transfer of assets abroad code.
The transfer of assets abroad provisions exist to counteract tax avoidance achieved by means of
a relevant transaction which results in income becoming payable to a person abroad by virtue of a transfer of assets. Where the transfer of assets abroad code applies, it operates to treat income arising to the person abroad as belonging for UK tax purposes to any UK resident individual responsible for the original transfer of assets to a non-UK person.
In the case of HMRC v Fisher and others [2021] EWCA Civ 1438, the Court of Appeal allowed HMRC’s appeal and reversed the decision of the Upper Tribunal, ruling (subject to a convincing dissenting judgment from Philips LJ) that:
The story so far
The facts of the case have been rehearsed previously in the Tax Adviser article ‘All Bets Are Off’ (June 2020). To briefly set the scene, the case concerned the Fisher family, who consisted of four members – Stephen, Anne, Peter and Dianne. From the late 1980s until 1999, the family ran a telebetting business (SA) in the UK through a UK company.
The patriarch Stephen dealt with the shops and administration, and had overall responsibility for the company. He and his son Peter were responsible for the day to day running of the business, future planning and strategy, and they made the majority of the decisions. Dianne worked on accounts administration, while the matriarch, Anne, had virtually nothing to do with the business from 1996 onwards and played no active part in the company’s decision making processes. No assessments were raised on Dianne as she had not been UK resident at the relevant time.
In 1999, a major competitor in the betting industry moved its entire betting operation to Gibraltar, which charged a much lower rate of betting duty. The entire industry quickly followed and by July 1999, it had become clear that the only way in which to save the business would be to move it to Gibraltar.
On 29 February 2000, the majority of the SJA business was sold to a Gibraltar company which was also owned by the family (SJG). On the date of the transfer, Stephen and Anne held approximately 38% of the shares of SJA and Peter and Dianne each held approximately 12%. Following the transfer, Stephen and Anne each held 26% of the issued share capital of SJG and Peter and Dianne each held 24%.
Stephen, Anne and Peter were assessed by HMRC under the transfer of assets abroad code to a proportion of the profits of SJG in line with their shareholding from 2000/01 to 2007/08.
The First‑tier Tribunal held that the assessments had been validly raised and that the transfer of assets abroad code was invoked. The FTT also held that the code infringed Anne’s EU law rights as an Irish citizen.
The Upper Tribunal quashed HMRC’s assessments in their entirety, holding that the transfer of assets abroad code did not apply; and that even if it had applied, the taxpayers were entitled to claim the motive defence contained in Income and Corporation Taxes Act 1988 s 741.
The Court of Appeal
Before the Court of Appeal, the following issues were considered:
The tax years under appeal straddled the rewrite of the transfer of assets abroad code from the Income and Corporation Taxes Act (ICTA) 1988 to its current location at Income Tax Act (ITA) 2007 Part 13 Chapter 2. The parties agreed that the rewrite had not altered the law in any relevant way and the judgment refers to the ICTA 1988 provisions.
Who can be a quasi-transferor?
The concept of a quasi‑transferor was first alluded to in the case of Congreve v IRC (1948) 30 TC 163, where the idea emerged that the transfer of assets abroad code could apply even if an individual didn’t actually effect the transfer but instead procured it.
In Vestey v IRC [1980] AC 1148, the concept of a quasi-transferor was narrowed by the House of Lords and considered more akin to individual associated with the transfer. Walton J, who
coined the actual phrase ‘quasi‑transferor’ in IRC v Pratt [1982] STC 756, contributed to the evolution of the concept further and considered (albeit in a different context) whether there could be multiple transferors and a corresponding apportionment of income between taxpayers.
With this backdrop of jurisprudence, the Fisher judgment considers the question as to whether the taxpayers had procured the transfer at length. It was decided that this is a broad spectrum anti‑avoidance provision intended to apply to any number of transferors (or quasi‑transferors) who
could be said to have procured the transfer by virtue of doing something positive to bring about the transfer.
Note that taking no active part in the decision making, merely passively allowing someone else to do something (as Anne had done here), was not enough to bring her within the scope of the provisions – Anne had not procured the transfer and so could not be a quasi-transferor.
In addition, a director who is not also a shareholder could not be a quasitransferor, as he would be acting solely in his capacity as an officer of the company and not on his own behalf. However, directors/shareholders having control jointly (but not individually) of a company may be regarded as together procuring a transfer, thus invoking the transfer of assets abroad provisions.
Lord Justice Phillips, dissenting, considered it wrong in principle and illogical to regard a minority shareholder as procuring an act by the company of which the shareholder was a member simply by voting in favour or otherwise supporting that act. Unless there was a voting pact with other shareholders, a minority shareholder had no power in his own person to procure any outcome. Phillips LJ would therefore have dismissed the appeals in their entirety. Of course, the trouble with arguing that minority shareholders are not able to procure – even if they vote in favour – is that some careful fragmentation takes the taxpayers outside the scope altogether, because no single shareholder’s vote would be decisive. The context here is a company controlled by two parents and their two children.
Was it necessary to have avoidance of actual income tax?
The taxpayers contended that for the transfer of assets abroad code to apply, there needs to have been avoidance of income tax as a result of the transfer – and here the Fisher family were seeking to mitigate betting duty payable by the company.
The House of Lords had previously considered this question in the case of IRC v McGuckian [1997] 1 WLR 991 and had held the contrary – that no actual avoidance of income tax was required. The Court of Appeal saw no reason to disapply the rationale of McGuckian and seemed to state that although s 739 refers to income tax, the underlying objective of the legislation would be undermined if the section could only be in point if there had been income tax avoidance.
The motive defence
Given how potentially far reaching the transfer of assets abroad code is, the motive defence is intended as a means of taxpayer protection to provide some limits to its application; however, it is notoriously difficult to invoke and prove in practice. It was accepted that the transfer was a genuine commercial transaction – the taxpayers were trying to keep up with their competitors. The Upper Tribunal had said that the avoidance of betting duty had simply been the means of achieving the
main purpose, which had been saving the business. Regardless, the Court of Appeal opined that the tax saving or avoidance here was too pivotal and intertwined with the commercial rationale – it was impossible to separate the avoidance of betting duty and saving of the business – and thus it simply could not be said that the avoidance was not one of the purposes of the transaction.
Having a commercial driver is seemingly not sufficient to secure the motive defence where there is also a tax saving on the agenda. Any decision on this subject will be very fact specific and the decision is certainly vulnerable to an appeal.
The EU law defence
The court considered the previous CJEU case law on direct tax infringements, including a reasoned order of the CJEU dated 12 October 2017 in response to a reference from the Upper Tribunal in this case. The CJEU held that Gibraltar is, for the purposes of EU law, a part of the UK and not a separate member state or a third country. It also held that the fundamental freedoms of establishment and free movement of capital do not apply to a situation happening wholly internally within a member state; to say otherwise would compromise the fiscal autonomy afforded to each member state.
Conclusion
No doubt HMRC will be buoyed by the victory and potentially seek to apply the transfer of assets abroad provisions to more circumstances whereby individuals, holding shares in a company which transfers assets outside of the UK, could be said to have procured the relevant transfer.
The transfer of assets abroad code is intricately drafted and the court seems to seek to apply it in a way so as to ensure a fair outcome. It will be interesting to see if the Supreme Court comes to a different conclusion as to what would be fair in this context – one assumes an appeal will be forthcoming.
KEY POINTS
What is the issue?
Her Majesty’s Revenue and Customs has recently closed down the special unit tasked with the investigation of family investment companies (FICs) and broadly given them a clean bill of health.
What does it mean for me?
Those who have been anxious about utilising FICs can now cautiously proceed with an exploration of their usefulness in achieving the objectives of the family.
What can I take away?
FICs are a useful vehicle in any succession planning strategy; however, the tax issues involved are complex so detailed advice should be sought.
Her Majesty’s Revenue and Customs (HMRC) has recently released a report from a dedicated compliance team tasked with looking at the strategy and mechanics of family investment companies (FICs). HMRC has said that it now has a better understanding of who uses FICs and found no evidence of a correlation with non‑compliant behaviour.
Given taxpayers effectively have the green light to proceed, business as usual, in utilising these structures where appropriate, this article considers the practical set‑up and relevant tax considerations for FICs. There is inevitably a tax cost to profit extraction, so it is more common to use the structure for investment roll‑up purposes. It is also worth making reference to the continued use of the trust as a family tax and succession planning vehicle.
There are considerable tax advantages to sheltering the profits of a family enterprise inside the savings box of a corporate vehicle. The relatively low corporation tax rate allows profits to accumulate for the ultimate benefit of future generations.
Set‑up
An FIC can be established with the desired proportions of shareholdings allocated among the family ab initio or, alternatively, by later injecting cash or assets into a company and creating different types of shares for different family members that carry different rights to dividends, entitlement to vote and entitlement to capital on winding up (commonly referred to as alphabet shares). In most cases, ordinary shares are used, but it is possible to issue preference shares that carry priority rights to dividends.
The matriarch or patriarch will want to retain control and will therefore be named directors and possibly preferential shareholders, perhaps retaining voting rights (caution is recommended), but will likely limit their rights to underlying capital for succession planning reasons. Other shares may be gifted to family members when the company is set up with little or low value or, if gifted later, the value of the money or property transferred (as long as no beneficial interest is retained) will fall outside of the parent’s estate for inheritance tax (IHT) purposes after seven years.
In the event family members are aged under 18 and have no legal capacity to hold shares, a simple nominee declaration or bare trust can be used to hold the legal title without affecting the underlying beneficial interests.
Profit extraction
Profits are commonly extracted as dividends and taxable at the normal dividend rate of the recipient. The directors are entirely at liberty to pay or legally waive declared dividends in accordance with how all members of the family (i.e., the shareholders) wish to direct.
IHT
During a dividend waiver, which must be done by deed and before entitlement arises (i.e., before payment in the case of an interim dividend or resolution and declaration for a final dividend), a person waiving a dividend could, prima facie, be making a transfer of value by the omission to exercise a right under s.3(3) of the Inheritance Tax Act 1984 (the Act). However, s.15 of the Act explicitly states that a person who waives any dividend on shares within 12 months of a declaration does not, per se, make a transfer of value.
Income tax
When looking at income tax on profit extraction via dividends, one needs to be wary of s.620 of the Income Tax (Trading and Other Income) Act 2005 (the settlements legislation), which is intended to prevent a settlor from gaining an income tax advantage by making arrangements that divert income to a person who is liable to income tax at a lower rate. Where the settlements legislation applies to a dividend waiver, all the income waived is treated as that of the settlor. This legislation applies in certain circumstances for gifts between spouses or to a minor child as the settlor is treated as retaining an interest in an asset or income deriving from it.
These rules (now commonly referred to as ‘income shifting’) were debated in the House of Lords in the case of Jones v Garnett (Arctic Systems) [2007] UKHL 35. In this case, Mr and Mrs Jones owned equal shares in the family company. Mr Jones was the fee‑earner and Mrs Jones did the administration. They both took a small salary and a significant dividend. HMRC argued that the anti‑avoidance rules relating to settlements applied to the dividends paid to Mrs Jones to treat the dividends as income of Mr Jones.
Lord Hoffman commented that this arrangement was no normal commercial transaction between adults at arm’s length, but instead it was ‘natural love and affection’ that provided the consideration for the benefit he intended to confer upon his wife.
The House of Lords ultimately dismissed the HMRC appeal on a technical argument that the rules did not apply on the basis that, in this case, the ordinary shares were not substantially a right to income. This was an important distinction and, following this case, most shareholdings issued in this context involve shares that also carry full voting and capital rights.
In the context of a family company, although there might be a s.620 settlement, the legislation at s.624 would not operate to tax the settlor on income paid out to either a child who is no longer a minor or to a grandchild or any family member who it could not be said would result in the settlor retaining an interest in the income.
The mechanics of how a dividend is declared is of paramount importance in navigating the settlements legislation and ensuring that there is no income diversion. If it makes no difference to the amount received by the recipient shareholder that the other party waived their right to take a dividend, then it cannot be said that there has been any diversion of income. If, however, a global dividend sum is declared and then divided among the family member shareholders, and certain members waive their rights and the result is that some members consequently benefit from an increased dividend, then this is a different story. There need to be sufficient distributable reserves to cover the dividend payment as well as the waiver in this latter scenario, so it can truly be said that there has been no diversion of income, as it would not make any difference to anyone if the shareholder forgoes their right to a dividend or not.
Capital gains tax
If the market value of shares gifted exceeds the original cost, there will, prima facie, be a gain chargeable to capital gains tax (CGT). In the context of a family company, it may be possible to utilise exemptions or reliefs to mitigate this charge. Any gift between spouses will be exempt as the transfer is deemed to take place at no gain, no loss; the spouse simply inherits the base cost of the donor. Gifts into a trust can usually benefit from holdover relief from CGT on the basis that a lifetime IHT arises; however, this exemption will not work for transfers into a company.
Transferring immovable property into a company makes matters more complicated as this could potentially result in CGT and stamp duty land tax.
A trust as an alternative
There has been a large decline in the use of trusts in the context of family tax planning, following the enactment of the Finance Act 2006 and the introduction of the 20 per cent lifetime IHT charge on any amount transferred into a trust (absent any relief and if in excess of the GBP325,000 nil‑rate band). In addition, periodic charges (every ten years, tax is levied on the value of the trust property at circa 6 per cent) and exit charges (when property leaves a trust) apply to relevant property.
Notwithstanding these tax charges, a discretionary trust might still be appropriate if the aim is to hold shares in order to benefit beneficiaries at some future time and possibly on a discretionary basis; to prevent beneficiaries becoming entitled upon reaching majority; or to protect the shares from errant spouses.
Conclusion
Often, parents are reluctant to bestow substantial benefits on their children, but look more favourably on funds extracted to educate grandchildren, so the flexibility of using alphabet shares to direct profits where desired is attractive. Nevertheless, it is a tricky area to navigate, riddled with tax traps, so proper advice should be taken at all times.
What is the background to the draft Finance Bill 2022 clauses on tax avoidance published on 20 July 2021?
In the wake of Sir Amyas Morse’s Independent Review of the Loan Charge back in December 2019 the government committed to implementing further measures to tackle promoters of tax avoidance schemes (POTAS) and reduce the scope for marketing of such schemes.
In March 2020 HMRC published its Promoter Strategy which looked at ways of disrupting the business model of those still marketing such schemes.
The July 2020 consultation Tackling Promoters of Tax Avoidance introduced some new measures which were included in Finance Bill 2021 that strengthened the existing anti-avoidance regimes and these were complemented by the November 2020 paper which called for evidence on raising standards in the tax advice market.
Despite all of this, HMRC is still concerned that promoters (and others in the tax avoidance supply chain) continue to fail to comply with their voluntary obligations and are still managing to sidestep HMRC compliance activity and sell their schemes.
What further provisions does FB 2022 contain to target POTAS?
The draft FB 2022 clauses include four new provisions to further address promoters of tax avoidance:
• giving HMRC the protective mechanism to freeze a promoter’s assets to prevent dissipation before payment of potential penalties. There were talks of giving HMRC powers to apply to the court for security payments in addition to these new asset freezing orders, but this is on the backburner for now
• tackling offshore promoters by charging additional penalties (of up to the total amount earned by the scheme) against UK entities that facilitate tax avoidance via these offshore promoters
• allowing HMRC to present winding-up petitions to close down companies that promote avoidance schemes and thus operate against the public interest, and
• enabling HMRC to publish details of promoters and their schemes to raise public awareness and give taxpayers the opportunity to identify and exit any arrangements—the policy objective is to protect the taxpayer while also getting the tax in
When will the FB 2022 changes take effect?
The FB 2022 (which implements proposed measures announced in the March 2021 Budget) draft legislation was published on 20 July 2021. The consultation on the Finance Bill measures will run until 14 September 2021 and Royal Assent is expected to be forthcoming in time for the new tax year in Spring 2022.
The new clauses will generally have effect in relation to all penalties assessed or determined or arrangements enabled on or after the date of Royal Assent but note that any information or non-compliant behaviour ongoing prior to this time could form part of HMRC’s case.
What guidance has been published?
The new clauses each include a helpful explanatory note published on the government website. The results of the consultation (that ended on 20 July 2021) regarding the implementation of the proposed legislation are also available to read on the government website.
Why does HMRC continue to try to strengthen these regimes?
HMRC is committed to disrupting the business of any promoters still operating and are determined to impose harsh sanctions. The concern is that as new measures are introduced, companies and promoters find new loopholes to bypass these measures, making it necessary to incorporate further regulations. These individuals are only able to operate because of the naivety of the taxpayer so the plan is to also do more to support the taxpayer and ensure that they can steer clear of and exit any tax avoidance arrangements.
What evidence is there of the disclosure of tax avoidance schemes (DOTAS), POTAS or enablers regimes having been effective so far?
When the General Anti-Abuse Rule (GAAR) Report was published in 2011, it found that the existing tools, including DOTAS (which requires promoters of avoidance schemes to give HMRC information about the schemes they are promoting and who their clients are) had been incapable of dealing with some abusive tax avoidance schemes.
Subsequently, the POTAS regime, accelerated payments and follower notices were introduced by the Finance Act 2014. The POTAS rules are aimed at changing the behaviour of promoters and deterring the development and use of avoidance schemes by monitoring the activities of those who repeatedly sell schemes which fail.
Since 2014, the number of Scheme Reference Numbers allocated by HMRC under the DOTAS rules appears to have decreased significantly. HMRC has also said that thanks to anti-avoidance measures, about 25 significant promoters have ceased all activity. The very fact that new sanctions continue to be introduced suggest that there is still a problem to tackle, although this is now considered to be very localised and indeed by 2018/19 the tax avoidance gap had shrunk to 0.3% of the total theoretical liabilities for that year—this is a small problem in the scheme of things but may still be a big problem from a policy perspective.
What further measures or changes to the draft legislation do you expect to be announced at the next Budget or fiscal statement?
There may be yet further measures mooted if the existing ones prove to be insufficient, but it is unclear at this stage what these might look like.
There is a real concern about whether the constant ebb of new rules is really addressing the problem. It seems clear that there is a stubborn disconnect between the language spoken by HMRC and the policy advisers and some so-called tax advisers. If schemes still exist it is because there is still a market for them and a desire for taxpayers to pay as little tax as possible, albeit sticking within the confines of a particular interpretation of the tax rules.
HMRC considers that the policy objectives should override any contrary interpretation of the legislation and the intention is that many of these new rules are principles-based in a bid to overcome this ‘policy vs interpretation’ disconnect.
We may see yet more targeted attempts to stamp out those that attempt to sail too close to the wind. Another option might be for the GAAR to become a point of first, and not last, resort going forward.
There must also be consideration of whether resource is better directed at enforcement, such as more large scale investigations of aggressive tax avoiders, rather than new anti-avoidance measures.
The Professional Footballers’ Association (“PFA”) has waded in on the long running tension between HMRC and the way that footballers and their agents are remunerated. The PFA is pushing for a dialogue with HMRC to consider a joined-up approach to establishing some clear and agreed principles and parameters particularly in the realm of dual representation of agents. It has become quite common for an agent to act for both the club and the footballer (as specifically permitted by FIFA) when it comes to negotiating transfers. The agent will be compensated handsomely by the club on behalf of both the club and the player for his efforts. The footballer can mitigate the correspondingly hefty tax liability on the agent fee by treating it as a benefit in kind and the footballer is exposed to tax on only half of the total sum paid by the club given the fee is shared between both parties. Given the tax at stake, plus interest and penalties, if HMRC disagree with the position taken by the parties, any headway that the PFA can make will be most welcome and might avoid an emotional penalty shoot-out once an investigation is started.
HMRC have for a long time paid close attention to the tax compliance of footballers likely due to the huge sums involved. In the tax year 2018/19, 87 professional footballers were under investigation by HMRC, this rose to 246 for 2019/20. For agents, the numbers under investigation went from 23 to 55 over the same two tax years and for the clubs themselves from 23 to 25. The additional tax yield following the outcome of the investigations into footballers alone was over £73m in 2019/20.
As well as agents’ fees, image rights payments continue to be scrutinised by HMRC. Images rights payments can be substantial amounts paid to the player on top of salary for use of their image by the club or other parties for advertising and endorsements such as Messi’s controversial Danone/Adidas/Pepsi deals. As a form of intellectual property, the image rights can be owned by a UK company thus taxable at the corporation tax rate of 19% rather than at the 45% rate of earnings for additional rate taxpayers. For non-UK domiciled footballers paying tax on the remittance basis, image rights payments are often split between a UK and non-UK company sheltering an agreed proportion from UK tax entirely.
HMRC have always been uncomfortable with the agreed UK versus offshore split arguing that more falls in the UK tax net than has been declared as UK source hence it is vital that this split is properly documented and justified. HMRC also continue to challenge the commercial reality of the actual payment itself. Buoyed by recent successes before the tax tribunal in relation to their argument that the image right payment is essentially just additional salary and should be taxable as such, HMRC are certainly on the attack and footballers on the defensive. The pandemic adds to the Government’s need for cash so even if you thought it was all over, it’s not yet! Hopefully the PFA can make some inroads in agreeing a universally applied and accepted stance in relation to both agents’ fees and image rights payments but until then advisers must assume a robust and clearly established position and accept that the receipt of image rights payments over and above what a player’s profile might reasonably merit will be ripe for HMRC investigation.
Key Points
In the context of tax disputes, privilege as referring to the fundamental is commonly understood legal right which allows individuals and companies to resist disclosure of confidential evidence. Under English law, there are strict rules on when privilege may apply and this article explores two distinct categories of legal professional privilege: legal advice privilege and litigation privilege.
Another form of commonly encountered privilege is ‘without prejudice’ privilege, which operates to prevent statements made in a genuine attempt to settle an existing dispute from being put before the court as evidence of an admission against the interest of the party making them.
Legal advice privilege
Legal advice privilege only applies to communications between a lawyer and client which have come into existence for the dominant purpose of giving or receiving legal advice. Legal advice privilege is narrower in ambit than litigation privilege but is claimed more commonly. The communications remain privileged at all times unless privilege is waived by the client or inadvertently lost; for example, when confidential information is unintentionally disclosed.
The underlying purpose of legal advice privilege is to ensure that the lawyer’s professional skill and judgment is given freely and is not subject to any constraints. The risk areas in the context of legal advice privilege lie in:
Litigation privilege
Litigation privilege applies to confidential communications between a lawyer and the client or a third party created for the dominant purpose of litigation, which is existing, pending or reasonably contemplated.
The burden of proof in establishing privilege is on the party claiming it. Litigation privilege exists in order that a potential litigant is free to seek evidence without being obliged to disclose their research results.
Recent case law
Two recent pertinent cases address how privilege can be maintained and also so easily lost. These are both worth examining.
Frasers Group: protection by litigation privilege?
The first case is FRC v Frasers Group Plc (formerly Sports Direct International Plc) [2020] EWHC 2607 (Ch). The background to this case was the investigation by the Financial Reporting Council (FRC) into Grant Thornton’s 2015/16 audit of the financial statements of Sports Direct International Plc (SDI), controlled by UK billionaire Mike Ashley.
In 2014, Sportsdirect.com Retail Ltd (SDR), SDI’s subsidiary, received an email from the French tax authorities asking SDR, amongst other things, whether it had paid English or French VAT. The email was interpreted as being in contemplation of a potential enquiry and possible ensuing litigation, and SDR instructed SDI’s solicitors and accountants.
As instructed, SDR’s professional advisers prepared a series of reports on:
The issue for the judge to consider was whether these reports in the hands of SDI were protected by litigation privilege and therefore not required to be disclosed to the FRC. The High Court held that the advice was not protected by privilege as it was ostensibly not prepared for the sole or dominant purpose of litigation.
In his judgment, Lord Justice Nugee made it clear that the ‘sole or dominant purpose test’ for litigation privilege was an extremely high hurdle which could not be overcome in this context simply because, at the time the reports were produced, SDR expected there to be litigation with respect to its VAT arrangements. He said:
‘A taxpayer who takes advice as to how to structure his affairs does not do so for litigation purposes. He does so because he wants to achieve a particular result for tax purposes… Even if it is contemplated that the particular structure will be likely to be attacked by the relevant tax authorities and that there will be litigation, the advice as to how to implement the new structure … is not primarily advice as to the conduct of the future possible litigation. It is primarily advice as to how to pay less tax.’
Advice about a potential course of action may not be covered by litigation privilege, even if that course of action is expected to lead to litigation. However, where the document or advice in question is legal advice given by lawyers, legal advice privilege (rather than litigation privilege) is likely to apply.
The Supreme Court in R (Prudential plc) v Special Commissioner of Income Tax [2013] UKSC 1 confirmed that legal advice privilege does not apply to advice from other professionals. Until Parliament decides otherwise, it continues to be the case that legal advice privilege can only protect legal advice given by members of the legal profession to their clients. The same advice emanating from accountants or other non-lawyers is still vulnerable to disclosure.
Civil Aviation Authority: protection by legal advice privilege?
The judgment in the case of Civil Aviation Authority v R (on the application of Jet2.com Ltd) [2020] EWCA Civ 35 is essential reading for companies relying on the advice of in-house legal teams.
In this case, Jet2 brought judicial review proceedings against the Civil Aviation Authority (CAA) in relation to the CAA’s publication of material critical of Jet2’s lack of participation in a consumer complaint scheme. Jet2 argued that the CAA made the materials public for an improper purpose and applied for disclosure of all relevant drafts and discussions relating to the disclosure. The CAA asserted that such were protected by legal advice privilege.
The Court of Appeal concluded that drafts of the materials should be disclosed unless specifically drafted by lawyers for the ‘dominant purpose’ of obtaining legal advice. Documents circulated to or by in-house lawyers, or the mere presence of a lawyer at a meeting, did not automatically satisfy this dominant purpose test.
Where the dominant purpose is to obtain or give advice, even if in a commercial context, then this should satisfy the dominant purpose test. Communications addressed to lots of different recipients need to be considered very carefully so as not to dilute the legal advice and render it merely a subsidiary purpose. Where external lawyers are appointed, legal advice privilege will clearly apply.
Points to take away
In order for litigation privilege to apply, the relevant document must have been created for the dominant purpose of obtaining advice in relation to litigation that is reasonably in contemplation. This does not include litigation that may possibly arise in future as a result of a particular course of action.
It is always difficult where a communication has a mixed commercial and litigation purpose. A safe way to protect such communication is to ensure that it is also covered by legal advice privilege.
Legal advice privilege is also subject to the dominant purpose test. Where not inextricably intermingled, it may be possible to separate out the component parts of some advice but if there are commercial as well as legal issues being discussed great care is recommended.
Draft legislation for inclusion in Finance Bill 2021 was published on 21 July 2020, the day before Finance Act 2020 received royal assent. The draft measures include detailed proposed legislation to further reduce the scope for promoters and enablers to market tax avoidance schemes and to strengthen the sanctions against those who continue to promote or enable such schemes. The government published a consultation in conjunction with the draft clauses on 21 July 2020 which closed on 15 September 2020. The consultation ran alongside a call for evidence on disguised remuneration wherein the government is seeking insight as to the drivers for any continued use of disguised remuneration tax avoidance, what if any schemes are not presently covered under current legislation and what the government can do to further tackle disguised remuneration tax avoidance with a closing date for comments of 30 September 2020.
The proposed new clauses also form part of the House of Lords Economic Affairs Finance Bill Sub-Committee inquiry (deadline for submissions 7 October 2020) which seeks written evidence on:
• How effective are the existing powers of HMRC in tackling promoters and enablers of tax avoidance schemes?
• What experience do practitioners have of the promoters of tax avoidance schemes (POTAS) rules and the enablers rules in practice?
• How effective will the proposed measures be against those who promote aggressive tax avoidance schemes, and in informing and deterring potential scheme users?
It is evident that significant government time and resource is being channelled into this area, which is of course very reassuring. HMRC is clearly of the view that promoters continue to frustrate and try to circumvent their obligations under POTAS, DOTAS and GAAR, and thus further action is required. Still more powers are expected to be bestowed upon HMRC in the next Budget (which will now be next spring) to tackle those in persistent default. There is no doubt that this is an ever-evolving area that needs to be kept under constant review.
Proposed changes
The new rules contained in Finance Bill 2021 apply to three distinct areas of existing legislation, namely POTAS, DOTAS and the GAAR. It should be acknowledged from the outset that there is concern among the professional bodies that any newly drafted legislation ought only be enacted to the extent that it is properly and specifically targeted, so as not to increase compliance burdens on those already conforming.
The new draft rules are framed in the following way.
POTAS
The government is keen to strengthen the promoters of tax avoidance schemes (POTAS) rules, contained in FA 2014 Part 5, by giving HMRC power to issue a stop notice (to stop the scheme being marketed while HMRC investigate) at an earlier stage and in a wider range of circumstances, as well as enabling HMRC to name and shame where a stop notice has been issued.
The conditions in the draft legislation, incorporating new s 236A into FA 2014, are very widely drawn as they presently stand and the threshold for HMRC to issue a stop notice is very low. The definition of ‘arrangements’ within the new clause would potentially apply to many commercial arrangements simply by virtue of conferring a ‘tax advantage’ (as widely drafted). A similar concern is that the power to issue a stop notice would be based on whether the authorised HMRC officer merely ‘suspects’ that a person promotes arrangements; this is a very low bar which creates scope for its misapplication. Some tweaks might be needed to these rules before they reach the statute book, and we are yet to see how the internal review and appeals process would apply to these new sections, so as to protect those that are explicitly not the target of these new rules. It is important
not to over burden those legitimate and honest advisers who should simply not be within the ambit of the rules.
In addition, the intention is to widen the POTAS rules to include individuals who control, or significantly influence, entities that carry on promotion activities. This should prevent errant scheme promoters from using a corporate vehicle to circumvent the existing rules.
The legislation also introduces a range of technical amendments in relation to conduct notices, including extending their application up to a maximum of five years (currently two years) to take into account the promoter’s behaviour, and further conduct notice threshold conditions have been added.
As the draft legislation stands, it is notable that noncompliance with DAC 6 may lead to the issue of a POTAS conduct notice, which is especially surprising given that some DAC 6 hallmarks do not even require any tax avoidance or advantage motive. This will no doubt add to the current anxiety over the looming onerous compliance obligations of DAC 6.
DOTAS
The draft legislation would also introduce yet more HMRC information powers under the FA 2004 Part 7 disclosure of tax avoidance schemes (DOTAS) and enabler regimes.
The DOTAS changes would enable HMRC to act more promptly where promoters fail to disclose or provide information about their scheme within 30 days, primarily by introducing a new information notice which could be issued in a broader range of circumstances. If the information required is not forthcoming or insufficient, HMRC would have the power to issue a scheme reference number (SRN), which in turn may be published.
Advocating and legislating for the use of early intervention tactics is a good policy; however, under the current draft rules, there would be no right of appeal against a new information notice under FA 2004 new s s31D, so even compliant advisers would need to safeguard themselves against the potential for these new rules to inadvertently bite.
F(No.2)A 2017 Sch 16 would be amended to enable HMRC to use its Sch 36 information powers as soon as a scheme has been identified. Advisers would need to be more vigilant than ever in ensuring that HMRC strictly adheres to the limits of these powers and only requests such information that is reasonably required.
GAAR
The ambit of the general anti-abuse rule (GAAR) in FA 2013 Part 5 would also be amended, so that it would apply to partners and partnerships who enter abusive arrangements. This is intended to operate on a similar basis to the representative partner approach that currently exists for enquiries conducted under TMA 1970.
Interaction with PCRT
The professional bodies are frustrated by the perceived need for yet more legislation targeted at a small number of boutique firms or individuals that bring the profession into disrepute. Over the past few years, the Chartered Institute of Taxation (CIOT) and other professional bodies have spent a significant amount of time and effort on the professional conduct in relation to taxation (PCRT) rules to ensure they set a minimum industry standard on professional behaviour expected of their members when undertaking tax work, such as forbidding tax planning on a generic basis. Failure to comply with PCRT may expose a CIOT member to disciplinary action. The problem, of course, is that scheme promoters may not be affiliated with a professional body.
Tackling disguised remuneration
As discussed, the new draft provisions sit alongside the call for evidence on tackling disguised remuneration. Appreciating this context is important in understanding the perceived need for and scope of the proposed new rules. Back in 2016, the government announced the introduction of the loan charge which it intended would draw a line under disguised remuneration schemes. The subsequent Morse review that looked into the controversies surrounding the loan charge highlighted concerns that such schemes were unfortunately still being used and henceforth the government set out that further action would need to be taken. In fact, reportedly as late as December 2019, over 20,000 new schemes had emerged with 8,000 of those in 2019/20. The recent HMRC call for evidence in tackling disguised remuneration focuses not only on promoters but on how to disrupt the employment supply chains where such schemes are being used and how to help taxpayers avoid schemes. To its credit, HMRC is hosting a series of virtual roundtables on this call for evidence to better understand how to tackle the continued use of schemes.
The tax gap
The National Audit Office (NAO) entitled report Tackling the tax gap, published on 22 July 2020, examined the effectiveness of HMRC’s approach in reducing the tax gap. The tax gap is certainly diminishing; however, given the inevitable significant fiscal impact of Covid -19, the House of Commons Public Accounts Committee inquiry furthered the work of the NAO questioning senior members of HMRC and HMT in relation to inroads being made to further reduce the tax gap on 7 September 2020.
It should be borne in mind that the tax gap attributable to avoidance is low compared to the gap attributable to error and non-payment, and evasion is the real issue which is a criminal offence. In relation to taxpayer error, the NAO highlighted that significant tax is lost as a result of mistakes, undoubtedly attributable to the complexity of the tax system so adding more legislation arguably is not the answer. Anti-avoidance legislation trying to squeeze diminishing returns from this area might be a vote winner and grab the headlines, but perhaps it is time for a change of direction or the compliant risk being overburdened.
Where does this leave us?
The reality is that there are still determined profiteers from certain schemes who are able to quickly bring these schemes to market, realise a hefty profit and then disappear. As some of these individuals or outfits are committing fraud and undertaking serious criminal activity, it is questionable as to whether yet more legislation will discourage their behaviour. Perhaps a better way to tackle this residual abuse would be for HMRC to more effectively use the information it has available via RTI and take more effective enforcement action. HMRC could consider applying a PAYE or VAT security notice at an early stage.
Ultimately, we need to see a clear and strong public message that these promoters can no longer get away with such tactics (HMRC spotlights arguably do not reach their intended audience), perhaps coupled with more leniency for whistleblowers. HMRC should also work harder to ensure that the unwary taxpayer is not fooled by these schemes. HMRC s counter avoidance and fraud investigations teams need to communicate and work on a more rapid response. Efforts should be concentrated on better policing, as many tax evaders may still undertake illegal activity on the basis that they are unlikely to be caught.
What changes, in overview, are made by this draft legislation?
Over the past ten years the government has introduced significant additional powers for HMRC to use to combat the promotion of abusive tax schemes. There is a lack of detailed evidence to undertake a useful evaluation of how effective these changes have been but given that the government is now seeking to further strengthen the sanctions against those who have continued to promote or enable tax avoidance schemes, it must be assumed that those promoting tax schemes have been able to frustrate HMRC’s ability to quickly suppress the promotion of such schemes.
The following key changes are now suggested:
Why does HMRC want to strengthen the existing regimes in this way?
The proposals are part of a wider policy to further curtail the behaviours of those who continue to design and promote aggressive tax avoidance schemes and to provide further clarity for the taxpayer in deciphering where they are being misled.
There is still a concern that taxpayers are being enticed into schemes without any real understanding of the risks. These powers will enable HMRC to intervene at an earlier stage to address this issue and allows HMRC to act where it concludes that the scheme cannot achieve what is being promised by the promoter.
The policy intent of the new powers can be considered alongside the continued action HMRC is taking against disguised remuneration schemes. In a recent call for evidence specifically related to such schemes HMRC talked about wanting to ‘disrupt the business model/ economics and supply chains of avoidance as well as helping taxpayers steer clear’.
Has HMRC used the POTAS rules much since their introduction in 2014?
The POTAS rules were really an additional deterrent and a means by which HMRC could monitor the activities of a small number of persistent repeat offenders. There is little tangible evidence of their use, but it may be reasonable to assume that HMRC has been more active than the evidence suggests.
Notwithstanding, it is clear that the overall level of tax avoidance activity has been significantly reduced in the main due to the combination of the DOTAS and accelerated payment notice regimes that plugged a significant gap. It was always hoped that few promotors would meet the given POTAS threshold conditions and thus be issued with conduct notices, and that from there most would comply with a conduct notice so that there would be no need to issue a subsequent monitoring notice.
HMRC describes the changes as 'necessarily far-reaching'. Should law-abiding tax advisers be concerned?
It was surprising that Sir Amyas Morse’s independent review of the loan charge published in December 2019 stated that since the introduction of the loan charge in 2016 over 20,000 new schemes had emerged and 8,000 of those emerged as late as 2019–20. This data was somewhat difficult to believe given the controversy caused by the loan charge and the extent of the consequent publicity but plainly some individuals have continued to play fast and loose with the rules.
The rules should not apply to those tax advisers who steer well clear of tax schemes and many advisers will support these changes as targeting anyone who continues to promote tax avoidance schemes and undermine the integrity of the profession.
Does the new consultation document shed any additional light on how the new provisions will be applied?
As with all new anti-avoidance measures HMRC must ensure that adequate procedural safeguards exist for the protection of the taxpayer and the difficulty is always ensuring that these do not compromise the effectiveness of the rules. Some further thought will be needed in relation to an appeals process.
Further measures are promised for the Autumn Budget 2020, do you have any views on what we might see?
As mentioned above, the new rules sit alongside a call for evidence on tackling disguised remuneration schemes so we should expect to see additional measures in this area. The existing rules are complicated for HMRC to apply and even with these changes HMRC is likely to find that there remain issues in how effectively it can tackle those most determined.
It seems likely that many of the anti-avoidance rules and corresponding taxpayer protection measures will continue to be streamlined to increase their effectiveness.
There are presently many strands of evidence-gathering concerning promoters of tax avoidance schemes, including a recent All-Party Parliamentary Group paper on responsible tax practices. As a result the government may conclude that even more wide-ranging changes, including a possible new Taxes Management Act, are required.
When will the Finance Bill 2021 measures take effect?
Many of the tweaks to the existing rules will take effect for all new schemes which are or continue to be promoted after the date of Royal Assent. The new information powers will apply to all current as well as future investigations into potential enablers.
Interviewed by Halima Dikko.
HMRC’s Trusts and Registration Service (TRS) was born back in 2017 as part of the implementation of 4MLD[1]. 5MLD[2] has mandated notable amendments to the operation of the TRS that clients and practitioners should not overlook. We have created a Q&A to help to navigate the new upcoming compliance obligations.
Does my trust need to register under 4MLD?
Yes- if it is a relevant taxable trust. This means a trust with a UK tax consequence i.e. the trust has a liability to pay UK income tax, CGT IHT or SDLT. There is no deminimus threshold. Registration deadlines are tied to when a tax liability is crystallised which itself depends on the type of tax liability payable.
Under 4MLD it is possible for non-UK resident trusts to fall in and out of TRS depending on when they have a UK tax liability e.g. a liability arises only on the occasion of a 10-year charge.
What about a trust with an IHT liability due to enveloped property?
4MLD did not extend to ATED. Assuming the property was held at company rather than trust level and the company was not a mere nominee then there would be no TRS obligation despite the Schedule 10 F(no2)A 2017 IHT look through.
So, what has changed in light of 5MLD?
5MLD has removed the tax consequence requirement and now all UK resident express trusts and some non-EU resident trusts must register irrespective of whether they have incurred a tax liability.
A non-EU trust must register with the TRS where the trust either acquires land in the UK after 10 March 2020 or after this date enters into a business relationship with a UK-based entity which is subject to AML rules. It is irrelevant where the trust itself is resident.
What does business relationship mean?
One off advice from a UK accountant or law firm is not covered but if it is advice given to the trust over some period then the trust will have to register – this aspect of the rules is controversial and not yet finally accepted particularly by those who are worried it will deter clients seeking UK tax advice. If you’ve already got an ongoing legal relationship with the UK firm prior to March 2020 then you don’t need to register just because of this existing business relationship.
What about if the business relationship is with the underlying company?
The business relationship should have an element of duration between the relevant person and the trust itself.
Is the register public? If so who has access?
It is important to appreciate that under 5MLD, individuals who have a legitimate interest in information concerning the beneficial ownership of the trust can apply to access certain information. This is potentially quite alarming for those who value their privacy. Someone asserting that they have a legitimate interest will have to provide information to substantiate that interest, such as why the applicant suspects that the trust has been used for money laundering.
If you have already registered does this mean you are exempt from legitimate interest requests?
This remains unclear at the date of writing.
What about a Foundation?
The obligations imposed on trustees should be assumed to apply to the managers of a Foundation which for English law purposes would generally be characterised as a trust.
Can you register voluntarily?
The prospect of highly sensitive information regarding key individuals being delivered to HMRC and potentially being available to interested parties perhaps including investigative journalists albeit in strictly controlled circumstances will make few want to register unless obliged to do so.
What’s the timing on all of this?
The deadline for registering all pre-10 March 2020 trusts is 10 March 2022 and new trusts created after 10 March 2020 have 30 days to register. Any changes to the beneficial owners of the trust must be reported within 30 days. The 30 days deadline may prove to be quite a challenge for many trustees and will certainly be problematic for trusts created on death as it can take time for assets to vest.
What information needs to be registered?
When registering, the following information will be required:
For UK resident individuals name, date of birth and NI number is required. For non-UK resident individuals name, address and passport/ID number must be provided.
Trustees are required to make an annual declaration that the details on the register are correct. Information provided will be retained on the register for 6-10 years after the trust is terminated.
Is the above different from existing information already held/ required under 4MLD?
Where a trust is already registered for TRS under 4MLD, some additional information will need to be provided in order to fulfil the requirements of the new 5MLD (including whether or not a trust holds a controlling interest in a third party entity).
Are all trusts included?
5MLD covers express trusts. An express trust is one established deliberately by a settlor. Therefore, excluded from scope are: statutory trusts, resulting trusts and constructive trusts. Unit trusts are also considered to be outside the scope of the definition of express trust.
UK registered pension schemes, UK charitable trusts are excluded as are trusts consisting solely of an insurance policy, such as a life insurance policy, which is a pure protection policy and payment is not made until the death or terminal illness of the insured. More detailed discussion of these exclusions should be considered if necessary.
Trusts established to meet legislative conditions such as PI trusts, trusts for the vulnerable, share option schemes, co-ownership trusts are also excluded.
What about nominee arrangements?
Bare trusts are expected to be excluded but HMRC clarification on this is still pending.
What happens if I don’t register?
Initial failure to register will be met with a nudge letter and there will be no financial penalty for a first offence of failure to update details but thereafter there will be a penalty of £100 per offence. Deliberate failure to register on time or update the register will carry significant penalties.
What if my trust is registered in another jurisdiction?
Some trusts will end up with registration obligations in multiple jurisdictions but if the trust is already registered in another EU member state then it does not need to also be registered in the UK under 5MLD.
[1] The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLR 2017) came into force on 26 June 2017 to implement the Fourth Money Laundering Directive ((EU) 2015/849)
[2] Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU
As the dust settles on changes to the non-domiciled regime and, moreover, changes to the way in which UK tax will dictate how non-UK-resident or non-UK-domiciled individuals hold UK property, is the UK, and London in particular, still as desirable a place to own a Mayfair pied-à-terre?
Tax on purchase
In the 2020 budget, Chancellor of the Exchequer Rishi Sunak announced plans for a 2 per cent stamp duty land tax (SDLT) surcharge for non-UK resident purchasers of UK residential property, in another attempt to discourage global high-net-worth individuals from using the UK property market as a financial instrument with huge returns and low risks. The surcharge will take effect from 1 April 2021. Taxpayers ought to be made aware that this prompts a test of residency at the point of purchase. It remains to be seen how these new rules will transpose into statute.
Tax on disposal
From April 2019, the disposal of any UK property (residential or commercial) held by a non-UK resident (individual or corporate) is within the scope of UK non-resident capital gains tax or corporation tax on chargeable gains where the disposal is by a non-UK-resident company.
More significantly, disposals of interests in companies whose value derives from an interest in UK land may also be chargeable to UK tax. The legislation refers to direct and indirect disposals, the former referring to an actual disposal of UK land and the latter giving rise to a tax charge where the asset actually disposed of is not UK land but rather shares in a company that holds UK land. No longer is the principle that companies are not transparent for UK tax purposes strictly observed.
Schedule 1 to the Finance Act 2019 (the Act) effectively rewrites part 1 of the Taxation of Chargeable Gains Act 1992, and applies where a non-UK resident holds an interest of 25 per cent or more in what is termed a property rich entity, or has done so at some point in the previous two years, ending with the date of the disposal. An entity is considered property-rich if, at the time of a disposal, 75 per cent or more of the value of the asset disposed of derives directly or indirectly from UK commercial or residential land. The 75 per cent test looks at the gross asset market value of the entity at the time of the disposal without any deduction for loans. A disposal might be of the interest in the entity directly, or it may be a disposal of a holding company or an interest in a trust or structure that, when looked at together, meets the property-rich test.
Note the potential for the same economic gain to be taxed twice if a non-resident shareholder disposes of their shares and the company then disposes of the property that is taxable on the company.
Inheritance tax
When considering inheritance tax (IHT) exposure, there remains a difference in treatment depending on whether the property is residential or commercial. Irrespective of whether it is commercially let, residential property held via a non-UK company whose shares are not UK-situs assets, and so were once considered to be excluded property for IHT purposes and outside the scope of IHT, are now within the IHT net, according to sch.A1 of the Inheritance Tax Act 1984 (the 1984 Act). The 15 per cent SDLT rate introduced in 2012 for the purchase of enveloped dwellings and the 2013 introduction of the annual tax on enveloped dwellings clearly did not do enough to discourage this common
tax structuring technique used by non-UK-domiciled individuals. It is important to note that IHT mitigation through the use of a non-UK company when it comes to purchasing and holding commercial property is still possible.
Going forward
The changes brought in by the Act are a clear step to try to align the tax treatment of UK residential and commercial property and a further move to eliminate tax advantages available by using corporate structures. Perhaps the next step will be to extend sch.A1 to the 1984 Act to cover commercial property as well. As the changes have been piecemeal, the legislation in this area remains disparate and complex, and great care is required.
EU Directive 2018/822 of 25 May 2018 (mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements) amends for the sixth time Directive 2011/16/EU on administrative cooperation in the field of taxation (“DAC 6”) and requires the disclosure of information relating to certain cross-border arrangements (“CBA”).
The main objective of DAC 6 is to strengthen tax transparency and prevent what are considered to be harmful tax practices through the automatic exchange of information between the EU Member States on potentially aggressive tax planning. The UK Regulations will require any CBA involving two countries, where at least one is an EU Member State (considered to include the UK) to be reported where it meets certain criteria (referred to as the “Hallmarks”) that could indicate aggressive tax planning – these are known as a reportable CBA, or “RCBA”. The obligation to disclose such an arrangement will be on an intermediary involved in the arrangement. Although classed as intermediaries, lawyers will usually be exempt from submitting a report due to legal professional privilege.
On 8 May 2020, in response to the global pandemic, the European Commission published a proposal to delay disclosure deadlines imposed by DAC6 by three months but it should be noted that the proposal only defers the reporting deadlines, the beginning of the application of DAC 6 remains 1 July 2020. Professional advisers will need to be alert to DAC6 and clients will notice amended terms of engagement and a new focus from the outset on these new compliance obligations as penalties for non-compliance can be up to £1 million in serious cases.
Key Points
What’s the issue?
An ever increasing deluge of ink on the statute books is dedicated to quashing any perceived tax avoidance before it even sees the light of day. Over time, legislation has also been drafted to increase HMRC’s powers and attempt to streamline the process of tax collection.
What can I take away?
The legislation and case law are unambiguous, and it is commendable that in practice we have come such a long way towards closing the loopholes in tax law. But in analysing the rafts of new legislation, one must question whether it has all been necessary.
What does it mean to me?
There has been a seismic shift in the field of tax avoidance. Government resources now ought properly to be directed at policing and enforcement.
An ever increasing deluge of ink on the statute books is dedicated to quashing any perceived tax avoidance before it even sees the light of day.
The introduction of the DOTAS rules in Finance Act 2004, under which a scheme promoter or user is required to disclose the main elements of any avoidance scheme to HMRC, was groundbreaking.
The government consultation ‘Raising the stakes on tax avoidance’ was published in August 2014, setting a clear pathway. In February 2016, the criteria for the DOTAS rules were broadened substantially. The legislation in Finance Act 2014 and 2015 complemented DOTAS in relation to tackling any promoters of tax avoidance schemes with the ability for HMRC to monitor promoters and issue conduct notices. The introduction of the GAAR from July 2013 to invalidate any abuse also sent a very clear message.
Sir Amyas Morse published his independent review of the controversial loan charge on 20 December 2019. Part of his remit was to consider whether the original 2016 policy was both necessary and proportionate. His report expressed deep concern that since the new legislation was introduced, there have been well over 20,000 new loan charge schemes, 8,000 of which have emerged since the start of the 2019/20 tax year. Sir Amyas concluded that the loan charge was a necessary piece of legislation, although he did not accept it was proportionate for it to go back for 20 years. He had a specific recommendation for promoters:
‘The government must improve the market in tax advice and tackle the people who continue to promote the use of loan schemes, including by clarifying how taxpayers can challenge promoters and advisers that may be mis-selling loan schemes. The government should publish a new strategy within six months, addressing how the government will establish a more effective system of oversight, which may include formal regulation, for tax advisers.’
Over time, legislation has also been drafted to increase HMRC’s powers and attempt to streamline the process of tax collection. Finance Act 2014 introduced follower notices (FNs) and accelerated payment notices (APNs) which essentially require a taxpayer to remove any tax advantage claimed and for any tax in dispute to sit with the Exchequer whilst a resolution is found. With only three months to act, the consequences of receiving a notice are very serious. Penalties for non-compliance are hefty and can easily amount to up to 50% of the value of the denied tax advantage.
More recently with a shift towards global tax transparency, cross border exchange of information and the Common Reporting Standard, the focus moved to offshore evasion.
Finance Act (No2) 2017 introduced the Requirement to Correct, requiring taxpayers with overseas assets to regularise their historic UK tax position. Non-compliance after 30 September 2018 triggers severe penalties of up to 200% of the potential lost revenue and potential naming and shaming. The legislation has become very robust and the penalties for non-compliance send a clear message.
Evolving precedent
In the past few years, we have also seen numerous cases occupying court and tribunal time to ensure that any perceived or actual abuse of the tax rules is simply no longer conceivable.
Elaborate or circular schemes, complete with a ‘pre-ordained series of transactions into which there are inserted steps that have no commercial purpose except the avoidance of a liability to tax’ (IRC v Burmah Oil Co Ltd 1982 STC 30) will not be tolerated; and anyone party to or promoting such arrangements will be punished harshly and rightly so. In many circumstances (notably in relation to FA 2003 s 75A), a tax avoidance motive is not even necessary to be deemed to have suppressed a scheme, as the Supreme Court set out in Project Blue Limited v HMRC [2018] UKSC 30.
It is abundantly clear (from WT Ramsay Ltd v IRC [1982] AC 300, UBS AG v HMRC [2016] UKSC 13 and Hancock and another v HMRC [2019] UKSC 24, to name but a few) that when it comes to analysing any potential exploitation of the legislation, there can no longer be a blinkered approach to the facts.
It is well established that the ‘ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically’ (Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46).
The view from the profession
The legislation and case law are unambiguous, and it is commendable that in practice we have come a long way since the days of dubious tax professionals marketing and implementing schemes to exploit loopholes in tax law against what must have been Parliamentary intent. Credit must be given to the 2017 edition of ‘Professional conduct in relation to taxation’ for ensuring that the tax profession takes the lead in upholding high ethical standards in relation to any potential facilitation of tax avoidance.
In analysing the rafts of new legislation, one must question whether it has all been necessary. Arguably yes, but could Taxes Management Act 1970 s 55 (recovery of tax not postponed) have been used instead of the hundreds of pages of new statue introducing complex rules regarding FNs and APNs? And take Finance Act 2019 Sch 4 in relation to profit fragmentation arrangements.
The legislation is designed to counter avoidance where UK traders and professionals arrange for their UK-taxable business profits to accrue to entities resident in territories where significantly lower tax is paid than in the UK. Does this not smack of the transfer of assets abroad rules with a hint of the transfer pricing and controlled foreign company rules thrown in?
Did we need Finance Act (No.2) 2017 Sch 16 in relation to enablers? Will the additional legislation really influence and promote behavioural change beyond which has already been achieved? Or did we need FA 2007 Sch 24 paras 3A and 3B, introducing a presumption of carelessness in avoidance cases and the concept of guilty until proven innocent?
Legislation that will never need to be employed is not helpful. Many commentators have questioned the potential superfluous nature of the GAAR sitting alongside the many TAARs. In the first GAAR ruling, the panel decided that a complex employee benefits trust scheme involving payment in gold bullion or platinum sponge was not a reasonable course of action. Even the most optimistic taxpayer having read the Rangers case (RFC 2012 Plc (in liquidation) v AG for Scotland [2017] UKSC 45) would have struggled to see how HMRC could possibly have lost the legal argument at tribunal so was a GAAR referral necessary? The vast majority of GAAR referrals have centred around employment taxes, and more specifically marketed schemes, so the role of the GAAR panel is significant in that the opinions will be of useful broader application.
The GAAR Advisory Panel opinion of 7 August 2019 is potentially of wider interest. The specific issue concerned the extraction of value from a company by its directors and shareholders through the use of employee shareholder shares. The opinion recorded that the use of employee shareholder shares by existing shareholders was reasonable in the context of the legislation and additionally that a reorganisation of activities to ensure the legislative requirements were met was also reasonable. However, the specific terms of the shares used meant that value flowed out of existing taxable shares into new exempt shares, which was not considered reasonable. The panel gives credence to its role in plugging a gap where the legislative draftsman had not considered or anticipated the potential value shift. The opinion expressed the view that it was never the intention of Parliament for the law to be applied in the given manner. As a concept this works, as the GAAR is primary legislation; perhaps, though, one could rightly be concerned that it may make the draftsman less fastidious if he knows that he has a safety net in the GAAR panel. This will not aid our quest to make the legislation clear, unambiguous and all encompassing.
Direction of travel
We must acknowledge that there has been a seismic shift in the field of tax avoidance. Even simple structuring advice to clients is starting to require contingent counterarguments if anything is ever challenged. So, what next? Government resources now ought properly to be directed at policing and enforcement.
What we need now is to be sensible and we need fiscal honesty. When we analyse the tax gap figures, in 2019 the tax gap is estimated to be £35 million or 5.6% of tax liabilities. 37% of this is from income tax, NICs and capital gains tax. The biggest offenders are small businesses, which account for 40% of liabilities; individuals account for only 11%. Failure to take care and legal interpretation accounts for 18% of the gap, and evasion for 15%, while avoidance is a reassuring 5% (£1.8 billion). Non-payment is 11%. We need to focus on restoring public faith and be assured that the door has been closed on tax avoidance behaviours via legislation, judicial view and professional practices.
Tax receipts were down by £26 billion in April as the UK’s economy was hit by the coronavirus crisis. HMRC figures show that the April tax take was £35 billion which is £26 billion (42%) less than the £61 billion received in April last year.
HMRC has it seems now quietly resumed taxpayer investigations which had been put on hold at the peak of the pandemic and have started to contact taxpayers and advisers again where there is any suspicion of non-compliant activity.
Taxpayers previously under inquiry who had a brief period of respite should now prepare for investigations to resume with aplomb and perhaps with added vigour as HMRC have a close eye on the £337billion hole in the public purse.
HMRC have confirmed that if a taxpayer is unable to meet an obligation (such as a payment or filing deadline) due to COVID19 that will be accepted as a reasonable excuse provided the taxpayer is able to remedy the failure as soon as possible. Taxpayers will need to explain how they have been affected by COVID-19 in making their appeal.
Taxpayers affected by COVID-19 will also be given further time to seek a review of, or appeal against, an HMRC decision. HMRC will give an extra three months (in addition to the usual 30 days) to appeal any decision that is dated February 2020 or later.
The Statutory Residence Test provides that an individual is considered to have spent a day in the UK if they are in the UK at the end of the day (midnight) subject to several exceptions, one of which is exceptional circumstances. The exception applies for 60 days only in any given tax year.
During the COVID-19 pandemic HMRC have confirmed that the following circumstances are considered exceptional:
Exceptional days up to a maximum of 60 days per tax year will be disregarded for the purposes of:
But importantly the concession will not apply for the counting of days in relation to:
Currently there is no definitive date after which all days are regarded as exceptional for 2019/2020. HMRC are still considering this point. 23 March 2020 (lock down announced) would seem to be a reasonable point.
HMRC continues to fight the good fight in its quest to cut down on tax avoidance and have recently been issuing further “nudge” letters to taxpayers who may have an income source or assets producing gains overseas and consequently an undisclosed outstanding UK tax liability. The letter reminds the taxpayer that HMRC have visibility on overseas income or gains via their network of global information exchange and the onus is on the taxpayer to regularise their tax affairs. Unforced disclosure will result in reduced penalties for non-compliance.
Batches of these letters are being sent out weekly by HMRC and ultimately thousands are expected to be issued. Some letters are accompanied by a certificate whereby the taxpayer can state that his tax position is up to date and all in order or that he needs to make a disclosure. Taxpayers need to ensure that they fully understand the statement they are making and the repercussions of making an inaccurate or incomplete statement before they return the form.
Changes have been made to the original wording of the letter but it still directs those who need to make a disclosure to the Worldwide Disclosure Facility which may not be appropriate in all cases, particularly as it does not offer protection or assurances against criminal investigation.
Case law concerning the availability of PPR relief continues to apply the legislation in a somewhat inconsistent and unpredictable manner, but some common themes can be identified: the taxpayer needs to be able to produce satisfactory evidence of an intention to reside in the property as a home, and the tribunals will look at both the length of time and the quality of occupation in considering such an intention. The availability of the relief is, however, being curtailed both by HMRC’s increasing eagerness to challenge taxpayer claims, as shown by recent case law and by further legislative changes in the draft Finance Bill 2019/20 provisions which are due to come into force in April. The lack of clarity provided by case law, coupled with a tinkering to the rules by Finance Acts, has led to an increasingly confused picture for taxpayers and consequently undermined their ability to properly plan their affairs.
To read the full article, access the following link from the Tax Journal subscription required).
Originally published by Lexis®PSL Private Client on 4 November 2016.
Helen McGhee, senior associate at Joseph Hage Aaronson, gives Lexis®PSL Private Client her predictions for Autumn Statement 2016. Includes Brexit, non dom changes, anti-avoidance, HMRC’s unquenchable thirst for more powers, digital tax, the downturn in the residential property market, pensions, and perhaps an increase in the personal allowance.
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