The Long & Winding Road: Tax Landscape Evolving

The Office of Budget Responsibility has suggested that by 2018-19 the UK’s budget deficit will have fallen by 11.2% of GDP - from its post-war peak in 2009-10 (around £190 billion in today’s terms).  This improved economic position has been achieved by just over 80 per cent of the reduction – coming from lower public spending.  Taking Government consumption of goods and services to its smallest share of national income at least since 1948; when comparable National Accounts data are first available.  The balance, just under 20%, is accounted for by higher receipts.

 VAT and Stamp Duty Land Tax are two elements that have helped the Government to ‘balance the books’ with increased VAT rate and SDLT contributing with both rising house values, but additionally more focus on SDLT evasion and avoidance schemes.

 As part of Budget 2011 the government published ‘Tackling tax avoidance’ which set out their anti-avoidance strategy and introduced their 3 key principles as:

• preventing avoidance at the outset
• detecting it early where it persists
• counteracting it through legislative change and litigation

 Recent cases such as that of Acornwood and others v HMRC [2014] TC 03545 UKFTT 416 (TC) – more familiarly known as “Icebreaker” demonstrate HMRC’s more litigious approach – but also success in challenging abusive tax schemes.  The Icebreaker scheme was designed to attract investment from wealthy individuals into a number of LLP’s which were specially set up to finance music and other creative activities.  Each investor’s initial capital contribution was then increased by way of bank borrowings.  Although the scheme purported to be a commercial investment which would generate returns for the investors, however the tribunal found it was solely designed to avoid tax, with investors claiming tax relief on the total sum committed, including the money borrowed from the bank.  The losses generated by the partnership could then be offset against other income, via “sideways loss relief”.

The vast majority of UK individuals and businesses pay the tax that is due.  However, there is a small minority who don’t.  One of the tools HMRC has at its disposal is DOTAS.  This stands for Disclosure of Tax Avoidance Schemes.  Under the DOTAS rules, HMRC must be notified of any schemes which meet certain criteria.  The scheme is then assigned a DOTAS reference number, and every person participating in the scheme must include that reference number on their tax return.  The promoters of the scheme must also provide HMRC with details of who has invested.

Whilst these rules seem onerous, it is possible they could soon become even stricter.  There are plans to give HMRC powers to demand that users of DOTAS schemes make an upfront payment of tax before the scheme has been challenged through the courts, effectively imposing a principle of “guilty until proven innocent”.  This trend continues further with the recently closed consultation of Direct Recovery of Debts – proposing that HM Revenue & Customs could have powers to access tax payers bank accounts directly to recover these outstanding tax debts.  Most practitioners, whilst sympathising with the problem, have grave concerns about DRD without appropriate and robust safeguards to protect the taxpayer from HMRC errors.

Irrespective of the ‘colour’ (or blend?!) of the next Government, the focus on increasing tax receipts and reducing the ‘Tax Gap’ (the difference between HMRC’s Collection and Expectations) will undoubtedly remain.  The tax landscape has changed forever – during this age of austerity - a bright light has shone onto the tax affairs of multinational businesses, celebrities and how HMRC seeks to police the system.

This means that all businesses must ensure they invest time and resources to ‘managing’ their tax position from both a financial perspective, but also in terms of reputational impact. 

Since Finance Act 2009, the UK’s largest businesses (T/O >£200m or Balance Sheet >£2bn) have had commit to the Senior Account Officer (SAO) regime about proactively managing their tax affairs and submitting a Certificate to HMRC confirming that the company had appropriate tax accounting arrangements throughout their financial year. 

Smaller businesses – outside the scope of SAO - don’t have this ‘big stick’ to incentivise them to think proactively about their tax position.  However we believe a key aspect for businesses to ‘keep on track’ is to dedicate more energy to optimising their available tax breaks and improving cash flow.  Not aggressive or abusive – simply claiming the tax relief and allowances their business may be entitled to.  Being complacent or maintaining the ‘status quo’ won’t necessary deliver for shareholders when the environment all around is continuing to change.

The majority of UK businesses incur a high proportion of their business costs on real estate, whether leased, owned or for investment - and yet we frequently find tax payers that have never heard of capital allowances, nor claimed them in respect to their property holdings – sometimes very significant.  Since Integral Features were introduced in April 2008 the average capital allowances claim has increased to approximately 25% of the property’s purchase or development cost.

Why pay more tax that necessary?  If you own commercial property or large scale residential properties or Furnished Holiday Lettings (FHLs) then you might be entitled to significant capital allowances - on the historic acquisition or development or refurbishment costs - that may generate a tax rebate, or reduce on-going tax liabilities in turn improving your cash flow.  Our property tax specialists can quickly identify opportunities, quantify the potential savings and advise you about the next steps to improving your tax position, and navigating your way safely through the ‘sharp bends’ within the tax legislation.