Adrian Boulding: Tax planning’s blurring of the lines

Adrian Boulding weighs up the implications of a joint HM Treasury and HMRC tax avoidance report that reveals a worrying blurring of the lines between 'aggressive tax planning', tax avoidance and evasion

© Ian Macaulay

The 68-page HM Treasury and HM Revenue & Customs (HMRC) policy paper entitled Tackling tax avoidance, evasion, and other forms of non-compliance, published this spring is a tough read by anyone’s standards – especially for the wealthiest UK residents and larger companies based in the UK.

It documents the progressive tightening of the tax regime in the UK since 2010, detailing 100 measures and associated legislation changes that have been deployed to tackle ‘tax avoidance, evasions and non-compliance’ in the last nine years.

All told, it claims to have closed out loopholes and recovered unpaid taxes to the value of up to £200bn. This is money that otherwise might have gone unpaid and is now “secured and protected” for HM Treasury – a cause for great celebration, at least for them.

Evasion has always been straightforward. It is about creating false records or deliberately under-declaring sources of income. It is criminal and no adviser who values their qualifications would contemplate it.

Ever since the coalition government invented the General Anti-Avoidance Rules, we have witnessed a change in attitudes to tax avoidance. Once it was regarded as ‘clever’ to find new schemes that just fitted within the limits of existing tax rules. The needle on what is considered acceptable in Britain’s boardrooms has changed, however, so that between 2013 and 2019 the percentage of large firms thinking tax avoidance was an ‘acceptable practice’ fell from 45% to just 21%.

Today, if you use tax laws for purposes they were not intended for, you are likely to find the relief you thought you would enjoy disallowed. That’s tax avoidance – and HMRC has put a stop to it.

What worries me is the blurring of the lines between tax planning and tax avoidance, with HMRC inventing a new phrase “aggressive tax planning”. In so doing, HMRC appears to be widening its target of attack so it can now come after firms and individuals where the primary reason for a course of action is to reduce a tax liability.

I can save into a pension plan and collect 40% tax relief if my primary driver is to save for retirement. But if I already have more than I could ever need in my retirement and the reason for stuffing further contributions into my pension is simply to shelter my money from income tax, that could be classified by HMRC as ‘aggressive’ tax planning.

It is a trend that gained considerable momentum back in March 2015 as George Osborne, the then Tory chancellor, went to work on the likes of Google and Amazon to get them to pay more tax during the era of austerity when government coffers were severely depleted.

He introduced a ‘diverted profits tax’ for businesses found to have declared profits in more favourable tax regimes rather than declaring it in the jurisdiction where it was due. The leaks of the Panama Papers and Paradise Papers, later that year, added further grist to the mill of Osborne’s anti-tax avoidance campaign.

Increasing resources

New specialist teams inside HMRC are being given increasing resources to go after firms using tax avoidance schemes and tax mechanisms. At one point in the document, there is a boast that the number of criminal investigations launched by the Fraud Investigation Service, which was only set up in 2016, has apparently increased sixfold so that half of the UK’s largest businesses are now under investigation.

HMRC has gone to war on marketed tax avoidance schemes, closing down many of the firms involved and recovering £87bn in this area alone. Anecdotally, those at the wrong end of these shutdowns found not only the amounts of tax ruled ‘avoided’ had to be repaid to tight timescales, but the accrued interest on those debts as well. It seems the taxman comes complete with iron fist as well as a bowler hat these days.

And if you have money in offshore accounts, don’t think it is out of sight. Some 1.3m offshore accounts have been reported to HMRC in the last eight years and tax demands issued with increased penalties for non-payment starting at 100% of what was owed and rising to 200% if you don’t pay up promptly – yikes!

A specialist offshore tax recovery unit at the HMRC which was only set up in 2015 following the Panama Papers leak, saw £560m of tax revenues recovered in 2018 and 839 new investigations launched – up from £325m recovered in 2016/17. Complex offshore tax recovery cases are probing up to 12 years back in time to unpick multi-party chains of tax avoidance.

Interestingly, hitting the wealthy harder through a tighter pensions taxation regime is also included as part of the paper, although clearly putting ordinary money into a pension should not be classified as ‘tax avoidance, evasion or non-compliance’. HM Treasury seems particularly proud of reducing the lifetime allowance from £1.8m to £1.055m today and pegging allowance rises to the lower CPI inflation rate (rather than RPI), the paper details.

Non-compliance bear traps

In the process, it may perhaps have set up one or two pensions tax non-compliance bear traps that unsuspecting high earners could easily fall into. One such is set for those earning in excess of £150,000 per year who now find themselves subject to a complex and increasingly maligned ‘tapered annual allowance’.

This sees their annual allowance fall on a sliding scale to as low as £10,000. In answer to the charge that this system is too complicated and high-earners will unwittingly find themselves underpaying tax on contributions, the HMRC is reported to have responded: “It’s an individual’s responsibility to make sure they have declared their income correctly.

“Pension scheme administrators are required to provide a scheme member with details of their annual pension savings where they exceed the standard annual allowance, or where they have reason to believe the member has flexibly accessed their pension rights and their pension savings exceed the money purchase annual allowance.”

While in defined contribution scheme, a pension contribution is easy to measure, for high-earners in defined benefit schemes the position is perilous as annual accrual will depend on scheme rules and pensionable earnings. It is all too easy to trip over the tapered annual allowance and face a stiff tax charge.

The plight of client and adviser trying to escape labyrinthine tax law is now akin to Icarus and Daedalus: fly too low, and your client’s finances will be clogged and held back by taxes that could have been avoided with good planning. Fly too high, however, and the gaze of HMRC will melt the wax holding your tax plans together, and your client’s finances risk falling to earth with a bang.

Finding a safe middle way is now both a science and an art. You must ensure that clients stay within both the letter of the law and the spirit Parliament intended for that law when it was originally drawn up and passed into statute.

Adrian Boulding is director of retirement strategy at Dunstan Thomas