JOURNAL 35


HAPPY CHRISTMAS


Perhaps happiness means different things to different people. An HMRC Press Release earlier this week mentioned that last year 270 people actually filed their tax returns online on Christmas Day.

I tend to drink too much, eat too much, drink a bit more and fall asleep in front of the TV on Christmas Day. I thought that is what everybody does.

I find it hard to get my mind around the fact that apparently some people, instead of becoming merry, clear the debris of the turkey and pudding off the dining room table, spread out their tax papers, turn on the computer and settle down to their tax returns. At least I hope the indication is that they complete their tax returns sober, rather than that they need their quota of Christmas drinks before they can face up to trying to recollect what happened during the previous tax year. Completing a tax return requires a clear head, if only because HMRC are adept at pouncing on mistakes and omissions and exacting a penalty in retribution for any perceived carelessness.

So, to any readers of the column to whom happiness is a warm (off the press) tax return, “If that’s what makes you happy OK, but have you ever thought about getting a life?” To the rest of you “I’m not intending to grapple with tax on Christmas Day, I’ve got better things to do. I hope that you’re not either but that you will find a better route to happiness over Christmas and (unlike the 1776 people who were fit enough after last year’s New Year’s Eve celebrations to file their tax returns on New Year’s Day) have a joyous New Year too.”

JOURNAL 34


HMRC ERRORS IN THE TAXPAYER’S FAVOUR


In my previous posting I mentioned that there were two things that struck my eye in last Saturday’s Times. The second was a response by a reader to a question posed by Joe Joseph, in his column, Modern Morals, the previous Monday: “My accountant found that HM Revenue and Customs had made an error in my favour and wants my permission to alert them. I don’t see why I should pay him £200 an hour to engage in a lengthy correspondence”.

I can never work out whether Mr Joseph’s column is a spoof on agony aunts or a semi-serious column written by someone with a weird moral sense. In any event Mr Joseph’s response to the above question was “An “error in your favour” is the mirage of the tax world. It just doesn’t exist in real life.” He went on to conclude, “You are morally and legally on thin ice. But, it’s academic; they’ll notice soon enough.” Oh that he were right on either count! In my experience, and that of most, if not all, other accountants I know, HMRC make many errors. Their staff are human after all! And although most errors in the interpretation of the law tend to favour the State, arithmetical errors can, and do, benefit either the State or the taxpayer. And no, most of the time they do not notice soon enough!

What interested me however was not Mr Joseph’s naivety but the reader’s response namely, “Your accountant has a legal obligation to advise the taxman of the error. His seeking your permission is only really a courtesy.”

This is news to me. As far as I am concerned, as an accountant, I have a duty of confidentiality to my clients. Although this falls short of legal professional privilege
I am under no legal obligation to breach that duty by telling HMRC or anyone else of a mistake HMRC makes in a client’s favour. I have a legal obligation to tell the Serious Organised Crime Office (SOCA) if I suspect that a client (or anyone else) has, or has used, the proceeds of a crime, but as far as I am aware it is not a crime to keep silent if someone makes an error in your favour. Section 3 of the Theft Act 1968 provides that a person is guilty of theft “if he dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it”. If HMRC actually makes a tax repayment (or greater repayment than they otherwise would have done) to a client the question arises whether he dishonestly intends to permanently deprive HMRC of the funds, but I would have thought that he does not if he intends to repay the money to HMRC should they ever ask for it.

I hasten to add, that is not to say that I will cheerfully turn a blind eye to such an error unless it is very minor. Under the ethical rules of the Institute of Chartered Accountants in England and Wales (and of the other professional bodies of which I am a member) I have an ethical duty to seek the client’s authority to advise HMRC of the error. If the client declines to give me such authority I will seek to persuade him to do so. If he still declines I have an ethical obligation to consider whether I should continue to act for him, bearing in mind the importance for trust to exist between HMRC and ICAEW members. As a result of such consideration, I would undoubtedly choose to cease to act for the client. But my duty of confidentiality would still preclude me from informing HMRC of the error or of why I had ceased to act. If the client goes to another accountant who asks me if there is any information of which he should be aware before deciding whether or not to act for the client, I would tell him that I had ceased to act because the client was not prepared to notify HMRC of an error they had made in his favour, but would not be able without breaching my duty of confidentiality to the former client to tell the accountant more than that.

The ICAEW regards the duty of confidentiality as a fundamental professional duty that can be breached only where the law gives me a specific right or duty to do so. They regard the public interest in giving people an assurance that they can seek advice from members in confidence as more important than the public interest in everyone paying the right amount of tax. So readers of “The Times” can rest assured that the decision as to whether or not to tell HMRC of their errors is firmly in the client’s own hands.

JOURNAL 33


"The Times” Special Scrooge Prize


A couple of items caught my eye in last Saturday’s “Times”. The first was the award by “The Times Money” to Gordon Brown of “the Special Scrooge Prize” for performing a recent U-turn on alternatively secured pensions and putting the squeeze on holidaymakers by doubling air passenger duty. They added that the tax burden on individuals has also risen sharply. This year the figure is set to increase by 6% netting Mr Brown a windfall of £399.1 billion, which is 85% more than he received when he took office in 1997.

It is some time since I read “A Christmas Carol” but my recollection is that the point of Dickens’ Scrooge was that he was a miser with his own money and the three apparitions opened his heart so that he became generous. I’m not normally an apologist for Mr Brown but whatever else one may think about him Scrooge seems unfair. My recollection is that he instituted a Christmas party for disadvantaged children and has been one of the loudest voices in the government urging substantial increases in aid to the third world.

Miserly is also an odd description of his purported U-turn on alternatively secured pensions. What he has said is that if a person puts money into a pension scheme and claims tax relief for the contributions he must draw a pension at least from age 75, the amount of the pension he takes must be at least 65% of the pension that the fund warrants, and he cannot take a small pension and when he dies expect his pension fund to pass for the benefit of relatives free of inheritance tax. That does not seem miserly to me. It seems commonsense. Mr Brown originally introduced the concept of alternatively secured pensions to recognise that in the past the religious sensitivities of some citizens prevented them from entering into pension schemes as the old approved schemes required the purchase of an annuity, which such people regarded as a form of gambling. To find a way to enable such people to provide for their retirement in a tax efficient manner like anyone else was surely an act of generosity not miserliness. Of course Mr Brown could be accused of naivety for not realising that people without such religious scruples would abuse the tax relief for pension funds by seeking to claim tax relief on pension contributions, not with the intention of taking a pension but with the intention of avoiding inheritance tax. I find it odd that The Times should regard measures to eliminate such abuse and achieve his original benevolent objective as a U-turn. It seems the precise opposite to me; a measure to remove from the road those who sought to bypass its intended destination.

I find it equally hard to regard an extra tax charge of £5 on a flight to most European Countries and £20 on a flight to a further off destination as putting the squeeze on holidaymakers. That seems to me so small that I am sceptical whether it will achieve its objective of making people stop and think whether in the light of global warming they ought to fly.

As far as the tax burden is concerned, in 1996/97 the standard income tax personal allowance was £3,765 and tax was charged at 20% on the next £3,900 of income, 24% on the next £21,600 and 40% thereafter, which meant that an individual paid £5,964 tax on his first £29,400 of earnings and 40% on any excess. In 2006/07 the personal allowance is £5,035 and tax is charged at 10% on the next £2,150 of income, 22% on the next £31,150 and 40% thereafter, which means that an individual pays £7,068 of tax on his first £38,335 of earnings and 40% thereafter. An individual earning £38,335 in 1995/96 and having the same income today pays £2,470 less tax than the £9,538 he paid in 1995/96. The RPI in March 1995 was 147.5 as compared with 195.00 at March 2006. A person earning £38,335 today whose earnings increased with inflation would therefore have been earning £28,996 in 1995 on which he would have paid tax of £5,867 so his tax bill has gone up by £1,201 because his earnings have increased by £9,349, i.e. he pays an extra 12.85% tax on each extra pound that inflation has given him. There are roughly 30 million taxpayers so an extra £1,200 from each accounts for only a tiny proportion of The Times 399.1bn windfall. Logically the rest of the “windfall” must either be because as a country either we are earning more or more of us are in work or a mixture of the two, not because Mr Brown has acted miserly.

Another curiously is that the pre- Budget Report says that income tax is estimated to raise £146.1bn in 2006/07 and total taxes (including council tax) are estimated to be £487.1bn (including £88.5bn National Insurance). A windfall of £399.1bn would mean that total taxes in 1995/96 raised only around £90bn, which seems somewhat unlikely. A windfall of that size from tax on individuals would mean that in1995/96 many of us received very substantial tax repayments. Funny, I don’t remember that world!

I will save the second item for another day.

JOURNAL 32

THE PRE-BUDGET REPORT

Gordon Brown did not say much about tax in his tenth (and probably last) pre-budget report; an anti-avoidance provision for managed service companies, a temporary SDLT exemption for new “zero-carbon” homes (he actually called it stamp duty, but he has introduced so many new taxes that he obviously can’t be expected to remember them all), a doubling of air passenger duty, an extension of the bio-diesel fuel duty relief, an extra 1.25p a litre on petrol and a promise of early rulings on business tax (although he may have got that one partly wrong too as it is a recommendation of the Varney review which applied only to large businesses).

HMRC and the Treasury have however made up for Gordon’s apparent disinterest in tax. HMRC have issued 64 pages of press releases and the Treasury a further 33 (plus a large number of targeted regional press releases). There are then a further 20 Treasury reports, consultation papers and other documents plus 16 more from HMRC and 10 sets of draft legislation (with three more promised).

So here are the real tax changes.

1. The government is taking action to tackle Managed Service Company (also known as Composite Companies) schemes, which are used to avoid paying employed levels of tax and NIC’s. From 1 April 2007 these will be taken out of the IR 35 legislation and PAYE and NIC will have to be applied to the income generated by each worker. Actually the consultation document suggests that what is being tackled is evasion, rather than avoidance, but what’s in a word. There is no suggestion that those who have ignored the IR 35 rules and thus defrauded the country should be prosecuted. Indeed it’s carry on defrauding for another four months for them. Of course it could be that the consultation document is wrong and that such companies actually fall outside the current IR 35 rules, contrary to what the document says. But surely no one who hopes to become Prime Minister would deliberately lie in a consultation paper, so that can’t be the case.

2. The CFC rules will be amended to conform with EU law following the ECJ decision in Cadbury Schweppes. But the change will merely allow a company to apply to HMRC to disregard their CFC profit that “arise from genuine economic activity in business establishments in other EU countries. Presumably they will then need to convince HMRC of their genuineness. A “highly artificial avoidance scheme” will also be countered by repealing the public quotation exemption, so forcing a lot more companies to cope with the CFC legislation.

3. There will be yet more changes to the rules on financial instruments. Apparently when HMRC got round to finalising the regulations last month they discovered that the primary legislation is not wide enough to allow them to do what they want to do.

4. There will be more changes to the REIT rules too. In typical Gordon Brown fashion these were bulldozed through parliament in the last budget in the face of much industry criticism. He has now decided to listen to many of the arguments that he so peremptorily rejected last April.

5. There are a number of threatened changes for insurance companies. As Blackstone Franks do not act for any, I have not bothered to look at these.

6. There are a number of corporation tax anti-avoidance rules (applying from 6 December 2006 – it is only fraudsters who are allowed four months grace to continue defrauding), dealing with schemes that involve:

(a) the creation of artificial losses by claiming exemption from tax on annual payments by individuals but claiming a deduction for the cost of acquiring the right to such payments;

(b) using authorised investment funds to avoid DTR restrictions;

(c) the avoiding of the manufactured payment unallowable purpose rule by paying a fee instead of a manufactured payment (or as HMRC put it “by characterising such a payment as a fee”);

(d) using guarantees and thinly capitalised companies to hedge currency exposure in such a way as to generate deductible losses but tax free gains;

(e) using lease and leaseback arrangements that result in claiming a deduction for rent for what is in substance a loan; and

(f) shifting profits offshore and returning them to the UK without incurring a tax charge.

The swathe of anti-avoidance legislation is of course a tribute to the effectiveness of the tax avoidance scheme disclosure rules.

7 The landlord’s energy saving allowance will be extended to include the installation of floor insulation from 6 April 2007. As the allowance is capped at £1,500 this is not an earth-shattering change. The relief allows the cost of energy saving work, which is improvements and thus capital, to be deducted when the expenditure is incurred. The allowances will now continue until 2015 (they were due to expire in 2009) and will be extended to corporate landlords who let residential property. From 6 April 2007 the £1,500 cap will become per building instead of per landlord.

8. The rules on alternatively secured pensions, which were amended last year, are to be further amended so that the beneficiary will be forced to take a minimum pension at aged 75 of 65% of the amount of a comparable annuity. There will also be a bar on using a member’s transfer lump sum death benefit to enhance the pension of another member (such as a relative).

9. There will also be a range of “technical components” to the pension legislation. As this came into effect only on 6 April this year there has been little time for practical problems to surface, so this is probably the first batch of technical improvements, with more likely next year.

10. An investment regulated pension scheme that (with its associates) owns more than 10% in a REIT that invests in residential property will be treated as having an indirect holding in its share of the underlying property. This apparently amends the law to conform with the regulations that the Treasury has issued! This is a novel approach. Normally regulations conform with the law, but as in this case the law only takes effect from 1 February 2007 both should be in effect (assuming the Finance Bill is enacted) by the time the REIT regime begins.

11. There are two SDLT anti-avoidance measures from today.

(a) There will be a notional land transaction where a person acquires an interest in land by a series of transactions (this blocks a number of schemes).

(b) The rules on partnership transfers are to be tidied up to close a possible loophole.

12. A targeted anti-avoidance rule is to be introduced to counter schemes that create artificial capital losses for individuals and trusts; loss relief will be restricted to those arising from genuine commercial transactions.

13. If you invest in microgeneration technology to generate power for your personal use and are able to sell surplus power to an energy company the sale proceeds will be (and apparently currently are) tax free.

14. From 1 February 2007 air passenger duty will be doubled to £10 for flights within the EU (and certain other countries) and £40 elsewhere for the lowest class of travel. Those that can afford Club or First Class will instead pay £20 and £80.

15. The already threatened changes to the VAT partial exemption rules, which have been strongly criticised, are to be introduced in any case. A business will be required to declare that its proposed special method is fair and reasonable. If it later transpires that it is not (on the basis of the information that was available at the time), the special method will be withdrawn retrospectively.

16. The VAT TOGC rules are to be amended to allow the vendor to retain his business records rather than having to beg HMRC to let him do so. This change, which accords with commercial reality, is to be applauded, albeit that it has taken over 30 years for it to happen.

17. As previously announced that standard rate of landfill tax increases from 1 April 2007 by £3 to £24 per tonne.

18. From today SDRT will no longer be payable on Exchange Traded Funds.

19. Personal tax allowances for 2007/08 increase in line with inflation – an extra £190 on the basic personal allowance, bringing it to £5,225. Nothing has been said about the tax rate band thresholds.

20. The self employed Class 2 NIC contributions will increase from next April by 10p to £2.20 per week. The Class 3 voluntary contribution will increase by 25p per week to £7.80. The NIC thresholds all increase in line with inflation.

Robert W Maas

06.12.06

JOURNAL 31

DOMICILE IS’NT NECESSARILY WHERE THE HEART IS EITHER

Whilst the public reaction to the Special Commissioners decision in Gaines-Cooper v HMRC has concentrated on the residence aspect of the decision, (which is considered in Blog 30) the case also has interesting lessons on the domicile front.

Mr Gaines-Cooper was born in England in 1937. His first business venture begun in the UK in 1958. He sold the business in 1971. In 1973 he visited the Seychelles, largely by accident (his flight from Sri Lanka to Zaire was delayed there for several days), and, he said, “immediately fell in love with the Seychelles and wanted to make his permanent home there”. From that time he visited the Seychelles frequently and in 1973 sought a residence permit there. This was granted on condition that he invest in the local economy, so he set up a factory in Seychelles. He owns and operates that factory to this day. At the end of 1975 he bought a house in the Seychelles. He occupied it for about a year and then let it out for three years as a business venture in Canada was in financial difficulty and he needed to be in Canada to sort it out. He also let his UK house for roughly the same period. He was granted a Seychelles residence permit in 1976 and moved his personal effects from the UK to Seychelles. A Seychelles residence permit is for five years, but it has always been renewed and Mr Gaines-Cooper has had such a permit continuously since that time. He has not however taken Seychelles citizenship but continues to be a UK citizen. As an international businessman I suspect that he feels a UK passport makes travel easier. In 1976 (when the UK had exchange contracts) he informed both the Bank of England and the Inland Revenue that he had taken up residence in the Seychelles. His will declared him to be domiciled in the Seychelles, but it was drawn up by English solicitors. It appointed an Isle of Man trust company as executors. In 1999 he made a new will which again stated he was Seychelles domiciled but was again drawn up by English solicitors in accordance with English law and appointed English based executors.

In 1993 he married a Seychellois woman, Jane, who he had met in 1975, in the Seychelles. She had come to the UK in 1977 to complete her education. In 1979 her family had moved to the UK because of adverse political pressures in the Seychelles (her father was a civil servant there). Their first child was born in 1998 and Jane seems to have spent most of her time in the UK bringing up their children since then, although she visited the Seychelles several time a year.

Mr Gaines-Cooper gave evidence that he firmly believed and intended that he would live out his days in the Seychelles, he had never had the desire to return to live in England, although he had to travel extensively on business the Seychelles was his true home, and it is where he intended to spend the remainder of his days. Jane gave evidence that she regarded their house in the Seychelles as her home and their UK house as her base when she was in the UK. Five independent witnesses, including a Bishop, gave evidence that they were in no doubt that Mr Gaines-Cooper had made his home in the Seychelles and that he was regarded by all there as Seychellois.

How then could the Commissioners have held him to be UK domiciled, bearing in mind that domicile is normally dependent primarily on intention?

1. They largely dismissed the evidence of the witnesses on the grounds that they knew him only in the Seychelles and knew little of his life elsewhere.

2. They seem to have been heavily influenced by the fact that he always retained a house in the UK in which his family lived.

3. They regarded it as significant that nearly all his connections with the UK were located in a comparatively small area of Berkshire and Oxfordshire.

4. They regard the fact that his will was under English law and prepared by English solicitors as “of some significance”.

5. They noted that Mr Gaines-Cooper had always retained British citizenship and did not apply for citizenship in the Seychelles.

6. They also noted that Jane had taken British citizenship.

7. They did not think that Mr Gaines-Cooper spent materially more time in the Seychelles than in England.

8. He had not established his family principally in the Seychelles.

9. It was significant that Jane had chosen to live in England – and it was clear that “the Appellant is much attached to his wife and we believe he had the intention to spend time with her”.

Their conclusion was that “the Appellant never did wholly reject England nor, indeed, that small part of it located in Berkshire and Oxfordshire where he had so many ties and connections; on the contrary he felt its pull upon his affections and interests all his days”. It is not clear how they could discern such an attachment in the face of Mr Gaines-Cooper’s evidence to the contrary. The answer is that they looked at the “totality of the facts” rather than at his professed intention. This is worrying in so far as history cannot be a guide to future intention. As far as I can recollect this is only the second domicile case that HMRC have taken whilst the taxpayer is still alive. In the past they believed that they were bound to lose in such circumstances as they could not disprove the evidence of the taxpayer as to his intention. If the approach of the Commissioner now is, as in this case, to discount the evidence of the taxpayer, we can probably expect to see a lot more domicile cases in the future.

It must however be remembered that in both this case and the earlier one the taxpayer had started life with a UK domicile. It is for the person who contends that there has been a change of domicile to prove it. Most people claiming non-UK domicile status start life with a non-UK domicile of origin. It is accordingly for HMRC to prove that, on the balance of probabilities, the person has acquired a UK domicile. It may well be that whilst the totality of the facts might cast doubt on the taxpayer’s professed intention in the context of the acquisition of a domicile of choice, they would not suffice to demonstrate the acquisition of such a domicile in the face of a taxpayer’s professed intention to retain his domicile of origin.

Although the Gaines-Cooper case seems to have been argued on an all or nothing basis, the Commissioners did express a view that Mr Gaines-Cooper may well have acquired a Seychelles domicile of choice in around 1976, but that, if he did so, he lost it before 1992 (the start of the period to which the tax assessments related), as from 1992 his physical presence in England was that of an inhabitant, so from that period “he did not discharge the burden of proving that he retained an intention permanently or indefinitely to reside in the Seychelles rather than England”. This not only emphasises the fragility of a domicile of choice but indicates that it is probably far more fragile than most of us believed. It shows that establishing a non-UK domicile is only the first step. Retaining it may be far more of a challenge.

Robert W Maas