Tax planning: Where are we now?
The golden era of artificial tax planning, some would argue, is coming to an end – no doubt having been hastened recently by the unprecedented leak of some 11.5 million documents known as “the Panama Papers”. Around the world, governments are stepping in with domestic and international fiscal “interventions” intended to design and develop “fairer” tax systems.
But these interventions are not taking place all at once, nor are they simple and straightforward. And as we’ve been hearing from politicians over the past two weeks or so, since the Panama Papers hit the world’s headlines, lots more such interventions are likely, no doubt sooner rather than later.
Here, one of the UK’s leading experts on tax issues, Prudential technical manager Gerry Brown, looks at the current state of play in the UK.
INDIVIDUAL TAX ISSUES
• A revamped regime will apply with effect from 6 April 2017:
(1.) Any individual who has been UK resident for at least 15 out of the previous 20 tax years will be deemed UK domiciled.
(2.) Any individual born in the UK, with a UK domicile of origin, who subsequently becomes domiciled elsewhere, will be deemed UK domiciled for any period in which he/she is UK resident.
• The “remittance basis” – whereby UK residents who are not UK domiciled may pay UK tax only on income and gains from UK sources, and on only such foreign income and gains they remit to the UK – will not be available to those falling within (1.) or (2.) above.
• The new rules will also apply for inheritance tax purposes (replacing the current “17 years out of 20” rule).
• Individuals born in the UK with a UK domicile of origin, who have acquired a domicile of choice elsewhere, will become “deemed domiciled” for UK IHT purposes if;
(a.) at any time they are resident in the UK, and
(b.) they have been resident in the UK in at least one out of the two previous tax years.
• When an individual who has become deemed domiciled leaves the UK and becomes non-UK resident, he/she will continue to remain deemed UK domiciled for up to 6 years following departure.
• Excluded property trusts will become essential tools in any IHT planning strategy for individuals who might become UK deemed domiciled.
OWNERSHIP OF UK PROPERTIES
Inheritance tax – From 6 April 2017, individuals domiciled other than in the UK, who hold UK residential property through an offshore trust, offshore company or other offshore structure, will be subject to UK inheritance tax.
Annual Tax on Enveloped Dwellings – The Annual Tax on Enveloped Dwellings (ATED) is an annual charge payable mainly by companies owning UK residential property.
From 1 April 2016, properties valued at more than £500,000 will be subject to ATED. (The previous lower limit was £1m.) Properties in the £500,000 to £1m band will attract an annual charge of £3,500.
Returns for properties in this band are due for the chargeable period 1 April 2016 to 31 March 2017 onwards, and must normally be filed by 30 April 2016.
GENERAL ANTI-ABUSE RULE (GAAR)
The 2015 autumn statement contained a proposal to introduce a penalty of 60% of the tax due charged in all cases successfully tackled by the GAAR. The government also intends to make small changes to the GAAR’s procedure to improve its ability to tackle marketed avoidance schemes. These proposals are currently subject to a consultation process.
ACCELERATED PAYMENT NOTICES (APN)
HM Revenue and Customs issues APNs to taxpayers (individual or corporate) involved in avoidance schemes disclosed under the Disclosure of Tax Avoidance Schemes (DOTAS) rules, or countered under the General Anti Abuse Rule (GAAR).
The practical effect of an APN is that it requires the taxpayer to pay some or all of the disputed tax on account, while the dispute is litigated in a tax tribunal. The government’s rationale for APNs is to remove the cash flow advantage enjoyed by users of tax avoidance schemes.
Tens of thousands of APNs have been issued. Some have been (unsuccessfully) challenged through the courts – a few have been withdrawn because HMRC agreed that it had exceeded its powers in issuing them.
CORPORATE TAX ISSUES
BASE EROSION AND PROFIT SHIFTING (BEPS)
BEPS is a generic term for tax planning strategies used by multinational companies. These strategies exploit gaps and mismatches in tax rules to artificially shift profits to low-tax (or no-tax) jurisdictions.
There is little or no economic activity in these jurisdictions, usually resulting in little or no worldwide corporate tax being paid. Strategies used include “transfer pricing” and the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income.
The Organisation for Economic Co-operation and Development (OECD) is developing an international action plan to combat BEPS and this is gradually being implemented.
DIVERTED PROFITS TAX
Diverted profits tax is designed to combat tax avoidance by large multinational enterprises with business activities in the UK who enter into contrived arrangements to divert profits from the UK, by avoiding a UK taxable presence and/or by other contrived arrangements between connected entities.
Diverted profits tax started on 1 April 2015, so it is too early to judge its effectiveness.
At one level, diverted profits tax can be seen as a UK response to the BEPS initiative.
Gerry Brown (FCA, TEP) is a member of Prudential’s technical team. He started his professional career as an Inspector of Taxes, and later qualified as a chartered accountant. He is a member of the Society of Trust and Estate Practitioners. His role at Prudential involves providing technical assistance – internal and external – on the taxation of life assurance contracts (both”onshore” and “offshore”), OEICs and ISAs, and on their use in financial planning strategies.