Making donations to charity, getting paid in shares, moving offshore … professional advisers have a host of strategies to help high-earners keep as much of their income as possible. But the Revenue is fighting back
It’s pay and bonuses time for thousands of investment bankers in the City. And with the end of the tax year fast approaching, it is also traditionally the busiest time for tax advisers.
Bankers need only sit back as advisers cold-call them with offers of schemes that promise to cut their tax bills. One City high-flier was recently promised huge tax breaks if he invested in a scheme that donated funds to charity. The salesman told him he could offset some of his bumper pay and bonuses against tax before the April deadline.
The investment plan, which involves writing off gifts of shares to charities, was put to him despite a government crackdown on similar schemes in December. Treasury minister Stephen Timms says he is dismayed that charities are being used by the rich and wealthy to artificially cut their tax bills.
A spokesman for Timms says: “The financial secretary to the Treasury has made it very clear that the government will not put up with the abuse of rules that were put in place to encourage bona fide gifts of shares to charity. It is particularly offensive that reliefs which support the work of charities are targeted by a few for personal gain. HM Revenue & Customs will always take action to stop such abuses.”
Tax accountants are noticing a trend since the last budget for HMRC officials to re-examine popular tax dodges to recover some of the estimated £40bn lost each year through illegal tax evasion and aggressive, but legal, tax avoidance.
Mike Warburton, a senior tax adviser at accountant Grant Thornton, says investigations by HMRC are becomingly increasingly draconian and wide-ranging: “It is obvious that there has been an increase in activity by HMRC as it seeks more tax from wealthy people.”
The chancellor, Alistair Darling, is under intense pressure to drive up the tax take after a disastrous January that saw taxes on income and wealth decline from £32bn to £27bn year-on-year. To make up the difference, tax inspectors are trawling through past years to find funds they believe were taxable. More than £1bn has been set aside for enforcement and compliance over the current tax year, a quarter of the Revenue’s total budget. Revamped computer systems, some of the most expensive in Whitehall, allow it to target individuals more effectively and free officials to work on investigations. In 2008 the Revenue examined the affairs of more than 62,000 people.
But to many in the City, Timms and Darling are fighting a losing battle. Earlier this month their ministerial colleague, Lord Myners, told parliament that projections of a £2bn windfall from City bonuses would need to be revised downwards after it became apparent aggressive tax planning was allowing bankers to avoid much of their tax bill.
Common themes in the tax avoidance industry are emerging as people with incomes of more than £150,000 put in place schemes to avoid tax ahead of the new 50p income tax rate, which takes effect in April. For example, if income can be translated into shares and the benefits taken as dividends, wealthy individuals can benefit from the far lower 18p capital gains tax rate.
Timms has refused to give up his pursuit of tax dodgers and a series of court cases and rule changes suggest that a general clampdown is under way.
Last month, self-employed IT consultant Robert Huitson, a client of Montpelier Tax Consultants, was facing a tax bill of almost £100,000 after being told by a high court judge that anti-avoidance legislation introduced by the government under the 2008 finance act could be used to outlaw his tax arrangements going back seven years.
Mr Justice Kenneth Parker ruled the backdating of demands by HMRC was “in the relevant circumstances proportionate”, despite claims by Huitson that the retrospective nature of the legislation breached his human rights.
Along with Huitson, another 3,000 Montpelier clients with offshore bank accounts could be forced to pay back as much as £200m.
In another landmark case, HMRC established that a businessman who moved to the Seychelles to escape UK tax had failed in his mission and owed millions of pounds in tax.
The court ruled that Robert Gaines-Cooper, a multimillionaire businessman, was liable to pay £30m in back taxes because England had remained “the centre of gravity of his life and interest”.
Thousands of tax exiles, including well known private equity boss Guy Hands, the Barclay brothers (owners of the Telegraph group) and racing driver Lewis Hamilton could be caught by the ruling. Hands, who runs Terra Firma, the owner of EMI, said in unrelated court documents earlier this month that he had stayed away from Britain since last April, even though most of his businesses remain in the UK and his wife and two school-age children live in Kent. Hamilton is known to spend time in the UK where his McLaren team is based.
HMRC’s crackdown also extends to older schemes in which it believes wealthy investors are involved in artificial efforts to avoid tax.
Last week it came to light that a bevy of TV personalities, including Jeremy Paxman and Anne Robinson, along with footballer Wayne Rooney and film director Guy Ritchie, were caught up in an investigation into investment plans operated by Ingenious Media. The 2005-06 Inside Track fund allowed Ingenious Media clients to enter partnerships with the firm to invest in films.
HMRC is understood to be concerned that these investments were doomed to fail and the partnership structure allowed clients to write off the combined investments against their own tax bill.
Ingenious, which is founded and owned by multimillionaire media entrepreneur Patrick McKenna, maintains that it only invested in films to make money and that the longstanding arrangements complied with tax rules.
As spokesman for McKenna says: “It is the job of the HMRC to distinguish between bona fide trading businesses and schemes aimed at simply exploiting tax benefits.
“As a matter of routine, all of our businesses are subject to rigorous scrutiny and have been found to have been operated in the proper manner. In particular, we have consistently demonstrated that investors have claimed correctly for any losses that they have incurred.” He confirms that a typical investment of £36,000 would be added to a loan from the company of £64,000, making £100,000 of “total risk”, but denies the investment is a one-way bet, with a gain on a hit film, or a loss if the film flops, both claimable against tax .
“The fact that we put our money where our mouths are is irrelevant to the tax relief available to the investor. Tax relief is limited to 90% of the capital put in by the investor himself. So, in this case, the investor claimed tax relief of £36,000 – equal to the initial cash outlay rather than the total amount at risk,” he says.
Inspectors have also gone further and taken action against some of the tax planners behind the schemes. David Perrin and Roy Faichney were charged last year with a multimillion-pound tax scam involving celebrity clients including ex-England rugby captain Martin Corry. The pair, who worked for City accountants Vantis, are due to appear in court in the next few months to face claims they “cheated Her Majesty and the public purse”.
HMRC has accused them of abusing the Gift Aid scheme, promoted by Gordon Brown to encourage charitable donations, which allows taxpayers to claim relief at the highest rate on gifts to charity.
The executives are said to have developed a scheme to exploit donations and allow clients who pay tax at 40p in the pound to claim large amounts of tax relief. HMRC alleges the case involved the creation of 321m shares in four new companies that were then listed on the Jersey stock exchange. The shares were gifted to charities on the basis they were worth £1 each.
However, HMRC said the shares were “for practical purposes worthless or of nominal value only”, after investigating whether the share prices had been manipulated for tax purposes.
Some charities that received the gifts, including the Terrence Higgins Trust Aids charity and Action Medical Research, found the shares were worthless because they were impossible to sell.
Perrin and Faichney have insisted that they are innocent and unaware of any wrongdoing. Vantis, which said at the time of their arrest last October that both men would strenuously defend any charges against them, has since severed its links with them.
Claims for tax relief following gifts to charity are an attractive option for higher-rate taxpayers because HMRC repays the funds by cheque. For a higher rate taxpayer, a donation of £100,000 would result in a £40,000 refund from the exchequer.
Montpelier also marketed a scheme in the City that involved charitable donations. Watkin Gittins, one of the firm’s Isle of Man-based directors, said the scheme was closed to clients following a change in the law in December that in effect outlawed such plans.
Under the scheme, clients were asked to invest upwards of £15,000. The sum was combined with a loan from the company of £85,000. The total was used to buy “blue chip” shares, which are then donated to charity. The client claimed tax relief on the whole donation, including the loan, following a complex set of transactions.
Montpelier is an advisory business with 52 offices in more than 20 countries. It has about 20 offices in the UK and has designs on becoming a top 10 accountancy firm within the next few years.
The high court decision to reject Huitson’s case is likely to prove a blow to the company’s image. The Isle of Man is also concerned about its image as a tax haven. Last week the island’s financial services commission came under pressure from members of the Manx parliament, who expressed concern that the ruling against Huitson would harm the island’s relations with UK government.
Manx treasury minister Allan Bell concedes Montpelier’s tax consultancy business was unregulated and not covered by the commission’s rules. He says the commission regulates the firm’s administration arm, and it is examining whether it had a separate role to play as a watchdog alongside HMRC.
Montpelier says it has already appealed in the Huitson case, which it claims was one of many such schemes offered by accountancy firms.
Accountants say aggressive tax planning is likely to become more popular over the coming months as London-based investment bankers pocket six-figure pay packets.
Some investment bankers are happy to delay taking their bonus for three or more years in the hope that an incoming Tory government will get around to abolishing the 50p tax rate within that period.
One tax accountant warns that any aggressive tax planning would face scrutiny from better trained inspectors with the backing of the Treasury, which will be quick to bring forward new legislation. “The government needs to protect the tax base more than ever before and is going to return fire on those people who push too hard to avoid paying,” he says.
According to figures obtained by law firm McGrigors, special anti-avoidance teams at HMRC netted £373m in 2008-09 compared to just £81m only four years ago. This year, the sums could rocket