Paragraph 2.4 of the Consultation Document on a General Anti-Abuse Rule (“GAAR”) says that the GAAR should not affect “the centre ground of tax planning”. That being the case, it would be really useful to know where that centre ground lies.
HMRC seeks to define this by exception, setting out illustrations of planning that they regard as being caught by the proposed GAAR. There are 6 illustrations, covering the following situations:
1. Exploitation of the interaction between two discrete areas of legislation (accrued income scheme and manufactured payments rules).
2. Artificial generation of a loss not corresponding to a true economic loss.
3. Pre-determined and self-cancelling series of transactions.
4. Exploitation of the loan relationship rules to generate a tax loss where no economic loss exists.
5. Dividend buying scheme using a nno-resident company.
6. Charitable gifts in the form of shares with value recycled to the taxpayer by way of interest-free loans.
I would have no hesitation in defining all of this as abusive tax avoidance which is certainly well outside my definition of the ‘centre ground of tax planning’, and so it follows that I have no problem with any of this. But then I must remember that I am not coming at this from the layman’s perspective, but from that of a tax consultant and tax planner whose raison d’etre is to advise clients on how to minimise the tax consequences of any particular transaction.
I would therefore be interested in how the non-tax fraternity would see the following 6 examples of my own, which I think are firmly within the centre ground of tax planning, but then I am sure we all think our political views are the very definition of moderation, and we can’t all be right about that, can we?
1. Income tax planning
A highly profitable partnership introduces a company as a partner, and channels the amjority of its profits through the company. As a result, it takes advantage of lower corporation tax rates as opposed to income tax rates, saves national insurance and allows the individual partners to control the level of their income for tax purposes. This also gives the individual partners the opportunity to generate a capital gain on the sale or licensing of goodwill to the company, taxable at 10%.
2. Corporation tax planning
Three individuals each have a one third interest in three highly profitable companies. The companies are obliged to share the corporation tax 20% band of £300,000 equally, with the result that significant amounts of corporation tax are due at the marginal rate of 25%. The individuals are advised that if each of them takes control of one of the companies as majority shareholder, the companies will each have a full 20% band of £300,000.
3. Capital gains tax planning
A client who lives in Manchester is given a 3-year posting in London by his employer, after which it is expected that he will be offered the opportunity by his employer to work abroad. He has a residence in Manchester where his family lives, and is considering his options in respect of a London property (hotel, rental or acquisition).
He is advised that he can acquire a property in London and elect for that to be his main residence for capital gains tax purposes, as he spends the majority of his time there (i.e. the working week). If he then sells that property and the family home at the end of the 3 year period, before moving abroad, both disposals will be fully eligible for capital gains tax main residence exemption, thus exempting gains on both properties from tax.
4. Inheritance tax planning
Husband and wife jointly run a successful business through a limited company. Their joint assets are well in excess of the combined inheritance tax nil rate band of £650,000, even after allowing for 100% business property relief on the company shares. Husband is terminally ill, and wife intends to carry on the business after his death.
Husband is advised to change his will, which currently leaves his entire estate to his wife. Instead, he leaves his shares in the company to his (adult) children. Following his death, his wife buys the shares from the children for market value, leaving the sale proceeds outstanding as an interest-free loan, repayable following her death.
Neither capital gains tax nor inheritance tax arises as a result of these transactions, and on the wife’s death the value of the outstanding loan is available as a deduction from the value of her estate for inheritance tax purposes, thus reducing the inheritance tax payable by 40% of the amount of the loan. Effectively each spouse has received 100% tax relief on the value of the husband’s shares.
5. VAT planning
A housebuilding company buys some old farm buildings subject to an option to tax, and converts them into houses, but because of prevailing housing market conditions is unable to sell them, and proposes instead to let them to tenants on a permanent basis.
The company is advised that it should sell the houses at market value to another company formed for the purpose (a zero-rated sale for VAT), thus avoiding any clawback of VAT suffered on the purchase and conversion of the properties.
6. National insurance planning
A couple owning and running a profitable trading company are advised that they can jointly withdraw almost £77,000 from the company each year by a judicious mix of salary and dividends without suffering any personal tax or national insurance, and whilst safeguarding entitlement to state benefits.
I regard all of the above as firmly in the centre ground of tax planning, and by deduction from HMRC’s examples in the GAAR Consultation Document I suspect they do too. But I remain to be convinced that the general mass of the tax-paying public would share that view, which is a vital consideration, because if they do not, they are going to be disappointed at the scope of the GAAR and the limited nunber of taxpayers that it affects.
So how do you view my examples 1 to 6 in terms of their place on the continuum of tax planning, from generally acceptable through centre ground to abusive, because I believe this is a debate that needs to take place now, before the GAAR is cast in tablets of stone. It would be most helpful if there was at least some consensus on where the elusive “centre ground of tax planning” lies.