Accountancy isn’t always a discipline that gets the general public talking excitedly. But there are few people who don’t have an opinion about taxation. In the Budget of 2014, the Chancellor raised a new spectre which was guaranteed to cause controversy – the proposal that HMRC would be allowed to dip into taxpayers’ bank accounts and take the monies it believes are rightfully owed to the government.
We could see this announcement as just one part of a wider picture of the Revenue cracking down on tax avoidance, of course.
There’s been plenty of high-profile debate about large businesses organising their affairs in such a way that they can seemingly duck out of paying corporation tax in the UK. Critics may see this as a cynical attempt to avoid corporate responsibility, while others point to the fact that these companies are employing large numbers of people and paying significant amounts of national insurance.
Whatever the rights and wrongs of the issue, the climate has noticeably shifted and many accountants find that clients are reluctant to take advantage of perfectly legitimate planning opportunities to reduce their tax liability.
One long-standing option for small business people, for instance, is to pay themselves a modest salary and remunerate themselves via company dividends. When used to its full advantage – perhaps in a company where a husband and wife each have a 50% stake – this strategy reduces national insurance contributions and can take individuals out of the higher-rate personal tax bracket.
Other arrangements are more elaborate and require what is called a Disclosure of Tax Avoidance Scheme (DOTAS) to the Revenue. There has never been a guarantee that such schemes, often promoted by specialist firms, will be accepted by HMRC. In fact, they are frequently challenged in court and the government will attempt to recover the sums of tax they claim are due. Promoters of the schemes may well arrange insurance to cover clients’ professional fees in these circumstances.
Under new regulations in the Finance Bill, however, HMRC will be able to take the tax at source before any proceedings begin. The burden of proof seems to be shifting towards the assumption that the scheme is irregular. It’s only if you manage to prove your case that you can recover the sums involved. And in the meantime, the government has being sitting on your cash.
No one likes uncertainty. So as high-net-worth individuals consider their options, it may be that more and more will choose to play safe. It’s also worth bearing in mind that the fees charged by specialists in these tax schemes can be quite off-putting. There’s always a danger that the lure of a tax saving is actually disguising arrangements which are not quite as financially beneficial as they first appear. So the message might be: don’t let the tax tail wag the commercial dog.
It’s difficult to be certain of how this area of regulation will develop in the coming years. Perhaps there’s a potential silver lining in what seems an increasingly cloudy world? If the overall tax take increases and avoidance is reduced, some might argue that tax rates are likely to fall. In the meantime, the important thing is that you consult with your accountancy firm carefully and go into any scheme with your eyes wide open. Be aware of the facts. And understand the risks.
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