Out-Law News | 19 Mar 2014 | 5:30 pm | 3 min. read
Tax expert Jason Collins of Pinsent Masons, the law firm behind Out-Law.com said that new tax reliefs had been announced for investment in social enterprise, theatres, micro-businesses and others – "but investors are becoming ever more wary of investing in anything which mentions 'tax' because HMRC is developing a reputation for moving the goalposts and tying investors up in knots".
The Chancellor confirmed that two changes which will require payment of tax before disputes over avoidance schemes have been resolved with HMRC will come into force in the summer.
In January the Government outlined draft new rules that would give powers to HMRC to require payment of money it claims is owed in tax, up front, before any dispute with HMRC is resolved. HMRC will be able to issue a 'follower notice' to taxpayers who have entered into widely marketed schemes where the scheme has been held to be ineffective in a judicial ruling involving another taxpayer.
HMRC will also be able to seek upfront payment where a scheme hits certain "avoidance hallmarks", such as the scheme being subject to disclosure requirements under the DOTAS rules or where it has been the subject of a counteraction decision by the GAAR Panel.
In the case of a DOTAS scheme, the tax may have to be paid upfront even if no court has ruled in favour of HMRC. Taxpayers would remain free to make their case to the tribunal or court and, if successful, their money would be returned with interest. Many commentators criticised the retrospective nature of these proposals which apply to schemes that were entered into before changes come into force, when the Finance Bill becomes law.
Commenting on the proposals Jason Collins said, "HMRC has today been given unprecedented powers to demand £5.1bn of cash from 33,000 individuals with a mean gross income of £262,000 (compared to £29,000 for the wider income tax paying population) in respect of historic tax avoidance disputes. The payments are 'on account' of a potential tax liability. Is this a step too far?"
Collins said that the requirement to pay tax up front where new tax avoidance schemes are entered into after the legislation comes into force "is likely to send promoters offshore - where they will not be subject to a penalty if they wrongly advise their customers not to disclose a scheme and thus avoid upfront payment." He said that it could "drive avoidance underground and reduce the information HMRC has about new forms of tax avoidance".
In a new announcement the Chancellor said that HMRC would be given the power to take tax debts over £1,000 directly from personal bank accounts. "No data has been supplied, but presumably those who fail to pay their debts are more likely to be on lower incomes. Will they also use this power to collect tax directly from the 33,000 who receive an accelerated payment demand?" Collins said
Other announcements that could affect high net worth individuals include the reduction in the threshold whereby residential property acquired by a company is subject to the highest SDLT rate of 15%. The Chancellor announced that the threshold will be reduced from £2m to £500,000 for acquisitions by non-natural persons on or after 20 March. Tax expert Ray McCann of Pinsent Masons described these changes as "something of a surprise".
A related change was announced to the Annual Tax on Enveloped Dwellings (ATED) to reduce the threshold from £2m to £500,000 in stages. From 1 April 2015, a new band for properties valued between £1m and £2m will be introduced with an annual charge of £7,000. A further ATED band for properties between £500,000 and £1m will come into effect from 1 April 2016 with an annual charge of £3,500.
McCann explained that the Government is also correcting a technical flaw in the IHT rules as they apply to 'non-doms' and these follow on from the changes it made in 2013 to what liabilities could be allowed in computing the estate on death for IHT purposes. In future borrowed funds that are simply deposited in a UK bank account will be treated as not deductable for IHT purposes. Previously where a 'non-dom' had used borrowings to acquire assets and those assets were "excluded property" for IHT purposes, the outstanding liability was not allowed as a deduction from the chargeable estate. Funds held in a UK bank account other than in Sterling by a non-resident and non-domiciled individual were not excluded property but were nevertheless not charged to IHT. He said that this meant that where the deposited funds were originally borrowed, the restriction on liabilities did not apply.
"None of these changes are likely to raise significant extra revenue or indeed any extra revenue and oddly the yield expectations in respect of dual contracts suggests almost no impact on the mischief the Government is looking to discourage," McCann said.