Every year just before Christmas, 20 or so former Simmons partners meet at Tate Britain for a boozy lunch. Many of my former business colleagues, I do not see from year to year, and it is fascinating to watch what they get up to; some retire, some start their own businesses and others ‘give back’.
Edward Troup, now Sir Edward Troup was appointed Executive Chair and Permanent Secretary to HMRC in April 2016, for which he was knighted in the 2018 new year’s honours list. He was the former head of the firm’s tax department and the most brilliant brain I have ever encountered.
He knows his tax and is highly regarded. In 2000, he advised on the management buyout of part of the hedge fund Man Group commenting that ‘achieving a tax efficient structure in the context of a buyout involving businesses and shareholders round the world posed some interesting challenges’. The new business owners of the company ended up holding their shares through a trust company in Jersey.
Troup knows that without specific legislation tax cannot be raised. He is on record as saying
‘Tax law does not codify some Platonic set of tax raising principles. Taxation is legalised extortion and is valid only to the extent of the law’ – a point of with which I concur.
During Troup’s time at HMRC, revenue increased for seven consecutive years, and in 2015/16 it raised a whopping £574.9 billion up by £38.1 billion on the previous year. In the annual report for 2015/16 it said ‘£28.9 billions came from compliance yield which would have otherwise been lost to the UK through fraud, tax avoidance and evasion. We have tightened our grip on those who deliberately cheat the system and continue to pursue those who refuse to pay what they owe.’
But the question now is, has HMRC gone too far?
The House of Lords Economic Affairs Committee, EAC, published its findings in December 2018, and thinks so!
A ‘careful balance must be struck between clamping down and treating taxpayers’ fairly. Our evidence has convinced us that this balance has tipped too far in favour of HMRC and against the fundamental protections every taxpayer expects.’
In 2000 some employers set up Employee Benefits Trusts for their employees. They paid their employee wages into an offshore trust which then loaned the income on a 5 or 10 year basis to their employees, in the knowledge that this loan would be rolled over and no tax paid.
This arrangement was considered effective in avoiding tax. In fact, I was asked to advise on it many years ago. In my opinion, the arrangement was legally sound, but I could not recommend it because once in, it would be impossible to get out, if the law or the attitude of HMRC subsequently changed, without a huge tax bill. This would now appear to have been good advice.
In 2010 HMRC warned that such arrangements were unacceptable, and that those who used such an arrangement had to repay the loan, pay the tax or face fines.
A Loan Charge Action Group was formed which represented 50,000 affected contractors. It declared that many employees were in now in danger of losing their homes or made bankrupt through no fault of their own.
These employees were merely complying with what they had been told by their employers was lawful and for their benefit. They now faced huge tax bills, which they were unable to pay. The EAC decided that it was wrong for HMRC to treat these people in the same manner as those who deliberately went out of their way to avoid/evade tax.
The EAC may have sympathy for the ‘man in the street’ who unwittingly gets caught up in tax avoidance, but it would not be sympathetic if the victims were multi-millionaire settlors of their own offshore trust from which they had saved millions of pounds in tax.
It is clear from what has already been published that the information to be received by HMRC this year from offshore financial institutions under the Common Reporting Standard once analysed will be used to attack settlors of offshore trusts. The first such attacks are expected in about six months.
HMRC has said that it will first go for well-known names with significant assets in trust. It has been advised to attack structures which have Persons of Significant Influence on the basis of sham. It will then look very closely for clauses in the Trust Deed once provided absolving the Trustee from any form of liability and duty to interfere. This it will take as further evidence that the Trust was nothing more than a nominee arrangement and tax the settlor as if no trust had been set up together with 200% penalties.
If this line is pursued by HMRC, it is then debatable whether the trustee can rely on its indemnity clauses in the Trust Deed, and could well get sued by its client, with little protection.
For those professional fiduciaries, who are alive to the dangers, there are plenty of things which can be done to minimize their exposure, but they must be pursued in a timely manner. If not, and HMRC starts an investigation, it will be too late to do anything other than wait, worry and watch the litigators get rich.
If you would like to discuss what can be done to protect and control assets in trust and to reduce the risks posed by HMRC or any other tax authority call Caroline on 020 3740 7422 or email on caroline@garnhamfos.com
You can also buy her books ‘When you are Super Rich who can you Trust?’ and ‘Uncovering Secrets; How to Win Business from Private Clients’