Public Accounts CommitteeWritten evidence from Tax Trade Advisors Limited

I would like to thank the Committee for inviting me to give oral evidence on the subject of Tax avoidance: tackling marketed avoidance schemes, particularly our response to the recent report by the National Audit Office on “Tax Avoidance: tackling marketed avoidance schemes”.

I was grateful for the recognition of my honesty in giving evidence to the Committee. I cannot emphasise enough that the structures we have promoted have always operated strictly within the law both in terms of specifically how they are implemented and also how they have been promoted.

Tax Trade Advisors’ (TTA) role is the independent review of income tax structures in the market. Our aim is to provide clear and transparent explanations of the promoted product, the risks and timeframes clients can expect as well as the expected tax relief. We also aim to provide comprehensive support during the application process and for any subsequent HMRC correspondence until the scheme is concluded. TTA has never developed its own structures.

We consistently advise our clients to pay their taxes irrespective of the deduction they are claiming via their tax return. With the majority of our clients suffering tax at source via PAYE most clients will not see the benefits of a successful tax avoidance strategy until such time as that structure is either successful in the courts or whether an agreement is reached with HMRC. By adopting this approach, if a structure is successful the Treasury will be required to repay the taxes paid plus interest.

As I made clear in my evidence we accept that the legislation being relied upon is being used in a way that was not intended by Parliament, best summarised by Justice Henderson in 2007.

“In short, this is in my view one of those cases, which will inevitably occur from time to time in a tax system as complicated as ours, where a well-advised taxpayer has been able to take advantage of an unintended gap left by the interaction between two different sets of statutory provisions.”

Justice Henderson, High Court—D’Arcy 2007

We should point out that whilst we have only been comfortable in promoting “pure” avoidance strategies disclosed under DOTAS, there is an active market of those who are happy to work in areas where there is already a Targeted Anti-Avoidance Rule (TAAR), for example share loss schemes and partnership sideways loss schemes. These promoters and their non-disclosed schemes will therefore arguably continue beyond the widely anticipated General Anti-Abuse Rule (GAAR). Such firms argue that the strategies they promote are commercial and provide investors with real upside opportunity where the downside is often protected by tax relief. Often the economic risk of those structures is limited to the costs/fees invested in them.

It may also be worth noting that, only this week a senior QC who specialises in tax avoidance has passed his own judgement on the draft GAAR published as part of the Finance Bill 2013, describing it as “good for business”. He refers of course to the business of tax avoidance and my own view is that his comments reflect the complexity of the drafting of that GAAR and the inevitable “gaps” that are left behind.

This theme of complexity aiding tax avoidance is one which was touched on at the PAC meeting and also in the NAO report. There is little doubt in my mind that a simplification of the GAAR and generally as simplification of tax legislation as a whole, would reduce the ability of developers of tax schemes to “run rings” around HMRC as you described it.

The NAO report confirms that tax avoidance is legal, it often involves contrived transactions that serve little purpose other than to produce a tax advantage. However, it is often referred to by HMRC alongside (or interchangeably with) so called “acceptable tax planning”, which again is not overly helpful if the idea is to brand one thing as acceptable and the other as unacceptable.

There is also the perception, which is well founded in my view, that HMRC do regarded all tax planning as unacceptable and have a tendency to go after anyone who makes any attempt to reduce their liability. For instance, in 2007 a couple who had set out on a new business venture (Arctic Systems) together and organised their business affairs so they were able to maximise their combined lower rate tax bands, resulting in a tax saving of £7,000. HMRC challenged them aggressively, and Mr & Mrs Jones were forced to take their argument all the way through the courts to the House of Lords before it was eventually accepted that they had done nothing wrong. HMRC branded their activity as tax avoidance, although interestingly the NAO report suggests this is now acceptable tax planning. All too often, the distinction between acceptable tax planning and tax avoidance is deliberately blurred by HMRC.

In summary, I believe the distinction between acceptable tax planning and tax avoidance is an extremely subjective area. On the one hand there is a DoTAS procedure that might suggest where the line should be drawn, yet on the other hand there are some firms taking a different view of whether a scheme is disclosable at all, whilst others take the opposite view and disclose everything in order to ensure that they are protected.

Clearly the space Tax Trade Advisors occupies is the promotion of tax avoidance strategies and we therefore know exactly what is required to comply with the regulations but those who argue their schemes/strategies are not tax avoidance may well be falling foul of their requirements not least the requirement to comply with DOTAS.

Finally, to clarify a point raised by Nick Smith MP, I would like to make it clear that it is not illegal to promote, or to participate in, a tax avoidance scheme provided that HMRC’s DOTAS regulations are met (a responsibility we and those we work with take very seriously—we never have and never will promote a structure which seeks to stay out of the scope of DOTAS). The amendments in legislation which subsequently block disclosed tax avoidance schemes do not render the transactions illegal, but they do remove the tax benefit, which is the reason that a particular scheme would then cease to be promoted. There is nothing illegal about entering into the same transactions that were entered into prior to that change in the law; the only certainty is that the particular tax relief at the heart of the arrangement will no longer be available. We therefore wish to categorically state that our clients never have and never will be promoted any “illegal scheme” via Tax Trade.

Answers to Questions

I was specifically asked by the Committee for the name of the arrangement we promoted whose promotion was governed by the FSA rules on promotion. Having now checked the terms of the Non-Disclosure Agreement that binds my firm, I am able to confirm that the structure was called “The First De Sales Limited Partnership”, an exempt Limited Partnership registered in the Cayman Islands.

With reference to the “Working Wheels” structure, Nick Smith MP asked how many clients used it and what we made from it. As an introducer, and not the developer, I can only advise how many of our clients used the structure which was 60. The structure was implemented between March 2007 and December 2007, our accounts are prepared to 31 July each year and filed on Companies House. Our net profit for those two years was £59,000 and £305,000 respectively.

Aidan James
Managing Director

14 December 2012

Prepared 18th February 2013