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Marketed tax planning schemes are 'doomed' in UK, but individual planning will survive

Monday, 7 July, 2014

A new briefing paper from UK law firm Farrer considers the future of tax planning in the UK in the face of government-inspired media hostility.

It notes that media headlines and UK government announcements in recent years have tried to erode the traditional distinction between tax evasion and tax avoidance. For example, Treasury assessments of the so-called tax gap (the shortfall between what HM Revenue & Customs actually collects and what it believes is due) constantly conflate the two practices. Tax advisors must therefore consider whether the two concepts have become one in the public perception.

Moreover, recent anti-avoidance measures have been pushed further than ever. Of particular note are the new regime taxing UK residential property owned through a corporate envelope; the introduction of the general anti-abuse rule classifying tax planning as ‘abusive’ if it fails a reasonableness test; proposals for taxpayers to pay disputed tax up-front during disputes with HMRC; measures to allow HMRC to recover tax directly from taxpayers’ bank accounts; and controls on ‘high risk’ advisors.

Farrer concludes that tax planning itself is not dead, but old ways of thinking about it are. Recent court and tribunal judgments suggest that highly artificial marketed schemes will no longer work, but the famous Duke of Westminster test – that each individual has the right to order his affairs to minimise tax – is still valid. Thus, bespoke long-term tax planning for individual clients – notably non-doms – is still on the table, provided it does not contravene specific measures.

The key, says Farrer, is for practitioners to structure clients’ affairs in a way the legislation intended. For example, it points out, despite media headlines, the UK’s non-domicile rules are not loopholes but incentives put in place to encourage international individuals to come to the UK. 

‘They have been discussed and debated and they are deliberately generous’, says the firm. ‘Individuals are entitled to take advantage of them and should continue to do so.’

However, clients must also be aware of the new reputational risks. ‘Public opinion and government legislation are increasingly hostile to aggressive tax planning’, notes the firm. ‘So now, more than ever, it is important that clients take detailed, considered advice before putting any planning in place and also that they exercise their own judgement as to whether the planning is commercial, appropriate and fit for the long term.’