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FFW's Tax Partners Contribute to PLC's Leading Experts Budget Commentary

Once again, FFW's tax partners contributed to PLC's Budget 2014 leading experts' tax commentary.  Our comments are set out in full below:HARTLEY FOSTERO tempora o mores! In 2005, HMRC announced (in Once again, FFW's tax partners contributed to PLC's Budget 2014 leading experts' tax commentary.  Our comments are set out in full below:


O tempora o mores!

In 2005, HMRC announced (in somewhat Panglossian fashion) that tax avoidance would be ended by 2008. Budget 2014 implicitly confirms that this aim has yet to be achieved, and, indeed, probably never will be. Some nine years on, tackling avoidance remains a key theme for the Government; and yet further measures with the objective of curbing "tax avoidance" have been announced. It is to be noted that the introduction of the GAAR under Finance Act 2013 has yet to preclude the, at least, annual publication of screeds of targeted anti-avoidance legislation. A further weapon in HMRC's ever-burgeoning arsenal of measures available to be used against what it perceives to be egregious tax avoidance committed by a minority of taxpayers is to be introduced in Finance Act 2014: accelerated payment notices. These will require the tax said to arise in relation to avoidance structures to be paid before it is determined by the First-tier Tribunal whether or not there is a tax liability. The explicit basis of this policy is to preclude the taxpayer obtaining a cash flow advantage from entering into a tax avoidance structure, in respect of which it may take several years before its being considered by the First-tier Tribunal. As a corollary, the implicit basis is that it is the Treasury that should have the cash flow advantage: "this will ... secure tax revenues for the provision of public services." Chipping away at the somewhat glacial pace that tax disputes often have to progress at is, accordingly, unlikely to be a focus of the Government. It is expected by the government that accelerated payment notices relating to existing avoidance cases currently under dispute (which concern £7.2 billion of tax) will be issued to c.33,000 individual taxpayers and c.10,000 corporates primarily over the course of 2014/15 and 2015/16. There are two bases on which an accelerated payment notice will be able to be issued. The first is in relation to arrangements that have been notified under the DOTAS rules or have been the subject of a GAAR counteraction (a "DOTAS APN"). The second is where the "claimed tax effect [of the avoidance structure] has been defeated in other litigation" (a "CTE APN").

A CTE APN may be issued only if there has been a relevant final judicial ruling. A final judicial ruling is a decision of the Supreme Court or an un-appealed decision of any other court or tribunal. This is even though, first, a decision of the First-tier Tribunal is not binding precedent and, secondly, that a taxpayer has chosen not to continue with an appeal is not conclusive of that appeal not being meritorious per se. Given the anticipated numbers of APNs to be issued as against the comparatively much small number of Supreme Court decisions in relation to tax avoidance matters that have been released, it may well be that HMRC will be encouraged to adopt a wide interpretation of the precondition for a CTE APN: "the principles laid down … would, if applied to the applied arrangements, deny the asserted advantage". The risk is that arrangements that might have, at best, only a superficial similarity to the principles laid down in a decided case will be considered sufficient. Indeed, in many instances, it is motive, rather than, say, the contractual terms, that has been determinative.

There is no route to appeal against the issue of APNs to the First-tier Tribunal. Recipients of an APN will have to either appeal the penalty or issue judicial review proceedings to challenge the APN. The government expects that "a range of different legal challenges, including judicial review proceedings, an increase in closure notice applications … and disputed enforcement activity" will ensue.

Each of the measures has a degree of retrospectivity – "judicial rulings" includes decisions released before the enactment of Finance Act 2014. It is intended that CTE APNs can be issued consequent on pre-Finance Act 2014 decisions, but may not be issued later than two years after enactment of Finance Act 2014 or one year from the day the return was submitted or appeal made. It may be that DOTAS APNs will be able to be issued in relation to arrangements that have been notified prior to the enactment of Finance Act 2014.

That the fons et origo of the DOTAS rules was to provide HMRC with information about tax structures in advance of their receipt of tax returns seems to have been forgotten in the tax avoidance maelstrom. An arrangement being notified under the DOTAS rules was not an egregiousness signifier. Previously, it had not been uncommon for advisers to recommend that a notification should be made in circumstances where there was uncertainty as to the application of the rules. That may not be the optimal approach post Finance Act 2014. The numbers of DOTAS notifications has been falling year on year (from 587 in 2004/05 to 77 in 2012); that fall may be accelerated consequent on the introduction of DOTAS APNs.


It was commended to the House as a Budget for "the makers, the doers, and the savers", although perhaps the savers did best this time around as recompense for having involuntarily put up with desperately low interest rates on their savings for years (or to get their votes…). Pensioner bonds, to redress the imbalance of the effect of interest rates for savers versus borrowers, and intended to pay an above market interest return are likely to prove popular. However, much more fundamental are the changes to the structure of pensions, intended to offer greater flexibility to investors. A huge change will be the removal of the requirement to buy an annuity, expected to take effect from April 2015. The billions wiped off the share value of UK insurance industry a few minutes after the Chancellor made the announcement, and before he had finished his speech, indicated the significance of this proposal. For those still some way off retirement, the benefits of the new regime are likely to be moved further off, as a result of consultation for the normal minimum retirement age to be moved from 55 to 57 from 2028. It will be interesting to see whether in the future the Chancellor will play around with tax relief on pension contributions as the price for greater flexibility on drawdown. In the meantime, in addition to making pension contributions, savers will be able to invest more, more flexibly, in nicer ISAs.

For businesses (the makers and the doers), it was generally a quieter affair. For the owner-managed sector, it was a case as steady as she goes. Despite some rumours, the reduction in the main rate of corporation tax to 20% from April 2015 was not brought forward a year, the main rate from April this year being fixed at 21%. However, there was good news in the form of the doubling of the annual investment allowance to £500,000 from 1 April 2014 to 31 December 2015. Given that the AIA will plummet back to £25,000 from 2016, the Chancellor clearly hopes his measure will spark a rush of investment (more making and doing, and less saving). He is probably right.

Those who invest in the makers and doers will be pleased to see that the Seed Enterprise Investment Scheme (SEIS) and the associated capital gains tax reinvestment relief will be made permanent (it was originally only a temporary measure). For EIS and SEIS, the government announced that it will consult on the need to accommodate the use of convertible loans. This is encouraging. At present, shares issued on the conversion of convertible loans do not without additional structuring qualify for EIS or SEIS status, whereas, conceptually, the investor is on conversion taking risk in the company in a way commercially comparable to straightforward EIS-eligible investors.

In addition, the government is concerned about the use of what it calls contrived structures to allow EIS investment in low-risk activities benefitting from income protection through government subsidies. We can expect venture capital tax relief for these structures to be stopped. EIS and SEIS are aimed at giving investors a tax break to encourage investment in riskier enterprises and so it is no surprise that the government is targeting structures where the risk may not warrant the relief. It will be interesting to see the detail of what the government has in mind and how it will take effect.

Whilst it was 'steady as she goes' for most, those involved in perceived tax avoidance faced choppier waters. There were the usual specific measures and tweaks to DOTAS. Advance payment notices will enable the government to get its hands on disputed tax up-front in a move that (like the new follower penalties) seems a little incongruous with the Chancellor's support in his speech of the Magna Carta. One wonders whether the cash-flow advantage from APNs will make the speed of progress of tax cases even more like sailing into the wind than now and, to overdo the metaphor, whether HMRC will seek to pick off the weaker ships first so that it can issue APNs to the whole fleet.


This is, hopefully, the dawning of a new era. Budget 2014 confirmed the previously announced important new tax exemptions for employee ownership trusts ("EOTs") will be enacted in the Finance Bill 2014. These exemptions have wide-ranging potential to create a fairer choice between direct and indirect employee ownership business models:

  • There will be no need to compromise the principle of employee trust ownership to provide tax free bonuses to staff. Instead of the complexities of having to establish a share incentive plan ("SIP"), a company controlled by an EOT will be able, instead, to pay income tax free cash bonuses, on same terms, to all employees. The same individual limit as now applies for SIP free share awards, £3,600 per tax year, applies to these bonus payments. The income tax exemption provides a tax effective reward to employees for working in a company that adopts the trust or indirect model of employee ownership.

  • The new capital gains tax ("CGT") exemption will provide an alternative solution for owners with a succession problem: a sale to an EOT. Why sell to, say, a few managers in a management buy-out and pay 10% CGT (after entrepreneur's relief) when there is a complete CGT exemption for an all-employee buy-out?

  • The many owners currently planning to introduce indirect employee ownership will have an additional way to help finance that move; through the tax savings in the new income tax and CGT exemptions.

But the employee ownership sector has to wait until 27 March 2014, for the publication of the Finance Bill to see what changes have been made during the consultation process. The original specification of an EOT needed changes to it. There were encouraging signs, from HM Revenue & Customs and HM Treasury, during the consultation process that some additional flexibility would be added to make the EOT a more viable option. Let's see what gets announced on 27 March 2014.

Budget 2014 confirmed that the government will also consult on the Office of Tax Simplification ("OTS") proposal to introduce an employee shareholding vehicle. As previously acknowledged by the OTS, the need to facilitate sales by employees of relatively modest quantities of shares that they have acquired via a share plan, and the need, identified in the Nuttall Review of Employee Ownership, to hold a large static shareholding "should be considered together, in order to have a consistent approach to a common theme, and to avoid complexity and contradiction in any resulting legislation


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