20 January 2015
The gap between perception and reality
Tax avoidance and evasion have in recently been at the centre of an international furore with regards to the financial conduct of businesses and individuals. Companies such as Apple, Google and Starbucks have been questioned on their use of ‘tax havens’ and individuals including Gary Barlow and Jimmy Carr have been called up on their use of shelter vehicles.
One such vehicle is the use of trusts, a long-standing feature of the UK’s tax and financial planning world. The types and nature of trusts are many and varied and their uses in the world of tax mitigation is fairly well established. Trusts have been around for centuries and were originally invented as a means of providing control and security over assets and property, generally while someone went away for a long period of time, perhaps on military service. They were not initially invented as a means of saving tax. However, they have long been used as tax saving structures in a number of different ways. Their uses for tax mitigation purposes are more limited than they used to be, as there have been many anti-avoidance provisions over the years by successive governments. Yet they continue to be seen by some as flexible vehicles offering some important facilities which render them useful for individuals and businesses attempting to make tax savings. A trust has a separate existence and tax planning often rests upon being able to divest oneself of assets or wealth, or being able to make payments to an ostensibly ‘separate’ and ‘independent’ legal entity.
The tax planning industry finds itself at the centre of an ever increasingly negative climate of adverse publicity. Many politicians clearly see any form of structured tax planning as wholly unacceptable.
Some have said that tax planning per se is unfair to the honest taxpayer. Recent uses of trusts by the tax planning industry, especially in the rarefied world of employee remuneration planning in highly paid sectors, have attracted this sort of negative comment. It is seen by many as not only unfair but bordering on the dishonest. The problem is that the boundary between what is legal and what is not seems to be frequently misunderstood by tabloid journalists and politicians, or even to be deliberately ignored in the interest of sensationalist headlines and demonising the individuals who have used these strategies.
Trusts are a perfectly legal and proper financial structure so long as they are used within the boundaries of UK financial and tax law. The UK actually has some of the most rigorous tax avoidance legislation applicable to trusts anywhere in the developed world. Some would no doubt argue that the use of offshore trusts for UK tax purposes is extremely difficult and heavily curtailed since the first major tranche of anti-avoidance provisions were introduced back in 1991.So why do trusts continue to attract such adverse comment from some quarters?
Although mainstream wealth protection and inheritance tax planning continues with the use of family trusts, especially discretionary trusts, and is hardly what one might term 'controversial', there have in recent years been other, increasingly artificial uses of trusts by the tax avoidance industry. It is here that perhaps the politicians and other commentators have been more justifiably turning their attention.
A trust is a separate legal entity and it has a legal existence. It is a ‘person’, to use the technical term, and as such offers the tax planner certain attractive facilities. When property is put into a trust, it no longer belongs to the person who puts it there (subject to special rules, which can mean this feature is overruled for tax purposes where benefits or rights are retained over it). In the world of company profits, tax planning or employee remuneration planning, the PAYE regulations struggle to apply to payments made by a company to a trust. In particular, it is difficult for current legislation to impose a National Insurance charge on payments made to a trust rather than to an individual employee. It is here that the use of trusts became prevalent during the 1990s and the early part of the 21st century, until the introduction of the ‘disguised remuneration’ legislation in December 2010, which attempted to actively target the use of such structures as Employee Benefits Trusts. Since the introduction of those rules, more complex, convoluted and totally contrived artificial tax schemes, using ever more Byzantine trust and company structures, have been developed to circumvent the rules.
The point on which most of these tax planning strategies rest is that any payment to or transfer of assets to a trust, provided it is done properly, is a payment to an entirely separate legal entity. It is on this foundation that most trust tax planning schemes or strategies rest on. This is the essential feature of the use of trusts, which is difficult for the tax authorities to defeat without reference to specific anti-avoidance legislations or bringing a more difficult argument in court of ‘sham’.
The issue currently for many therefore is not whether the use of such planning techniques is legal but whether they are fair in the eyes of many politicians and commentators. Some tax professionals might simply respond by asking what the word ‘fair’ has got to do with taxation. A judge once questioned the relevance of looking for any ‘equity’ in taxation. It is in fact implicit in the imposition of taxes that government chooses at its own discretion to impose taxes on individuals and businesses – there is nothing implicitly fair in tax at all, it is just the law. If the government is thereafter unhappy with the way lawyers and individuals operate within the law, then it is surely up to the legislators to change the law, not complain about the way it is interpreted.
We have seen the introduction of a General Anti-Abuse Rule in 2013, as an addition to the weaponry available to the UK tax authorities. Time will tell how deep the impact of these provisions will be on the enthusiasm of the UK tax profession to continue use of artificial tax planning strategies.
However, this does not address the heart of the matter. Although many people might feel aggrieved that the super-rich can make tax savings by using sophisticated trust tax planning schemes because they can afford to pay for the advice necessary, it does not alter the fact that what many of them achieve is perfectly legal. A trust, if properly set up and operated, is a legally established entity separate from the original ‘settlor’ – subject of course to the plethora of special UK anti-avoidance rules, which can apply to settlor-interested trusts. What we have to ask is whether or not, as general point of principle, we find it acceptable that a trust, which some would say is essentially a simple means of protecting money from people or people from money, should also be used as a tax saving measure by those who can afford to avail themselves of the services of the professionals who know how to set up and operate these structures? Is this acceptable from a moral and ‘fairness’ standpoint in the modern world of so-called transparency, of which we are all supposed to approve in taxation today?
In the past, some trust and company structures have relied on the ‘smokescreen’ approach with multiple layers of ownership and hidden identities of controlling trustees and shareholders. This is no longer acceptable but the use of trusts cannot surely by itself be regarded as beyond the pale. Where the boundary lies between acceptable tax planning and mitigation, and unacceptable tax avoidance of the artificial and structured kind seems to be increasingly difficult to determine – and herein lies the real dilemma. What measures are legitimate to mitigate tax liabilities? If it is so difficult to decide what is acceptable or what is not, why should a business not seek professional help and advice in making these decisions? Or has the climate become so much one of fear that the tax authorities simply expect all businesses to adopt an ultra-cautious approach and thereby end up paying a lot more tax than they could do legitimately.
Russell Cockburn is an independent tax consultant