Editorial
Income shifting update
As many readers may be aware after the favourable (from the taxpayer’s perspective) judgment in the Arctic Systems case, the government has pledged to put an end to income shifting – the practice of married couples/civil partners running their own businesses moving income from one to the other to reduce their overall tax liability. This may be done by paying the spouse/partner a wage or by gifting shares in a company to a spouse/partner and declaring a dividend.
The question of new legislation seems to have been shelved for the moment – but that doesn’t mean it won’t come up again in the near future. Therefore, any tax planning should be viewed as short-term and should be reviewed on a regular basis.
There are several possible options.
To begin with, it is much harder for HM Revenue & Customs (HMRC) to attack a partnership, because, of course, partners share liability as well as reward. Therefore, if you and your spouse/civil partner form a legal partnership, this may open up some useful tax-planning opportunities.
It is also much harder for HMRC to attack so-called income shifting if it can be shown that the spouse/partner is making an appropriate contribution to the business. For instance, if he or she contributes to the business’s planning and strategy, talks to clients and customers, handles research or marketing, looks after the bookkeeping and debt collection, does the banking and makes deliveries and so forth, this needs to be recorded. Also, if he or she takes financial risk – for instance if there is a charge on jointly held property or funding has been supplied – this should also be recorded.
Changing your business structure could have other legal and tax consequences and should be considered carefully before action is taken. On the other hand, it is ridiculous not to take full advantage of any opportunity that exists to reduce tax.
Non-resident warning
The High Court has dismissed the decision of the Special Commissioners in the case of HMRC vs Grace. As a result, all sorts of people who thought that they were non-resident for UK tax purposes may now find that their position is challenged by HMRC.
Mr Grace was an airline pilot whose flying base was London’s airports. He had previously lived in the UK, but claimed to have ceased UK residency when he subsequently set up home in South Africa. He was assessed for income tax on the basis that he was resident and ordinarily resident in the UK and he appealed. The Special Commissioners allowed his appeal because his main residence was very clearly outside the UK. In this respect, it was held that his visits to the UK, although regular and in connection with his employment, were not sufficient to make him resident in the UK.
In November last year, the High Court overturned the Special Commissioners’ ruling, stating instead that, while an individual may only have one domicile, he can be resident in more than one place at any time. In contrast to the Special Commissioners’ conclusion, the High Court determined that short but regular visits can amount to residence, particularly if they are connected to the performance of duties and are not casual or transitory.
Experts are waiting to see what will happen next. In the meantime, if you feel that there is any risk that HMRC might attack your non-resident status, you would be well advised to take expert advice. Do remember our free ‘Ask the Experts’ service in this regard.
Criminals have more rights than taxpayers
A QC, with whom I went to school, recently pointed out to me that a citizen of the UK is better protected by the law if he is suspected of a serious crime than if he is suspected of not paying even a relatively small amount of tax. HMRC can demand information, raise assessments, enter premises and enforce payment on grounds that wouldn’t be allowed in any criminal prosecution. He also pointed out that information provided to HMRC can no longer be considered confidential given the appalling data losses that it and other government departments have experienced. I have actually taken the time to write to a number of MPs about this; if you have ten minutes, I would urge you to do the same.
A case of double standards
President Obama, who last year voted for the Stop Tax Haven Abuse Act – a bill that has yet to become law in the US – is planning to stamp out what he perceives to be tax evasion involving offshore financial centres. During his pre-election campaign, Mr Obama said that he wanted to abolish tax havens worldwide, put an end to all banking privacy, set up an automatic exchange of information between all national tax authorities, repeal all banking secrecy laws and make public the hitherto private beneficial ownership of trusts, foundations and corporations.
It would be naive to believe that offshore financial centres aren’t being used for tax evasion or to hide the proceeds of crime. However, over the last few years there has been a vigorous and successful campaign – supported by the tax havens themselves – to ensure that such abuse is stopped. There are few offshore centres left in the world that aren’t tightly regulated.
The reality is that if someone wishes to evade tax or to hide the proceeds of crime it is much more likely that they will use traditional financial centres, such as London, Frankfurt and New York, or smaller, developed jurisdictions where no one tends to look that hard, such as New Zealand and Canada.
So, perhaps it isn’t surprising that at the same time the American government is planning to pursue offshore financial centres it has decided to withdraw its proposal to enforce money-laundering rules on hedge funds. The industry is worth $2 trillion.
What all the offshore financial centres have been campaigning for is a level playing field. They haven’t a hope.
