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With the golf season now in full swing, I was thinking about the number of times a client has asked for my opinion on a no-risk tax avoidance scheme overheard at the golf club. Apart from wondering if Mazars should open up offices in golf clubs around the world to offer on the spot wealth warnings, my response is normally if it sounds too good to be true, it usually is.
The 2012 Budget has reopened the issue of tax avoidance and could potentially change the tax planning landscape (or fairway!) for years to come. It has become clear that, since the introduction of the 50 per cent higher rate of income tax, the appetite for avoiding tax has reached unprecedented levels, with tax advisers becoming more and more creative to satisfy this demand.
So as we start the new tax year, we are likely to see a shift in tax planning strategies more to the middle ground with sound, bespoke solutions that increase wealth, but do not leave taxpayers with sleepless nights — and not just about their golf swing!
To continue the golfing analogy, here are my four top shots that help ensure you are prepared for the next round of tax planning following this year’s budget.
1) Going for the green
The budget has created multiple tax planning strategies for high earners in 2012/13. The combination of advance warning of the top 50 per cent rate moving to 45 per cent as from April 2013 and limitations on tax reliefs from the same date, creates big opportunities for taxpayers to plan well in advance.
As a result of the reduction in the top rate of tax, taxpayers will have an extended opportunity for deferring income from 2012/13 to 2013/14. The restrictions in reliefs will provide a similar extended opportunity to maximise tax reliefs before the restrictions are imposed in 2013/14. In a nutshell, it will be a case of “defer income and bring forward deductions”. But, as always, taxpayers need to be aware of hidden hazards. For example, moving income could have inheritance tax and non-tax implications that are specific to each case.
It is difficult to think of a combination of changes which lends itself more to increasing levels of tax planning activity for high earners in the coming year. This is odd since the Chancellor claimed the introduction of the 50p rate in 2010 meant “an astonishing £16 billion of income was deliberately shifted into the previous tax year — at a cost to the taxpayer of £1 billion”. The changes in this year’s budget create a similar scenario.
Not only will we see equivalent levels of income shifting from 2012/13 to 2013/14, but a corresponding shift of reliefs from 2013/14 to 2012/13 is likely to result in a massive reduction in the tax take for the coming year.
2) Water hazards and bunkers
The reduction in the tax rate is well understood. Less understood right now is the cap on unlimited tax reliefs. This will be the subject of a consultation and is genuinely new in the UK tax system. From April 2013, if you want to use more than £50,000 of tax relief from uncapped sources — that is not including the tax relief available on pensions and enterprise investment schemes, both of which already cap the amount of tax relief they can offer — the relief you can claim is limited to £50,000 or 25 per cent of your income.
That comes close to introducing a minimum marginal tax rate of 30 per cent for 40 per cent taxpayers and 33.5 per cent for 45 per cent taxpayers. Already, the charitable sector — which benefits from unlimited tax relief — is concerned about this and it remains to be seen how the consultation will progress. It could be referred to as a 'tycoon tax'. Potentially it’s a step towards the adoption of an alternative minimum tax system as used in the United States.
3) Shot selection
So what strategies can taxpayers use? At the simplest level, top rate taxpayers should defer income such as bonuses or dividend payments until 2013/14. While for more complex circumstances a bespoke solution will be needed. Similarly, investing in pensions in 2012/13 should be considered to make the most of 50 per cent tax relief. Thought should also be given to maxing out tax reliefs for charities and using up Business Property Renovation Allowance (BPRA). Strategies for unlimited reliefs such as interest relief, trading losses, losses on unquoted investments, or capital allowances will need to be put on hold until we see what the consultation brings. Once this becomes clear, bespoke solutions can be adopted to bring forward those reliefs as much as possible into 2012/13.
4) Out of bounds?
Following consultation in the summer, a general anti-avoidance rule (GAAR) is to be introduced from April 2013. This is likely to be directed at artificial tax avoidance schemes, rather than the type of planning discussed here. While few should disagree with proposals to counter artificial and abusive tax avoidance, any definition of this phrase is likely to be very subjective and highly emotive.
As far as taxpayers are concerned, the government should not lose sight of the well-known quote from a 1936 tax case which said: “Every man is entitled if he can to arrange his affairs so that the tax attaching…is less than it would otherwise be…he cannot be compelled to pay an increased tax.”
It should make for an interesting summer that will hopefully result in a workable, practical GAAR, which learns from countries such as Canada and Australia that have struggled to implement a clear GAAR of their own. In the meantime, taxpayers and their advisers will need to keep close track of forthcoming changes.
At the end of the day, a tax adviser’s role should be as the best caddy to their client. This not only requires a deep understanding of the key issues, but the ability to communicate the downsides as well as the benefits of tax planning strategies.
The right shot selection will be key if you don’t want to miss the cut.
Tim Davies, is UK Head of Tax at Mazars, London
For more indepth coverage of the UK Budget announcements and what they mean see here
To download a free copy of the Mazars Tax Facts booklet click here