HMRC have decided not to press ahead with the introduction of tax treaty anti-avoidance legislation because of what they describe as a “significant uncertainty”.

This seems a remarkable U-turn bearing in mind the Consultation period to the original Technical Note (issued on 1st August 2011) only ended on 22nd September 2011.

What was certaintly evidence from the initial document, and this is sadly a feature of previous Governments as well (you only need to look at how the FA08 changes to non doms were rushed in to see that) was that the proposals were simply not thought through properly and potentially were the classic “sledgehammer to crack a nut” approach that we have recently seen in the Disguised Remuneration legislation.

The proposals were extremely wide in their potential application, there were no grandfathering provisions and certain commercial arrangements (such as loan financing provided through treaty vehicles) could have been impacted – how all this would have impacted on the ability of the UK to remain competitive in the current climate was unclear.

Thankfully, the comments that were raised during the Consultation period were taken on board, although why it ever got to that stage is a little unclear.

Hopefully, if treaty “abuses” do exist that HMRC have in their sights then hopefully a more targetted approach will be adopted – possibly by way of agreed override provisions on the appropriate treaties.

All the comment in the press recently concerning the Liechtenstein Disclosure Facility (“LDF”) and the “ground-breaking” (as AccountancyAge.com have called it) agreement that HMRC have just reached with the Swiss authorities (more on that in a later post) have set us all thinking.

Whilst everyone tends to focus on an effective tax rate of 52% tax, which lets be honest – is high – does the UK perhaps offer an entrepreneur a more tax efficient regime (with the correct structuring) than an initial cursory flick through the legislation suggests?

Most UK holding company shareholdings in trading companies (UK or foreign) will be exempt by virtue of the substantial shareholdings exemption, which effectively means trading activities could be sold off tax free.

Coupled with that and a maximum individual capital gains tax entitlement of £10m at 10% things are starting to look attractive. We also have an extensive network of double tax agreements and a membership of the European Union.

Whilst the Government have recently withdrawn their plans to introduce some fairly radical changes to the agreements, various countries such as Cyprus, Malta, Luxembourg and even Denmark offer some interesting reliefs for those who are looking to structure their affairs in a tax efficient manner.

With care, withholding taxes on royalty payments can be reduced and interest payments to non residents can be totally eliminated.

With effect from next April 2012 it should also be possible for foreign domiciliaries to bring their foreign income or gains into the UK in order to invest in a UK business without triggering a taxable remittance (although for those that cannot wait, this can actually be done now with care).

The reality therefore is that the UK does offer some attractive tax efficient structuring opportunities for both UK and foreign domiciliaries.

The recent case of Mr Golding may be of interest to those in the farming community.

Whilst a little unusual in its facts, HMRC lost the case and Agricultural Property Relief was given on the value of the house.

Whilst only serving a very small acreage (around 16 acres of farmland), the farming activities had declined over the years such that Mr Golding sold eggs to customers and grew vegetables for his and his customers consumption. He had however recently acquired a tractor and a bailer.

The farmhouse was somewhat archaic with no electricity in its three bedrooms. There were also some outbuildings, sheds and other buildings that HMRC accepted were used for farming – produce was also stored in the bedrooms!

The full facts of the case are not expanded out here but those with a particular interest may wish to follow the attached link to the tribunal website (http://www.financeandtaxtribunals.gov.uk/Aspx/default.aspx).

The corollary to this case is that as ever a case will turn on the individual facts and as far as APR is concerned it is important to look at the farmhouse and ensure that it is of an appropriate character in relation to the surrounding farmland and the activities being undertaken.

With the dust having now firmly settled on the recent changes that were introduced with effect from 6th April 2011, now seems an ideal time for a quick recap of the main changes in so far as they are likely to impact on “private clients”.

The changes were extensive and were brought in on the back of various consultations.

The annual pension allowance on which tax relief can be claimed has been reduced from £255,000 to £50,000,
The lifetime allowance has also been reduced from £1.8m to £1.5m with effect from next April. Unused allowances from up to the 3 previous years can be carried forward (for those that were actually members of registered schemes!),
Tax relief will be given at an individual’s marginal rate of tax – hence, relief at up to 50% will be available,
There is also some more flexibility on what can be drawn down, and on drawing down income at 75.
Whilst on the face of it these are massive reductions in the tax reliefs now available for pensions, they still offer good tax breaks for those with excess cash looking to invest efficiently and those with the ability to contribute into pensions should still be looking to utilise these reliefs – with relief available at up to 50%, and up to £200,000 of relief available (inc unused reliefs).

Clearly, for some, these reductions will have a big impact on what can now be invested and those individuals will no doubt need to consider alternative (or additional) strategies/vehicles through which to invest.

No doubt interesting times ahead…..

Hot on the tails of their residency proposals, HMRC have also issued a consultation document headed “Reform of the taxation of non-domiciled individuals: a consultation” focussing on the reforms that were highlighted in the March Budget.

HMRC confirm that its objectives are “…to encourage non-domiciled individuals to invest and do business in the UK, while also ensuring that they make a greater tax contribution, especially when they have been resident in the UK for many years…”

They confirm the objectives of the reforms outlined in this consultation are to:

ensure that non-domiciled individuals, especially those who have been resident in the UK for many years, make a fair tax contribution (on the bad news front, this is simply “code” for increasing the current £30,000 charge); and
encourage non-domiciles to invest in the UK, contributing to the Government’s priority of generating economic growth (on the good news front, this is to address the anomaly of having to pay tax to bring money into the UK to invest in a business).

And carry on to confirm that the consultation document attempts to strike a balance between increasing the tax contribution made by non-domiciles and encouraging them to invest in the UK. These reforms include the following measures:

increasing the existing £30,000 annual charge to £50,000 for non-domiciled individuals who claim the beneficial tax regime available to them (“the remittance basis”) in a tax year and who have been UK resident in 12 or more of the 14 years prior to the year of claim; enabling non-domiciles to remit overseas income and capital gains tax-free to the UK for the purpose of commercial investment in UK businesses; and making technical simplifications to some aspects of the current rules to remove undue administrative burdens.

The £50,000 charge will operate in the same way as the £30,000 charge, which will remain in effect for those individuals who have been UK resident for 7 out of the last 10 years – so effectively a two tiered payment system depending on the length of time the individual has been UK resident.

The more interesting proposals contained with the document relate to the existing remittance rules which are effectively counter intuitive in the sense that they operate to tax monies (i.e. foreign income or gains) brought into the UK to invest into commercial business opportunities.

In order to encourage investment in a broad range of businesses, the document sets out a proposal to allow tax-free remittances for investment in the following types of business. They would be classed as “qualifying businesses” for the purposes of this policy.

This does seem an attractive proposal as in our experience, and in fairness to the Government, this broad definition extends to all sectors of the economy and caters for entrepreneurial businesses as well as more traditional ones. As the document indicates, it does encompass many of the businesses and sectors in which non-domiciles want to invest – such as manufacturing, retail, technology and importing goods for example.
There are a couple of exclusions which are suggested in the document such as investing in residential property (where it is felt the individual may reside in the property) or leasing (which it is felt could be open to abusee for certain rich “toys” such as yachts, art etc to be perhaps financed in a tax free manner).

At this stage we have not digested the document fully, but in essence the two key areas are highlighted above.

Further updates will be issued shortly once the full extent of the document, and some of the early professional press comment have been considered.

The consultation period runs parallel to the statutory residence test consultation, with the intention to again introduce from 6th April 2012.

Businesses undertaking the development or letting of commercial property: “…this is generally carried on as a commercial business but may not technically fall within the definition of trading activity. The Government recognises that non-domiciles often want to invest in commercial property and that including it will broaden the appeal of the incentive. To qualify for tax relief, development or letting of commercial property must constitute a substantial proportion of the overall activities of the business…”.

Businesses carrying out trading activity: “…it is proposed that this will follow the generally understood definition of “trading” as developed in case law, namely that trade generally involves the exchange of goods or services with a customer for reward. Trading on a commercial basis must constitute a substantial proportion of the overall activities of the business in which the individual invests…”