Her Majesty's Revenue and Customs

VAT & Tax Mitigation

In England & Wales, the historic starting point for all parties seeking to mitigate their taxes was the House of Lords case of  IRC v Duke of Westminster [1936] AC1, in which Lord Tomlin, stated:

"Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue (now HMRC) or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax" 

This sanctioning of a 'cat & mouse' game between legislators, the courts and tax payers was effectively the position up to and until the 1st of April when the general anti-abuse rule ("GAAR") was introduced.

What the General Anti-Abuse Rule ("GAAR") Means?

From the 1st of April 2013 GAAR applies to income tax, national insurance contributions, corporation tax, capital gains tax inheritance tax and property stamp duty land tax (SDLT). The declared aim of GAAR is simply to create a default position where-by any deemed 'abusive' tax planning scheme can be reversed even if not technically in breach of any specific legislation or HMRC rules. 

At first glance, this would seem to deny anyone the right to 'arrange' their affairs in a tax efficient manner and indeed give HMRC the right to impose their perception of what is a reasonable and/or acceptable rate of tax for every individual and company in the UK. However, whilst there is an undoubted 'moral' undertone within GAAR, the massively complex UK tax system means that whatever the intention the result is that there will still be many 'non-abusive' and highly variable tax rates. Indeed, the GAAR's guidance notes clarify that "...it is in place in order to impose an overriding statutory limit on the 'extent' to which taxpayers can go in trying to reduce their tax bill, being the point beyond which actions could not 'reasonably be regarded as reasonable".

In short, what GAAR has done, which is laudable, is attack the aggressive tax planning schemes that professional tax planners and accountants would never have advocated in the first place.

The Continued Primacy of International Law & Treaties

Notwithstanding the introduction of GAAR, it should be noted that the primacy of international law and the tax treaties that the United Kingdom has signed with other countries around the world is still in place and cannot be usurped by domestic legislation such as GAAR. In other words, companies and indeed individuals who have legitimate international business can still plan their affairs in the most non-abusive but tax efficient manner possible. In particular, companies will still be at liberty to use European Union (EU), directives and regulations such as the Parent Subsidiary Directive 90/435 (which prevents withholding tax on dividend distributions from one member state to another), the Interest Directive 49/03 (which prevents withholding tax on loan interest payments from one member state to another) and of course the general double taxation treaties that exist between the UK and virtually every non tax haven jurisdiction in the world. Therefore, in general it is safe to say that provided there are legitimate business (and not simply tax) reasons for establishing a corporate presence abroad, then any tax savings, be they in respect to corporate tax, value added tax (VAT), local salary levels, taxes on dividends, royalties and interest will be valid.

The Importance of International Tax Treaties

In international tax planning and/or international accountancy, a practitioner must have in depth knowledge of international tax treaties, EU directives and regulations and in particular what is required to satisfy that a particular person and/or entity is (or is not) tax resident in a particular country. In such matters, the interpretations, rules and regulations of the Paris based Organization for Economic Co-Operation and Development (The O.E.C.D.) are paramount especially when a tax planner seeks to garner tax treaty provision protection.

Non-Domiciled Tax Benefits Continue

Notwithstanding the restrictions imposed by the Finance Act of 2008 (please see the section on domicile and residence) and subsequent amendments, the UK is still a remarkably attractive location for 'foreign' individuals to ordinarily reside for tax purposes. Of course, it could be argued that it is unfair that wealthy foreigners are in effect only taxed on (at worst) their remitted income to the UK for at least the first 7 years of being UK resident but it is this firm's belief that to compromise these benefits any further would be against the collective interests of the UK and simply drive away the wealthy foreign diasporas, which are so vital to especially the City.

For more information on SCF international accountancy services please contact an SCF Consultant