There's an interesting piece in Taxation this week about the Drummond case, recently before the Special Commissioners.

For those who don't know, the case is about the purchase, and rapid surrender, of a life assurance policy to generate a tax loss where there is no real economic loss. It is, in short, a classic tax avoidance scheme.

Jason Drummond is an internet entrepreneur, and had been getting a bit miffed about his tax bill, what with having all that money (his net worth has been put at more than £100m). So he asked KPMG to help him out.

The upshot was a tax scheme that, by buying a life assurance policy and then surrendering it created a loss for CGT purposes with no gain for tax purposes on the other side. Drummond lost for several reasons, but the Special Commissioner also made one interesting point about the tax scheme in general, says David Whiscombe of Berg Kaprow Lewis.

The commissioner argued that the fact that there were clear aspects to the scheme that made it pre-ordained meant that it must fail under the Ramsay principle. So because the facts showed that it was all a try-on meant that as a try-on it could be set aside.

What if the taxpayer was more subtle? In this case, instead of buying policies worth £2m which were worth £1.75m (the difference being the tax advisers' cut, essentially), they had paid £1.75m, and essentially separated everything out, in essence been craftier about it, would it work? A series of transactions, you say? Not at all.

Whiscombe says if a tax adviser only revealed the steps to a taxpayer as they went along, it might be acceptable: 'Can it truly be the case that the incidence of taxation can be different for a taxpayer to whom a scheme is revealed piecemeal, than for one who is kept for a period in delberate ignorance by his advisers.'

If I have understood the point correctly, the implications would surely worry the taxman. Were tax advisers to operate in a kind of 'this isn't a scheme' because you can't prove there's any pre-ordained construction as far as the taxpayer is concerned, would it work?

Would it not mean they were dodging the disclosure scheme, apart from anything else?

It would certainly raise a few eyebrows in court. 'No really,your honour, I had no idea that is what KPMG meant when they advised me to buy a life insurance scheme.'

It is an interesting thought, but ultimately any adviser doing it would surely be playing with fire. If the taxman, after all, could prove any pre-ordained connection between events that advisers claimed were not connected, the full force of the law would surely be enacted on the firm and the taxpayers concerned.

Read the case here.

July 27, 2007 | Permalink | Comments (1) | TrackBack (0)

Accountancy Age gets an interview with Alistair Darling! Not quite the first (it will be a while before the chancellor comes to us before the Financial Times, but we're working on it), but still ahead of much of the opposition.

There's one point you may not be aware of from last week's interview.

We asked Darling a question about non-doms. His answer itself was relatively bland:

This is a complex area and we have an ongoing review considering the whole issue.  Once we see the outcome of that review we will take stock on what we need to do next. Whatever we do will be in the best long term interests of the country.

What is interesting is the fact that this didn't even approach an answer to the actual question, which was as follows:

Gordon Brown pledged as shadow chancellor to crack down on non-domiciles, something you now imply you aren't interested in doing. What has changed?

In other words, the question was why the Labour party had changed its view, not what the policy is now.

There are some who argue that they've changed their view because they've realised the non-doms are a good source of party funding. If Darling and others refuse to answer the question, it's a charge that will become increasingly compelling.

July 25, 2007 | Permalink | Comments (0) | TrackBack (0)

I'm going to be bold, and say where I think the argument on private equity taxation is going to end up.

After all the fuss from the unions and others, it looks like two key areas will be tackled where private equity is vulnerable.

Firstly, I can't see how private equity can defend the 'ratchet' system on a capital gains tax footing. Guy Hands has claimed that money PE execs put in to the companies they own is 'risk capital.' Well, it may be in some cases, But many of them put very small sums in, and see their stakes ratcheted up from 1%, say, to as much as 10%. You can hardly say that the resulting capital gain down the line involved an equivalent amount of 'risk capital.' A review must surely be in order there.

Separately, there is a review under way on whether private equity debt really is debt or equity. There has been discussion for a few years about hybrid capital structures. I'd be surprised if the Revenue didn't feel like striking hard at the use of them and tried to erode some of the advantages not just private equity, but all businesses, can get from them. The issue is not interest relief, as John McFall of the Treasury Select Committee realises, it's the abuse of interest relief.

Both moves would be hard for private equity to object to, and politically I can see those moves satisfying critics. They would be targetted and welcomed I think as intelligent reviews to the tax rules. The last thing Alistair Darling needs to kick off his time as Chancellor is a row along the lines of 'PE tax changes will hammer A.N.Other business sector.'

And a nice irony, if the analysis is right, would be that both reviews appeared to be underway before the whole row kicked off. The taxman wanted to crack down on ratchets last year but couldn't under existing rules. And Ed Balls announced a review earlier this year of debt/equity structures (see paragraph 79 of his March speech).

That's another reason, perhaps, to think civil servants run government, and the rest of us are merely pawns in their game.

July 13, 2007 | Permalink | Comments (0) | TrackBack (0)

I see that director general of HM Revenue & Customs Dave Hartnett is calling for questions that he will answer on the next series of podcasts that the department is producing.

I've got a question, though it's probably a bit off topic.

Why does Dave say in Who's Who that his recreations are 'food, wine, Marcus Tullius Cicero'?

I can understand the first two, but the third is somewhat eccentric, I think. He is a Latin scholar, his entry suggests, but is there more we can read into it?

Still, it could be worse. Paul Gray, the chairman of HM Revenue & Customs, lists his interests in Who's Who as 'family, walking, Wensleydale sheep.'

Again, the first two, fine.

Is there something they put in the water at HMRC?

July 11, 2007 | Permalink | Comments (0) | TrackBack (0)

The Chartered Institute of Taxation (CIoT), the body that keeps all tax advisers honest (ish), held a media reception last night at the House of Commons.

I don't say this to show off what smart parties I get invited to, but because the parliamentary representative of the CIoT is one Quentin Davies MP, formerly of the Tory party and now nestled, as of last week, on the government benches.

I hadn't realised he was their man (and perhaps I wouldn't have been interested) until now. What's more, he trousers at least £5,000 a year for showing the body around the corridors of power, according to the Register of Members' Interests. The CIoT will be pleased, I suppose, that they don't have a deadly rival for him to defect to.

Still, it could be worse.

July 5, 2007 | Permalink | Comments (0) | TrackBack (0)

Whoever said Wikipedia was no use? A contact has directed me to a full list of all the Paymaster Generals there have ever been!

OK, so you might have to be a bit of a tax geek to be all that interested, but there is currently something curious going on with the position too.

Tessa Jowell is the current incumbent, despite, as traditional, having nothing to do with the Treasury or the taxman, as you might expect given the title. Perhaps in her role overseeing the Olympics, the word 'paymaster' is, however, peculiarly appropriate.

More pertinently, does anyone know if there are any perks associated with the role? And why has it not been given to Jane Kennedy, who is the new HM Revenue & Customs' boss? Does it create any constitutional issues for the fulfillment of her role?

July 4, 2007 | Permalink | Comments (0) | TrackBack (0)

Robert Peston at the BBC has an interesting story about Saga and the AA. They paid no corporation tax while owned by private equity, despite making huge profits.

They did so by using interest relief. Just to be clear, there is nothing especially contentious about interest relief per se. The idea that you could offset the cost of debt against profits is fine.

And also, just because a company pays no corporation tax does not mean it doesn't pay the 17 other taxes that companies pay. Employees still pay income tax, national insurance is still paid, and the economic activity generated is still a huge boon for the exchequer.

The issue is whether or not the loan is really a loan or equity. Rather well put by John McFall, I thought:

'The question is, are the private equity companies using debt as equity?' he said.

'If they are, then they are distorting the system. These are questions that are still to be answered.'

We don't know that, and it would be interesting to know (and there is I think a review underway).

Peston goes on to say:

Private equity partners tend to argue that all they do is transfer the liability for tax to those institutions that lend money to their companies.

But in a globalised financial world, many of these providers of debt are domiciled outside the UK, and do not pay tax here (if they pay tax at all).

And separately on his blog

You can dismiss the private equity argument that the tax liability is merely transferred to those who lend to their companies. Some of these lenders pay tax in the UK, but in a globalised financial world, most don't.

You can't dismiss it that easily I don't think. What's it to the private equity industry if they use an offshore lender? Why should they care if it's the best value loan they can get?

There are issues around transparency, and whether the firms are really using straightforward lending structures, but we need to go a lot deeper into this issue before we can start accusing anyone of doing anything untoward.

July 3, 2007 | Permalink | Comments (0) | TrackBack (0)

Jane Kennedy is, we are told, set to take on HM Revenue & Customs from Dawn Primarolo under the new regime under Alistair Darling.

What do we know about Kennedy?

Well, she is apparently quite a Blairite, having fought against the Militant wing of the Labour party in Liverpool in the 1980s.

Much more than that, however, it may be difficult to say. She has held a lot of different government posts, and is said to be 'an instinctive loyalist'.

All in all, the Treasury team looks finely balanced. Which way will Blairites like Andy Burnham, chief secretary to the Treasury, and Kennedy go on issues like private equity and tax? That will be the interesting question.

July 2, 2007 | Permalink | Comments (0) | TrackBack (0)

Kitty Ussher is the new economic secretary to the Treasury, the post previously occupied by Ed Balls.

She takes charge of 'City' affairs, apparently, and you might be interested in a piece she wrote in 1999 for the Centre for European Reform.

In it she argued that tax harmonisation was the stuff of Eurosceptic scare stories and nothing more.

I'm not sure how well that stands up today, in a Europe in which plans for a common tax base are proceeding at pace (the suggestion that a majority of countries, for instance, are against tax harmonisation would I think be denied by EC officials today. When I spoke to people involved with the tax commissioner's office earlier this year, they argued that the UK and Ireland were pretty much the odd ones out).

More than that, corporates are themselves breaking down the barriers of tax in Europe through the group litigation orders. The eurosceptic opposing them? Ussher's new boss, one Gordon Brown.

Ussher is understood to be very pro-Europe (she is also very able, it should be added, and has shone in committee meetings). She may need to review her outlook on tax and the European challenge.

July 2, 2007 | Permalink | Comments (0) | TrackBack (0)

I mean that headline. The government has announced its Treasury team, and in amongst them is Angela Eagle.

Eagle has got a job as 'exchequer secretary', which I understand will have some input into tax policy.

Jane Kennedy is set to be in charge of the tax authority, of which more later.

I have nothing against Eagle, other than that at select committee meetings she always seems a bit angry and gets a bit hot under the collar. She will have the experience of being got at by angry MPs like herself to look forward to.

It's more that she was a prime mover in the angry criticisms of private equity's tax position in recent weeks. A crackdown now seems that much more likely.

UPDATE: The only relief, I suppose, is that Eagle probably won't be on the committee grilling more private equity bosses tomorrow. Jon Moulton of Alchemy is due to appear, as well as Sir David Walker, the man leading the transparency initiatives at the BVCA.

July 2, 2007 | Permalink | Comments (0) | TrackBack (0)