Beware the tax crackdown

The taxman is on the war path for tax dodgers and evaders. Not only that, he's backdating the rules to catch schemes that worked in the past. Should you be worried? Simon Wilson reports.

What's the problem?

Britain's precarious fiscal position. Now it's not just spending departments within government that are under intense pressure to save money. The tax man is also being pushed to get as much cash in as possible. That's hardly surprising, given last month's tax revenues slumped 16% year-on-year from £32bn to £27bn. As a result, Her Majesty's Revenue & Customs (HMRC) has decided to get aggressive when it comes to closing loopholes and reviewing popular tax dodges. HMRC hopes to recover a slice of the estimated £40bn lost through (illegal) evasion and (legal) avoidance. Figures from law firm McGrigors show that the Revenue's special anti-avoidance teams recovered £373m in 2008/2009 compared to £81m four years ago.

Who is being targeted?

The well-off. Last April, the Revenue set up a dedicated 500 strong High Net Worth Unit to scrutinise the tax affairs of the rich more closely. It has a particular focus on complex property and shares transactions, plus opaque structures, such as offshore trusts and companies set up to minimise income tax. Indeed, in the current tax year, more than £1bn has been earmarked for enforcement and compliance a quarter of the agency's total budget. In addition to raising money, no doubt they want to put down a marker ahead of the new 50% marginal income tax rate from April.

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Should the wealthy be worried?

Yes. HMRC's aim appears fair enough the rich must meet all their legal and tax obligations in just the same way as everyone else. But what spooks tax accountants is the Revenue inspectors going back through past years to find funds that they believe should be taxable not just under the rules at the time, but under new rules that have come in since. Worse, the taxman has been given strong backing by the courts when it comes to clawing back millions from wealthy UK residents by backdating rules on offshore trusts. In a decision last month, the High Court ruled against Robert Huitson, an IT consultant from Cheshire. He has been ordered (under the 2008 Finance Act) to repay £100,000 tax he had saved since 2001 via an Isle of Man scheme. And he's not alone. The scheme, which was widely marketed by some tax consultants, involved 2,500 taxpayers and £300m.

Is that fair?

Judge Kenneth Parker ruled that human rights law should not prohibit backdating in cases where previous arrangements were "artificial". That means that the only purpose was to minimise tax. He also ruled that existing legislation (the Finance Act 2008) obliged him to strike a "fair balance" between Huitson and others who had benefited from a similar scheme, and ordinary taxpayers. Tax accountants and lawyers warn that this opens the door to a broader strategy of backdating tax rules when HMRC sees fit. New corporation tax rules, for example, could raise £1bn retrospectively and £1bn a year from 2011.

That's good news for HMRC isn't it?

Sure. It puts much needed extra revenue in the coffers for HMRC in the short term. But as accountants KPMG point out, the change could easily dent confidence in UK plc. "A tax system which is prepared to rewrite history... may be less attractive to potential investors who seek certainty of their tax position and thus may damage UK competitiveness." Moreover, two other recent court decisions have reinforced a growing perception that the UK tax authorities are adopting a new no-prisoners attitude.

What are they?

Last week the Court of Appeal ruled that a 72-year-old businessman, Robert Gaines-Cooper, was liable for UK tax despite moving to the Seychelles in 1976. Even though he had adhered to Britain's residency rules, the court decided that England remained the "centre of gravity of his life and interests". He owns a house in Oxfordshire, where his second wife still lives. His son went to school here. Mr Gaines-Cooper, the son of two tax inspectors, now faces a tax bill of £30m dating back to 1993. Tax advisers fear a crackdown on non-residents, who now need to be ultra-careful about cutting ties with Britain (see below) to escape British tax.

A separate case involved Andreas Tuczka, an Austrian corporate financier based in the City. He was found by the Tax Tribunal to be ineligible for "not ordinarily resident" status for the first two and a half years of his time here. Yet accountants normally follow HMRC guidance that overseas residents working in Britain don't have to pay tax on their global earnings until they've lived here for three years. These rulings are a blow for 30,000 Britons who work mostly overseas and for foreign workers here. HMRC's message is clear: tax avoiders watch out.

Sever all ties if you leave Britain

The "centre of gravity" concept applied in the Gaines-Cooper case has muddied the waters considerably when it comes to deciding who counts as a UK taxpayer, says Alexandra Goss in The Sunday Times. If you are British born, you need to sell up completely and not come back to Britain in your first year. And you'll need to live abroad for three years to avoid UK income tax and five years for capital gains. Resign any directorships, don't leave your spouse here, or children in British schools, close bank accounts and terminate mobile-phone contracts. For added peace of mind, resign British club memberships and check the electoral register is updated with your overseas details. In short, sever all your ties to Britain.