Archives For tax avoidance

So where’s the avoidance?

accapr —  9 September 2013 — Leave a comment

JP  03By Jason Piper, technical manager, tax and business law, ACCA

The recently announced deal for Vodafone to sell its stake in the American Verizon corporation has prompted many commentators to question whether the failure of the transactions to generate tax revenue directly for the UK tax authorities is evidence of avoidance on the part of the participants.

As things stand, the answer would appear to be ‘no’. In fact, if tax campaigners are to be believed and the definition of avoidance is ‘manipulating the tax system to achieve a result not intended by Parliament’ then it would be arranging matters so that a charge arose which would be ‘avoidance’. For, as has been well evidenced elsewhere, there are not one but two acts of parliament in play to ensure that a deal like this does not directly attract capital gains tax in the UK.

The most relevant (that is, the one which actually applies) is the participation exemption which means that when the proceeds of the sale do finally arrive in the UK as a dividend from the Dutch company which currently owns the shares, then there won’t be any tax due at corporate level on those funds.

The second provision is ‘SSE’, the substantial shareholdings exemption. Enacted in 2002, this directly exempts sales of trading companies from the capital gains regime for corporation tax. It’s not a ‘no-gain/no-loss’ provision, deferring the impact of the gain, or a ‘tax at 0%’ provision relieving the gain itself, but rather it’s a wholesale exemption for such transactions – whether they generate a gain or a loss. And because of the underlying economic driver for the exemption, it’s mandatory; if the conditions are met, the treatment applies whether the participants want it to or not. So, if Vodafone were selling today at a loss (as they have done before) they would get no tax allowance for that loss either.

So it seems pretty clear that the UK parliament does not intend to tax these proceeds, if the current law is to be believed. And there seems to be a further inconsistency in some of the criticism levelled at the group. The ‘profits’ here are based on the value of the Verizon shares – a value based on accrued (after tax) profits, and projected (taxed) profits.

To charge tax on proceeds which supposedly reflect that post-tax position looks suspiciously like double taxation. And to then tax the passage of those profits through the group structure (i.e. tax the dividend from Dutch HoldCo to UK) would look like triple taxation – after all, the economic reality is that no additional economic value has been generated in the Netherlands, so why should any tax arise there? And finally of course there will be tax on the proceeds when they make their way out of the UK parent to shareholders as dividends, although the imputation credit system would at least avoid the spectre of quadruple taxation.

So as things stand, the ‘economic reality’ argument might suggest that the proceeds making their way around the world have already effectively been taxed in the trading company that has generated them. Even if not, and some extra charge were due, none of the jurisdictions involved currently applies that argument, so it is hard to see how the intention of parliament has been avoided in this case. The case for changing the international system of taxing profits has been clearly made, and broadly accepted by those in a position to effect change.

But if there is to be any hope of ending up with a coherent successor to the current arrangements then we need coherent thinking from those trying to influence the process, not empty rhetoric and muddled polemic.


Chas Roy-Chowdhury-14


By Chas Roy-Chowdhury, head of taxation, ACCA

Well that’s it for the fourth Budget of the Coalition Government, and what a bore it was.

There wasn’t really any surprises, partly down to the leak from the Evening Standard less than one hour before George Osborne began his Budget speech.

I can’t help but feel that this Budget was very bland and that more could have been done to boost the economy.

The Chancellor of the Exchequer should have considered a temporary cut to the basic rate of income tax to 15 per cent for one year, instead of leaving it at 20 per cent, as people would have more money to spend and it would help revive the economy.

At a time when the economy is stalling, it needs a genuine boost. Cutting the basic rate to 15 per cent until 5 April 2014 would have been a brave move, but would help working families across the UK. Under today’s proposals they, and many others, will not notice any difference. A temporary tax cut seems drastic but these are exceptional circumstances.

The other “highlights” of the Budget was the personal allowance increase. On the face of it, looks good, but it will only benefit the population who are currently 20 per cent taxpayers, of which there are fewer and fewer. By dropping the threshold for the 40 per cent income tax bracket, many hardworking people who will begin paying 40 per cent for the first time will not just lose the benefits of the increased personal allowance they will actually need to pay additional tax on such things as savings and dividends because of the way the UK system taxes the top slice of income.

On the issue of tax avoidance – while it is no surprise the Chancellor went after it, he will always be treading a fine line between collecting tax and denting the UK’s appeal as a business-friendly economy – an essential requirement for our recovery.

A tougher looking tax avoidance regime might look good to the public, but while the Chancellor has been making noises about a global effort to crackdown on tax avoidance, unilateral measures such as GAAR, risk diverting businesses currently in or looking to move to the UK into the arms of other markets. The question will be whether other business-friendly tax initiatives, such as the patent box and the lower corporation tax rate will help the UK remain appealing. Some evidence would suggest the rot is already setting in.

The Chancellor mentioned that those who actively promote tax avoidance will be named and shamed. ACCA has always said that a ‘loose’ name and shame approach to tax avoidance is counterproductive. Tax avoidance is not illegal. Naming and shaming can penalise individuals and business reputations when they have not broken the law. There is also an issue over where you draw the line There isn’t a clear cliff edge between what you could say is acceptable tax planning and what is unacceptable tax avoidance. There is difficulty in terms of when name and shame becomes appropriate. Is it something that is linked to the amount of tax that isn’t paid, or the way tax is avoided?

There is always the risk with any name and shame approach that it becomes disproportionate and that companies promoting perfectly acceptable financial planning initiatives are severely punished when they have operated within the mainstream rules.

We hope that the Government has looked in more detail at the PAC’s proposals and will consider naming and shaming only when there is repeated, heavy use by individuals of tax avoidance initiatives. A quicker and wider review of the tax system needs to be considered, than what the Office of Tax Simplification (OTS) is currently resourced to implement, with a view to radical simplification.

On families and tax credit – the downside of this initiative is that it is a 20 per cent tax credit, when a full payment subsidy of £1,200 would be a much more beneficial vehicle for many young families struggling to meet childcare costs, which are notoriously expensive. The nature of a tax credit means that where a family is forking out thousands of pounds a year, it is the “carer” that will receive the complicated tax credit. If the Government is prepared to pay up to £2,400 for two children there is no reason why they cannot give it to families as a subsidy, irrespective of the amount they actually pay for the care. A one-child family with two working parents would hugely benefit from the extra funds.

Should one parent lose their job or decide for the benefit of their child or children that they wish to stay at home, the loss of this credit will be felt.

And then we turn to fuel duty – ACCA predicted the rise in fuel duty would be scrapped. That will be welcomed by households as well as businesses in the UK. ACCA’s Drivers for Change survey report showed that UK businesses identified fuel costs as a major short term challenge, so this may give them respite.

So is this a Budget for an “aspiration nation”, and for hardworking families? Time will tell…

Don’t forget to have a look at our coverage of the Budget as it happened here