Much ink has already been spilled (or in today’s digital world, keystrokes expended) in anticipation of Chancellor Sunak’s Budget Statement. There has in recent weeks, for example, been a lot of ‘sound and fury’ around possible changes to Capital Gains Tax (‘CGT’), ultimately ‘signifying nothing’ (to take Macbeth’s soliloquy completely out of context).
The Chancellor announced in the Budget Statement on Wednesday that there would be a freeze from April 2022 until at the earliest April 2026 in regard to thresholds at which income tax becomes payable at the basic and at the higher rate. There will, however, be an immediate freeze until at the earliest April 2026 on: the CGT annual exemption; the Inheritance Tax nil-rate band; and the pensions Lifetime Allowance.
These measures will undoubtedly result in increased tax for many who are relatively asset rich. There may, therefore, be temptations to engage in the kind of ‘tax planning’, which even recently would be considered standard, but in the current circumstances could be viewed by HMRC as bordering on the aggressive.
There are also measures in the Finance Bill 2021, which should invite further caution when considering ‘tax planning’.
The first is in relation to tax schemes: there are plenty of schemes that are marketed as ways to reduce tax and part of the Finance Bill 2021 is designed to further bear down on these.
HMRC will be given enhanced powers to investigate schemes of which they become aware, but which have not been notified to them, under the existing disclosure (co-called Disclosure of Tax Avoidance Schemes or ‘DOTAS’) rules.
HMRC will be able to approach anybody who is involved in promoting, marketing or advising in relation to the scheme. If HMRC believe that the scheme should have been notified under DOTAS, they will be able to publicise the scheme, including the names of those involved with it, with a view to deterring taxpayers. Furthermore, HMRC will be able to stop promoters from marketing schemes that HMRC believe do not work.
While it may be claimed that the motive is to protect taxpayers, the risk is that in due time even straightforward tax planning arrangements may fall within HMRC’s net. Taken with measures that have been introduced in recent years, which have empowered HMRC to crack down on even statutory tax schemes, there is an undoubted drift towards a more draconian approach.
A further power to be conferred by the Finance Bill 2021 is in relation to HMRC’s ability to access information regarding taxpayers: currently HMRC can request that a taxpayer provides information in order to check their tax position.
HMRC can also obtain information from third parties, such as banks; however, in order to do so, they must get the approval of the Tax Tribunal. This is an obvious safeguard where a third party, such as a bank, is being required to provide confidential information in regard to a taxpayer.
From when the Finance Bill 2021 becomes law, probably in July, HMRC will be able to require that financial institutions provide information about taxpayers without having to get approval from the Tax Tribunal. For example, they will be able to ask a bank to supply bank statements for an individual taxpayer.
What is of concern is that there will be no right of appeal against such an information notice.
The only safeguard is that HMRC must tell the taxpayer that they are seeking the information and give reasons as to why they are doing so. However, that safeguard itself is limited as HMRC can apply to the Tax Tribunal for an order to stop the taxpayer who is under investigation from being alerted to the information notice.
So, while the temptation to engage in ‘tax planning’ will be even greater as the tax take inevitably increases as a result of the measures announced on Wednesday, such planning must be approached with care and after having taken proper advice from those who are suitably qualified and who do not have a vested interest in promoting a particular scheme or strategy.