CCH Live News - Budget 2012

Budget 2012

Tax administration


The two major items in the 2012 Finance Bill relating to the administration of tax have already been widely publicised, will not actually come into effect until next year and, in their own ways, are controversial.

The UK-Switzerland Tax Agreement, which has come in for criticism on a number of fronts, is to be given legal effect from 1 January 2013. Essentially it allows UK tax evaders to retain their anonymity upon payment of a withholding tax. This provides them with a certificate that they can produce if, at any subsequent time, they become the subject of a Revenue investigation which will absolve them from any UK tax, interest and penalties in respect of those assets. In other words, its a Get Out Of Jail Free card.

Legislation in the Finance Bill will provide that the holder of such a certificate will not be liable to UK tax in respect of income and gains arising from those investments, provided that the holder is not already the subject of an investigation at the time the certificate was issued, has not been in the past the subject of a criminal or civil investigation, has not taken part in any previous anmesty, the investments do not represent the proceeds of crime and do not represent the proceeds of criminal attacks and systematic fraud against the tax and benefits regimes of the United Kingdom.. Given the increasing resources being devoted to targeting tax evasion, an individual will have to avoid detection for almost another year before he can benefit from this agreement.

The withholding tax is in two parts. The first is a one-off charge levied on the capital value of the Swiss investments which is intended to draw a line under the past non-disclosures. The effective rate is arrived at by a complex formula which starts from a base of 34% and takes into account the length of time the investments have been held and the average balances over that period. The second is on on-going withholding levies on the income and gains actually arising and is charged at various rates dependent upon the type of income or gain concerned. As a result of a protocol agreed this week, this one-off withholding tax will also be deemed to cover the inheritance tax liability on the Swiss assets of an individual who dies on or after 1 January 2013.

Of course, the public-spirited tax evader can always authorise the Swiss paying agent to make a full declaration to the Revenue and then negotiate a settlement in the usual way. However there is no absolute immunity from prosecution nor any special offer on penalties, as is the case with the Liechtenstein Disclosure Facility. Indeed some commentators have suggested that affected individuals might consider opening an account in Liechtenstein in order to get within that facility rather than disclose under the Swiss agreement.

The other major item to be included in the Finance Bill is the legislation to introduce new penalties for dishonest conduct by tax agents. This has had a long and troubled history beginning in April 2009 with a consultation document entitled Working with Tax Agents. in which the target was deliberate non-compliance. In the subsequent consultation document, Working with Tax Agents: The next stage, this became deliberate wrong-doing, the definition of which was so badly drafted that it meant the nation's favourite tax adviser would not have been able to appear on radio and advise listeners to invest in an ISA.

The concept has now become dishonest conduct , which at least now acknowledges the need for the intention to defraud before the new penalties can be applied.

Those suspected of dishonest conduct will first of all, be served with a conduct notice and if the appeal process has upheld that notice, the agent will become liable to a penalty of up to £50,000 and the Revneue would be able to gain access to all his working papers, even those which may have been passed on to successor agents. It would seem from the draft legislation that there is no limit to the number of conduct notices that can be issued. So if an agent puts in fraudulent claims for expenses for a number of his clients, presumably each claim is a separate instance of dishonest conduct?

The new provisions replace the current sections 20A and 99 of the Taxes Management Act, and the additional tax which is expected to be raised up to and including 2015-16 is negligible. Nevertheless, the Revenue say they expect spend up to £800,000 over the next five years on changes to their IT systems and up to £3 million on setting up and maintaining specialist teams to investigate recalcitrant agents. Presumably the benefits to the Exchequer will materialise in later years?

Of less widespread interest in the tax administration field, are changes in the tax treatment of incapacitated persons. Firstly the antiquated definition in TA 1970, s. 118(1) is to be abolished and together with a number of measures which transfer rights from that person to his or her trustee or guardian. The intention is that those rights should remain with the incapacitated person so that the trustees etc. are not personally liable for his or her tax liabilities. Nevertheless the trustees etc. will be able to act on behalf of the incapacitated person in a representative capacity.

A measure announced on Budget Day (but widely predicted some weeks ago) is to tell taxpayers how much tax they have paid and how the Government has spent it. Although put forward as part of the Government's policy on tax transparency, it seems to be part of a propaganda campaign to promote the idea that paying tax is public spirited because it is being spent on such motherhood and apple pie items such a schools and hospitals

Trevor Johnson is a senior technical editor with CCH.

Detailed Budget Measures

CCH Comment:

The one-off withholding tax is to be levied on the balance, at 13 May 2013, of a UK-resident individual’s Swiss bank accounts or other investments at a rate between 13 per cent and 34 per cent, determined by a complex formula. This is intended to wipe the slate clean as regards past UK liabilities, including inheritance tax in the

case of individuals dying on or after 1 January 2013. For the future, a withholding tax will be applied by Swiss paying agents to income and capital gains arising from 1 January 2013. The rates are 27 per cent for capital gains, 40 per cent for dividends and 48 per cent for interest and other income.

Individuals can opt out of these levies by authorising the Swiss paying agent to make a full disclosure to the UK revenue and then settle their liabilities (including interest and penalties) in the normal way. However, those who do not opt out of these levies will retain their anonymity.

Under the penalty regime introduced in Finance Act 2007, where the inaccuracy involves an ‘offshore matter’, the country involved can influence the level of penalty. In classifying countries for this purpose, the Treasury are to be allowed to take arrangements such as this Swiss agreement into account.

Information powers

CCH Comment:  

This measure will enable HMRC to obtain identifying information about a person where, for example, they are aware of a bank account, but do not know that person’s full name and address. HMRC will be able to serve a notice on a third party (not just financial institutions), supply the information which they already hold and require that third party to supply the person’s name, last known address and date of birth.

Tax agents: dishonest conduct

CCH Comment:

These measures will replace the current HMRC powers to call for the papers of a tax accountant (TMA 1970, s. 20A) and to impose a penalty on anyone assisting in the preparation of an incorrect return (TMA 1970, s. 99). They are the result of three years of consultation and will be brought into effect from a date to be appointed by Treasury Order, which is expected to be 1 April 2013.

‘Dishonest conduct’ is defined as doing something dishonest with a view to clients accounting for less tax or accounting for it later, gaining more relief or gaining it earlier, than they are required/entitled by law.

According to HMRC’s impact assessment, these measures will yield negligible additional tax, but over the next five years could cost up to £800,000 in adapting IT systems and up to £3m in resourcing specialist teams to conduct investigations into tax agents.

Incapacitated persons: a modern approach

CCH Comment:

This measure follows from a consultation exercise last year. Technically it makes the incapacitated person responsible for their tax obligations and able to exercise their own rights, though in practice these rights and obligations will be exercised via their representatives. It will come into effect when the Finance Bill 2012 receives the Royal Assent.

Tax agreement between the United Kingdom and Switzerland

The measure will give effect in the United Kingdom to the Agreement dated 6 October 2011 between the governments of the UK and Switzerland and contain further provisions. The Agreement itself has three main effects.

First, it provides for a one-off levy to be applied to accounts in Switzerland held directly or indirectly by individuals who are resident in the UK unless the individual authorises disclosure of those accounts. Compliant individuals should authorise disclosure and so avoid the levy.

Secondly, it applies a withholding tax to income and gains arising on those Swiss accounts from 1 January 2013. Compliant individuals may authorise disclosure and avoid the withholding tax.

Thirdly, it provides for enhanced exchange of information between the tax authorities of the two countries.

The measure also provides that the fact that arrangements with a territory contain significant protection for UK tax revenue may be taken into account in classifying a territory for the purposes of the offshore penalty legislation.

For more details see the Tax Information and Impact Note on the measure.
Information powers

A new power allowing HM Revenue & Customs (HMRC) to require a data-holder to provide a person's name, address and date of birth from identifying information held by HMRC and provided to the data-holder.

For more details see the Tax Information and Impact Note on the measure.
Tax agents: dishonest conduct

Legislation will be introduced in Finance Bill 2012 to allow HM Revenue & Customs (HMRC) to issue a tax agent with a conduct notice if it has determined that they have engaged in dishonest conduct. This notice would be subject to appeal.

Subject to prior approval by the first-tier tribunal, HMRC would be able to issue a File Access Notice requiring production of the working papers of tax agents found to have engaged in dishonest conduct. Where working papers are no longer in the power or possession of the tax agent, HMRC would be able to request these from a third party.

There will be a civil penalty for dishonest conduct in an amount of up to £50,000. In cases where full disclosure was not made, HMRC would be able to publish details of the penalised tax agent.

For more details see the Tax Information and Impact Note on the measure.
Incapacitated persons: a modern approach

This measure will remove the current definition of incapacitated person from the Taxes Management Act (TMA) 1970 and in doing so remove the offensive terms within that definition from the statute book.

The measure will remove the current legal provisions that transfer certain rights and obligations under the TMA (and other similar legislation) to the person that represents an incapacitated person. Instead, those rights and obligations will apply to the person with mental health conditions or child with taxable income, these individuals' representatives will then continue to be able to act for them on their behalf (as the law allows).

For more details see the Tax Information and Impact Note on the measure.