Tax planners say so long to the loopholes

Simon Hildrey sees how investors should respond to a clampdown on avoidance schemes

It used to be the case that with sound financial planning you could cut your tax bill. It isn't so straightforward now, with the Government closing a succession of legitimate loopholes, from inheritance tax plans for your home to film partnerships.

It used to be the case that with sound financial planning you could cut your tax bill. It isn't so straightforward now, with the Government closing a succession of legitimate loopholes, from inheritance tax plans for your home to film partnerships.

In his latest Budget Gordon Brown went even further, announcing plans to introduce a registration system for "avoidance schemes". These are likely to include most forms of inheritance tax planning.

The Inland Revenue says: "The Government is introducing a new disclosure measure to counter large-scale avoidance of direct taxes. This will require those who devise and market certain avoidance schemes to provide the Inland Revenue with details ... This will improve transparency and allow the Inland Revenue to make a swifter and more targeted response to deliberate abuses of the tax system."

More details are expected in next month's Finance Bill, and accountants and solicitors hope that the Revenue's reference to financial and employment-based products may mean there is a limit to the number of schemes that have to be registered.

But they admit it will make life harder for clients. Under current rules, you can take out a scheme and not tell the Revenue for up to 21 months. So, for example, if you invest in a scheme on 6 April 2004, you won't have to disclose it until your next tax return.

Under the new plans, you will have to tell the Revenue much sooner, shortening the "window of opportunity" for investing in such schemes, warns Geoff Everett, tax director at Smith & Williamson, the independent professional and financial services group. Because if the Revenue doesn't like what it sees, and believes you are exploiting a legitimate tax loophole, it will simply close the scheme down.

"The Revenue often does not find out about schemes until a year after they have been established," says Mr Everett. "But as it will be provided with details much sooner, it can close what it regards as loopholes straightaway."

Under the new system, once a scheme has been sold, your professional adviser should notify the Revenue, which will provide a registration number. This will be placed in a box at the top of your next tax return.

Until more detail has been released, it is hard to know how the new regime will work. "We see potential problems with the definition of what exactly has to be cleared - the definition of a shelter - and the general administrative burden this creates for taxpayers, advisers and the authorities," says John Whiting, partner at accountants PricewaterhouseCoopers.

Martyn Laverick, at independent financial adviser (IFA) Charcol Holden Meehan, says: "There will be fewer tax planning opportunities. The Revenue does not close schemes retrospectively, so it is keen to close them as quickly as possible before too many people benefit from them."

On a positive note, Robert Rackliffe, joint chief executive of IFA Aurora, says the new system may provide greater certainty for investors. "If they register a scheme and the Revenue does nothing then it may be providing approval," he explains. "At the moment, if accountants or lawyers set up schemes, they stress they could be challenged by the Revenue, which would lead to expensive legal action."

THE AMERICAN EXPERIENCE

The Revenue's proposals closely follow US tax shelter rules. These appear to have succeeded in reducing the number of "aggressive" tax planning schemes in the US.

Richard Collier-Keywood, head of tax at Pricewaterhouse- Coopers, says: "In effect, these have closed down the promotion and implementation of 29 'abusive tax shelters' on the IRS [Internal Revenue Service] list, and some companies have less appetite for more aggressive planning schemes than they did."

New York-based tax lawyer David Schulder, of Tannenbaum, Helpern, Syracuse & Hirschtritt, agrees that accountancy firms in the US have become more cautious in their use of "cutting edge" schemes. "For most investors, the tax shelter rules have not made much difference, except there is more form-filling required," he says.

"The difference has been that the IRS has gone after accountancy practices and some of the law firms. The IRS has taken firms to court to obtain their lists of clients and has succeeded. This has made accountants and some lawyers wary about promoting aggressive tax planning schemes."

He adds that, initially, the IRS had a broad definition of tax shelters. But after being swamped by hundreds of thousands of schemes, the service has narrowed its definition of those shelters that have to be registered.