Journal :: Will the New Tax Avoidance Reporting Regulations Apply to the Advice I Give?

Published: July 19, 2004
Author: Graham Dragon
Category: Tax
Permalink: Will the New Tax Avoidance Reporting Regulations Apply to the Advice I Give?

The new tax avoidance reporting regulations will, if granted royal assent, come into force on 1st August 2004. But, very significantly, they will apply to any advice you may have given since 18th March 2004, so the advice you are giving at the moment could require you to file a report in the first week of August. Do you know how to spot whether or not you are likely to be caught by the regulations? Hopefully this bulletin will help you decide.

Inland Revenue has shown us in its draft guidance to the new regulations how to determine whether or not a financial product falls within the reporting requirement. Two examples they give are a Cash ISA and a Stocks and Shares ISA, both of which they demonstrate are not reportable.

The method is quite straightforward. First calculate the tax benefit. This should include any tax deferred as well as completely eliminated, and should be the position over a two year period. ?Tax? includes income tax, capital gains tax and corporation tax only ? you can ignore, for example, any national insurance or inheritance tax benefits. Next work out any other economic benefits ? for example a return of cash from the investment ? and add these to the tax benefits. Finally take away the cost ? e.g. the amount invested. If the end result is positive this arrangement could be reportable, but if it is negative ? i.e. the client ends up with worse cashflow ? it will not be reportable. If the arrangement could be reportable following this calculation, you then have to decide whether the vehicle you are using falls within the six categories defined within the Statutory Instrument.

Using this method I will consider another product commonly recommended by an IFA ? an EIS.

As you know, an EIS is an extremely tax efficient vehicle. Under the proposed regulations there is no specific exemption simply because it is a Government approved scheme, so it is important to determine whether an investment into an EIS could be reportable.

In my example, I will assume your client has made a ?100,000 taxable gain on shares which he has not held long enough to acquire any taper relief. He is also expecting to pay just over ?20,000 income tax this year. You have reviewed his investments and, taking account of his attitude to risk, believe it would be appropriate for him to invest the ?100,000 gain in an EIS, taking advantage of the considerable tax benefits.

The total tax benefit for the purpose of the Regulations will be ?60,000 - ?40,000 deferred capital gains tax and ?20,000 income tax reducer. We can ignore the inheritance tax benefit.

There are no other economic benefits to the investor. The EIS may produce an investment return within the first two years, but this is not particularly expected, and even if it does, the investor cannot withdraw any of it without losing some of the tax benefits.

There is therefore a ?60,000 benefit and a ?100,000 cost (the original sum invested). The net result is negative, and therefore this cannot be a reportable transaction.

I think you will find a similar result if you apply this logic to most of the standard investments you are likely to recommend, other than those of you in specialist areas such as geared-up film partnership investments.

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About Graham Dragon

Note: We do not accept liability for the content of our e-mail Journal or for the consequences of any actions taken or not taken by yourself or any third party on the basis of the information provided. We are unable to advise you on tax matters. If you wish to obtain further information or help on this or on any other tax matters you should consult with a tax accountant or other suitably qualified and experienced tax professional.

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