Tax avoiders braced for a crackdown from the Chancellor

Anti-tax avoidance measures seem certain to feature in next week's Budget. Diane Coyle,, Economics Editor, outlines the Government's options

FOR ONE of Britain's thriving industries, the past nine months have been the boom before the bust. Ever since Gordon Brown announced his intention to crack down on tax avoidance in his first Budget last July, the tax planning business has been in overdrive.

As The Independent revealed yesterday, the very rich have been flocking to take advantage of so-called "private" authorised unit trusts as a means of controlling the timing of the capital gains from their investments.

Every Budget brings a handful of measures closing loopholes that the Inland Revenue reckons have become too popular by half. In November 1996 Kenneth Clarke introduced his "spend to save" programme, hiring 2,000 extra Inland Revenue staff in order to net around pounds 2bn in revenues that would otherwise have evaded the coffers of the Exchequer.

However, Mr Brown went further, saying the Inland Revenue would carry out a wide ranging review to identify the most significant areas of tax leakage. And in November he signalled an intention to introduce eventually general anti-avoidance legislation rather than just ruling out specific ploys in each Budget.

Not surprisingly, then, the past few months have seen a rush on the part of both well-off individuals and companies to get all their "tax planning" in ahead of the Chancellor's speech on Tuesday.

David Williams, of London-based accountants Smith and Williamson, said: "The Chancellor has been a victim of his own pre-announcement of how concerned he is about this."

Accountants claim that past crackdowns mean there are no glaring loopholes left. Yet avoidance - as distinct from evasion, which is illegal non-payment of tax - is still estimated to cost billions of pounds in lost revenues each year.

One favoured method of reducing tax liability is to spend a full April- to-March financial year overseas. In that case, any income or capital gains are liable to being taxed abroad rather than the UK, so a sensible choice of location or clever moves from one country to another can keep tax bills to a minimum.

One of the best-known examples was Dave Clarke, the 1960s pop star who subsequently became an entrepreneur. Musicians have always been prominent amongst those favouring stays in low tax places like Ireland and the Channel Islands.

According to John Whiting, head of tax at Price Waterhouse: "There are still people leaving the country to avoid capital gains tax. We could see tightening up in the rules about coming and going." He adds, though, that people do also go abroad for all kinds of good reasons.

He also points out that the tax authorities in other countries are prepared to do deals with the rich, and settle for whatever tax payments they can negotiate. The Inland Revenue takes a tougher line, which results in some rich taxpayers leaving the country - as Andrew Lloyd Webber and Paul Daniels famously threatened before Labour won the election.

Experts can list a few other specific avoidance schemes that are still quite widely used. Some reliefs from capital gains tax are expected to go, such as retirement relief, which allows executives over 50 who sell shares in their company to pay a reduced rate when they retire; or reinvestment relief, where capital gains are exempt from tax if they are invested in another going business.

But the highest profile will have to be the measures the Chancellor takes to restrict the use of trusts, which the Opposition will be scrutinising carefully for their impact on Geoffrey Robinson, the Paymaster General, who was criticised in the House of Commons for benefiting from an offshore trust.

The big crackdown on these trusts, based in places such as Guernsey and Jersey, occurred in 1991, and it is now difficult for UK residents to gain any tax advantage from them. Last week Mr Brown acted to close one of the remaining small loopholes available to the beneficiaries of older offshore trusts.

However, many of the rich still use UK-based trusts as a tax efficient way to spread their assets. The catch here is that lots of middle class grandparents use them too, as a sensible way of passing on their money.

Peter Wyman, head of tax at Coopers & Lybrand, says: "There are a million reasons why people set up trusts, only one of which is tax avoidance. The revenue authorities have become paranoid."

Elspeth May, an expert on personal tax at KPMG, agrees: "A lot of the things that we would consider legitimate tax planning, the Chancellor appears to think of as tax avoidance."

The real concern of the accountancy profession, however, is the introduction of general anti-avoidance legislation. This could only work with a system of gaining advance clearance for proposed transactions, they argue. Otherwise nobody could be sure of not having their financial arrangements retrospectively attacked by the Inland Revenue or Customs & Excise.

But tax experts fear that this would be cumbersome because of Inland Revenue understaffing, and would give tax inspectors disturbingly wide powers to judge citizens' behaviour.

At the heart of their concerns is a different philosophy about tax. Where the tax authorities assume that the money is really theirs, the financial advisers believe it is really their clients', the people who have generated the wealth in the first place.

EVEN IF Gordon Brown had not already pledged to crack down on clever tax avoidance schemes in the Budget, the furore over an offshore family trust benefiting Geoffrey Robinson, the Paymaster General and a close ally of the Chancellor of the Exchequer, would have made it inevitable. Mr Robinson is a discretionary beneficiary of a Guernsey-based trust set up by a wealthy Belgian businesswoman, Joska Bourgeois, for the Robinson family. The offshore Orion Trust bought shares in TransTec, the engineering business Mr Robinson built up, and in Coventry City football club. Mr Robinson said he had not controlled or influenced these decisions, and dismissed allegations of wrong-doing as 'smears and mud'. He also pointed out that he had paid about pounds 1.4m in UK taxes over five years. However, the storm means Mr Brown could not possibly seem to backpedal on his tough talk about a clampdown on tax leakage. Tuesday is expected to bring a draft of specific measures along with a draft general anti-avoidance proposal for consultation.

Tax Loopholes, old and new

Gone ...

Payment in gold bars, coffee beans or other commodities, avoiding income tax and national insurance contributions - outlawed in November 1993.

Other benefits in kind in place of salary. For example, private use of a mobile telephone provided by employer - taxed as a perk worth pounds 200 a year from April 1991.

Salary payment in the form of the transfer of the right to be repaid a debt owed by customers. Employees got cash when the debt was settled without liability to PAYE - abolished July 1997.

The Business Expansion Scheme, offering tax relief for investment in new businesses, introduced 1981 - restricted to pounds 500,000 a year in 1988, and abolished at the end of 1993. Replaced by Enterprise Investment Scheme giving 20 per cent tax relief to investors in unquoted trading companies.

Turning your company into an empty shell with just a bit of cash and a lot of unpaid tax, putting the profitable business into a new company. Owners sold the shell to a new owner who took the cash and was not liable for the tax - abolished July 1997.

Going ...

Set up a "private" authorised unit trust to postpone capital gains tax on investments until the most convenient date - such as a year you'll be spending abroad. Technically, these have to be open to other investors, but it is easy to put people off with a very high minimum investment and management fee.

Spending a financial year abroad is still a favoured method of avoiding particularly heavy tax liabilities due at a particular time. Those working full-time overseas for a full 1 April - 31 March year do not pay UK tax, although they may liable to pay tax elsewhere. But by either choosing a country of temporary abode carefully, or by travelling enough, tax can be minimised.

Otherwise, live in a tax haven permanently.

Get rid of your company car, which has become an increasingly heavily taxed perk. Instead, persuade your employer to pay you a tax-free mileage allowance for a car you lease from a 'Structured Employee Car Ownership Plan'.

Create a non-beneficial trust for your spouse or children. It safeguards some of your assets and is subject to a less onerous tax regime.

Take advantage of 'retirement relief' from capital gains tax, paying a lower rate when you leave your own company. Or reinvest a gain tax-free in unquoted shares in another business. Re-investing in a farm has been a popular choice for people taking advantage of this relief.