Solicitors warned off SDLT avoidance schemes after landmark judgment
Schemes designed to dodge stamp duty land tax (SDLT), which cost the public purse £170m a year, will face tough scrutiny from HM Revenue & Customs after a landmark tribunal judgment this week. Regulations have also been laid that will force users of avoidance schemes to disclose them to the authorities, HM Revenue & Customs said.
A First Tier Tribunal ruled against Durham-based Vardy Property Group after it sought to exploit a rule to avoid paying £290,000 of stamp duty on the £7.25m purchase of commercial property in 2006.
The group had sought to use sub-sale relief, an exemption designed to protect house-builders from having to pay stamp duty twice, when they buy land and then sell the houses they have built on it. It structured the purchase through a newly formed unlimited-liability company, which immediately distributed the property as a dividend to the shareholder company. The group claimed that as the final purchaser had paid nothing for the property it was not liable for stamp duty.
But the tribunal found that the unlimited company had not properly carried out company law requirements for declaring a dividend, and that in reality the ultimate owner of the property had indirectly provided the purchase price. Therefore, the avoidance scheme failed and SDLT was due.
Meanwhile, the new regulations on the disclosure of tax avoidance schemes will give HMRC better access to information about them and those who promote and use them, enabling them to be challenged and closed down more quickly, HMRC said.
HMRC’s director general of business tax, Jim Harra, said: ‘This victory at the First Tier Tribunal sends a clear message to tax avoiders that we will challenge avoidance relentlessly.’
Earlier this year, the Solicitors Regulation Authority urged solicitors to think twice before becoming involved in SDLT schemes, and warned the profession to ensure any involvement it has with such schemes complies with the code of conduct.
Richard Collins, executive director, said: ‘In view of the level of concern on the part of HMRC and the fundamental importance of integrity in the provision of legal advice, we will look very closely at the conduct of any firm actively involved in these schemes. Buyers of property are free to use honest and proper tax planning to mitigate their tax liability, but there are a number of risks and misconceptions surrounding SDLT schemes,’ he said.
Head of corporate tax at national firm Pannone, Simon Moulden, also cautioned solicitors who have no expertise in tax law against advising clients on using such schemes. He expressed concern that some schemes that were designed for commercial property are being marketing in residential conveyancing, especially at the low value end.
Moulden warned: ‘The danger for some solicitors is that they have got sucked into marketing schemes offered by third parties as a way of making more cash at a time when margins are tight.’
The Vardy Group said it will not be appealing the decision. A spokeswoman said: 'We went into this arrangement in good faith having been professionally advised, along with many other property investors, that it was a perfectly legitimate and legal course of action. With the benefit of hindsight, it was the wrong decision. Important lessons have been learned as a result, not least taking action that is based entirely upon professional advice,' she said.
Comments
The schemes do not "cost" the
The schemes do not "cost" the public purse a penny. The tax is either legally payable or it is not.
If it is legally payable and is not paid that is tax evasion which is illegal. If it is not payable, then it is not payable. The money then not having ever been due, it has not been lost to the public purse.
The presumption that all money belongs to the state which then allows the citizen to keep some is insidious and dangerous. The state has no money-it never has had, and it never will. It has the power to take money from the people to pay such debts as it incurs-that is all it has.
The SRA has no business whatsoever telling solicitors or citizens how they should arrange their own financial affairs. However as the SRA seems to believe that it has the right to do what it likes, it is unsurprising that it pontificates on these matters-whilst takes large amounts for its people in what might best be described as a tax on solicitors.
Quite agree
hear hear.
The online gazette should allow users to either "like" or "recommend" a comment!
Where's the like button:)
Where's the like button:)
SRA
If the SRA is telling solicitors to think twice before becoming involved in such schemes, is the Bar Standards Board telling tax silks to think twice before being asked to devise/approve such schemes? I very much doubt it. Anyone who knows about tax avoidance/tax deferral schemes like this is well aware that they are either devised by or looked at and signed off by a tax silk. There is nothing inherently wrong in solicitors becoming involved in such schemes (or, indeed, in solicitors devising or advising on tax avoidance measures). The implied suggestion that a solicitor who does so might be committing some sort of breach of the Code of Conduct is entirely unjustified: the SRA really must learn that a solicitor's duty is owed to his client, not to the government (or, for that matter to the SRA).
SDLT schemes
I support the SRA's warning on this.
Ever since Furniss v. Dawson and Ramsay v. IRC, over 30 years ago, it has been obvious that convoluted and abusive tax avoidance schemes do not work. Sooner or later the purchaser will always end up paying the tax plus penalties and interest and the costs of the litigation.
Any solicitor advocating the use of these schemes is both ignorant as to the law and does his/her client a great disservice.
It is irrelevant whether a "tax silk" has advised on the scheme as these strictures extend equally to the allegedly more learned and senior members of the profession. Solicitors should be asking searching questions about the "opinions" they are receiving.
No reasonably competent solicitor can properly involve his/her client in a scheme which will ultimately disadvantage the client.
There is also the issue that some of these schemes could well involve fraud on the public revenue which is a criminal offence.
I leave it there.
Advocating the use of these schemes
Schemes like this are typically advocated not by solicitors, but by accountants, who have had them vetted by tax silks. To say that no reasonably competent solicitor can properly involve his client in a scheme which will ultimately disadvantage the client is to state the obvious (and to miss the point). In any event, the SRA is not talking about whether the solicitor is reasonably competent (being a matter about which the SRA seems completely indifferent), but about whether there might be a breach of the Code of Conduct.
The danger of solicitors
The danger of solicitors getting involved in these schemes is that when the don't work, everyone blames the solicitor, and no one else is insured.
HMRC propaganda
I agree that Kevin on Fri, 21/09/2012 - 23:03 does not know what he is talking about (or is perhaps biased, like the SRA, in favour of HMRC).
If the decision had gone the taxpayer's way (like with the DV3 SDLT case), would there be an SRA alert saying that solicitors are now obliged to assist their clients with such schemes? Of course not. This is HMRC propaganda (supported totally unjustifiably by the SRA) pure and simple. If the taxpayer is being advised by a suitably qualified and regulated professional, there is nothing improper whatsoever in such SDLT mitigation planning. It is no different to IHT and other tax mitigation planning where a regulated, tax qualified professional is advising the client in his (and not HMRC's) interest. There should be no question of penalties etc. in such circumstances if the planning fails.
If anything, this particular case shows why lawyers (and not accountants etc.) should implement such planning. They might have appealed it then, as they would probably not have messed up on the company law issue (the Tribunal's reasoning on the indirect funding point opens up potential "double SDLT charge" arguments under s45 FA 2003).
Interestingly, this case supports the robustness of other (different) SDLT subsale schemes, but I doubt Kevin or others like him would know that.
Schemes
It's obviously wrong to say that the only person who is insured is the solicitor. If Patrick Stevens is the Patrick Stevens who is the President of the Chartered Institute of Taxation, he should know that the accountants who developed and sold the scheme to the client will also be insured. Clearly, any solicitor advising a client on aggressive tax planning may need to give appropriate warnings about the risks of the relevant scheme being challenged by HMRC; but, provided he gives such warnings as are appropriate (and that the scheme is not fraudulent in some respect) he should not have to worry about the SRA.
Tax avoidance schemes may be unpalatable to many people, but the SRA needs to be careful to draw a distinction between what some people may regard as unpalatable and what amounts to professional misconduct. Warning solicitors not to touch things which may be unpalatable is a sure way to undermine both the independence and the reputation of the profession.
But the entire raison d'etre
But the entire raison d'etre of the SRA is to undermine the independence of the profession-and suck up to the state which brought it into being.