Marlborough

With apologies for mixing my ancient historical metaphors we thought it would be useful in this edition of Phoenix to give you our personal view on the threat to EFRBS.

With the recent announcements from HMRC and even more recent adverse media attention on EFRBS we all suspect that the beloved Chancellor of the Exchequer will be giving a prebudget report on 29th November and that this will include measures designed to tackle the so called abuse of pension schemes.

The Political Bit:

It really is rather worrying that the Lib-Dems do not understand the difference between tax evasion and avoidance, as exemplified by those doyens of economic theory known as Nick and Vince. Furthermore, when the media bandwagon jumps on the tax avoiders as the spawn of Satan then all of us in the financial industry must take note.  I was staggered by the recent Channel 4 Dispatches documentary that accused a Tory minister of immoral tax avoidance because hereceived some of his income from a privately owned company by way of dividend rather than salary!  Let’s make it clear: if the wealthy are taxed proportionally at a vastly higher rate than anyone else then ultimately they will leave the UK. We have seen more clients leave the UK in the last 6 months than in the previous 6 years put together due to what they consider as the unfairness of the tax system. We can debate the right or wrong of this but cannot question the loss of revenue to HM Treasury when wealthy individuals take themselves and their businesses abroad.

Of course what would give the tax avoidance marketplace a massive wake up call would be if the UK government introduced a flat rate of tax. No difference between income and capital gains, no IHT, VAT or NIC. It would mean the tax laws could be reduced in volume by 95% and the total tax take would increase as many would see it as a fairer system. Having said that, please do not mention this to anyone you know in government as we would all have to revert to being tomato growers here in Guernsey.

Rant over – The Technical Bit:

When is a pension not a pension? When it doesn’t behave like one. Pension schemes that allow high proportions of loan backs to members are clearly pushing the boundary and therefore we expect this to be a prime point of attack for HMRC. EFRBS are currently outside the registered pension limits of contribution rules and therefore those obtaining advance corporation tax deductions are bound to be targeted. This could be through anti-avoidance legislation but we think it will also come through attacking subtrusts. Once a sub-trust (or individual EFRBS with one member) is established there is no question over who is going to obtain the benefit of that sub-trust fund. Surely it would be easy to describe any transfer to a sub-trust as an emolument and tax it on the member to income tax immediately.

The Worst Case:

It is possible that EFRBs will be brought into the registered pension regime and therefore they will have little attraction beyond a standard UK pension – or will they? The investment flexibility of an EFRBS is likely to stand and if contributions are capped at a certain level then this means the EFRBS will have tacit approval from HMRC going forward. This change would limit the benefits to high earners but does make it a mass market product.

What’s in a name? 

Current thinking among UK tax advisers is that an EFRBs established for all employees of a UK company that does not obtain an advance CT deduction and does not transfer funds into separate legally identifiable sub-trusts are very difficult to attack. How can HMRC allocate funds to one employee rather than another? If the pension makes suitable pension-like investments and has a pension age in line with the UK then why should it be attacked? That said, HMRC may go on an all out attack. As such will this include contract based as well as trust based pensions schemes, what about QNUPS, ROPS or OPS? Only time will tell but we look forward to finding out and thinking up new acronyms, although hopefully they can be more entertaining than the current batch.