Tax Policy Associates (TPA) has recently highlighted a ‘school fees planning’ scheme, promoted by Signature Tax – a boutique tax advisory firm and part of the AMS Accountants Group, which counts among its clients the Scottish National Party.
The scheme, alleges TPA, requires a relative of the taxpayer to take a small investment in the taxpayer’s company which is immediately put into trust for the benefit of the taxpayer’s children. The trust then receives a ‘special’ dividend. Rather than the taxpayer paying tax on dividends extracted from the company, and then using that income to pay private school fees (i.e. out of post-tax income), the trust receives the special dividend and the children pay tax on it at their marginal rate, after deduction of the personal allowance and dividend allowance. In the example suggested by TPA, rather than £100,000 school fees costing £164,000 in pre-tax income, the scheme reduces the cost to just £106,000.
The scheme appears to rely on a family member acquiring genuinely valuable shares when, in reality, the family member pays little for those shares and the taxpayer stands to benefit from the arrangements. TPA points out that the shares in such schemes typically are acquired for far less than their true value – for example, shares worth several years of expensive school fees (potentially into the £100,000s) acquired for a single payment of £1,000.
TPA suggests a whole range of approaches HMRC might take to challenge the scheme, including the overarching application of the GAAR. As TPA notes: ‘In short, the scheme is technically hopeless. I don’t think any reasonable adviser would disagree with that conclusion – the acquisition of the B shares at an undervalue is a fatal flaw. The biggest challenge for HMRC would be working out which of the 57 potential lines of attack they would run.’
TPA also suggests that the firm could find itself within the scope of a penalty for failure to disclose a tax avoidance scheme under DOTAS – capped at £1m.
Tax Policy Associates (TPA) has recently highlighted a ‘school fees planning’ scheme, promoted by Signature Tax – a boutique tax advisory firm and part of the AMS Accountants Group, which counts among its clients the Scottish National Party.
The scheme, alleges TPA, requires a relative of the taxpayer to take a small investment in the taxpayer’s company which is immediately put into trust for the benefit of the taxpayer’s children. The trust then receives a ‘special’ dividend. Rather than the taxpayer paying tax on dividends extracted from the company, and then using that income to pay private school fees (i.e. out of post-tax income), the trust receives the special dividend and the children pay tax on it at their marginal rate, after deduction of the personal allowance and dividend allowance. In the example suggested by TPA, rather than £100,000 school fees costing £164,000 in pre-tax income, the scheme reduces the cost to just £106,000.
The scheme appears to rely on a family member acquiring genuinely valuable shares when, in reality, the family member pays little for those shares and the taxpayer stands to benefit from the arrangements. TPA points out that the shares in such schemes typically are acquired for far less than their true value – for example, shares worth several years of expensive school fees (potentially into the £100,000s) acquired for a single payment of £1,000.
TPA suggests a whole range of approaches HMRC might take to challenge the scheme, including the overarching application of the GAAR. As TPA notes: ‘In short, the scheme is technically hopeless. I don’t think any reasonable adviser would disagree with that conclusion – the acquisition of the B shares at an undervalue is a fatal flaw. The biggest challenge for HMRC would be working out which of the 57 potential lines of attack they would run.’
TPA also suggests that the firm could find itself within the scope of a penalty for failure to disclose a tax avoidance scheme under DOTAS – capped at £1m.
