Not many people outside those who work in tax know that one of the UK’s key financial centres (Canary Wharf) was built using legal tax avoidance. As well as the billions allocated to London’s Docklands in direct subsidy and private investment it was also allocated special “Enterprise Zone” status which amongst other incentives, meant expenditure on commercial buildings located in the Isle of Dogs could attract a 100% allowance. It was designed to encourage building and jobs in an area ravaged from 1970’s industrial decline.
The official designation was for a period of 10 years (1982 to 1992) but there was specific provision in the legislation for expenditure incurred on contracts entered with the original designation to still qualify for another 10 years (ie. up to 2002). The phrase “golden contract” was coined to reflect sites that had entitlement to allowances preserved, often for a range of development options.
There was a great deal of flexibility in the legislation to reflect the practical challenges of complex project delivery and the use of developers, along with claims before work completion to reflect real cash flow. There was also a provision for an Enterprise Zone Property Unit Trust. The government and legislators wanted Enterprise Zones to succeed.
The financiers, accountants, lawyers and tax advisors responded and EZ investments were syndicated and marketed to wealthy individuals, in some cases, with returns of over 200% funded by the tax claim (which investors could use to offset tax on other income) and high gearing. Most of these structures were legal but some were felt excessive and HM Revenue & Customs (HMRC) are still pursuing these through the Courts. Enterprise Zone status was awarded to over 30 areas (1981 to 1996) and investments ran for 30 years until 6th April 2011.
When Business Premises Renovation Allowances (BPRA), a 100% allowance for commercial property regeneration in disadvantaged areas, was introduced in April 2007 it had the potential to fill the void left from a waning Enterprise Zone market and it wasn’t long before syndicated BPRA schemes started to emerge. Like their predecessors there were legitimate schemes that worked and again some that were felt excessive. Some even went into liquidation belying the risky nature of property regeneration in areas of economic deprivation. On the hook were wealthy and in some cases high profile individuals (e.g. Wayne Rooney, Arsene Wenger, Jimmy Carr and Rick Parfitt) who unwittingly found themselves front page news and in dispute with HM Revenue & Customs. There were (and still are) arrangements going through the Courts.
The Disclosure of Anti-Avoidance Schemes (DOTAS) rules were tightened so that schemes like BPRA required to be notified to HMRC and secondary legislation was passed in the Finance Act 2012 to limit and clarify the qualifying expenditure. A special investigations unit was established to verify all claims, and the tools available to HMRC widened to collect payments (ie. accelerated payment notices, which require an individual to pay back tax first and then appeal if they disagree). For the more aggressive unacceptable arrangements there is now a general anti-abuse rule and a prescribed criminal offence for businesses (including employees) who encourage or assist with tax evasion. BPRA expired in April 2017.
In the court of public opinion, tax avoidance, is not acceptable. The risks are huge not just in terms of the financial exposure but in real and lasting reputational damage. The government has had to act to protect HM Treasury and the reputation of the tax system, not just because of aggressive BPRA schemes but because of ongoing more significant and sophisticated tax planning.
The financial and tax landscape has changed dramatically in the last 10 years. Banks are much less likely to lend on speculative property and certainly not at the levels before the 2007 financial crisis. Individual investors and businesses are a lot more cautious on tax; both want greater certainty and are much more risk averse. At the same time; however, the need for targeted investment in areas such as good affordable housing; better and more integrated transport & technology infrastructure; greener buildings; and a more diverse geographic economic base is clear.
Capital allowances incentives are no panacea but they can be a useful tool to encourage investment and if they are used, any such schemes that emerge will only succeed if they can withstand the scrutiny of public opinion, have the confidence of the tax authorities, advisors and individuals whose money and reputation is at stake.
And that leads to a challenge, the UK tax system works under the principle of self-assessment (and has done since 1996), it is not HMRC’s role to tell you how much tax to pay but to assess whether you have calculated it correctly often long after the expenditure has been incurred and tax benefit claimed. To avoid the pitfalls of the past perhaps future capital investment incentives that make their way into promoted schemes should be accompanied by clear policy statements, a clearance application and fast track assessment centre so that allowances can be controlled, infringements policed and the original policy objectives upheld.