The View from No 50

 

 

 

 

May 2003

K P Bonney & Co 

Chartered Accountants and

Chartered Tax Advisers

50 Cleasby Road  Menston 

Ilkley LS29 6JA

Tel: 01943 870933 

Fax:  01943 870925 

www.kpbonney.co.uk

 

 

 


 

MONEY LAUNDERING

- HELP US TO HELP YOU

Over the past few years the subject of money laundering has reared its head with alarming and increasing regularity.  Originally this subject related solely to the ill gotten gains from drug trafficking.  However, under new legislation money laundering includes the proceeds of any criminal activity.

In this country we have recently seen the introduction of new legislation concerned with money laundering – the Proceeds of Crime Act 2002 and the Money Laundering Regulation 2003.  This legislation will have far reaching effects for a number of businesses and will specifically impact on accountancy practices and similar business, eg solicitors.  Accountants are now obliged to obtain personal information about their individual clients and those who run businesses for whom they act.

Before we look at specifics, let us first define the term ‘ money laundering’.  Money laundering can be defined as the process by which the proceeds of crime (note – any crime, not just those connected with drugs or terrorism) are made to appear legitimate.

The methods used to convert ‘dirty’ money into ‘clean’ money can be complex, but basically involve the following three stages:

1        Placing the dirty money into the economy

2        Blurring the trail by ‘layering’ a number of transactions

3        Integrating the money into the legitimate economy.

Under the new legislation, accountants are ‘relevant businesses’.  As such they are under a duty to report any suspicions of money laundering to the National Criminal Intelligence Service (NCIS).

But there is more.  Accountants are not allowed to disclose to their clients that they have made a report to NCIS.  If they do so they could be guilty of ‘tipping-off’ which is a criminal offence punishable with a fine or up to 14 years’ imprisonment, or both.  ‘Tipping-off’ is any act that might be prejudicial to a criminal investigation.

From now on accountants will have to take a number of practical steps in order to comply with the new legislation.  The most important so far as the clients are concerned is that accountants must take steps to identify clients.  This will involve collecting data about a client which could include the following:

·          Name

·          Address

·          Date of birth

·          Place of birth

·          Photograph

·          Passport number

·          Driving licence number

·          Copy of birth certificate

·          NIC number

The above may seem a little extreme and an over reaction to past events and indeed it may not always be necessary to obtain all the above information.  However, the sole purpose of the exercise is to ensure that the people we deal with are, in fact, the people they claim to be and are carrying out a legitimate business which does not involve the laundering of money obtained from the proceeds of crime.

Our advice:  Over the past years, the misuse of drugs and the effects of terrorism have caused much misery. Most sensible people would agree that it is important that we all try to assist in the prevention of such acts.  If you receive a request from us asking for details about you or your business we hope that you will bear with us as we try to carry out those duties imposed on us by the new legislation.

 

INLAND REVENUE ATTACKS

DIVIDEND PAYMENTS ON SHARES

The owners of small family companies and their advisers have recently been surprised and concerned by the Inland Revenue’s attack on dividend payments made to individuals who play little or no active role in the company.

The Revenue attack centres around what are known as the ‘settlement provisions’.  The best way of explaining the particular settlement provision being targeted by the Revenue is by way of example.  Please note that in the example that follows we have assumed that the husband is the working shareholder, but of course it could equally be the wife.

A husband starts up a company in which, apart from staff, he carries out all or most of the day to day work.  The company’s issued share capital is 1,000 ordinary shares held as to 500 in the name of the husband and 500 in the name of his wife.  The husband pays himself a small salary (probably sufficient to cover the entitlement to state pension) and the remaining profits are paid to him and his wife in the form of dividends on their respective sharholdings.

Under this arrangement the husband saves paying higher rate tax on the part of the dividend that is paid to his wife provided she pays tax at the basic rate.

Enter the Revenue.  It could (it argues), using anti avoidance legislation contained in the Taxes Act, reallocate the dividend received by the wife to the husband and reclaim the tax saved.  The Revenue is entitled to go back six years to reclaim the underpaid tax, together with interest and penalties.

A number of companies have structured their share capital to facilitate the paying of different dividends by using two or more classes of share, eg ‘A’ and ‘B’ shares.  Often the shares will rank equally except that the directors can vote a different dividend on each class of share.  This avoids the administrative burden of certain shareholders waiving their rights to some or all of their dividends which they would have to do if the company had one class of share.  The Inland Revenue considers it can apply the settlement provisions here too.

It is not just husband and wife companies that are open to attack.  Any situation where dividends are paid to a person doing little or no work in the company could fall foul of the anti-avoidance legislation.  On the whole, however, it will be husband/wife, parent/children, working director/close relatives who may be caught.  If shares are given to employees working in the company, the settlement provisions should not be a problem.

The Revenue also considers it can apply the provisions to partnership situations in which a partner receives a profit share which is not commensurate with the capital and/or work contribution of that partner.

Just what will be the outcome of this situation remains to be seen.  The Revenue is convinced that it is correct in its approach.  Distinguished tax experts disagree.  The problem is one of uncertainty.  To date the Revenue has apparently raised assessments for underpaid tax on relatively few individuals but this might just be the tip to the iceberg.  Until a challenge goes to court, which could be a considerable period of time away, we shall not have a definite answer.

Our advice: The first point is that if you have structured your company to achieve tax savings in the manner described you have acted on the best advice available at the time  There is nothing you can do about this now.  You will just have to wait and see what the outcome of the current stand off is.

At this early stage we do not recommend changing existing structures.  To do so would be to volunteer to pay tax when no tax may actually be due.

We do, however, recommend that you consider setting aside money equivalent to your annual tax savings so that, if an Inland Revenue challenge against you is ultimately successful, you have available the money to fund the arrears of tax.

 

YET ANOTHER REVENUE ERROR

WILL AFFECT PENSIONS

The Inland Revenue gets upset if taxpayers fail to file returns and pay tax on time.  In recent weeks news has emerged of another failure by the Inland Revenue to meet its own obligations to taxpayers.

Since 1998, the Revenue has failed to warn taxpayers that they have not paid enough national insurance contributions to make years into ‘qualifying years’ for the purpose of the calculation of state pension.  Originally, it was understood the omission was a straight error but it now transpires that officials at the Inland Revenue actually took the decision to stop sending out reminder letters to taxpayers because they, the Inland Revenue, had more urgent matters to attend to at the time.

The Inland Revenue has stated that it will now write to all people likely to be affected by their decision.  These people will be given the opportunity to make supplementary contributions and accordingly they should not lose out on any state pension benefits.

Our advice: If you are concerned that you may not have earned enough in the years 1997 to 2001 to make those years in to qualifying years, contact us and we shall advise you accordingly.  The Revenue has stated that no one will lose out as a result of the error and any person affected will be given a period of five years to make good any shortfall.

 

MEN IN BLACK

 

St Peter was challenged by the Devil to a football match.  St Peter said, “We’ve got all the best footballers up here.”  The Devil replied, “Yes, but I’ve got all the referees.”

 

 

 

 

 

 

 

Copyright  Ó  K P Bonney & Co LLP 2003.  All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers.  Disclaimer  The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors  or the publishers.

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