Wealth advisor’s misleading tax scheme advertising
Wealth advisor, Knight Wolffe, has been rapped by the Advertising Standards Authority (ASA) for misleading income trust advertising that uses HMRC’s logo.
In the recently published Spotlight 40, ‘Income trust schemes: misleading advertising’, HMRC label the Knight Wolffe income trust as an avoidance scheme as the trust aims to divert income from a business into a trust. The trust then loans it back to the business owners, their families, or both, claiming that no Income Tax or NIC arises.
HMRC complained to the ASA that:
- the use of the HMRC logo and the claims that Knight Wolffe Income Trust was “known and accepted by HMRC since 1994” and “approved by the House of Lords in 2005” misleadingly implied endorsement by those bodies;
- the adverts misled by omission because they failed to make reference to the disguised remuneration scheme or proposed loan charge, or make clear that there might be costs if HMRC challenged the arrangement, including those costs which arose as a result of the General Anti Abuse Rule (GAAR);
- claims that the Income Trust scheme involved “no tax avoidance” were misleading, because the scheme appeared to involve tax avoidance; and
- efficacy claims for the planning, such as “use statutory reliefs” were misleading, because they implied payments could be claimed as a deduction for tax purposes with all income being free of tax.
Knight Wolffe’s response
In their defence, Knight Wolffe only responded to points 1 and 3 as follows:
- They did not consider that the use of the HMRC logo inferred endorsement of their scheme and they made great efforts to ensure that each prospective client was aware there was no such endorsement from HMRC. Reference was made to the 2005 House of Lords ruling in Macdonald (HMRC) v Dextra regarding the claim “approved by the House of Lords”.
- They disagreed that the term “no tax avoidance” was misleading as they advised clients that the structure used was always declared to HMRC within their tax return. As the relevant case law and statutes they had relied on as the basis for the scheme not falling under Disclosure of Tax Avoidance Schemes (DOTAS), it therefore followed that there was no tax avoidance within the scheme. The structure was protected by Intellectual Property Law and had been in place for nearly 25 years in various guises. HMRC were aware of the legal existence of the structure. Reference material was publicly available and they made reference to a book that had been published on the subject but did not provide the title or any further details.
How income trust schemes work
HMRC’s understanding of the income trust scheme is that the:
- business establishes a trust for the benefit of its suppliers
- business pays money into the trust
- money paid in is claimed as a tax-deductible business expense
- claimed purpose of the trust is to provide an incentive to suppliers
In reality, the suppliers aren’t aware they’ve become beneficiaries of the trust. The trust funds are then loaned, usually to the business owner, their family, or both. The terms of the loan mean the funds are unlikely to be repaid.
Eventually the loans are claimed to reduce the scheme user’s estate value for Inheritance Tax purposes. As a result, the scheme user has full use of the money, which appears to be tax-free.
The ASA upheld every one of HMRC’s complaints and now sets a precedent so that promoters of similar schemes must not make the same claims. Failure to do so could result in the ASA imposing sanctions.
Already using an income trust scheme?
For those already using one of these schemes, HMRC are urging people to e-mail email@example.com to arrange settlement of tax and NIC due.