Monthly Archives: July 2013

A lack of clarity can come back to bite you

As a long time Gooner I have found myself drawn into the (set to be) long running saga of the Luis Suarez transfer.

Aside from the football related aspects it’s the contractual point that interests me.

There appears (at least according to the press) to be some uncertainty over a key clause.  One side, Luis’ side, feels the words of the clause in question compel Liverpool to sell Suarez if an offer of more than £40m is made.  There is a variation on this interpretation that is that the £40m+ offer compel Liverpool not to sell but to allow the player to talk to the team making the offer.

And the last interpretation is that the clause merely compels Liverpool to inform Suarez of the offer but does not compel them to allow him to speak to the club who mad the offer.

If you favour either of the first two interpretations (and especially the first one) then you would make an offer of just enough to trigger the outcome you are seeking wouldn’t you? An offer of say £40 million plus £1. Now who would do that? What could they be smoking?

Leaving aside any discussion of what is or isn’t being smoked, one could say that the Arsenal offer was over generous if “triggering the clause” was the objective… £40m and 1p would have done. But hey, we’re like that .generous to a fault. And if questions are to be raised about being under the influence, some more serious questions could be asked of our friends from the North in relation to the acquisition of Andy Carroll , Jordan Henderson , Stuart Downing …the list goes on. Some have even suggested that the extra £1 in Arsene’s offer was, indeed, for Mister Downing.

But, moving on from the banter…non lawyers will express disbelief that there isn’t clarity over such an important clause in a contract.  Lawyers and those with legal training (like many of us at TC) will however know that a lack of clarity in a legal document is completely believable. Regardless of whether such a lack of clarity actually exists in the Suarez contract.

I have seen many trusts and wills where it is far from clear what the effect or outcome of a clause should be.  The intention may have been clear but the articulation is less than perfect.  After all, “it’s only words” – as the Bee Gees sang.  Not that I am a Bee Gees fan – or a fan of unclear drafting.

And it’s not just private documents that suffer from a lack of clarity.  Legislation also suffers from a divergence in what is stated by the words from what Parliament’s intention was.  That’s why so many avoidance schemes have been so successful.  They have worked to achieve an outcome that wasn’t intended by Parliament but was not prevented by the mere words of the legislation.  And that’s why we have had a steady flow of litigation involving HMRC attempting to secure a “purposive” (ie less than strictly formally legal) interpretation of legislation and, of course, the General Anti Abuse Rule that will operate, broadly speaking, to apply the intention of Parliament in cases where there has been abuse (as defined within the GAAR).

The lesson coming from the Suarez case (that may itself, it seems, go to some form of arbitration) is one that anyone involved in composing the terms of a private trust or will, would do well to observe.  Ensure that what you mean to achieve is expressed clearly by the words of the legal document you are to use.  Clear in a way that is beyond confusion.  Setting out, in some way, a plain English intention before using the necessary legal words in the document, a kind of “recital” or “narrative” may also be helpful – if only to concentrate the mind on the job at hand.

It will save a lot of trouble down the track.

If only the legal team advising Pep’s brother had worked to these principles – we may have had Luis in the team for our first shot at a trophy this weekend. OK, it’s the Emirates Cup … but beggars can’t be choosers!


What have Starbucks and Prince Charles got in common? No, not frapuccinos or grandchildren – though, no doubt, some grandparents and grandchildren do visit Starbucks.

There are two things in common that I know of.

The first is that the tax that they pay (or, more accurately the lack of it) has been a subject of interest and debate for “Witchfinder General” Margaret Hodge of the Public Accounts committee. The second is that both pay tax voluntarily. Starbucks, following the “inquest” into their low (but apparently not illegal) effective rate of corporation tax. Prince Charles on account of the arcane tax position of the “private estate” that is the Duchy of Cornwall. Basically, the Duchy has no legal liability to pay tax (income tax , capital gains tax or corporation tax) as it is equated to the (tax exempt) Prince himself.

The Prince, however, voluntarily pays tax on income from the Duchy that is paid to him net of any deductions for allowable expenses eg private staff costs. So on the one hand , “well done Starbucks and Prince Charles”. On the other, shouldn’t the law be amended to ensure that the amount of tax thought to be reasonable , is actually paid ?

In the case of Starbucks , of course, a high degree of international co-operation would be necessary to achieve this objective and when national self interest is at play the outcome is likely to be anything but certain and quickly achieved. Subject to this very real practical challenge though , relying on voluntary payments seems all a bit too “discretionary” in this day and age doesn’t it?

Anyway, make mine a Grande(daddy) Taxachino.

OK, that’s pretty weak I agree. Add two extra shots.

“Conversion, exchange, switch”.

Is this the financial sector’s version of “rock, paper, scissors ” ..or “ik, ak, ok” as I used to say as a child when playing this game with friends many years ago.

Well, was just the use of three words that brought the thought to mind. How juvenile!

But the three words that open this blog and their impact in relation to capital gains tax have been causing a bit of consternation to those engaged in the move to “clean” share classes.

The latest confusion may not have been helped by some HMRC guidance. They say :

“Will there be additional tax liability as a result of switching to “Clean” Share Classes

Under new regulations (SI 2013/1400) it is expected that it will be clear that switches to ‘clean’ share classes will not create a liability to capital gains tax.

Prior to 8 June 2013 most switches took place as part of a reorganisation or reconstruction and would also not create a liability to capital gains tax. The new regulations provide further clarification on the matter and widen the treatment to cover cases of switching that might not have fallen within the previous rules including switches undertaken on behalf of and at the instance of an individual investor.”

So what does this mean ? Well, its not so much the word that you use to describe the way in which you move to a clean share class but more what you actually do.

The draft regulations talk in terms of ‘exchange’, not switch and I ( having taken guidance from better people than me in the TC team) continue to think that anything involving a ‘sale’ is clearly not an exchange, reorganisation, reconstruction or conversion.

As we said in our Techlink bulletin on the subject:

“The key part of these regulations is that CGT will not arise where:

  • An investor in a collective investment scheme exchanges his shares/units in a scheme for other shares/units in the scheme “of substantially the same value” and the scheme property and rights of investors (ignoring any changes as a result of a variation in management charges) are unaltered;
  • Where a scheme reorganises in a way that all investors in one or more unit/share class (or all classes) exchange their holdings for other shares/units in the scheme.

 The exchange is treated for CGT purposes as a share reorganisation under sections 127-131 of Taxation of Chargeable Gains Act 1992 – in effect the original base cost is carried across to the new holding and no disposal occurs.

 Note that the word used throughout the regulations is ‘exchange’, not ‘switch’. A switch – generally considered in terms of a sale and purchase – would not be covered by these regulations because the sale would be a disposal, even if the repurchase was of a different class of units/shares in the same fund.”

Of course if what is described as a “switch” is , in fact an exchange, with no sale and disposal , then it seems to me that there would be no CGT event.

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You just can’t escape from tax…

You just can’t escape from tax as Parliament said to the Americans just around tea time.

I am writing this from Boston on the glorious 4th of July.

Over the past few days of walking around the City’s historic sites I have been reminded of the importance that tax plays in determining public sentiment. Now given what I do for a living it doesn’t take much to set the old tax antenna vibrating and I have been saturated in “tax alerts” in my time here. Tax certainly played a pretty big part in driving the events that led to American independence with the signing of the Treaty of Paris in 1783. Although not the only factor leading to revolution the series of taxing acts, including the Stamp Act, the Tea Act and the Townshend Acts, were significant in building anti-English sentiment to a fever pitch. The media, it seems, also did its fair share to fan the flames of indignation and revolution.

England needed the money to repair public finances seriously damaged by the 7 years war and America resented having to pay tax to and buy tea from a country where they had no direct representation in parliament.

And the rest is history… So to speak.

And although history isn’t exactly repeating itself in the same way or to the same extent, some of the key components in the time leading up to revolution are at play now in many countries and especially in the UK.

There’s certainly tax inspired resentment. The key difference in relation to taxation and public sentiment in the UK right now is that, back in 18th century America, the resentment was directed at the British Government seeking to raise the tax whereas in 21st Century Britain the (Government, Public Accounts Committee and media inspired and supported) resentment is aimed at those who are perceived not to be paying their fair share in these straightened times.

So the same public indignation, just directed at a different target.

And there’s also a strong Government motivation to tax to repair public finances (due to the effects of the financial meltdown, as opposed to the 7 years war)… and to be seen to be doing something to assuage public indignation. The take away points for financial advisers is that people care about tax and that the Zeitgeist in relation to tax avoidance and even tax planning has changed – possibly for ever, at least for “the foreseeable”.

This means that it’s pretty much compulsory to know about tax, what can and can’t be done to legitimately pay as little of it as possible.

Being “knowledgeably tax proactive” with your clients should be an investment that yields a pretty decent return – for you and your client.

Enough of the history already!

Right, time for tea.

Happy Fourth!

Tony Wickenden

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