Background
Summary of Council decision:
Four issues were investigated, all of which were Upheld.
Ad description
Ads from Knight Wolffe, tax and wealth advisors, seen in April 2017, promoted an Income Trust scheme:
a. A website www.knightwolffe.com, via its “Income Trust” link, led to a web page entitled “What is an Income Trust”.
b. A leaflet, entitled “How to Pay up to 80% less tax”, which stated “And without breaking the law!” … BUT THERE IS A SOLUTION… TAX TRUSTS”.
Issue
HMRC challenged whether:
1. 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;
2. the ads misled by omission, because they failed to make reference to the disguised remuneration scheme (DR) or proposed loan charge, or make clear that there might be costs if the HMRC challenged the arrangement, including those costs which arose as a result of the General Anti Abuse Rule (GAAR);
3. claims that the Income Trust scheme involved “no tax avoidance” were misleading, because the scheme appeared to involve tax avoidance; and
4. 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.
Response
1. Knight Wolffe Ltd said they did not consider that the use of a government body logo inferred endorsement of the structure used and they made great efforts to ensure that each prospective client was aware that there was no such endorsement from HMRC. They referred to Macdonald (Inspector of Taxes) v Dextra (2005 (HL)) regarding the claim “approved by the House of Lords in 2005”.
2. They did not provide any specific comments on this point.
3. They stated that the term “no tax avoidance” was not misleading as they advised clients that the structure used was always declared to HMRC within their tax return. They said that as the relevant case law and statutes they had relied on as the basis for the scheme did not fall under the Disclosure of Tax Avoidance Schemes (DOTAS), there was no tax avoidance with the scheme. They indicated that Macdonald (Inspector of Taxes) v Dextra (2005 (HL)) provided further information. They stated that the structure was protected by Intellectual Property Law. They added that it had been in place for nearly 25 years, in various guises; HMRC were aware of the legal existence of the structure. The said there was reference material available publically, and made reference to a book that had been published on the subject, but did not provide the title or any further details.
4. They did not provide any specific comments on this point.
Assessment
The ASA noted that HMRC’s understanding of the Income Trust scheme was that a business established a trust for the benefit of its suppliers. The business paid money into the trust which was claimed as a tax deductible business expense. HMRC understood that the claimed purpose of the trust was to incentivise the suppliers, but in reality the suppliers were not told that they were the beneficiaries of the trust. The trust funds were then loaned, usually to the business owner and/or his or her family on terms that meant they were unlikely to be repaid. HMRC understood that the loans were eventually claimed to reduce the scheme user’s estate for Inheritance Tax purposes. As a result, the scheme user had full use of the money, purportedly tax free.
HMRC stated it was clear that the schemes did not work and that tax was due at the time the schemes were entered into. HMRC was investigating and challenging the use of the schemes and were concerned it might result in those that had used the Knight Wolffe Income Trust, including small business owners, sole traders and the self-employed, facing a larger than expected tax bill, as they would be obliged to not only pay the tax, but the interest accumulated on it, as well as potential penalties.
1. Upheld
The ASA considered that the ad was targeted at traders and businesses including small business owners, sole traders and the self-employed.
We noted that ad (b) stated that “tax trusts … were approved by the House of Lords in 2005”, whilst ad (a) listed “The main features of an Income Trust …” and included “approved by the House of Lords in 2005”. We considered that those claims would be understood to mean that the tax and financial principles applied in Income Trust schemes had been formally considered by the House of Lords and found to be legal and effective. We further considered that some businesses would understand that Knight Wolffe’s scheme had been specifically considered and approved by the House of Lords.
We considered readers would infer from the inclusion of the HMRC logo, viewed in conjunction with the claims “Fully disclosed to HMRC” and “known and accepted by HMRC since 1994” in ad (a), that HMRC as well as having considered and approved the general principles of an Income Trust, the specific Income Trust scheme offered by Knight Wolffe had been formally considered by HMRC and had been given its specific approval.
We considered therefore that businesses would understand that both bodies had formally considered and endorsed Income Trust schemes and that HMRC had specifically found that Knight Wolffe’s scheme was legal, effective and was recommended to the public on that basis.
We noted that Knight Wolffe had not provided a copy of, or link to, Macdonald (Inspector of Taxes) v Dextra (2005 (HL)), nor any information explaining its relevance to their own scheme or their advertising claims.
We obtained a copy of the judgment. We noted that the Opinions of the Lords of Appeal for Judgment in the cause of MacDonald (Her Majesty's Inspector of Taxes (Respondent)) v. Dextra Accessories Limited (Appellants) on Thursday 7 July 2005 did not make any reference to Knight Wolffe or any schemes or services they offered.
HMRC provided some further background to the case of Macdonald v Dextra Accessories (2005 (HL)), which they did not believe supported Knight Wolffe’s advertising claims.
We understood that, at the time in question, if a taxpayer disagreed with an assessment or a determination of liability to tax made by the Inland Revenue there was a right of appeal. Appeals would be considered by the Appeal Commissioners – the Special Commissioners were one of the two distinct bodies of Appeal Commissioners and were independent of the Inland Revenue. The Special Commissioners were a tribunal with full-time members appointed by the Lord Chancellor following consultations with the Lord Advocate. Appeals were normally heard before a single Special Commissioner.
HMRC stated that the Special Commissioners were not a court of record and therefore set no precedent. In the case of Macdonald v Dextra Accessories (2005 (HL)), HMRC stated that the Inland Revenue had appealed the Special Commissioner’s decision on the sole ground that payments to employees through trusts were disallowable as potential emoluments, and had succeeded in the Court of Appeal and House of Lords on that point. HMRC maintained that the House of Lords had therefore not ruled on whether or not Income Trust arrangements of the type being advertised by Knight Wolffe amounted to tax avoidance. HMRC further maintained that the facts of the case were not comparable to the scheme being advertised and that relevant new legislation had been passed since that case was decided which made comparisons with the Income Trust scheme invalid.
HMRC also pointed out that the judgment was given in the House of Lords in 2005, but they understood that Knight Wolffe was not incorporated until 14 June 2014.
We did not consider that we had seen sufficient evidence from Knight Wolffe showing how Macdonald v Dextra Accessories (2005 (HL)) supported their claims that the House of Lords had formally considered and endorsed Income Trust schemes or that HMRC also endorsed Knight Wolffe’s Income Scheme. We noted we had not seen any other evidence in support of their claims. On that basis we concluded that the claims were misleading.
On that point, the ad breached CAP Code (Edition 12) rules
3.1
3.1
Marketing communications must not materially mislead or be likely to do so.
3.3
3.3
Marketing communications must not mislead the consumer by omitting material information. They must not mislead by hiding material information or presenting it in an unclear, unintelligible, ambiguous or untimely manner.
Material information is information that the consumer needs to make informed decisions in relation to a product. Whether the omission or presentation of material information is likely to mislead the consumer depends on the context, the medium and, if the medium of the marketing communication is constrained by time or space, the measures that the marketer takes to make that information available to the consumer by other means.
(Misleading advertising),
3.7
3.7
Before distributing or submitting a marketing communication for publication, marketers must hold documentary evidence to prove claims that consumers are likely to regard as objective and that are capable of objective substantiation. The ASA may regard claims as misleading in the absence of adequate substantiation.
(Substantiation) and
3.50
3.50
Marketing communications must not display a trust mark, quality mark or equivalent without the necessary authorisation. Marketing communications must not claim that the marketer (or any other entity referred to), the marketing communication or the advertised product has been approved, endorsed or authorised by any public or other body if it has not or without complying with the terms of the approval, endorsement or authorisation.
(Endorsement and testimonials).
2. Upheld
We considered that traders and businesses including small business owners, sole traders and the self-employed would understand that the ads were providing an overview of Knight Wolffe’s Income Trust scheme, so they could determine whether the scheme might be relevant to their financial and tax arrangements and decide whether to seek further information by contacting the firm. Whilst we accepted that businesses would expect the ads to present the benefits of the scheme, we considered they would also expect them to provide relevant information about the tax implications and risks of entering into the scheme.
We understood that HMRC believed the Income Trust scheme fell into a type of tax avoidance scheme referred to as a disguised remuneration scheme (DR) used by employers, employees and the self-employed. HMRC also stated that, at the time the ad appeared, a proposed loan charge would have applied to outstanding DR loan balances from April 2019, although scheme users could prevent the loan charge by repaying the loans or agreeing a settlement with HMRC before the charge took effect. We noted that the loan charge proposal was included in the Finance Bill 2017, but was subsequently removed from the Bill, following the UK General Election in June 2017. HMRC stated, however, that the Financial Secretary to the Treasury had confirmed, in a written statement to Parliament, that a further Finance Bill would be introduced later in the year, and that would legislate for policies dropped from the earlier Bill. HMRC therefore expected it to become law in due course. We also understood that HMRC could consider whether the General Anti Abuse Rule (GAAR) would apply, which could also involve a penalty or charge.
We noted the ads did not make any reference to DR, the proposed loan charge or GAAR, nor did it set out any other risks about the status of the scheme. Moreover, we noted that the ads included claims such as “fully disclosed to HMRC”, which we considered would further reassure businesses that there were no other implications or risks of which they should be aware.
We noted that Knight Wolffe had not commented on or explained why DR, the proposed loan charge and/or GAAR were not relevant considerations of which businesses should be aware before deciding whether to seek more information about the scheme or enter into it, in spite of the view that HMRC had expressed to the ASA. We also noted that Knight Wolffe had not provided any further detail about the way in which the scheme worked or provided any evidence, beyond that referred to under point 1, to support the position that omitting information about DR, the loan charge and/or GAAR would not mislead businesses.
Because we had not seen such substantiation and because we considered that relevant information about the implications or risks of entering into the scheme should be set out in the ads, but information about DR, the proposed loan charge and/or GAAR had been omitted, we concluded that the ads were misleading.
On that point, the ads breached CAP Code (Edition 12) rules
3.1
3.1
Marketing communications must not materially mislead or be likely to do so.
3.3
3.3
Marketing communications must not mislead the consumer by omitting material information. They must not mislead by hiding material information or presenting it in an unclear, unintelligible, ambiguous or untimely manner.
Material information is information that the consumer needs to make informed decisions in relation to a product. Whether the omission or presentation of material information is likely to mislead the consumer depends on the context, the medium and, if the medium of the marketing communication is constrained by time or space, the measures that the marketer takes to make that information available to the consumer by other means.
(Misleading advertising) and
3.7
3.7
Before distributing or submitting a marketing communication for publication, marketers must hold documentary evidence to prove claims that consumers are likely to regard as objective and that are capable of objective substantiation. The ASA may regard claims as misleading in the absence of adequate substantiation.
(Substantiation).
3. Upheld
We noted that the official guidance from the government and HMRC defined tax avoidance as follows: “Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law. Most tax avoidance schemes simply do not work, and those who engage in them can find they pay more than the tax they attempted to save, once HM Revenue and Customs (HMRC) has successfully challenged them”.
We considered that definition was in line with the way businesses, including small business owners, sole traders and the self-employed would understand the claim that Income Trust involved “no tax avoidance”. We noted that ad (b) stated “And tax trusts don’t involve tax avoidance - they use statutory reliefs” and that both ads stated that finances were fully disclosed to HMRC. We considered that would further reassure businesses regarding the status of the scheme.
We noted that Knight Wolffe believed that their scheme did not fall under the Disclosure of Tax Avoidance Schemes (DOTAS) and that Macdonald v Dextra (2005 (HL)) provided further information.
We understood that HMRC considered that the arrangements provided by Knight Wolffe were likely to meet any reasonable definition of tax avoidance. They also maintained that Macdonald v Dextra Accessories (2005 (HL)) contained no further information or determination on the issue of whether these types of schemes constituted a form of tax avoidance.
HMRC stated that the requirement to notify HMRC under DOTAS was not a conclusive indication that an arrangement amounted to avoidance. DOTAS sought to capture avoidance arrangements, but did not always achieve that and sometimes avoidance was not notifiable or arrangements that were not avoidance were notifiable. HMRC believed that the arrangements advertised by Knight Wolffe did appear to be notifiable under DOTAS.
Because, we had not seen any supporting evidence that Knight Wolffe’s scheme did not fall under DOTAS or any other relevant evidence showing that the scheme was not tax avoidance we concluded that the claims were misleading.
On that point, the ads breached CAP Code (Edition 12) rules
3.1
3.1
Marketing communications must not materially mislead or be likely to do so.
3.3
3.3
Marketing communications must not mislead the consumer by omitting material information. They must not mislead by hiding material information or presenting it in an unclear, unintelligible, ambiguous or untimely manner.
Material information is information that the consumer needs to make informed decisions in relation to a product. Whether the omission or presentation of material information is likely to mislead the consumer depends on the context, the medium and, if the medium of the marketing communication is constrained by time or space, the measures that the marketer takes to make that information available to the consumer by other means.
(Misleading advertising) and
3.7
3.7
Before distributing or submitting a marketing communication for publication, marketers must hold documentary evidence to prove claims that consumers are likely to regard as objective and that are capable of objective substantiation. The ASA may regard claims as misleading in the absence of adequate substantiation.
(Substantiation).
4. Upheld
We considered that the claims that the scheme “uses statutory reliefs”, that “contributions are deductible for corporation tax and income tax reliefs” and “business profits can be placed in the Trust as an allowable business expense too”, meant that the scheme would legally enable businesses including small business owners, sole traders and the self-employed to reduce their tax liabilities. Because we had not seen evidence to support those claims, we concluded that the ads were misleading.
On that point, the ads breached CAP Code (Edition 12) rules
3.1
3.1
Marketing communications must not materially mislead or be likely to do so.
3.3
3.3
Marketing communications must not mislead the consumer by omitting material information. They must not mislead by hiding material information or presenting it in an unclear, unintelligible, ambiguous or untimely manner.
Material information is information that the consumer needs to make informed decisions in relation to a product. Whether the omission or presentation of material information is likely to mislead the consumer depends on the context, the medium and, if the medium of the marketing communication is constrained by time or space, the measures that the marketer takes to make that information available to the consumer by other means.
(Misleading advertising) and
3.7
3.7
Before distributing or submitting a marketing communication for publication, marketers must hold documentary evidence to prove claims that consumers are likely to regard as objective and that are capable of objective substantiation. The ASA may regard claims as misleading in the absence of adequate substantiation.
(Substantiation).
Action
The ads must not appear again in their current form. We told Knight Wolffe Ltd not to use the HMRC logo or imply they were endorsed by HMRC, the House or Lords, or any other bodies when that was not the case. We told Knight Wolffe to ensure they also held sufficient evidence for their claims.
