You are a tax adviser and you and your firm are members of a professional accountancy body.
Question:
You are a tax adviser and you and your firm are members of a professional accountancy body. Your firm provides tax advice to HPT Ltd. You have discovered that HPT Ltd has not notified HMRC about loans it made to HPT Ltd’s two directors. Each loan was interest free and was for £50,000. A note on your client file says that the loans were made as part of a ‘tax planning’ scheme devised and implemented two years ago by a tax partner at your firm. The partner has now left your firm. You discussed the matter with the HPT directors who told you that although they thought that the scheme was ‘not quite correct’, they had paid for the tax advice and therefore believe that the loans are not breaking tax laws. The directors told you that the loans were instead of taking a salary and avoided paying progressive rates of tax. The directors rejected your suggestion that a taxable benefit arises on the provision of the loans to them by HPT Ltd and said that if you reported the matter to HMRC, HPT Ltd would report your firm to its professional body for giving inappropriate tax advice.
a) Explain which taxes are being avoided in the above scenario. Describe how the provision of a loan by HPT Ltd should be taxed on the directors.
b) Identify the key ethical principles and threats for your firm and set out the actions it should take.
c) Evaluate whether replacing the progressive way income tax is calculated with a flat tax will reduce tax avoidance and evasion. You should refer to the principle of ‘equity in your answer.
Managing Human Resources
ISBN: 978-0176506902
7th canadian edition
Authors: Monica Belcourt, Parbudyal Singh, George W. Bohlander, Scott Snell