Key Strategies
Aikido Strategy
Headlines
• Allows surplus cash to be paid to shareholders free of income tax
• Only available to shareholders
• Available to trading companies and investment companies alike
• No ongoing structure in place (unlike EBTs)
• No loans – straightforward cash dividend
• Uses HMRC’s own anti-avoidance legislation
• Designed with the assistance of Robert Venables QC and Michael Sherry, each of whom have specialist experience in the particular of area of tax that the planning is based on.
• Simple to implement and technically robust
• DOTAS registered
• Minimum £100,000 extraction
• Fees 6% plus VAT of the amount extracted. Additional 1% (no VAT) contribution to fighting fund to meet costs of potential future litigation.
• 1% additional “leakage” – not a fee but a real cost to the company
• Effective total cost is therefore 8% which represents just under a third of the tax saving for a higher rate taxpayer (who would otherwise pay 25% tax on dividends) or just under a quarter of the tax saving for a 50% taxpayer (who would otherwise pay 36.1% tax on dividends).
• Fee insurance likely to be available (to be confirmed)
Summary of the planning
The planning uses some very well established anti-avoidance legislation which was the subject of a recent House of Lords decision. Although HMRC were ultimately unsuccessful in the case, the courts agreed with their interpretation of this particular piece of legislation. We are therefore using this legislation in the identical manner in which HMRC argued it should operate but in such a way as to generate a tax saving.
The legislation is well known by all tax practitioners and is unambiguous. The purpose of the legislation is clear: to try to deter wealthy taxpayers diverting income deriving from an asset to (typically) other family members who are lower rate taxpayers (or non taxpayers). The legislation was therefore written on the assumption that the person diverting the income would normally pay a higher rate of tax than the person receiving the income. However, importantly, the legislation does not stipulate that this must be the case.
Accordingly, we have carefully created a structure whereby the legislation will still apply and will allow income to be paid to shareholders but the income will be deemed to belong to another, non-taxable, person.
Other points to note
Whilst it is not vital that all shareholders share in the Aikido dividend in the same proportions as their current shareholdings, our advice is that they do as this will maintain the robustness of the strategy.
The planning will typically require the creation of a new group company. Whilst this company is unlikely to be particularly active, one should prudently assume that HMRC will treat it as an associated company for the purposes of small companies relief and payments on account. You should therefore factor in any impact that this may have on the effective corporation tax rate and the cashflow implications of being brought within the payments on account regime.
HMRC challenge
In the current environment, we are working on the basis that any tax scheme will be strongly challenged by HMRC and will ultimately be litigated. Given the current delays within HMRC in processing tax enquiries this is likely to be a protracted process and all clients should work on the basis that their tax position is unlikely to be certain for a number of years. Despite this, Counsel’s view is that this is a technically robust strategy as it relies on the clear and unambiguous wording of the legislation and therefore ultimately we will be successful in rebutting any HMRC challenge.
If you have any queries regarding the above you will not hesitate to contact your usual Premier Strategies contact.
The Directors
Matt Hall - mhall@premier-strategies.com
Richard Coombs - rcoombs@premier-strategies.com
Mark Edmond - medmond@premier-strategies.com
Julie White - jwhite@premier-strategies.com