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  • Writer's pictureSara White

School fee scheme breaks tax rules

Updated: Mar 21

Parents using tax avoidance schemes to offset private school fees are being warned by HMRC that the schemes do not work.

Sara White, Editor, Accountancy Daily

HMRC has issued a spotlight warning telling people not to use a tax avoidance scheme being marketed as a tax planning option available to help fund the cost of school fees.

The arrangements are targeted at individuals who are the directors and main shareholders of owner managed companies.

The schemes avoid tax by allowing the directors of companies to divert dividend income from themselves to their minor children.

Firstly, a company issues a new class of shares which usually entitles the owner of the shares to certain dividend and voting rights.

Person A, usually a grandparent or sibling of the company owner, purchases the new shares for an amount significantly below market value, and usually gifts the shares to a trust or declares a trust over the shares for the benefit of the company owner’s children.

The investor, Person A, or the company owners vote for substantial dividend payments in respect of the new class of share. This dividend payment is paid to the trustees of the trust and as the beneficiaries of the trust, the company owner’s children are paid the dividend.

The company owner’s children pay tax on the dividend received. However, they pay much less tax than if the company owners received the dividend due to their children’s £12,570 tax-free personal allowance, £1,000 dividend allowance and eligibility for the basic tax rate on dividends.

HMRC’s view is that this scheme does not work as the arrangements are caught by specific anti-avoidance legislation contained in Income Tax (Trading and Other Income) Act 2005, from section 619 onwards that prevents this type of arrangement providing the tax advantage that is sought. Arrangements which operate in a similar way may also be caught by this legislation.

HMRC warns that users of the scheme should contact the tax authority to discuss concerns and strongly advises that people withdraw from any arrangements and settle their tax bills.

Scheme promoters must comply with the disclosure of tax avoidance schemes (DOTAS) legislation ensuring that arrangements they are marketing are disclosed to HMRC.

Promoters will be liable to a penalty if they fail to disclose a scheme to HMRC within five days of the scheme being made available or implemented. The initial penalty is up to £600 a day. If this is not considered to be sufficient deterrent promoters may have to pay a penalty of up to £1m.

HMRC will also use its powers under the Promoters of Tax Avoidance Schemes (POTAS) regime against those who continue to promote tax avoidance schemes.

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