Section 70 Finance Act 2009: Tackling Tax Avoidance Through Disguised Fees

Section 70 of the Finance Act 2009 represents a significant piece of UK tax legislation aimed at curbing tax avoidance schemes involving what are commonly referred to as “disguised fees.” Prior to its enactment, certain individuals and businesses were exploiting loopholes in the tax code by structuring remuneration in a way that appeared as something other than income, thereby avoiding income tax and National Insurance contributions (NICs).

The core problem Section 70 sought to address was the practice of converting taxable income into capital receipts or other forms that were taxed at lower rates or even entirely exempt. This often involved complex arrangements utilizing offshore trusts or other entities to hold and distribute funds. These structures were designed to obscure the true nature of the payments as compensation for services rendered.

The legislation targets these arrangements by specifically focusing on situations where a person (A) provides services to another person (B), and a third party (C) makes a payment to A or a person connected with A, which is connected to the provision of those services. Section 70 operates by treating this payment from C as earnings of A for income tax and NICs purposes, effectively stripping away the disguise.

Crucially, Section 70 introduced a broad definition of “services” to encompass a wide range of activities. It is not limited to traditional employment relationships but also includes freelance work, consultancy, and other forms of service provision. Similarly, the concept of “connection” between the service provision and the payment is intentionally expansive to prevent circumvention through indirect or convoluted arrangements.

The impact of Section 70 has been considerable. It has significantly reduced the attractiveness of disguised fee schemes by making it much more difficult to avoid paying the correct tax on remuneration. HMRC (Her Majesty’s Revenue and Customs) has actively used this legislation to pursue individuals and businesses suspected of engaging in such practices, leading to increased tax revenues and a more level playing field for taxpayers.

However, Section 70 is not without its complexities. Determining whether a payment is genuinely connected to the provision of services can be a challenging task, often requiring a detailed examination of the facts and circumstances surrounding the arrangement. There have been legal challenges to HMRC’s application of Section 70, with some cases reaching the courts. These cases have helped to clarify the scope and interpretation of the legislation.

In conclusion, Section 70 of the Finance Act 2009 is a powerful anti-avoidance measure that has been instrumental in tackling disguised fee schemes in the UK. While its application can be complex, its overarching aim is to ensure that individuals and businesses pay the correct amount of tax on their earnings, contributing to a fairer and more sustainable tax system.