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Spotting the signs of economic abuse

Sofia Thomas CTA ATT explores economic abuse and the role that advisers can play in preventing it, as well as a practical example to illustrate the importance of being able to spot the signs.

CoverTwo million people in England and Wales experience domestic abuse each year. The charity Refuge, in partnership with The Co-operative Bank, undertook a study in 2017 with the following key findings:

  • one in five people in the UK have experienced financial abuse in an intimate relationship;
  • 60% of all cases are reported by women;
  • 78% of women saying their abuse went on over five years compared to 23% of men;
  • for women, financial abuse rarely happens in isolation – 86% experience other forms of abuse; and
  • a third of financial abuse victims suffer in silence, telling no-one.

Different industries are waking up to the role they play in helping to prevent abuse. As accountants and tax advisers, I believe that we also have a part to play in helping to prevent or spot economic abuse. Economic abuse is defined broadly; financial abuse is a sub-category of this and involves coercive control over money. It also includes interference with a partner’s ability to gain, utilise and maintain financial resources. In 2015, the FCA introduced new regulations for assisting vulnerable clients. In 2018, the UK Finance Code of Practice on Financial Abuse was launched. Earlier this year, Metro Bank launched training to help its staff identify signs of economic abuse.

As accountants and tax specialists, the link to what we do and economic abuse may not seem obvious. But we are often one of the few trusted individuals who get to see inside the world of a family’s finances.

My company provides tax advice to couples on divorce or family breakdown. What we have seen in the past few years has caused me to question whether we as advisers are always aware of the long-term worst-case scenario consequences of the planning we may recommend to couples.

“It is vitally important that professionals such as accountants are aware of the dynamics of domestic abuse and how this can involve the control, exploitation or sabotage of an individual’s finances,” says Dr Nicola Sharp-Jeffs, director of the charity Surviving Economic Abuse. “Abusers commonly use financial systems, including the tax system, as part of the tactics they use to exert control over a victim, leaving them in debt and preventing them from rebuilding their lives safely. Professionals have an opportunity to raise awareness of economic abuse, close down such opportunities and link victims into specialist support.”

Joint taxation and abuse

In the last few years, there has been a subtle move back to joint taxation; the introduction of the high income child benefit charge in 2013, the marriage allowance in 2015 and universal credit still being rolled out.

A report by the Women’s Budget Group (WBG) and Surviving Economic Abuse talks about universal credit in relation to economic abuse. Universal credit is paid into a single nominated account. The WBG said they are concerned that the single payment could result in less equal couple relationships and risk further economic abuse. Individual financial autonomy should be preserved where possible.

Giving advice

We are often only engaging with one of the parties in a relationship. Typically, we will be working with the higher earner and they will be looking to save tax. On the surface there’s nothing wrong with this intention. But what happens if the structures we put in place inadvertently financially disadvantage the lower earner (on an individual rather than joint basis)?

One of the longer lasting effects of economic abuse can be debts. The way we have seen this manifest itself is with large HMRC debts; be that for income tax or in some cases repayments of tax credits which were incorrectly claimed and often paid to the husband.

How your spouse can help you save tax!

There are thousands of articles with the above or similar title. It can often be one of the first questions that clients ask. Of the 5.7 million private sector businesses in 2018, 99.3% were small businesses, so it’s no surprise that there is a huge appetite for tax saving strategies for this market.

The research shows that economic abuse is commonly perpetrated by men in heterosexual relationships. So, I’ll use an example of a husband and wife, although economic abuse is not limited to one relationship structure.

Mark owns a limited company. Mark is married to Tina who does not work. Mark meets with his accountant and wants to know the most tax efficient way to get cash out of the company. It is common practice for Mark’s accountant to advise him to make Tina a shareholder and for both to receive dividends on the shares (I’m not going to explore the settlements legislation). The advice would be to Mark and Tina that this planning would reduce their overall tax liability and ensure more cash is available for the family; this seems great on paper, but what actually happens when Mark leaves the office and what happens if the relationship breaks down?

Working with a lot of couples who are separating and with family solicitors who have seen these cases countless times, we have been able to build up a bit of picture through experience of what can happen in these situations.

Mark will have Tina’s dividends paid into his account or possibly a joint account which Tina does not have access to. Mark’s accountants will file the tax returns for both Mark and Tina. Mark will pay Tina’s tax liability. In practice we have seen that Tina may benefit from some of the money but is not actually able to access the dividends that have supposedly been paid to her.

Let’s assume the relationship breaks down. In our experience it is rare that this coincides perfectly with the payment of taxes. The result is that the company accounts and tax returns show that Tina has received dividends, but the tax payment is outstanding. Tina and Mark have separated, and Tina has a large liability with HMRC. This is her responsibility to settle, but we know historically that Mark would have paid this liability. This is an incredibly stressful situation for Tina.

If Tina can afford a divorce lawyer, they may be able to liaise with Mark and ask him to honour making the tax payment. However, Mark may refuse, and it is not Mark’s liability. So, Tina has a broken relationship and a debt to HMRC but no dividends; so, no cash.

We are so familiar with these structures that we don’t even question them, but I think we must be more vigilant when setting up these arrangements. It is not the planning itself which creates the issues; the issue is whether the financial flows stemming from the planning happen in the way that was intended. We are in a unique position to highlight to clients some of the unintended consequences of this type of planning.

Lifting the lid

A case we had a few years ago was of a husband and wife; both were directors and 50% shareholders, but the husband effectively ran the company. They separated and the husband left the UK with no forwarding address. Unbeknown to the wife, the company had run up huge VAT debts. HMRC, unable to reach Director 1, the husband, were pursing the wife for the VAT. Of course, this is well within HMRC’s remit, but is it a fair reality to hold the wife accountable when she had no real dealings with the business? Was her decision to be a director really scrutinised? Was she made fully aware of the implications of her decision?

The slow shift back to joint taxation creates a trickier environment for advisers who (if we listen to domestic abuse experts) should be encouraging our clients to maintain their individual financial status. Of course, it is not our role to be intrusive and try to design a client’s finances. But equally, as experts in a privileged and trusted position, should we be working within a framework that considers structures that could be potentially advantageous to an abuser?

Future actions

As a parting word, I would like to see us encouraging our professional bodies to acknowledge the responsibility we have when it comes to economic abuse and to develop guidance with the help of leading charities.

Should you want any further information or need a place to direct clients, the charity Surviving Economic Abuse has a large amount of helpful resources.

About the author

Sofia Thomas CTA ATT is director of Sofia Thomas Ltd, which specialises in tax on divorce and inheritance tax matters