The perils of tax avoidance schemes – HMRC update

Tax avoidance

HMRC has been publicly naming providers of what it believes to be tax avoidance schemes and urging people not to take part in them. HMRC has also recently issued ‘stop notices’ to some avoidance promoters to make them cease selling their arrangements.

In this update, we briefly consider the question of what tax avoidance is, outline what HMRC is doing and consider what can be done if you find yourself in an avoidance scheme, whether you knew it to be so at the outset, or not.

What is tax avoidance?

There is no one definition agreed by all, but HMRC states that; “Tax avoidance involves bending the rules of the tax system to try to gain a tax advantage that Parliament never intended.”

Often, tax avoidance attempts to alter the nature of a payment from something that would be taxable, into something that is not. Some avoidance schemes seek to create ‘losses’ which can be offset against taxable income to reduce a tax bill.

Lots of schemes have been developed over the years. There were arrangements which ‘paid’ employees in platinum sponge and other non-cash assets which sought to circumvent PAYE rules. Employee Benefit Trusts (EBTs) were used for a number of years, where money from a company was first sent to an EBT, before being loaned to the business owners. So-called ‘film schemes’ often sought to generate inflated losses to be offset against income.

Most prevalent recently have been contractor loan schemes, where self-employed contractors are directed to an umbrella agency, or a payment agency, which provides a small amount of their earnings as taxable pay, and the balance as a loan or annuity, which is then presented as being non-taxable.

What is HMRC doing in relation to tax avoidance schemes?

Historically, HMRC has always challenged anything it considers to be an avoidance scheme. Of the cases it takes to court, it usually wins.

HMRC has always struggled with the high volume of cases. This is unsurprising as, if one promoter sold an arrangement to 1,000 users, potentially HMRC had to fight 1,000 separate cases. Legislation like ‘follower notices’ was enacted to try to reduce that burden, but the quantity of cases has always presented a challenge.

As HMRC established precedent in several areas, some of the arrangements started to fall in prevalence. Changes in the penalty regime, increasing the likelihood of a penalty in an avoidance case, also reduced their popularity.

HMRC has recently started to try to tackle avoidance at the ‘promoter’ level, naming promoters and schemes and publicly warning people not to participate. HMRC has also written to people who have used schemes and suggested that they stop participating, as well as issuing ‘stop’ notices to some promoters.

Should I settle my avoidance scheme?

If you have used a scheme, then HMRC would want you to stop and pay any tax that might be due. Settling is possible, and sometimes ‘time to pay’ can be built into a settlement if it can’t be paid all at once.

Some schemes have complex effects on both a company and individual recipient of payments, computing the correct amount for settlement can be complex, and this is an area we have helped clients with in the past.

On occasion, HMRC can miss opening enquiries or issuing assessments, so it may be that the number of years needed in a settlement is fewer than HMRC believe. This is an area that is worth checking carefully.

HMRC can also issue ‘advance payment notices’ (APNs), as well as the follower notices previously mentioned. These should not be ignored. If it is believed that they were issued in error, representations can be made.

In relation to contractor loan schemes, in some instances there may be an argument that the umbrella company that has implemented the scheme should be liable to pay the tax, rather than the individual contractor.

What if I can’t afford to settle?

Where a settlement is to be entered, often HMRC will agree some level of time to pay which will be built into the contract.

If the bill is going to be too big to deal with over a few years, you may wish to speak to an insolvency practitioner. They can advise on whether a company insolvency, an IVA or a personal bankruptcy may be the best option to deal with the matter. They can also give support and advice on what the consequences are in relation to that. Our sister company, Quantuma Advisory Limited has staff qualified and experienced in this area and they can help.

Is Tax Avoidance the same as Tax Evasion?

Tax evasion is fraud. Tax avoidance does not involve fraud. However, if a tax avoidance scheme involves or relies on trying to hide or mischaracterise certain transactions or steps in the scheme, it is likely to then be moving into the realm of tax evasion. In some cases, HMRC has opened COP9 enquiries (fraud enquiries) into the use of avoidance schemes. For more information on COP9, please click here.

In the past, penalties were seldom considered in relation to tax avoidance cases. However, HMRC is now considering penalties in this area in many cases. The rules also changed a few years ago, so that, unless you get qualified and independent (i.e. not from the promoter or seller of the scheme) advice that the scheme arguably works, then you will be liable to a penalty if the scheme ultimately fails.

If you have unwittingly found yourself in an avoidance scheme, or if you are looking to settle your historical use of one, our team of experienced advisors can help you quantify your liability and negotiate settlement on your behalf. Get in touch for a no obligation initial discussion of your situation.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email jeremy.johnson@intaxltd.com.