HMRC gets tough on tax avoidance

The clear message from politicians in recent times has been to get tough on tax evasion and avoidance.

Now, HM Revenue and Customs is putting the brief from their political masters into action with its recent consultation document and a new straight talking guide.

Lisa Keeble, Managing Director for ContractorUmbrella Ltd, takes a look at how HMRC are bringing out the big guns in their fight against tax avoidance.

Lisa Keeble writes:

It would appear from the latest HMRC consultation document 'Raising the Stakes on Tax Avoidance' that HMRC have decided on the stick approach with little or no hint of carrot. They are proposing penalties for non-disclosure of avoidance schemes which should act as a deterrent for even the most hardened scheme provider:

• For failing to provide information to HMRC the initial penalty could be up to £1 million.
  
• For each subsequent day that the promoter fails to engage with HMRC there will be a penalty of £10,000.

If users of the scheme are not advised that the promoter has been considered 'high risk' by HMRC then a penalty will be levied of £5,000 for each user that hasn't been informed.

The consultation document considers the introduction of legislation that will allow HMRC to publicly designate a scheme promoter as 'high risk' if their business consists of designing, marketing or implementing products whose sole purpose seems to be the provision of tax saving to the user and the scheme hasn't been disclosed to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS).

Other indications of 'high risk' will be if the product appears to be a complex arrangement with a degree of artificiality designed to achieve a result not intended by Parliament or if the product results in an amount of gain for tax purposes that is significantly less than the amount for economic purposes.

There are many other indicators and all of them appear to target scheme providers that publicly offer little or no information about their scheme, promise high take home pay (in excess of 80 per cent) or imply that the scheme hasn't been registered under DOTAS because it has been approved by HMRC (which never, ever happens).

Further, the Government is proposing to implement information powers that will compel high risk scheme providers to disclose details of the products, marketing material and agreements entered into with scheme users. They will also require detailed information about the scheme users including the amount that they have invested in the product.

Sledgehammer

In another sledgehammer attack, HMRC have stated that they will impose penalties on users of tax avoidance schemes which are markedly similar to those which HMRC have proven do not work through litigation.

If an enquiry is entered into by HMRC the tax payer will have a choice to accept that the judgement in the case will also apply to their scheme and amend their tax return to represent the amount of tax advantage previously gained and cough up or they will have to explain why they think it doesn't apply; in this instance there will be a penalty if they don't have a reasonable basis for their conclusion.

So what does this mean for contractors? Well, HMRC are not letting this go, are they? They are taking the unusual step of addressing tax avoidance through penalties for non-disclosure and a public 'naming and shaming' rather than through adjustment of existing tax legislation.

This approach is likely to act as a major deterrent to scheme providers but also to contractors as it essentially gives HMRC power to gain details of anyone trying to avoid paying tax. The penalties will be connected to the tax advantage gained from using the scheme and are therefore likely to be extremely high.

Basically, if you work in the UK, are tax resident in the UK and live in the UK then you are liable for UK tax… oh and if it seems too good to be true then it very probably is!

Lisa Keeble is the Managing Director of umbrella company, ContractorUmbrella Ltd and founder member of AllUmbrellaCompaniesAreEqual.