Contractors' Questions: Will HMRC’s avoidance clampdown have impact?
Contractor’s Question: What does the clampdown on so-called ‘high-risk’ tax avoidance scheme promoters, and their users, by HM Revenue & Customs really mean, and what will its likely impact be, in practice?
Expert’s Answer: From looking at the consultation document, ‘Raising the Stakes on Tax Avoidance,’ it would appear that HMRC have decided on the stick approach with little hint of carrot. The tax authority is proposing penalties for non-disclosure of avoidances 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 (see Chapter 4.30 of the consultation). And 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 have 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 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%) or imply that the scheme hasn’t been registered under DOTAS because it has been approved by HMRC (which never, ever happens).
Furthermore, 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.
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 taxpayer 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 latter instance, there will be a penalty if they don’t have a reasonable basis for their conclusion.
As to what the clampdown means for contractors or other scheme users, well, HMRC are not letting the issue of avoidance go quietly 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 scheme users or 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. In terms of any tax mitigation scheme you come across, HMRC’s message is that, if it seems too good to be true then it very probably is.
The expert was Lisa Keeble, managing director of ContractorUmbrella.