Settle with HMRC? Yes, but on whose terms?
Outlining the tax situation facing Sanzar and other loan scheme contractors is a task that requires measure and balance, writes Graham Webber, a director at WTT Consulting. Such contractors should not be panicked into ill-advised action but equally, they need to take steps that let them gauge their tax position realistically.
But what about the taxman’s position?
HM Revenue & Customs is on record as saying that they will contest any arrangement that they believe is tax avoidance. Given that “avoidance” is not a defined term this gives considerable freedom for HMRC to challenge just about any means of transacting business that does not fit their ideal. Quite what that ideal is, nobody knows, but given the extraordinary political pressure to generate more tax revenues, it’s a fair assumption that anything which is less than full rate tax on all income, is within the net.
At the time of writing, HMRC has no way of executing their analysis without challenge. They have a court victory against a scheme (the Boyle case) but it seems to have limited application, and no mass marketed scheme has yet been struck down. It does seem that, for now, HMRC is attempting to land a killer blow upon the principles behind schemes that use offshore entities to funnel funds. This attempt, to have declared as “income” sums legally documented as “loans”, has so far failed. This point is at the heart of the Rangers FC case, heading for another hearing in a few months.
Contractors staring at an APN, or the CLSO
In the meantime, Accelerated Payment Notices (APNs) are appearing in increasing numbers. These require payment of disputed tax upfront and before the argument over the underlying liability is settled. They cannot be appealed but can be challenged. A legal challenge via Judicial Review is underway in some cases. Until a seminal case is decided (in court in early July) it’s too soon to be certain of the outcome. More certain is making a representation that the APN fails to meet the conditions for issue. This may delay or reduce an APN but it is unlikely to result in a withdrawal.
The most helpful advice I can offer if you have an APN is that chances are; you need to arrange to pay it, if necessary in instalments, perhaps delayed and reduced.
Paying the APN does not settle the tax due, nor arrive at an agreed final liability. HMRC continues to try to tempt contractors into a settlement under what’s called the Contractor Loan Settlement Opportunity (CLSO). The terms of the CLSO have changed as recently as a couple of weeks ago and, in my view, remain unclear in many areas. This uncertainty aside, the value of the settlement is based on applying tax to the loans. It has been suggested that this is less than taxing the invoice value. This suggestion is sound, but if these loans were in fact “self employed profits” relief on various expenses would be available.
Register, then step back and think carefully
My recommendation is to register an interest in the CLSO but think very carefully about accepting it. In particular, experience shows that there is a large number of errors and HMRC appears to be using the CLSO as a means of collecting data. Remember, you are not obliged to accept the final figure produced.
In the event you choose NOT to use the CLSO, the amount of final liability will be determined either by an HMRC whole or partial victory in court, say five to seven years from now, or by reaching a negotiated settlement with the tax authority. This may take between three and five years’ time and HMRC will be reluctant to immediately start negotiating. It is expected that HMRC will take a very hard line (at least to begin with), while it will also require careful and diligent digging into facts and processes behind schemes and the application of principles rising from avoidance cases to achieve progress.
In addition, litigation is expensive. Providers who remain visible may shoulder some of this burden for contractors. But those providers who are no longer with us have exposed those wishing to fight with potentially large legal bills. Costs will vary a lot but getting to First Tier Tribunal with an experienced advocate might cost £250,000, and in some cases an advance payment into court is required. Each level of appeal (there are up to four tiers in the appeals process) will also require funding, as might paying the winning party’s costs.
Strength in numbers
On the other hand, negotiation is less expensive - but it too requires the best advice you can afford. This is why in both instances (negotiation or litigation), I believe a group approach is better in order to spread and share costs.
The outcome of litigation or settlement might be that HMRC is correct and tax is due for past years based on the loans being income. To this would be added interest and potentially penalties. As to the former, interest on a 2003/04 liability is currently 48% of the tax due. And a penalty may be in the range of between 10% and 80%. It is a fact that 200% penalties are possible, but such a hefty fine is extremely unlikely for the majority of contractors.
Yet even settling the tax on the basis set out above, you would still be left with loans from a trust. These have to be dealt with and many providers are seeing more opportunity for fees here. There is also the chance that the write-off or forgiveness of the loans might create another income tax or inheritance tax problem.
Similarly, there is no certainty that a negotiated settlement will arrive at a better answer. Though there are a number of alternative theories for the taxation of the position that could reduce the final tax liability AND deal with the loans. Many professional firms offer such negotiation exercises and contractors potentially interested in them should question them carefully on their plans, experience and costs.
In summary, HMRC has no definitive answer on how to tax your scheme but they want to treat all loans as income. Chances are that they will achieve a partial victory in litigation within the next five to seven years. If you get an APN, by all means delay and reduce it but remember that the penalty for not paying is harsh (15%). My recommendation is that you register for the CLSO before it expires on June 30th 2015. HMRC says they will get a value to you before the end of September. Examine it carefully. If by then you think it is final enough and low enough, take it. If not, join a group and keep yourself informed.
Finally, a point of clarity: my firm and I are tax advisers who specialise in tax enquiry settlement. I am also a founder of BIG GROUP. The principles of BIG GROUP are to bring together people who, although in different schemes, have the same issues facing them and to find a negotiated settlement with HMRC. The schemes used in the past have many different names, but generally fall into three or four types. New arguments and analysis founded on anti-avoidance cases elsewhere, and bringing the best of the points from all sources to bear, are in everybody’s interests. Throughout this article, I have tried to be balanced and considerate of contractors’ interests but please consider the potential bias that may exist as a result of my two appointments.