HMRC has and will investigate a taxpayer’s affairs if it is discovered that they are part of a tax avoidance scheme. Many taxpayers have entered or been advised to enter such schemes which have subsequently failed resulting in large tax bills often requiring payment upfront. HMRC have reviewed the approach they are taking to taxpayers in such situations and are now considering “means-based” settlements. If you have received correspondence or a settlement offer from HMRC get in touch with our tax team.
HMRC have previously taken a firm approach to engaging with taxpayers who have been involved in tax avoidance arrangements where they have determined that the arrangements did not work.
HMRC would require taxpayers to enter into a settlement for the full amount of tax together with the accrued interest, showing no leniency with the amount. This led to many taxpayers being shocked with a significant tax bill which was required to be paid in a lump sum or as soon as possible. HMRC was open to time to pay arrangements but these were limited.
HMRC’s Counter Avoidance Directorate have recently advised us that HMRC recognises that due to the stance they took previously, many investors avoid entering into a dialogue with HMRC about the settlement of their tax avoidance arrangements. This is because they believe it is unlikely they would ever be able to meet the full tax and interest liability, even if a time to pay arrangement was agreed. To address this issue, HMRC is changing its stance in order to encourage more taxpayers to come forward and reach “means-based” settlements.
Tax Avoidance Schemes Advice
Code of Practice 8 investigations generally arise where HMRC suspect that artificial tax avoidance schemes have been used to underpay tax. HMRC defines tax avoidance as:
“[B]ending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law.”
Tax avoidance structures are used to minimise tax exposure and can be considered perfectly legal if a particular interpretation of tax legislation is applied. If the planning of a scheme has been challenged by HMRC, it is essential to consult legal tax specialists, because the adviser who promoted the scheme may lack the objective clarity to honestly review and defend the arrangement.
How to identify a Tax Avoidance scheme
HMRC offers the following guidance on the warning signs that you might be in a tax avoidance scheme:
- It sounds too good to be true: Some schemes promise to lower your tax bill for little or no real cost. They will say you do not have to do much more than pay the scheme promoter and sign some papers.
- Pay in the form of loans: Some schemes designed for contractors involve giving you some or all of your payment in the form of a loan that you’re not expected to pay back. It is diverted through a chain of companies, trusts or partnerships and you’ll be told this is to save you tax.
- Huge benefits: The benefits of the scheme seem out of proportion to the money being generated or the cost of the scheme to you. The scheme promoter will claim there’s very little risk to your investment.
- Round in circles: The scheme involves money going around in a circle back to where it started, or some similar artificial arrangement.
- HMRC has given it a Scheme Reference Number (SRN): This is where HMRC has identified the arrangement as having the hallmarks of tax avoidance and are investigating it. You will have been given an SRN by your promoter and will have included it on your tax return. Having an SRN does not mean that HMRC has ‘approved’ the scheme. HMRC does not approve any tax avoidance schemes.
- Schemes HMRC has concerns about: You can find examples of tax avoidance schemes HMRC is looking at closely. Even if a scheme is not mentioned, it may still be challenged by HMRC.
What will HMRC do if they discover you are part of a Tax Avoidance scheme?
HMRC will investigate fully your tax affairs if it is discovered that you are part of a tax avoidance scheme. In addition, HMRC may also:
- Require upfront payment of the tax avoided: You may receive a tax bill called an accelerated payment notice. This is a requirement to pay the full amount of tax HMRC calculates as being due, upfront and within 90 days.
- Take legal action
- Treat you as a high-risk taxpayer: HMRC will closely scrutinise all your tax affairs in future, not just your use of the avoidance scheme.
If you are implicated in a tax avoidance scheme, it is imperative to seek legal advice early. The implications for tax avoidance are serious, potentially leading to a prison sentence. Contact our dedicated team of London Tax Solicitors and Barristers today for urgent and confidential advice.
Examples of Tax Avoidance Schemes
Specialist Tax Solicitors should be consulted as soon as you enter into or suspect that you are part of tax avoidance scheme or are being investigated by HMRC. Examples of schemes that have formed part of a COP 8 notice include:
- Pension Schemes:
– Artificial Surplus: Some pension schemes create an artificial surplus. The scheme purports to enable a member of a registered pension scheme to remove funds from the pension scheme tax free. This can be by artificially creating a funding surplus through the surrender of rights by a member.
– Employer Financed Retirement Benefits Scheme (EFRBS): this unapproved pensions scheme involves the establishment of an offshore trust whereby an employer transfers funds and trustees apply funds via sub-trusts to the benefit of the employees. This ensures that retirement benefits in the form of tax exempt or low tax amounts in the form of a loan.
- Employee Benefit Trusts (EBT): These enable a person (trustee) to own an asset on behalf of another person (beneficiary) which minimises liability to pay National Insurance contributions and Income Tax. Employers pay into the trust which would then be distributed to employees in the form of tax free loans. Previously, those in EBT schemes could utilise the Liechtenstein Disclosure Facility which allowed taxpayers to disclose hidden assets to HMRC. However, this voluntary disclosure facility has been closed for new registrations since December 2015. Instead, HMRC recommends using the EBT settlement opportunity.
- Stamp Duty Avoidance Schemes: this is where property sale arrangements have been artificially structured to avoid paying the correct amount of SDLT. HMRC has repeadely stated that it will continue to challenge these schemes. HMRC successfully challenged a Stamp Duty Land Tax (SDLT) avoidance scheme in the First Tier Tax Tribunal in Vardy Properties and Vardy Properties (Teesside) Limited  UKFTT 564 (TC).
- Share Loss Relief Schemes: these schemes reduce the amount of tax payable on earnings by creating capital losses.
- Inheritance Tax Schemes (IHT): to avoid inheritance tax some schemes exist to allow the homeowner to sell a property to a trust and leave the proceeds of the sale outstanding as a loan which would then be gifted to a second trust.
- Contractor loan schemes.
- Capital Gains Tax: Entrepreneurs’ Relief tax avoidance scheme.
- Employee Bonus Schemes: Growth Securities Ownership Plan tax avoidance.
- Gift Aid with no real gift.
- VAT: artificial leasing.
I have received an offer from HMRC to settle my tax liability
Our specialist tax team can consider your case and assess the settlement offer and assist in discussions and negotiations with HMRC. We regularly liaise with HMRC in a wide range of cases and our specialist litigation lawyers can assist you to reach an optimal settlement.
My accountant advised me on a tax avoidance scheme
Our Expert Tax Lawyers will assist clients in negotiating settlements with HMRC if a penalty is levied against them following a Code Of Practice 8 investigation. Our team of Specialist Professional Negligence Lawyers can assist in securing compensation for the penalties from any advisor who mis-sold or recommended the Tax Avoidance scheme to them in the first place. The following advisors owe a duty of care to provide honest advice about the risks and consequences of entering into a tax avoidance scheme:
- Conveyancing solicitors;
- Tax advisors; and/or
- Financial advisors.
A professional negligence claim may exist where any of the above advisors have breached their duty of care owed to you and you have suffered loss as a result of HMRC investigating a Tax avoidance scheme.
Expert London HMRC Tax Investigations & Tax Avoidance Lawyers
If you need HMRC Tax Investigation advice, we are available to aid you at every stage of the HMRC investigation process. Members of our legal team have first-hand experience and knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations with HMRC and defending all forms of HMRC fraud, tax inquiry, tax fraud investigation, Code of Practice 8 (COP 8) investigations, criminal tax evasion and HMRC enquiries and investigations. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect of the investigation.
Our specialist Tax Solicitors and Barristers deliver expert technical knowledge, strong negotiation skills and respected advice, which can make a pronounced difference to eventual tax penalties, charges and liability. We provide urgent advice and representation to clients from our unique expert team of established Tax and Duties specialist solicitors and barristers with a proven track record of delivering authoritative results. Just call us on 0207 1830 529, or email [email protected]