If you've participated in an arrangement that HMRC considers to be tax avoidance, you can expect to be the focus of HMRC scrutiny and challenge. HMRC has extensive powers to target users and promoters of such schemes. Settlement opportunities exist but are becoming less generous.

If you have been involved in an arrangement which HMRC considers to be tax avoidance, we can provide an independent view of the arrangement, the benefit of reaching a settlement with HMRC, and the likelihood of success should you decide to disagree with HMRC and proceed (ultimately) to a hearing before the Tribunal.

Seeking such independent advice is now more important than ever, as legislation is in place to prevent individuals from using advice received from interested parties (such as the promoter) as a defence, should HMRC challenge the arrangement and seek penalties in relation to any unpaid tax.

If you would like to have an initial discussion with a member of our award-winning Tax Investigations & Dispute Resolution team, please get in touch with the team.

What is tax avoidance?

Broadly speaking, tax avoidance is anything which reduces a taxpayer’s liability to tax in a contrived or artificial manner, usually seeking to utilise a ‘loophole’ in legislation to reduce a tax liability or taking advantage of legitimate tax reliefs in an abusive manner.

Unlike tax evasion, tax avoidance is not considered fraud and is not illegal, so HMRC is unlikely to seek a criminal prosecution. HMRC will instead challenge the filed tax position and will seek to deny a tax advantage specifically sought from a scheme or arrangement and may potentially charge penalties and late payment interest.

HMRC’s current approach to tax avoidance

HMRC’s Counter-Avoidance Directorate was established in 2014 to challenge anyone who has participated in HMRC tax avoidance schemes. The formation of this team enabled HMRC’s operational and policy resources to unite into a single centre of expertise and it is still responsible for challenging avoidance schemes, issuing Accelerated Payment Notices (APNs), Follower Notices, and dealing with any representations thereon.

While HMRC’s focus in recent years has shifted to the promoters of avoidance arrangements, it still remains the taxpayer’s responsibility to ensure their tax affairs are correct, and HMRC will ultimately look to them for payment of any unpaid liabilities, and any interest that may have accrued.

Despite this, new tax avoidance arrangements continue to be developed and promoted. This is usually done offshore where sanctions can be avoided.

Umbrella companies

The most prevalent of these arrangements concern umbrella companies, or agencies, who offer their clients a way to increase their take-home pay. This is usually done by paying a small salary through payroll, which is subjected to PAYE, and then making a further payment described as a loan, advance, capital payment or similar term, which is not subjected to tax.

The agency will claim these payments are non-taxable, but ultimately HMRC’s position on the matter is very clear. The payments are made in return for the services provided, and as such they are taxable (usually as employment income, but sometimes as self-employed income). HMRC’s term for such payments is ‘disguised remuneration’.

While employers are responsible for correctly operating PAYE (deducting tax and NIC), HMRC can pursue the individual themselves for tax on such disguised remuneration if the agency is offshore. Furthermore, HMRC can also raise assessments on the individual if they file tax returns and do not include the untaxed payment, because ultimately the tax return is incorrect.

While HMRC will not usually impose penalties on individuals who become involved in disguised remuneration arrangements, the taxpayer is likely to find themselves the subject of a stressful investigation, which will ultimately result in having to pay a large amount of unpaid tax, and also interest.

Such agencies should, therefore, be avoided, and any workers seeking to work through an agency, or an umbrella company, should ensure the one they choose is operating PAYE on the whole of the amount paid during the relevant payment period.

Loan Charge avoidance

The Loan Charge was introduced to force taxpayers with loans they considered to be non-taxable (termed disguised remuneration loans by HMRC), to either repay those loans or pay tax on them. Essentially the legislation meant any loans granted after 9 December 2010, which had not been repaid by 5 April 2019, were considered taxable as earnings in tax year 2018/19.

Since its introduction, various promoters have marketed arrangements which purport to circumvent the legislation. These schemes range from ways to ‘repay’ the loans using contrived methods that do not actually result in a transfer of any value, to ‘clever’ ways to cause the original arrangement to be void, so that a new entity can be created with a new debt, which (according to the promoter) will not be subject to the Loan Charge.

Given HMRC’s stated position that it will pursue any and all tax avoidance arrangements, and the existence of the General Anti Abuse Rule (which essentially prevents the use of any abusive arrangements which seek to reduce a tax liability), it’s hard to see these schemes as anything other than a way for promoters to delay the inevitable and likely charge their customers an additional fee.

Taxpayers should be wary of all such promoters and should seek independent advice before entering into any arrangements which are marketed to reduce their tax liability, especially where those promoters are based overseas.

Settlement

HMRC is generally willing to reach a settlement in relation to unpaid tax resulting from avoidance schemes. This will usually be done by the taxpayer making a formal disclosure, but where tax avoidance is concerned, HMRC will often announce settlement opportunities specific to certain tax avoidance arrangements.

Disguised remuneration settlement opportunity 2020

One of the most widely publicised attacks on HMRC tax avoidance arrangements in recent years is the Loan Charge, which targeted individuals (and their employers) who had received remuneration in the form of loans going back as far as December 2010.

HMRC introduced the disguised remuneration settlement terms 2020 as a way for individuals and employers to settle their use of disguised remuneration schemes. The settlement allows all liabilities to be settled (some of which may not have been caught by the Loan Charge, such as inheritance tax) and enables open enquiries, or years with assessments, to be closed so that all areas of the scheme use can be considered resolved.

If done correctly, settlement in this way should allow the distribution of any funds that remain within the scheme, and the winding up of any trusts still in existence, removing the need for the payment of ongoing trustee fees.

Accelerated Payment Notices (APNs) and Follower Notices

As the use of marketed tax avoidance arrangements has declined, so has the issue of APNs and Follower Notices. However, they may still be issued.

APNs are demands for tax that HMRC believes is due, following the use of a tax avoidance arrangement. They are designed to prevent taxpayers from retaining the benefit of tax HMRC considers should have been paid. APNs will be issued if the following three conditions are met:

• Condition A: An enquiry or appeal is in progress

• Condition B: The tax return, claim, or appeal relates to a tax advantage resulting from a tax arrangement

• Condition C: One or more of the following applies: A Follower Notice has been issued, the arrangements are considered ‘DOTAS’ arrangements or a General Anti-Abuse Rule (GAAR) notice has been issued.

If the dispute is resolved in your favour, then HMRC will reimburse the payment with a small amount of interest. APNs cannot be appealed, although representations can be made if the APN has been issued wrongly or is incorrect in some way. Penalties of up to 15% of the amount due will apply if the APNs are not paid in time.

Follower Notices are issued if you have been involved in schemes similar to those that have been successfully challenged by HMRC. HMRC issue Follower Notices inviting you to take corrective action to deny the tax advantage claimed by using the scheme, rather than continue with a case that HMRC is now certain it will win.

Representations can be made if you believe the Follower Notice is invalid. However, if corrective action is not taken in time, penalties of up to 50% of the unpaid tax can be applied. HMRC has been applying harsh failure to take corrective action (FTTCA) penalties, particularly in cases where HMRC believes there has been a significant delay in taking corrective action.

How can we help?

We can review your planning and give you an honest and impartial assessment of your chances of successfully challenging HMRC, both in terms of any existing enquiry and also APNs or Follower Notices. We will then recommend either continuing the challenge or settling with HMRC.

If you have been issued with penalties in respect of either the late payment of APNs or FTTCA, we can confirm if those penalties are fair and proportionate in the circumstances of your case and, where appropriate, make robust representations for you.

Should we recommend a settlement, and you agree, we are well placed to negotiate this with HMRC, and agree a favourable payment plan where required.