A recent National Audit Office (NAO) report titled, ' Tax avoidance: tackling marketed avoidance schemes' has revealed that there is little evidence that HMRC is making progress in preventing the sale of highly contrived tax avoidance schemes to a large number of taxpayers.
The report does however recognise that the introduction of the Disclosure of Tax Avoidance Schemes (DOTAS) in 2004 has helped the Revenue in making some important headway in reducing the opportunities for tax avoidance. It has aided HMRC to change tax law to prevent some types of avoidance activity. Since the introduction of the regime, HMRC has initiated 93 changes to tax law to counter avoidance.
DOTAS has also helped change the marketing of tax avoidance schemes, with the larger accountancy firms less active in this area now.
In each of the last 4 years, over 100 new avoidance schemes have been disclosed under DOTAS. Although HMRC believes that most of these would be defeated if tested in the courts, there is no evidence that their usage is reducing.
The report reiterates that tax avoidance is not illegal and is therefore difficult to stop. HMRC define tax avoidance as being 'using the tax law to get a tax advantage that Parliament never intended'. Unlike tax evasion which involves fraud or deliberate concealment, tax avoidance is legal. However, it often involves contrived artificial transactions that serve little or no purpose other than to produce a tax advantage.
Taxpayers using avoidance schemes can gain a tax advantage until HMRC prove that an arrangement is not consistent with legislation but this can take many years and often requires litigation, putting a strain on the department's resources. Whilst the Revenue has a good success rate in the courts it cannot always successfully apply the rulings in lead cases to other cases.
There remains a backlog of 41,000 cases relating to marketed schemes used by individuals and small businesses, that could give rise to £10.2 billion tax, and HMRC has yet to demonstrate how this number will be reduced.
Amyas Morse of the NAO said, "HMRC must push harder to find an effective way to tackle the promoters and users of the most aggressive tax avoidance schemes. Though its disclosure regime has helped to change the market, it has had little impact on the persistent use of highly contrived schemes which deprives the public purse of billions of pounds.
It is inherently difficult to stop tax avoidance as it is not illegal. But HMRC needs to demonstrate how it is going to reduce the 41,000 avoidance cases it currently has open."
The report contains details of how HMRC investigates cases of suspected avoidance schemes marketed to businesses and individuals and illustrates the complexity of gathering the information HMRC requires to challenge schemes and the actions the department is taking to increase its effectiveness.
Of particular interest to contractors will be two specific references:
£600 million, 16,000 users.
Managed Service Companies legislation was introduced in April 2007. The disguised remuneration legislation introduced in the Finance Act 2011 also targeted these arrangements.
HMRC is currently investigating the schemes. One case was heard at Tax Tribunal in May 2012 and is awaiting decision. Two further cases are awaiting decision.
In April 2009, a scheme involving service companies was disclosed to HMRC under DOTAS. The scheme ran in the 2009-10 and 2010-11 tax years, and involved over 1,400 users.
In 2010, HMRC began investigating a sample of cases to inform its approach to all outstanding cases. HMRC is devising a settlement strategy to ask the scheme’s users to pay the amount of tax due, but is prepared to litigate if necessary.
The scheme is used mainly by individuals working as contractors (the ‘scheme users’) and earning at least £50,000 a year.
The scheme users became employees of an offshore employer for the 2011-12 tax year. The offshore employer seconded employees to a UK intermediary, which invoiced the companies using the scheme users’ services.
The offshore employer paid the scheme users the minimum wage. The scheme users would have been liable to pay the small amount of income tax and national insurance contributions due on this. The offshore employer loaned the scheme users the rest of the money they had earned as interest-free loans. Interest-free loans are a benefit in kind, and generate only a small tax charge. Thus, the scheme users received their full income, less any administration costs, but will have paid tax only on an amount equal to the minimum wage plus a small charge for the benefit in kind.
The scheme was notified to HMRC via DOTAS in July 2011. In August 2011, HMRC began investigating the scheme and issued a warning about this type of scheme on its website. The promoter met HMRC and explained how the scheme operated. HMRC also invited some of the scheme users to meet so that it could gather information about how the scheme worked and target its formal requests for information. HMRC could not oblige people to attend these meetings and none chose to do so.
HMRC knows that this scheme had approximately 1,500 users because the offshore employer would have had to submit a year end return listing its employees. HMRC received this information in May 2012. As HMRC has received scheme users’ tax returns, it has begun to open enquiries. It is investigating how much was received as loans, and whether these will in practice be repaid.