Tax Avoidance Schemes – The Truth

Following on from last week's article, 'Perilous Avoidance Schemes', we examine what contractors should be wary of when tempted by the lure of tax avoidance scheme promoters promising endless riches in a tax safe environment.

It is quite understandable that some freelancers will be enticed by the attractive offer of high income retention.

Many of these schemes use offshore trusts, partnerships, etc, and rely on the wording contained within double taxation treaties or seek to circumvent tax legislation by exploiting loopholes. Tax Counsel approval provides apparent reassurance of the scheme's credibility. Before getting involved in such a scheme however, freelancers should carry out their own research otherwise it could end up costing them their business and much more.

HMRC's website devotes a section to tax avoidance schemes entitled 'Spotlights' which features schemes that HMRC consider risky and about which there is a need to warn potential users. They will often be schemes that have already been disclosed to HMRC and given a Scheme Reference Number (SRN). Just because a scheme has been issued with a SRN does not mean that HMRC either approves the scheme or accepts that the scheme achieves its intended tax advantage. Needless to say, those schemes that appear in 'Spotlights' can expect to be challenged by HMRC and the users of such schemes enquired into.

'Spotlights' offers some useful guidance to taxpayers as to tax planning that should be wary of as follows:

 

  • It sounds too good to be true.
  • Artificial or contrived arrangements are involved.
  • It seems very complex given what you want to do.
  • There are guaranteed returns with apparently no risk.
  • Upfront fees are payable or the arrangement is on a no win/no fee basis.
  • The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.
  • The scheme is said to be approved by HMRC.
  • Taxation of income is delayed or tax deductions accelerated.
  • Tax benefits are disproportionate to the commercial activity.
  • Offshore companies or trusts are involved without any sound commercial reason.
  • A tax haven or banking secrecy country is involved without any sound commercial reason.
  • Tax exempt entities, such as pension funds, are involved inappropriately.
  • It involves exit arrangements designed to sidestep tax consequences.
  • It involves money going in a circle back to where it started.
  • Low risk loans to be paid off by future earnings are involved.
  • The scheme promoter lends the funding needed.
  • There is a requirement to take out insurance against the failure of the tax planning to deliver the tax benefits.

A consultation document entitled 'High Risk Tax Avoidance Schemes' that is due to close at the end of this month, proposes to list the most aggressive and artificial avoidance schemes in regulations. Regulations would describe the packages that are unlikely to achieve their stated aims.  Users will be required to disclose their participation in a scheme to the Revenue and they will be subject to an additional charge on underpaid tax. They will, however, be able to protect themselves from the charge by pre-paying the disputed amount of tax.

Whilst HMRC boast that they have recently impacted on deterring tax avoidance behaviour, the department has warned that there are still a small number of scheme promoters and users willing to sell and buy aggressive and highly contrived tax avoidance schemes that fall foul of existing legislation.

Before getting involved in any of these schemes freelancers should take independent advice from a tax advisor but the 'Catch 22' is that such advice comes with a high price tag. The old adage, 'if it sounds too good to be true, then it's too good to be true', is a useful rule to apply by anyone who is lured by the promoters of tax avoidance schemes.

 

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