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Differing approaches to combating marketed tax avoidance schemes
7th June 2022 by George Turner

Taxation magazine recently carried an article from our Executive Director looking at HMRC’s record on tackling marketed tax avoidance schemes over the last 10 years. The article looks at the differing results HMRC has achieved going after two different types of tax avoidance scheme and what lessons can be drawn. The text of the article can be found below. A pdf is available here: A_tale_of_two_avoidance_schemes_-_Taxation,_

  • In 2013, there were in effect two marketed tax schemes – sideways loss relief and disguised remuneration.
  • Several court decisions ruled that sideways loss relief schemes were ineffective from a tax law perspective.
  • There have been criminal prosecutions of people who operated these schemes.
  • HMRC has won two cases – Rangers and Aberdeen Asset Management – on disguised remuneration and that was on the PAYE argument.
  • The loan charge has helped promoters with the argument that nothing was wrong until HMRC changed the law retrospectively

The tax avoidance industry has been through a remarkable transformation over the past decade. Ten years ago, there were only two tax avoidance schemes that were sold to individuals in any volume: sideways loss relief schemes and disguised remuneration schemes. According to HMRC figures, in the 2013-2014 tax year 35% of all users of tax avoidance schemes – 8,500 people – were members of sideways loss relief schemes. Today that figure is zero. Over the same period, disguised remuneration has flourished. There were 13,200 people involved in disguised remuneration in 2013-14, but this has risen to 28,000 in 2019-20, the latest year when figures are available. Why is it that HMRC has been so comprehensively successful at combating one form of tax avoidance, while demonstrably failing to deal with another?

Respectable end of the avoidance market

In an appearance before the House of Commons Public Accounts Committee last year, Jim Harra, HMRC chief executive, offered one explanation: ‘The situation with the promotion of tax avoidance is over recent years, we feel we’ve been very successful at driving the respectable end of the tax profession out of offering tax avoidance.’ Clearly, we have come a long way since David Hartnett described sideways loss relief schemes as ‘schemes for scumbags’.

In 2013, there were in effect two marketed tax schemes – sideways loss relief and disguised remuneration. Several court decisions ruled that sideways loss relief schemes were ineffective from a tax law perspective. There have been criminal prosecutions of people who operated these schemes. HMRC has won two cases – has won two cases Asset Management – on disguised remuneration and on disguised remuneration and that was on the PAYE argument.was on the PAYE argument. The loan charge has helped promoters with the argument that nothing was wrong until HMRC changed the law retrospectively.

In particular, HMRC points to the code of practice on taxation for banks (large banks were frequently involved in providing the finance for sideways loss relief schemes), and the tightening of professional conduct rules for accountants and tax advisers in 2017, which in effect made it a disciplinary offence to sell a mass-marketed tax avoidance scheme. The implication is that more senior professionals subject to professional regulation were successfully persuaded to get out of selling the schemes to their clients. Although it is the case that sideways loss relief schemes were mainly targeted at high net worth individuals – the kind of people that employ professional accountants and lawyers and are clients of private banks – sideways loss relief schemes are not a form of tax avoidance defined by the involvement of professional advisers. It is well known that many senior lawyers signed off on disguised remuneration schemes, senior accountants operated and sold the schemes, and former HMRC inspectors regularly pop up as being involved with disguised remuneration. In fact, it was recently confirmed that an accountant that acts for the royal family is one of the more significant players in the field of disguised remuneration. If it really is the case that improvements in professional standards have driven out the respectable end of the avoidance market, why have allegedly respectable people continued to market disguised remuneration schemes? The simple answer is that codes of practice and professional ethics will only ever take us so far. That is not to say that improving professional standards is unimportant. It is, but sadly there will always be morally vacuous people in every profession who will seek to make a profit from taking advantage of others. In the end, the most effective way of stopping any form of tax avoidance is to establish that a scheme is unlawful with regard to tax law. As Lord Templeman put it many years ago: ‘Every tax avoidance scheme involves a trick and a pretence. It is the task of the Revenue to unravel the trick and the duty of the court to ignore the pretence.’ It is also important to ensure that dishonest behaviour is challenged, if necessary by way of the criminal prosecution of those that seek to promote dishonest tax avoidance schemes. As it was recently put by Lady Justice Simler and Mrs Justice Whipple in Ashbolt and Arundell v HMRC and Leeds Crown Court [2020] STC 1813 ‘tax avoidance moves from lawful conduct to criminal conduct when it involves the deliberate and dishonest submission of false documents to HMRC with the intent of gain by the taxpayer in question and loss to the public revenue’. When we analyse the performance of HMRC in both the civil and criminal courts, it is here where we see a real difference in performance with regard to different forms of tax avoidance.

Sideways illusion

Sideways loss relief schemes worked in the following way. Investors, who were always high earners with large income tax liabilities, entered into a partnership that was formed on the pretence of carrying out some form of trade. To encourage potential clients into the arrangements, often, scheme designers based them around well-known tax reliefs, marketing the scheme as a government-supported initiative. Film schemes such as Eclipse and Ingenious are perhaps the most well-known examples, but there were also schemes that invested in vaccine research or reforestation and green energy. However, almost any investment could be used to claim sideways loss relief, such as the well-known Working Wheels scheme based on the used car industry, and some lesser-known schemes investing in computer software. The expenditure incurred in the trade would result in losses which were used to reduce the income tax liabilities of the partners under the sideways loss relief rules. The trick was that these losses were inflated by circular financing arrangements which meant that the tax write-off ended up being multiples higher than the amounts of real cash put in by clients of the scheme. The effect of this inflation also meant that the majority of capital raised by the partnerships would never actually be spent on the trade itself. For example, in Vaccine Research Limited Partnership Scheme v CRC [2015] STC 179, the partnership claimed to have spent £114m on developing various vaccines, when in fact only £14m had been spent on research and development with the balance being paid in fees to the scheme operators and the banks that had funded the contributions of partners in the first place. HMRC disallowed the claims for tax relief for partners of sideways loss relief schemes, arguing that to qualify, expenditures had to be incurred for the purposes of a trade, and the partnerships needed to operate on a commercial basis.

Even though the schemes contained some commercial element which meant that it was theoretically possible for them to earn a profit, the inflation of losses made the prospect of any profit actually being made in the long term wholly unrealistic, undermining any idea that the partnerships were a commercial enterprise. As Judge Colin Bishop put it in his First-tier Tribunal decision in the Icebreaker case Acornwood and others (TC3545): ‘A 14-handicap golfer may set out on the first tee with the aim and hope of going round the course in par; but he could have no reasonable expectation of doing so.’ The courts were generally supportive of HMRC’s arguments, and there followed a long line of cases where various sideways loss relief schemes were defeated. This includes TowerM Cashback, Working Wheels, Eclipse, Ingenious and Vaccine Research. In some cases, HMRC started criminal proceedings. According to HMRC, since April 2016, 22 people have been convicted of ‘offences relating to arrangements that have been promoted and marketed as tax avoidance’. A review of HMRC press releases reveals that at least 20 of these individuals were involved in sideways loss relief schemes.

In these cases there was usually some aggravating factor which attracted the attention of HMRC’s criminal investigators. For example, in the case of R v Michael Richards and others, it was found that a sizeable chunk of the money that was supposed to have been invested in reforestation projects was being siphoned off into secret Swiss bank accounts for the personal benefit of the scheme operators. However, it is also remarkable that in at least some cases, the core elements of the offences prosecuted by the crown were the very basis on which sideways loss relief schemes operated. In his sentencing remarks following the conviction of four individuals behind the Little Wing film scheme Judge Drew described the ‘cheat’ as: ‘Submitting tax returns which contained false statements about the LLP’s allowable losses. They were false because the jury found as a fact either that the expenditure was not wholly and exclusively for the purposes of the LLP’s trade, or the trade was not carried out on a commercial basis.’ He may not have been aware of it at the time, but Judge Drew, in summarising the guilty act of a serious criminal offence, was in effect describing how all sideways loss relief tax avoidance operated. Something which must have at least given some promoters pause for thought.

Legal confusion

HMRC has not had the same success when it comes to disguised remuneration schemes. Many of these arrangements involve the creation of an offshore employee benefits trust. A company employing an employee or contractor would place funds into the trust, which would then be loaned to the employee. The trust might also provide some other benefit, such as a gift of shares in a company controlling a bank account full of cash. The scheme promoters argued that because the trust was independent of the company and that the loan was in theory repayable, then it should not be counted as income for tax purposes. The reality however, was that the trust always paid the loan and never asked for the money back. Both employers and employees regarded the money as income for the employee to keep.

Early attempts by HMRC to deny the benefit of schemes to taxpayers were met with opposition from the judiciary. In two cases that went before the Special Commissioners in 2000s, Dextra Accessories (SpC 331) and Sempra Metals (SpC 698), the judges found that loans granted by the employee benefit trust were not taxable income. In both cases the government decided not to appeal the point on income tax. In 2013 the Court of Session accepted HMRC’s argument that Aberdeen Asset Management v CRC [2014] STC 438 should have withheld income tax under PAYE for payments made to employees made through an employee benefit trust. HMRC won on the same argument again at the Court of Session in Murray Group Holdings v CRC [2016] STC 468, defeating the Rangers employee benefits trust scheme. In that case the judges was scathing of the rulings of the tax tribunals, which until then had found in favour of Rangers, saying:

‘The fundamental principle that emerges from these cases appears to us to be clear: if income is derived from an employee’s services qua employee, it is an emolument or earnings, and is thus assessable to income tax, even if the employee requests or agrees that it be redirected to a third party. That accords with common sense… This principle is ultimately simple and straightforward – indeed, so straightforward that in cases where elaborate trust or analogous relationships are set up it can easily be overlooked. That, it seems to us, is what happened before the First-tier and Upper Tribunals in this case.’

The Court of Session decision was later confirmed by the Supreme Court (RFC 2012 plc (formerly known Rangers Football Club plc) v Advocate General for Scotland [2017] STC 1556). Both the Court of Session and the Supreme Court found that Sempra and Dextra had been wrongly decided. However, although the Rangers case established beyond any doubt that the payments made to an offshore trust in relation to employment should be considered earnings and taxed as such, campaigners rightly point out that the case does not establish that employees in disguised remuneration schemes should be liable to pay the tax themselves. This was recognised by Jim Harra himself, in an email unearthed through a freedom of information request where he expresses frustration that he has been unable to obtain a legal analysis to back HMRC’s position that individuals are taxable on earnings received via a disguised remuneration scheme. One key difference between the findings of the civil courts in cases involving sideways loss relief and disguised remuneration, is that by removing the benefit of tax relief from the partners, the courts have taken away all the incentive for investors to participate in these schemes. With disguised remuneration, without a judgment that establishes that scheme users are liable for any tax bill, the incentive for an employee to take part in the scheme remains. Employees will care little if a scheme means that they reduce their tax bills, whilst their employer runs the risk of being hit with a tax bill in the future. This is in fact how some disguised remuneration schemes have played out, with organisations like the BBC agreeing to pay off the tax liabilities of freelancers engaged through tax avoidance schemes.

Limitations of legislative fixes

The most significant intervention the government has made against disguised remuneration has been the loan charge, a piece of legislation that attempts to ensure that people historically involved in disguised remuneration schemes are subject to taxation without the need to raise an enquiry into the scheme or a taxpayer’s returns.

However, in the absence of any decision of a court establishing that the users of loan based remuneration schemes had any tax liability at all, the use of legislation to enforce HMRC’s view of the existence of that liability has proved highly problematic. Inevitably, it has been interpreted by many people as demonstrating that disguised remuneration was at the time a lawful means of reducing a tax on the part of an individual taxpayer, which a defeated HMRC has been forced to attack with retrospective legislation, something which goes against every principle of justice in this country. The perception that the loan charge is an unjust act of a vengeful administration has pushed scheme users into the arms of promoters of loan charge avoidance schemes. As a policy designed to draw a line under disguised remuneration the loan charge has been a complete failure. Participation in disguised remuneration schemes increased substantially between the announcement of the loan charge in 2016, and its implementation in 2019.

Learning lessons

By looking at the history of litigation in both the civil and criminal courts, the answer to the question, why has HMRC been much better at tackling sideways loss relief schemes than disguised remuneration, is obvious. Through careful, painstaking litigation HMRC have managed to establish the principle that sideways loss relief schemes are not only ineffective in tax law, rendering the whole enterprise pointless for scheme users, but that the promotion and operation of these schemes could be regarded a cheat on the revenue, ending with a period of incarceration at her Majesty’s pleasure. It is little wonder that the use and promotion of these schemes has stopped entirely. Until now at least, HMRC have not been able to establish the same with regards to disguised remuneration. As recently confirmed by the financial secretary to the Treasury, the number of people that have been the subject of a successful criminal prosecution is precisely zero. Despite a barrage of legislative remedies, the practice continues to operate. This may soon be about to change. HMRC recently disclosed for the first time that it currently has 17 people under active criminal investigation for ‘offences relating to arrangements promoted as disguised remuneration tax avoidance schemes’. The only investigation where details have emerged publicly, Operation Skeet, is connected with alleged attempts by Paul Baxendale Walker’s firm (or its successor) to rebrand loans so that they fell outside the scope of income tax and the loan charge. In judicial review proceedings the Court of Appeal upheld search and seizure warrants issued against two individual users of these schemes whom it suspected of offences of fraud by false representation and cheating the public revenue (see Ashbolt and Arundell v HMRC and Leeds Crown Court [2020] STC 1813). On the civil litigation side, HMRC points out that it still has thousands of open enquiries into users of disguised remuneration schemes, some of which may still come before the tribunal.

One case currently before the Court of Appeal, Hoey v CRC, deals directly with the issue of whether HMRC has the right to tax an employee, and not the employer, in a disguised remuneration scheme, one of the biggest legal issues yet to be resolved. If HMRC is successful in bringing a series of civil and criminal cases against disguised remuneration schemes, we could see the practice go the same way as sideways loss relief. But do not expect that to happen anytime soon. HMRC first opened its enquiry into the tax returns of Rangers Football Club in 2004, yet it was not until 2017 that the Supreme Court finally resolved the case in favour of HMRC. In 2005 HMRC opened an enquiry into Carbon Trading Positive Ltd, which finally ended in the conviction of Michael Richards and his co-conspirators in 2017. In that case it took seven years to bring the case to trial after the defendants had been charged. There were long-running disputes over disclosure and, at one point, a High Court judge stayed the proceedings as an abuse of process, only for them to be re-instated at the Court of Appeal. The trial itself took 11 months. One of the jurors managed to conceive and give birth to a child during the course of it.

Justice delayed is justice denied

The old saying of justice delayed is justice denied was never more true than with disguised remuneration. The decisions of the tribunals in Dextra, Sempra and Rangers meant that for the best part of ten years, the tax tribunals supported an interpretation of the law that was later found by the superior courts to be wrong. In the interim, thousands of people were brought into disguised remuneration schemes having been reassured by senior lawyers and accountants that the structures they were entering into were perfectly legal. Had the tribunal’s interpretation of the law been corrected more quickly, many thousands of people may have been spared the stress and anxiety arising from their involvement in a tax avoidance scheme. What the story of disguised remuneration demonstrates beyond any doubt is that the pitifully slow progress of tax disputes is a source of real injustice and an issue that needs to be addressed.

This article was originally featured in Taxation Magazine

TaxWatch launches regulatory complaint against Mr Arthur Lancaster of AML
21st March 2022 by George Turner

TaxWatch has lodged a complaint concerning Arthur Lancaster, Director of AML Tax (UK) Limited, and Director of the Knox House Trust of the Isle of Man.

Mr Lancaster is both a member of the Chartered Institute of Taxation and the Institute of Chartered Accountants of England and Wales, as such a complaint has been lodged with both the ICAEW and the Taxation Disciplinary Board.

A recent judgement of the Upper Tier Tax Tribunal involving an information notice gives rise to the complaint. The judgment found AML Tax (UK) failed to comply with an information notice issued by HMRC and fined the company £150,000.

The judgment of the tribunal described the evidence of Mr Lancaster as “seriously misleading”, “evasive” and “lacking in candor”.

The judgment can be found here: https://www.bailii.org/uk/cases/UKUT/TCC/2022/81.html

The rules of Professional Conduct in Relation to Taxation, which cover both Chartered Tax Advisors and Chartered Accountants require members of professional bodies to comply with information notices issued by HMRC.

The case also confirmed AML Tax (UK) had been involved in the promotion of marketed tax avoidance schemes. Professional Conduct in Relation to Taxation rules state that members of professional bodies must not “create, encourage or promote tax planning arrangements or structures that: i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation; and/or ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.

As such the recent judgment, as well as a significant amount of information already in the public domain, indicates that the activities of Mr Lancaster breached the rules of Professional Conduct in Relation to Taxation.

A copy of the complaint sent to the Taxation Disciplinary Board can be found here: TDB_Lancaster_20220320

A similar complaint was made to the ICAEW.

Photo by oliver king on Unsplash

HMRC’s record on covid support and tax fraud under the microscope
14th February 2022 by George Turner

  • HMRC’s record on tax fraud has been questioned by two select committees and in several parliamentary debates in recent weeks

  • The last select committee inquiry on Tax Fraud was in 2015

Recent weeks have seen HMRC being put under intense scrutiny on their record on tackling tax fraud.

Part of the trigger for this was the revelation that on current estimates, the department would only recover 25% of the £5.8bn paid out in fraud and error via the Covid relief schemes, furlough, Eat Out To Help Out and the Self-Employment Income Support Scheme.

This figure is arrived at if you take the amount HMRC has already managed to recover from overpayments, added to the £800m-£1bn that HMRC says they hope to get back with their Taxpayer Protection Task Force.

HMRC’s estimate of how much the new Taxpayer Protection Taskforce would seek to recover has been around for a while,[1]Richard Partington, HMRC boosts efforts to recoup £1bn in suspect Covid payouts, The Guardian, 16 November 2021, … Continue reading however, HMRC had previously suggested that they could recover substantially more. Notably, when Jim Harra gave an interview to the Financial Times late last year, he said that they would struggle to recoup more than 50% of the funds lost (£2.9bn)[2]Emma Agyemang, HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df.

In January, HMRC put out a myth-buster which appeared to disclose for the first time that £1bn is the total of the department’s current ambition in Covid support scheme fraud and error recovery given the resources they currently have to deal with the problem.[3]HMRC responses to inaccurate claims, HMRC, 12 January 2022, https://www.gov.uk/government/news/hmrc-responses-to-inaccurate-claims

TaxWatch picked up on this, noting the apparent revision down from Jim Harra’s 50% remarks to the FT, and tipped off The Times, which ran the story the following week.[4]David Byers, Treasury writes off £4.3bn in Covid payments lost to fraud, The Times, 17 January 2022, … Continue reading

On the day the article was published, Jim Harra was asked about the story at his appearance before the Public Accounts Committee,[5]Public Accounts Committee, Oral Evidence: HMRC’s management of tax debt, HC 953, House of Commons, 17 January 2022, https://committees.parliament.uk/oralevidence/3288/default/ and on Friday 11th February, the committee published a highly critical report, stating that HMRC’s current plans “risks rewarding the unscrupulous and sending a message that HMRC is soft on fraud.”[6]https://committees.parliament.uk/committee/127/public-accounts-committee/news/160942/hmrc-ignorance-and-inaction-rewarding-the-unscrupulous-and-looks-soft-on-fraud/

After HMRC’s grilling before the PAC, next, it was the turn of Treasury Ministers when Labour’s Pat McFadden put down an Urgent Question forcing the Government to make a statement on the issue.

In that statement, the Government argued that the speed with which the Covid support systems were designed and implemented meant that a greater amount of fraud was inevitable. If the government put in place more checks that would have led to delays in getting cash into the hands of businesses that were in crisis, leading to far worse outcomes.[7]Coronavirus Grant Schemes: Fraud, Hansard vol. 707, Tuesday 18 January 2022

That is undoubtedly true, and it is worth noting that the furlough scheme has an estimated fraud and error rate of 8.7%, not wildly above the normal fraud and error rate in the tax system of around 5%.[8]Public Accounts Committee, HMRC Performance in 2020-21, House of Commons, https://publications.parliament.uk/pa/cm5802/cmselect/cmpubacc/641/report.html It is trite but true to say that the vast majority of claims were validly made by people entitled to them.

However, now that the money has gone, with billions currently sitting in the bank accounts of crooks, why are we not spending more to go after it?

This was a point made by Lord Agnew, the Government Minister responsible for counter fraud, in dramatic style later in the week when he resigned from the front bench when responding to a question from Labour on the £4.3bn tax fraud write off, stating that “a combination of arrogance, indolence and ignorance” was freezing the government machine.[9]Conservative minister resigns in anger over Covid fraud, BBC News, 24 January 2022, https://www.bbc.co.uk/news/uk-politics-60117513

Treasury ministers are now keen to stress that the £4.3bn which HMRC has said will, on current estimates, be unlikely to be recovered has not been written off. This point was made by the Chancellor himself in a tweet thread,[10]Rishi Sunak, Tweet Thread on Covid support measures fraud, Twitter, 26 January 2022, https://twitter.com/RishiSunak/status/1486332699337973763?s=20&t=AjAVwWPkHymzw2I7kcfPMw and again by Treasury ministers during an opposition day debate on fraud in the House of Commons.[11]Tackling Fraud and Preventing Government Waste, Hansard Vol. 708, Tuesday 1 February 2022, … Continue reading. The response by the Government that it would not be writing off the fraud prompted Lord Agnew to say that his resignation had at least “achieved something”.[12]Alice Thomson, Lord Agnew: ‘Billions were written off and no one seemed to care but me’, The Times, 28 January 2022, … Continue reading

However, the determination from Ministers to say that they will continue to chase down the missing £4.3bn has not yet been matched with any announcement of more money.

As TaxWatch has pointed out, the Treasury is investing far more money in going after the rise in benefits fraud coming out of the pandemic, giving the DWP a cash injection of £613m to tackle the problem.[13]Funding to fight covid related tax and benefits fraud, TaxWatch, 29 December 2021, https://www.taxwatchuk.org/covid_fraud_spending_dwp_vs_hmrc/

HMRC on the other hand appears to be funding their £100m taxpayer protection task force from their own resources. The staff are all being recruited internally, as was recently confirmed by HMRC.[14]Treasury Committee, Oral evidence: The work of HMRC, HC 1095 Q25, House of Commons, 2 February 2022, https://committees.parliament.uk/oralevidence/3394/pdf/

The growing disquiet about HMRC’s plans to recover losses to fraud and error in Covid relief schemes has also led to MPs raising questions about HMRC’s broader approach to tax fraud.

At a recent Treasury Select Committee hearing, Kevin Hollinrake MP began questioning HMRC officials on why levels of both criminal investigations and civil fraud investigations under Code of Practice 9 had been declining since 2016.

In response, HMRC said that they had taken a policy decision to do fewer fraud prosecutions and only concentrate on more serious and complex cases.

Hollinrake seemed unimpressed, saying that it sent the message that some crime doesn’t matter and comparing HMRC’s policy to telling a burglar, “ok so you stole the stuff out the house, give us it back, and a bit extra and you can carry on.”

Mr Hollinrake also questioned why there had been no successful prosecutions for promoters of disguised remuneration schemes, and called on HMRC to bring forward some cases in this area.

http://www.taxwatchuk.org/wp-content/uploads/2022/02/TRESCOMM20220202.mp4

This is not the first time MPs have raised concerns about HMRC’s approach to tax fraud in recent years. In 2015, the Public Accounts Committee’s annual report on HMRC’s performance described the number of criminal prosecutions for offshore evasion as “woefully inadequate”[15]HM Revenue & Customs Performance 2014-15, Public Accounts Committee, 28 October 2015, https://publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/393/393.pdf.

The following year, the Committee completed a short inquiry into tax fraud which found that HMRC had “no strategy for tackling tax fraud” and that there was a “perception that HMRC does not tackle tax fraud by the wealthy”, which needed to be addressed.[16]Public Accounts Committee, Tackling Tax Fraud, House of Commons, 23 March 2016, https://publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/674/674.pdf

At the time, HMRC told the committee that it was seeking funding to enable it to prosecute more cases of serious and complex tax fraud. This became a target to increase the number of prosecutions of “serious and complex” tax fraud to 100 a year by 2020.

As our recent State of Tax Administration report has found, HMRC appears to have quietly dropped that target, with progress against the target no longer appearing in HMRC’s Annual Report.[17]State of Tax Administration 2022, TaxWatch, 11 February 2022, https://www.taxwatchuk.org/state_of_tax_administration/

Given the growing concern about tax fraud, and indeed all types of fraud, falling levels of civil fraud investigations and criminal prosecutions, and a clear demand from both the public and Parliament for Government to do more in this area, perhaps this is the right time for Parliament to revisit the issue with another inquiry into HMRC’s approach to tax fraud.

References[+]

References
↑1 Richard Partington, HMRC boosts efforts to recoup £1bn in suspect Covid payouts, The Guardian, 16 November 2021, https://www.theguardian.com/world/2021/nov/16/hmrc-boosts-efforts-to-recoup-1bn-in-potentially-fraudulent-covid-payouts
↑2 Emma Agyemang, HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df
↑3 HMRC responses to inaccurate claims, HMRC, 12 January 2022, https://www.gov.uk/government/news/hmrc-responses-to-inaccurate-claims
↑4 David Byers, Treasury writes off £4.3bn in Covid payments lost to fraud, The Times, 17 January 2022, https://www.thetimes.co.uk/article/treasury-writes-off-4-3bn-in-covid-payments-lost-to-fraud-dfkxt5fr7
↑5 Public Accounts Committee, Oral Evidence: HMRC’s management of tax debt, HC 953, House of Commons, 17 January 2022, https://committees.parliament.uk/oralevidence/3288/default/
↑6 https://committees.parliament.uk/committee/127/public-accounts-committee/news/160942/hmrc-ignorance-and-inaction-rewarding-the-unscrupulous-and-looks-soft-on-fraud/
↑7 Coronavirus Grant Schemes: Fraud, Hansard vol. 707, Tuesday 18 January 2022
↑8 Public Accounts Committee, HMRC Performance in 2020-21, House of Commons, https://publications.parliament.uk/pa/cm5802/cmselect/cmpubacc/641/report.html
↑9 Conservative minister resigns in anger over Covid fraud, BBC News, 24 January 2022, https://www.bbc.co.uk/news/uk-politics-60117513
↑10 Rishi Sunak, Tweet Thread on Covid support measures fraud, Twitter, 26 January 2022, https://twitter.com/RishiSunak/status/1486332699337973763?s=20&t=AjAVwWPkHymzw2I7kcfPMw
↑11 Tackling Fraud and Preventing Government Waste, Hansard Vol. 708, Tuesday 1 February 2022, https://hansard.parliament.uk/Commons/2022-02-01/debates/151F8D55-94D6-408A-88CC-970D350C6F9D/TacklingFraudAndPreventingGovernmentWaste#main-content
↑12 Alice Thomson, Lord Agnew: ‘Billions were written off and no one seemed to care but me’, The Times, 28 January 2022, https://www.thetimes.co.uk/article/lord-agnew-billions-were-written-off-and-no-one-seemed-to-care-but-me-cvnsqjbzp
↑13 Funding to fight covid related tax and benefits fraud, TaxWatch, 29 December 2021, https://www.taxwatchuk.org/covid_fraud_spending_dwp_vs_hmrc/
↑14 Treasury Committee, Oral evidence: The work of HMRC, HC 1095 Q25, House of Commons, 2 February 2022, https://committees.parliament.uk/oralevidence/3394/pdf/
↑15 HM Revenue & Customs Performance 2014-15, Public Accounts Committee, 28 October 2015, https://publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/393/393.pdf
↑16 Public Accounts Committee, Tackling Tax Fraud, House of Commons, 23 March 2016, https://publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/674/674.pdf
↑17 State of Tax Administration 2022, TaxWatch, 11 February 2022, https://www.taxwatchuk.org/state_of_tax_administration/

TaxWatch launches complaint against “Mr Red”
27th January 2022 by George Turner

TaxWatch has submitted a complaint to the Tax Disciplinary Panel about the conduct of an individual identified as “Mr Red” in the case of Murray Group Holdings vs HMRC.

TaxWatch believes that it has managed to uncover the identity of Mr Red, who continues to practice as a Chartered Tax Advisor, despite evidence of serious misconduct he engaged in when an employee of Rangers Football Club.

The case of Murray Group Holdings vs HMRC, known as “The Big Tax Case”, was one of the most important tax decisions in recent times.

The case involved a disguised remuneration tax avoidance scheme operated by Rangers Football Club for a number of years that involved players and staff being paid in the form of loans via an offshore trust. The loans were not declared as income on the tax returns of the players leading to a significant reduction in their tax liabilities.

HMRC believed that these loans were in fact remuneration and should be taxed as income.

In 2017, the Supreme Court found that the payments were earnings under PAYE legislation which meant that the club should have withheld tax due and paid it to HMRC.

Although HMRC lost their case at both the First Tier Tax Tribunal and the Upper Tier Tribunal, the findings of facts of those bodies revealed some extraordinary behaviour on the part of officials of Rangers Football Club in an effort to cover up the scheme.

In particular, the Tribunal singled out the behaviour of “a senior member of the group’s tax function”, who appeared in the anonymised judgment as “Mr Red”. The Tribunal stated that Mr Red was a Chartered Tax Advisor and former Inspector of Taxes.

During the tribunal hearing, HMRC alleged that Mr Red “misled” HMRC’s investigation into the scheme, and that “he had lied in material respects to the tribunal”.

In her dissenting judgment, Dr Heidi Poon records how Mr Red wrote to HMRC denying the existence of documents that HMRC had requested under the a statutory request for information, writing in a letter “your belief in the existence of documents demonstrating how amounts contributed to the Trust are determined is irrational and unfounded. I cannot help with your fantasies and the production of a S20 makes no difference to this”. [1]Section 20 of the Taxes and Management Act 1970 permitted tax inspectors to demand information from a taxpayer or third party in relation to a potential tax liability In fact, the documents did exist and had been uncovered by a City of London Police raid on Ibrox Stadium in connection with an unrelated investigation.

Concluding, Dr Poon stated that Mr Red’s behaviour went beyond what could be described as “a lack of candour”, she said: “It would be judicial to conclude that it had been obstructive and obscurantist, and there is evidence of active concealment of documents… to describe Mr Red as ‘somewhat defensive’ in giving his sworn testimony would be an understatement. On more than one occasion, Mr Red had attempted to mislead the Tribunal”.

She went onto say: “The overall impression created by Mr Red’s evidence, oral and written, was that he was being vague and evasive. It was clear that he was not on sure ground, because he was trying to tell a version of how the trust scheme should operate, rather than the version as it actually operated. As a result of this schism, it led to deliberation and inconsistency in Mr Red’s testimony.”

Another incident highlighted by the Tribunal was an attempt by Mr Red to influence the evidence of other witnesses. This was highlighted by the majority judgment:

​ “One aspect of his [Mr Red’s] evidence which disturbed us was his meeting with Mrs Crimson on the eve of her giving evidence. Having collected her at Edinburgh Airport it seems that there was some discussion about Trust matters and he passed to her for her consideration that evening certain extra documents including company minutes. (These were produced as late extra documents by the Taxpayers’ Counsel and Advisors for scrutiny by the Tribunal.)”

In rules in force at the time, CIOT required a member to “be honest in all his professional work” and in particular, “must not knowingly or recklessly supply information or make any statement which is false of misleading, or knowingly fail to provide relevant information. Furthermore when acting for an employer, the members were obliged to “ensure that there is appropriate disclosure of all relevant information” to tax authorities.
Despite the very clear allegations of misconduct that were placed in the public domain by the Tax Tribunal, TaxWatch has discovered that no action was subsequently taken by CIOT or the Taxation Disciplinary Board, the bodies responsible for regulating the conduct of Chartered Tax Advisors.

As a result, the individual was able to continue in practice, holding a number of senior positions after leaving Rangers Football Club. Given that the Tribunal had been clear that Mr Red was a Chartered Tax Advisor, it would have been straightforward for CIOT to contact the Tribunal, Rangers Football Club, or HMRC to seek to identify Mr Red and take appropriate disciplinary action.
The failure to take action over very clear and high profile allegations of misconduct by a Chartered Tax Advisor brings into question the robustness of the disciplinary process for the tax profession, which in turn threatens to bring the whole profession into disrepute.

For that reason, TaxWatch hopes that the Taxation Disciplinary Board will take this opportunity to take appropriate action, sending the message that the kind of behaviour outlined in Murray Group Holdings vs HMRC is not an acceptable way for regulated professionals to conduct themselves.

Photo by Bence Balla-Schottner on Unsplash

References[+]

References
↑1 Section 20 of the Taxes and Management Act 1970 permitted tax inspectors to demand information from a taxpayer or third party in relation to a potential tax liability

Use of disguised remuneration avoidance schemes more than doubled after Loan Charge
7th December 2021 by George Turner

  • New analysis shows that the number of users of disguised remuneration schemes has increased dramatically despite government attempts to legislate against the schemes

  • Criminal investigations against promoters remain a rarity, with no successful prosecutions being brought against disguised remuneration promoters

On 30 November, HMRC published its latest update on the use of marketed tax avoidance schemes, including disguised remuneration schemes. [1]Corporate Report, Use of marketed tax avoidance schemes in the UK (2019 to 2020), HM Revenue & Customs, 30 November 2021, … Continue reading

HMRC state in their update that it “is determined to do all it can to stop unscrupulous promoters”, and that they are “targeting those who promote these schemes using all of HMRC’s powers.”

On that basis, something appears to be going seriously wrong.

According to the latest figures, the use of disguised remuneration schemes, which is one form of mass marketed scheme, remains significantly higher than before the loan charge was announced in 2016.

In 2013-2014 HMRC estimated that there were 22,000 individuals and 6,000 employers involved in mass marketed tax avoidance schemes. That peaked in 2017-18 at 41,000 individuals and 3,000 employers. In 2019-20, the latest year HMRC have figures for, the numbers are 28,000 individuals and 1,000 employers, a decline from 33,000 individuals and 2,000 employees in the previous year.

Use of avoidance schemes

Figure 1: Number of individuals and employers using avoidance schemes each year, source: HMRC

 

These figures relate to all mass marketed schemes, however, HMRC report that composition of the market for these schemes has changed markedly. In 2013-14, 35% of schemes were sideways loss relief schemes, and 60% were disguised remuneration schemes. In 2019-20 HMRC state that 100% of schemes on the market are classified as disguised remuneration.

A sideways loss relief scheme involves the creation of an investment which is structured to make paper losses which are then used to offset against an individual’s income tax return. It is a type of tax avoidance that was popular with high net worth individuals.

Types of avoidance schemes

Figure 2: Use of avoidance scheme by type, source:HMRC

If we adjust the figures for the total number of individuals using marketed schemes to take into account the changing nature of the market as published by HMRC, we calculate that in 2013-14, there were 13,200 people on disguised remuneration schemes, rising to 32,670 in 2018-19 and 28,000 in 2019-20. That is an increase of 110% between 2013-14 and 2019-20.

We put these figures to HMRC, who responded: “The tax avoidance market continues to be dominated by disguised remuneration avoidance schemes, often targeted at contractors and agency workers. Between 13/14 and 19/20 we have seen a large increase in the numbers of avoidance uses from Disguised Remuneration schemes.

During 2019 to 2020 we made over 500 interventions into promoters and enablers of tax avoidance across a range of different taxes and reporting obligations. This includes interventions into non-compliant umbrella companies operating avoidance schemes.” [2]Correspondence received via email from HMRC on 06 December 2021

The 2016 Budget speech [3]Budget 2016: George Osborne’s speech, Gov.uk, 16 March 2016 https://www.gov.uk/government/speeches/budget-2016-george-osbornes-speech when the loan charge was first revealed it was claimed that the policy would “shut down disguised remuneration schemes”. On that measure, the policy has been a failure.

In their latest data, HMRC state that there are still between 20-30 organisations behind most tax avoidance schemes marketed to the public. That is no change on when HMRC last reported the figures in the previous year.[4]Corporate Report, Use of marketed tax avoidance schemes in the UK (2018 to 2019), HM Revenue & Customs, 30 November 2021, … Continue reading HMRC state “Since the last report was published some promoter organisations have left or significantly reduced their activity in the avoidance market. However, new promoters have entered the market.”

Furthermore, in relation to disguised remuneration schemes HMRC’s latest report discloses that there are between 60-80 non-compliant umbrella companies involved in their operation.

The use of umbrella companies to propagate disguised remuneration schemes means that data on who uses the schemes is not accurate. The largest group of users of such schemes according to HMRC are those involved in “book keeping activities”, which is what a user would be classed as if they were part of an umbrella company, regardless of what their actual trade may be. This is important because it demonstrates that HMRC are not aware of which professions are being targetted by scheme promoters. This is particularly concerning as there has been a significant amount of controversy over HMRC’s action to recover funds from employees on lower incomes.

Clearly, the surest way to close down a promoter of a tax avoidance scheme is to put them in jail. Curiously, the role of HMRC’s powers of criminal investigation appear to have been downplayed in this year’s report. In 2020, HMRC stated: “Whenever HMRC identifies a promoter or enabler of avoidance schemes we will always consider whether there is scope for a criminal prosecution. Promoting tax avoidance is not, on its own, a criminal offence but we will investigate with a view to prosecution where there is evidence that a promoter or enabler has committed fraud whilst designing or marketing avoidance schemes.”

The 2021 edition of the report has the following passage: “As well as our full range of civil sanctions, where an avoidance scheme involves fraud or other criminal offences, HMRC uses the full range of criminal powers to tackle those who promote or enable avoidance schemes.” HMRC then adds, “Since April 2016, more than 20 individuals have been convicted for offences relating to fraudulent arrangements promoted and marketed as tax avoidance schemes. The courts ordered over 100 years of custodial sentences. Most of these individuals were promoters.”

In 2020 TaxWatch sent in an FoI request asking how many criminal investigations had been opened and how many convictions HMRC had secured with regard to the promoters of disguised remuneration schemes specifically.

The answer was that over the previous five years, the department had opened nine investigations with none of them having led to a conviction at the time of the request. It is therefore important to be clear that where HMRC say they have convicted more than 20 individuals since 2016, they are not referring to promoters of disguised remuneration schemes.

We asked HMRC for an update on the numbers, and they could not provide one. We can therefore only assume that there is yet to be a single successful criminal prosecution for a promoter of a disguised remuneration scheme.

Most likely the people that have been convicted are those promoting other forms of schemes, such as sideways loss relief schemes. For example, in 2019 HMRC secured the conviction of Banyard and Blakey for a scheme involving fraudulent investments in a cure for HIV.[5]Two jailed for £60m fraudulent HIV cure tax fraud, HM Revenue and Customs, 25 February 2019, … Continue reading Terrence Potter (who was already in jail for organising another tax fraud) and others, were convicted in 2017 for their involvement in a film scheme [6]IFA and ex-police officer jailed over film tax scam, FT Adviser, 05 June 2018 https://www.ftadviser.com/your-industry/2018/06/05/ifa-and-ex-police-officer-jailed-over-film-tax-scam/

The way in which HMRC combine their reporting on action related to sideways loss relief schemes, with action on disguised remuneration is becoming a bit of a theme.

In a recent Public Accounts Committee Hearing, Sara Olney, MP for Richmond Park asked, “just quickly on the loan charge what is the progress that has been made on pursuing the promoters of schemes?” [7]Public Accounts Committee Hearing on HMRC Annual Accounts 2020-21, Parliamentlive, 01 December 2021, https://parliamentlive.tv/event/index/d41af347-292b-4dcd-a87b-caca502ee109?in=14:03:31

The reply from Jim Harra stated, “The situation with the promotion of tax avoidance is over recent years, we feel we’ve been very successful at driving the respectable end of the tax profession out of offering tax avoidance, so the large accountancy firms, the banks, the main law firms all now have a code of practice that prevents them from doing that, but what we are left with is a core of about 20-30 hard core promoters.” He then went onto detail how the structure of the market had changed as a result of this, with most schemes now being targeted at employment income rather than high net worth individuals.

What Mr Harra is clearly referencing here is the shutting down of the sideways loss relief schemes. The latest HMRC data shows that these schemes have almost disappeared. However, this type of tax avoidance was always very different from disguised remuneration.

Sideways loss schemes were targeted at high net worth individuals (hence the involvement of major accountancy firms) and often used external financing arrangements to create fictitious losses that were used to write off a high earner’s tax bill (hence the involvement of large banks).

Disguised remuneration schemes, which is what Mrs Olney’s question was directed at, was always a different market, operated by different firms and targeting different groups of people. The figures demonstrate that there has been little progress in tackling these schemes over the last ten years, and it is not correct to suggest that the success in closing down a different from of tax avoidance should be used as a benchmark to assess the department’s performance in confronting the promoters of disguised remuneration schemes.

HMRC are clearly banking on being able to do more after they receive new powers to shut down promoters being considered as part of the current Finance Bill. However, there should be a continued focus on how the criminal law that already exists could be applied to the promoters of schemes.

HMRC’s description of what has been told to taxpayers by the promoters of schemes, which includes “You are told the schemes are safe, compliant or approved by HMRC. This is not true, HMRC does not approve avoidance schemes”, very clearly constitutes a misleading or false statement designed to prejudice the revenue, and therefore could fall under the criminal offence of cheating the public revenue.

HMRC have in the past claimed that the promoters being located offshore makes prosecution difficult. However, as we have pointed out, and as confirmed by Jim Harra in response to a question from Peter Grant at the Public Accounts Committee, there is no impediment for HMRC to arrest promoters located in the Crown Dependencies – That being the case, what are they waiting for?

References[+]

References
↑1 Corporate Report, Use of marketed tax avoidance schemes in the UK (2019 to 2020), HM Revenue & Customs, 30 November 2021, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2019-to-2020
↑2 Correspondence received via email from HMRC on 06 December 2021
↑3 Budget 2016: George Osborne’s speech, Gov.uk, 16 March 2016 https://www.gov.uk/government/speeches/budget-2016-george-osbornes-speech
↑4 Corporate Report, Use of marketed tax avoidance schemes in the UK (2018 to 2019), HM Revenue & Customs, 30 November 2021, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk
↑5 Two jailed for £60m fraudulent HIV cure tax fraud, HM Revenue and Customs, 25 February 2019, https://www.mynewsdesk.com/uk/hm-revenue-customs-hmrc/pressreleases/two-jailed-for-ps60m-fraudulent-hiv-cure-tax-fraud-2840331
↑6 IFA and ex-police officer jailed over film tax scam, FT Adviser, 05 June 2018 https://www.ftadviser.com/your-industry/2018/06/05/ifa-and-ex-police-officer-jailed-over-film-tax-scam/
↑7 Public Accounts Committee Hearing on HMRC Annual Accounts 2020-21, Parliamentlive, 01 December 2021, https://parliamentlive.tv/event/index/d41af347-292b-4dcd-a87b-caca502ee109?in=14:03:31

TaxWatch challenges HMRC over “sweetheart” deal with GE
6th December 2021 by George Turner

TaxWatch has launched the first stage of legal proceedings against HMRC over their decision to settle a billion pound tax fraud dispute with GE.

On 15th September it was reported that GE had reached a settlement with HMRC over a dispute involving a tax avoidance scheme that the company operated between 2004 and 2015.[1]TaxWatch calls for scrutiny over “sweetheart” tax deal between HMRC and GE, TaxWatch, 23 September 2021, https://www.taxwatchuk.org/ge_sweetheart_tax_deal/

GE had previously disclosed that were HMRC to be successful, they would be liable to pay an additional $1.1 billion in tax, before the calculation of interest and penalties. When announcing the settlement, GE disclosed that HMRC had settled for no current tax payment and GE accepting a deferred tax liability of $112 million or just 10% of potential impact that GE had disclosed.

HMRC cleared GE’s use of the scheme in 2005, on the basis that the main purpose of the arrangement was to gain a tax advantage in Australia and not the UK.

However, from 2011 HMRC received disclosures from the Australian Tax Authority which they said demonstrated GE had told the Australian Tax Office that the main purpose of the scheme was in fact to gain a tax advantage in the UK.

In 2018, HMRC is purported to have rescinded the agreement they reached with GE in 2005 on the grounds that GE obtained it by misrepresentation and concealment of material facts, and issued proceedings in the High Court seeking a declaration that the agreement had been validly rescinded.

In 2019, HMRC sought to amend their claim to state that GE made the misrepresentation and concealment fraudulently. The High Court granted the amendment but the Court of Appeal ruled that HMRC had waited too long before making the fraud allegations.

HMRC had applied for permission to appeal to the Supreme Court, and TaxWatch submitted arguments in support. The Supreme Court agreed to hear the case, but HMRC settled with GE before it could be considered by the Court. [2]GE Tax Fraud Case to be heard by Supreme Court, TaxWatch, 28 July 2021, https://www.taxwatchuk.org/ge-tax-fraud-case-to-be-heard-by-supreme-court/

This left in place a precedent of the Court of Appeal which limits the ability of HMRC and indeed all victims of fraud to get out of contracts which had been secured by fraudulent means.

TaxWatch maintains that given the allegations of fraud made by HMRC, the department should have initiated a criminal investigation under their criminal investigations policy. Instead, HMRC exonerated GE from any wrongdoing in its settlement without any investigation taking place under the criminal law.

TaxWatch has now sent HMRC a letter before the claim inviting the department to rescind the settlement agreement with GE by 08 December. If HMRC fails to take action, TaxWatch will consider launching a judicial review of the settlement.

Commenting, George Turner, Executive Director of TaxWatch stated:

“Given HMRC’s allegations of fraudulent misrepresentation, the public would expect criminal proceedings to be opened. Particularly given the large amounts of money at stake and the very high profile of the company and individuals involved.

“Instead, GE have been exonerated by an executive decision from HMRC, without the allegations being put before a court.

“The settlement with GE represents one of the largest settlements in favour of a multinational company that has emerged in recent years.

“It is vital that the department fully accounts for reasons behind their decision, which has seen them give up on over £1bn in taxation.”

References[+]

References
↑1 TaxWatch calls for scrutiny over “sweetheart” tax deal between HMRC and GE, TaxWatch, 23 September 2021, https://www.taxwatchuk.org/ge_sweetheart_tax_deal/
↑2 GE Tax Fraud Case to be heard by Supreme Court, TaxWatch, 28 July 2021, https://www.taxwatchuk.org/ge-tax-fraud-case-to-be-heard-by-supreme-court/

How should HMRC treat the victims of tax fraud?
2nd December 2021 by George Turner

What should be the tax liability of people who are the victims of fraud? That is the important question raised by the case of Mike Grogan, reported in The Times last weekend.

Mr Grogan is one of a number of victims of tax advisor fraud, where scam tax advisors make fraudulent claims for tax rebates on behalf of their clients, pocketing the money themselves before disappearing, leaving the victim with a large tax liability when HMRC uncovers the fraud and seeks to reclaim the tax.

In Mr Grogan’s case, a colleague recommended an adviser who claimed to be able to access tax reliefs on out of pocket expenses connected to his work. Many financial frauds rely on referrals, that see clients paid to refer friends and colleagues. People will let their guard down when approached by a trusted contact.

After engaging in some correspondence with the person from the firm, he provided them with his identity documents to make a claim on his behalf, and he received £3,883. Having an agent submit a tax return on your behalf is nothing unusual, however, as Mr Grogan would later discover, the fraudsters had used his details to impersonate him and submit returns in his name. They changed the nominated bank account to their own account and put in claims for £11,494, pocketing the difference.

The claims were made on the basis that Mr Grogan had invested in an enterprise investment scheme company which entitled him to tax relief. When HMRC would later investigate the claim, they would discover that the company did not exist, and no investment had been made. However, by that point, they had already paid out the money.

As the claim was made in Mr Grogan’s name, they presented him with a demand for the full amount – £11.5k, an amount he had never received. Before he was contacted by HMRC, he was completely unaware of what had happened.

He provided all the details of his contacts with the scam advisor to HMRC, who accept that he is the victim of fraud. However, they have not waived the liability and continued to demand full payment. In a review of his case carried out by an HMRC officer, he was told: “I cannot see that HMRC is at fault in this matter. The fraud has been enabled by you and you are sadly the victim.”

He was also told that providing login information to the scammers for his government account “was akin to providing [the scam company] with a pin code for your bank account in terms of security.”

HMRC are putting all of the blame on what they accept is the victim of crime, whilst accepting no responsibility for the fact that they made a payment on the basis of a false claim without making any checks themselves.

This was an issue picked up by James Wild MP, Member of Parliament for North West Norfolk at a recent hearing of the Public Accounts Committee. He raised the advisor fraud case reported in The Times and asked Jim Harra, the head of HMRC, whether they carried out any checks before making payments to these kinds of scams. Mr Harra confirmed that HMRC’s policy since the mid-nineties has been “process now check later”.

In this case there were a number of red flags which HMRC could have picked up on. The tax relief was being claimed under a scheme usually accessed by high net worth individuals, yet Mr Grogan is not a high earner. The company that the scheme was being claimed for did not exist.

With EIS, it is a requirement for companies involved in the scheme to seek certification from HMRC, and for investors to obtain a compliance certificate from the company before making the claim.[1]Venture Capital Schemes Manual, HMRC, 09 March 2016, https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm14130. It could be argued that given that in this case HMRC had not received a valid claim, they should not have been able to make the payment in the first place.

The case of Mr Grogan shows how HMRC’s policy of “process now check later” can easily be abused by fraudsters to pile liabilities onto their victims before HMRC get around to checking. For HMRC to accept no responsibility for the deficiencies in their own processes, whilst accusing the victim of being “careless” is victim blaming.

There is no dispute that Mr Grogan is a victim of crime, HMRC acknowledge that, and in pursuing Mr Grogan for the money that has been obtained fraudulently, they end up punishing the victim rather than the perpetrator of the crime.

This unfortunate situation is not inevitable. HMRC are the public body entrusted with “care and management” of the tax system and they have broad discretion over how they execute that duty. It would be perfectly within HMRC’s power to settle the matter for a much lower amount (i.e. the amount that Mr Grogan actually received). HMRC makes settlements with large taxpayers all of the time.[2]TaxWatch calls for scrutiny over “sweetheart” tax deal between HMRC and GE, TaxWatch, 23 September 2021, https://www.taxwatchuk.org/ge_sweetheart_tax_deal/

HMRC also have broad powers of criminal investigation which would allow them to pursue the advisor, and recover funds under proceeds of crime legislation, relieving them of the need to recover the funds from the victim. This is a much more difficult process for HMRC, but surely a course of action more in line with the principles of justice.

In this case, HMRC are refusing to disclose to Mr Grogan whether or not they have opened a criminal investigation. Again, this is a bizarre outcome of having the tax authority (which is under strict duties of confidentiality) taking on the role of the police. If someone was a victim of any other form of crime and walked into a police station to report it, it would not be acceptable for the police to reply, thanks, but we won’t tell you if we are going to do anything about it.

Overall the case raises important issues about how HMRC deals with the victims of tax crime. As the system is currently set up, the only victim is seen as the Crown, and HMRC seek to recover losses on behalf of the Crown. But as this case illustrates, taxpayers can be the victims of fraudulent tax advisors too, and it is often the taxpayer that ends up being severely impacted by HMRC action to recover the bill. Once that bill is recovered, there is little incentive for HMRC to go after the fraudster.

This is not a marginal issue involving a few shady actors. Recent years have seen an increasing number of claims brought by people involved in tax avoidance alleging negligence or even fraud against their advisors for recommending that they join a scheme and advising them that it was legal. When HMRC challenge the schemes and defeat them through the courts, that advice is demonstrated to be wrong but the tax bill lands at the feet of the taxpayer.

Many will be unsympathetic to the plight of people involved in tax avoidance schemes, but there is a broad spectrum of culpability on the part of the taxpayer. Mike Grogan’s case is an extreme example where the taxpayer had no clue what was being done in his name and the adviser stole money claimed on his behalf. In other cases, such as with some loan based disguised remuneration schemes, promoters have given wildly misleading statements about the schemes, in some cases claiming that they had been approved by HMRC.

The law is clear that where advisers behave dishonestly, they are committing tax fraud. HMRC needs to develop a better policy as to how it deals with the victims of tax fraud, beyond simply asking them to pay up and telling them it’s their fault.

References[+]

References
↑1 Venture Capital Schemes Manual, HMRC, 09 March 2016, https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm14130
↑2 TaxWatch calls for scrutiny over “sweetheart” tax deal between HMRC and GE, TaxWatch, 23 September 2021, https://www.taxwatchuk.org/ge_sweetheart_tax_deal/

G7 tax deal represents a tax cut for big tech in the UK – new analysis
27th September 2021 by George Turner

In June 2021 the G7 announced that it had reached an agreement on proposals to change the way that the largest multinational companies are taxed. This included a mechanism to redistribute profits to countries where sales are made (such as the UK), often referred to as “market jurisdictions” . The final agreement is due to be signed off in October 2021 at the OECD.

A new analysis from TaxWatch has demonstrated that tech giants will almost certainly end up paying less tax under the proposals put forward by the G7 than they are currently liable for under the digital services tax.

Scrapping digital services taxes was a key demand of the United States in the negotiations for a new global tax deal, which is expected to be finalised next month at the OECD.

TaxWatch has undertaken an analysis of the formulae used to calculate the DST and the potential future tax liabilities under the G7 proposals, and concludes that with a digital services tax rate of 2%, the current UK DST rate, and a corporation tax rate of 19%, the current UK corporation tax rate, a company would have to have a profit margin of 62% in order to pay more in tax under the G7 proposals than under the DST. Historically tech companies have never achieved these profit margins.

If the UK tax rate rises to 25%, as it is currently scheduled to do, then the profit margin required before a company ends up paying more than under the DST falls to 48%, a margin rarely seen historically.

The paper also analyses the proposals that have recently been put forward by the G24 group of countries, which advocate for more profit to be reallocated to countries where revenues are made (such as the UK) under the OECD formula. If these proposals were adopted, then tech companies would be likely to end up paying more in tax in market jurisdictions, with the result that profit margin required before a company pays more dropping to 44% assuming a 19% corporate tax rate or 36% assuming a 25% corporate tax rate.

The full report can be found as a web page here and as a PDF here.

 

Tax avoidance can be tax fraud – says government and MPs
29th April 2021 by George Turner

In response to critics that have questioned why HMRC has not done more to bring criminal prosecutions against the enablers and promoters of tax avoidance schemes, the government’s standard response has been to state that “there is no criminal offence of promoting or marketing tax avoidance schemes.”

Now, a recent debate in the House of Commons has confirmed a significant shift, with MPs and Ministers recognising that the promotion of tax avoidance often involves fraudulent conduct which can leave promoters liable for several criminal offences.

Tax avoidance and tax fraud

That the promotion of tax avoidance is often linked to fraud is a position that TaxWatch has been advocating for some time.

Speaking at the FS tax conference in November 2020, our Executive Director set out that

“many, and in my opinion the majority of tax avoidance schemes could easily fall foul of the law on cheating. Where there has been an active attempt to conceal the scheme, or a failure to disclose information relating to a scheme, that is clearly fraud.”

It was at this conference that the Director of HMRC’s Fraud Investigation Service revealed, in response to the comments by our Executive Director, that HMRC is conducting multiple criminal investigations into the tax avoidance schemes used by an undisclosed number of multinational companies to avoid tax. This was reported by the FT in January 2021.2

TaxWatch was invited to give oral evidence to the House of Lords Economic Affairs Finance Bill Sub Committee, which published its report on 19th December 2020. This report backed TaxWatch’s calls for HMRC to start more criminal investigations into the promoters of disguised remuneration tax avoidance schemes, including looking at historic cases.

Our Executive Director also responded to the Government’s call for evidence on tackling disguised remuneration tax avoidance, which ran from 21 July to 30 September 2020, In its response the government reflect the views of TaxWatch and others by stating:

“A number of respondents felt that promoters of schemes are not deterred by financial penalties and sanctions. They supported greater use of existing criminal powers including prosecuting promoters for fraudulent conduct.”3

The Government’s response accepted TaxWatch’s analysis on the legal position with regards to the promotion of tax avoidance schemes and marked a fundamental shift from the position that “there is no criminal offence of promoting or marketing tax avoidance schemes”:

“The Government recognises that the design of arrangements that are sold as avoidance schemes may in fact enable fraud.”4

The Finance Bill debate

On Tuesday 20 April 2012 MPs met to scrutinise the detailed provisions of the Finance (No. 2) Bill in a Committee of the Whole House.5

The most substantive amendment of the day,6 in the name of members of the All-Party Group on Anti-Corruption and Responsible Tax, sought to amend schedule 29 of the bill so that anyone subject to the Promoters of Tax Avoidance Schemes (POTAS) regime, and promoting or enabling abusive tax arrangements, should be deemed to have been acting dishonestly unless they can show that they acted in good faith and believed the arrangements to be reasonable.

This would mean, in respect of the criminal offence of cheating the public revenue, that a person would automatically be treated as dishonest where it had been demonstrated that they had promoted abusive tax arrangements as defined in the General Anti-Abuse Rule (GAAR) and there would be no requirement for any prosecution to prove dishonest conduct.

While opposing the amendment on a technicality, the Government re-emphasised it’s recognition “that the design of arrangements that are sold as avoidance schemes may in fact enable fraud.”

According to the Financial Secretary to the Treasury – Jesse Norman PM:

“I fully agree that promoters who break the law should face the consequences of their actions. That is why the Government are putting so much emphasis on anti-avoidance measures and measures against promoters of tax avoidance in the Bill and elsewhere. We should be under no illusions about this. It is not honest to market tax schemes or arrangements that are known not to work and that at their heart feature false statements.

However, cheating the public revenue is the most serious tax offence, carrying a potential sentence of life imprisonment. It is therefore right that the prosecution should have to prove its case beyond a reasonable doubt—the usual standard of proof in a criminal case—and to demonstrate that the person has been dishonest in order to secure a conviction of cheating the public revenue. We all want fraudulent operators to be brought to book, but shifting the burden of proof for such a serious crime on to the defendant to prove their innocence is at odds with the principles of our criminal justice system and would undermine the right of a defendant to remain silent. The burden should be on the prosecution to prove dishonesty to the criminal standard of proof. That is fundamental to the rule of law.”7

We believe that tax avoidance schemes “at their heart feature false statements” as a matter of course.

The Shadow Financial Secretary to the Treasure, James Murray MP , welcomed the amendment, stating ([c.896]:

“This kind of change is crucial if we are to shift towards more criminal prosecutions for the promoters of tax avoidance schemes, and to shift the gear of the Government’s approach.

At the moment, where tax avoidance has occurred, the system lands liabilities on the tax payers, who are usually not tax experts and may have been falsely told that a tax avoidance scheme is lawful.

In contrast, the promoters of tax avoidance schemes are allowed far too often to get away with it. We therefore welcome any efforts to strengthen penalties for the promoters of failed tax avoidance schemes.

But we have seen nothing from the Government today to raise the stakes and to make greater use of the powers HMRC already has to bring criminal prosecutions against the promoters of fraudulent tax schemes.”

“We know that HMRC recognises its power to use criminal investigation approaches to tackle the promotion and enabling of tax avoidance schemes, but in a letter the Financial Secretary sent me in January this year, he admitted that, since the formation of HMRC’s fraud investigation service in 2016, only 20 individuals have been convicted for offences relating to arrangements that have been promoted as tax avoidance. An average of around four people a year does not feel like a concerted effort.”

The principles behind the amendment attracted cross party-support on the back benches.

Andrew Mitchell, co-chair of the all-party group on anti-corruption and responsible tax [c.898] stated:

“Advisers who set up these schemes often have an aura of authority, because they are lawyers, accountants and professional people, which those whom they advise may not be.

I want more to be done to ensure that, where these bad schemes of tax evasion are put together by professional advisers, they do not get off scot-free while the people they put into these devices, or talk into going into them, take the rap. It is not right that they should just lose the fees that they earn, which I think is currently the position: we should toughen the financial penalties.”

Dame Margaret Hodge, co-chair of the all-party group on anti-corruption and responsible tax [c899-900]

“I simply say this to the Minister: he may have reservations about the technicalities of our proposals, but he should at the very least accept the principle that underpins them and say so today.

Big corporations and high net-worth individuals who engage in tax avoidance schemes and financial crime do not dream up these schemes on their own; they are invented and developed by the huge army of tax professionals—accountants, lawyers, banks and advisers—who spend their working life trying to identify loopholes and wheezes. The schemes they devise do not just help but actively encourage people not to pay their rightful contribution through tax to the common purse for the common good….

If advisers and promoters involved in a scheme know that the scheme does not work, they are committing the criminal offence—mentioned by the Minister—of cheating the public revenue. They are breaking the law, so they should be pursued, charged and convicted with a criminal charge. That does not happen now”.

Kevin Hollinrake, the Member of Parliament from Thirsk and Malton talked about his own experience of being approached by tax avoidance merchants during his career in business. He went onto say that reputable accountants would not market schemes if they were aware that their activities might end up with jail time. [c903-904]:

“It was probably 15 years after we set up our business that our own accountants came to us—we were making reasonable profits by then—and suggested that we take advantage of a tax avoidance measure, and a pretty aggressive one in our view. This was not a particularly unusual accountants—it had a decent reputation locally – but so much money potentially runs through these schemes that some promoters inevitably see an opportunity for themselves.

I must tell the House that we told our adviser that we did not want to take part in such a scheme, and there were two reasons: we believed that people should pay their tax—that we should all pay a fair amount of tax—but also that any person who takes up such measures should be afraid that HMRC will one day come along and say, “Those measures were not appropriate.” By that time, a lot of the money that they think they have saved has gone out in costs to promoters and the rest of it, and they are left with a huge bill.

Had the person who promoted that scheme to us—our accountant—thought that he would potentially end up on jail, I do not think he would have come to us and told us about it. This was a reputable local person, and perhaps he did not even think that tax avoidance at that point was fraud. Nevertheless, it certainly can be fraud, and in many cases it is. If we are willing to hold people to account, ultimately through a criminal prosecution—as HMRC can, of course, as the Minister pointed out earlier—there would be a lot less of this kind of promotion and a lot fewer of these activities.”

Catherine West, the MP for Hornsey and Wood Green cited TaxWatch’s recent report into criminal prosecutions for tax crimes, as compared to criminal prosecutions for benefits crime [c 908]:

“The scale of tax offences is clear, with a recent TaxWatch report finding that between 2009 and 2019, the UK prosecuted 23 times as many people for benefits offences as for tax offences—that theme has been echoed in today’s speeches—despite the fact that the value of tax fraud is nine times higher than that of benefit fraud. …

We know that a lot of this work is about priorities, and we need to prioritise criminal prosecutions so that there is not a decrease in taxation, as there has been of 39% since 2015. We need to look at the balance of the DWP employing 3.5 times more staff in compliance than HMRC. We know that we have to improve that balance, because quite simply there is much more money to be found in illicit finance and among tax avoiders than from those eking out a living on universal credit or personal independence payments.”

Ruth Cadbury, one of the co-chairs of the APPG on the loan charge, criticised the government for not doing enough to hold loan scheme promoters to account [c 910]:

“We need an effective tax avoidance policy that criminalises those promoting tax avoidance, rather than going for the workers inadvertently caught up in them, as this Government and HMRC have been doing with the loan charge in particular. That is the wrong target. While ordinary people who are victims of mis-selling are facing ruin and bankruptcy, the Government have done too little, too late to go after those who promoted the schemes.”

The whole debate can be seen here: https://parliamentlive.tv/event/index/79ba64da-407e-49d9-b8d7-ed56d11ab6ff?in=10:36:31&out=10:43:21

Too good to be true?

In seeking to warn people against using tax avoidance schemes, the government has frequently said that “if it looks too good to be true it probably is”. The increasing recognition from the Government that the “design of arrangements that are sold as avoidance schemes may in fact enable fraud” is a much more powerful message. It tells the public why tax avoidance schemes are “too good to be true”.

Photo credit: Parliament by James Newcombe

1  @LCAG_2019, Twitter, 19 July 2019, https://twitter.com/i/status/1152149052097585153

2 ‘HMRC pursues multiple criminal investigations in corporate tax disputes’, Financial Times, 11 January 2021 https://www.ft.com/content/e7ef0ec3-f4de-40f9-ad95-0e7587ac7e2d

3 Call for evidence: tackling disguised remuneration tax avoidance, Summary of Responses, HMRC, March 2021, paragraph 2.34 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972080/Call_for_evidence_tackling_disguised_remuneration_tax_avoidance_-_summary_of_responses.pdf

4 Ibid, paragraph 2.34. Emphasis supplied.

5 https://hansard.parliament.uk/commons/2021-04-20/debates/D1535D18-E261-4112-8739-964CE7F5F994/Finance(No2)Bill

6 Amendment 77.

7 Column 896. Emphasis supplied.

​TaxWatch launches the Tax and the Rule of Law project
8th April 2021 by George Turner

When we created TaxWatch a little over two years ago, our intention was to build an institution that represented the public interest in tax affairs.

The importance of this mission is clear. We are all taxpayers in one way or another. Whether this be the VAT on products and services we all buy, or income tax on our earnings. With tax at around 1/3rd of GDP, the shape of the tax system and how tax law is applied has a broad impact on the economy and society as a whole.

So much of the discussion on tax has been dominated by small, exclusive communities of tax professionals. Often these individuals are highly conflicted in terms of the interests they represent and have an interest in making tax inaccessible.

We believe that the near universal importance of the tax system to our daily lives means tax policy can only be properly developed when the public have access to clear, independent, and above all accessible information on tax issues – and in particular issues of major public concern such as tax avoidance.

To that end, we have sought to engage in high quality research which sets out the facts.

However, no matter how important that part of TaxWatch’s mission has been, our public interest mission extends beyond the production of information. We want to use the knowledge we have gained in order to make sure that the law is enforced to the benefit of all.

Today, we are launching an initiative which opens up a new, innovative and exciting front in our public interest mission – our Tax and the Rule of Law project.

This initiative will seek to improve both the application of the rule of law in tax administration by ensuring that the public interest is more sufficiently and more effectively represented in the courts and by regulators. This will involve a number of activities which we believe are ground breaking.

​Intervening in the public interest

When judges decide cases brought to them in the courts, the importance and effect of the decisions they make often go beyond any immediate impact on the people contesting the claim.

For that reason, it has long been established that there is a role to play for NGOs in making interventions in court cases to make submissions in public interest.

As set out by Lord Hoffmann in E v The Chief Constable of the Royal Ulster Constabulary (Northern Ireland Human Rights Commission intervening) [2008] UKHL 66, [2009] 1 AC 536:

“Leave is given to such bodies to intervene and make submissions, usually in writing but sometimes orally from the bar, in the expectation that their fund of knowledge or particular point of view will enable them to provide the House with a more rounded picture than it would otherwise obtain. The House is grateful to such bodies for their help”

Public interest interventions are common in various areas of law, such as human rights and environmental law. However, we believe that these kinds of interventions have never been made by an NGO before concerning UK tax law.

​Holding HMRC to account on tax compliance

As the government agency responsible for the collection of tax, HMRC play a key role in enforcing the tax system. Our Tax and the Rule of Law project will seek to ensure that the law is enforced fairly, equally and appropriately. We will do this through research and advocacy looking at how the law is applied in the field of taxation.

​Holding regulators to account

Another key area of our work will be holding regulators to account. Regulators play an important role in making sure that tax professionals act in the public interest. But to ensure that duty is being carried out, the public interest has to be represented, particularly in an area where so much regulation is carried out my membership associations.

Recent years have seen a number of scandals involving regulated professionals involved in unethical and unlawful tax practices. We want to ensure that regulators are playing their role in preventing and rooting out such practices.

In order to take forward this project we are hugely pleased to announce that we have hired Dr Osita Mba. Osita comes with a vast amount of experience in tax law, having been an HMRC lawyer for seven years and completed a PhD in tax law.

His PhD research, which studied the nature and meaning of ‘Tax Avoidance’ and ‘Tax Evasion’ in English law, has an obvious relevance to much of the work TaxWatch does and a particular relevance to our new initiative. As such he will make a huge contribution to the team to advancing research and thinking in this area.

We are also pleased to announce we have secured the backing of the Joffee Trust, who has pledged £25k a year to support this project over the next two years.

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