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Loan Charge

Beyond the Loan Charge: Will the most recent proposals finally shut down disguised remuneration schemes?

24th April 2023 by Dr Pete Sproat
  • In 2016 Chancellor George Osborne declared the introduction of the loan charge would “shut down disguised remuneration schemes”.
  • Yet HMRC estimates 31,000 people used such schemes in 2020-21, resulting in a loss of £400m in tax.
  • The authorities have attempted to address the demand and supply of such schemes, using mainly administrative and civil penalties.
  • While tens of thousands face the loan charge, few enablers have faced hurtful sanctions.
  • Fewer than six financial penalties for enabling defeated tax avoidance schemes have been issued since 2017.
  • Fewer than five investigations into disguised remuneration tax avoidance schemes resulted in a criminal charge since 2017.
  • Recent proposals are unlikely to shut down the disguised remuneration schemes anytime soon.

In the recent Spring Budget the government proposed to consult on a new criminal offence for those who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme1. This is welcome news, for the latest official estimates suggest that in 2020-2021, approximately 31,000 people were still using such schemes, and the UK lost £400m in tax as a result2. A staggering 99% of the tax avoidance market3 involves disguised remuneration (DR) – contrived arrangements that use schemes which use loans, annuities, shares or other valuables to make allegedly non-taxable payments in lieu of wages. Hospital workers constitute the largest group who are involved in such schemes today4. Many do not know they are participants in such schemes – at least until later when HMRC demand the tax owed. Others are unaware of HMRC’s view these schemes do not work5.

However, in terms of penalties it has been the users, not those promoters and enablers of unsuccessful schemes, who have been the most heavily penalised, most notably in the form of the Loan Charge imposed upon 50,000-100,000 people6. Introduced in the Finance Act 2017, the controversial policy places an income tax charge on the value of outstanding ‘loans’ on 5th April 2019 held by people who used disguised remuneration schemes. As originally drafted, the charge applies to any ‘loan’ entered into since 1999. In the 2016 Spring Budget speech, then Chancellor of the Exchequer George Osborne declared the introduction of the loan charge would: “Shut down disguised remuneration schemes”7. It is clear that his prediction has yet to come true.

Action taken

Over the past two decades, the authorities have correctly attempted to address both sides of the tax avoidance problem. In terms of demand, legislative changes have required the earlier payment of tax in dispute, as well as the loan charge. HMRC has been gathering lots of information about the tax avoidance market and this has enabled it to try to nudge and prompt the public into compliance, using emails, blogs, webpages, dedicated agent services and a helpline8.

The collection of information has also facilitated HMRC’s attempts to deal with suppliers of schemes operating outside of the spirit of the laws on tax. Thus, tax advisers have been required to disclose details of their avoidance schemes promptly under the Disclosure of Tax Avoidance Schemes (DOTAS) regime since 2004. However, while this enabled HMRC to identify many potential problems more quickly, within a decade the government felt the need to introduce the Promoters of Tax Avoidance Schemes (POTAS). It empowered HMRC to impose conditions on the behaviour of: “a small number of promoters who operate in a culture of non-disclosure, non-co-operation and secrecy”9. It also enabled the issuing of notices to promoters to stop them from selling schemes that had been defeated.10 Since then, HMRC has been authorised to impose financial penalties upon any enablers involved in the managing, marketing, designing or financing of defeated, abusive tax arrangements that were entered into on or after 16 November 2017.

HMRC has introduced, or supported, new codes of behaviour including its own Standard for Agents (2016), and the tax and accountancy professions’ Professional Conduct in Relation to Taxation (2013), and it reports tax advisors to their professional bodies. In addition, it can suspend tax agents’ access to its systems, or refuse to deal with any who seriously abuse the tax system11. HMRC frequently litigates civil action in tax tribunals, and occasionally it takes action against tax evaders and the promoters of tax avoidance schemes in criminal courts.

As a result of these changes and legal decisions, the nature and focus of disguised remuneration schemes have changed over the last decade or so. A HMRC policy paper states: “their creation and promotion have moved to the more disreputable and shadier end of the market”12. These days, marketed avoidance schemes almost always involve employer businesses and “umbrella” companies engaging larger numbers of contractors or agency workers, operating arrangements which falsely claim to reduce Pay As You Earn and National Insurance Contributions. Umbrella companies can provide a legitimate business structure and services for contractors, but in some instances, they facilitate avoidance schemes.

Currently, HMRC estimate there are around 70 to 80 non-compliant umbrella companies in operation13. This is no improvement on its suggestion there were 60 to 80 of these operating14 in 2019-20. Similarly, each of its recent reports on the marketing of disguised remuneration schemes note about 20 to 30 promoter organisations: “are behind most of the tax avoidance schemes that are marketed to the UK public”15. The fact that as many new promoters and companies have entered the market in recent years as have left, suggests HMRC’s actions have failed to shut down disguised remuneration schemes. One result is the authorities have proposed or introduced, even more changes in the last few years.

 

Will the latest approaches defeat disguised remuneration schemes?

Recent ideas to reduce demand include; publishing a guide to help contractors engaged through umbrella companies, greater cooperation between HMRC and the Advertising Standards Authority (ASA), and listing promoters and enablers of tax avoidance schemes in the hope recipients of their advice will leave these schemes.

However, it is difficult to suggest these will have more than a marginal impact on the demand side. It is incredibly optimistic to expect most contractors to read official guides, or the newly employed to walk away if they find out they are paid in an unusual manner16.Similarly, even if the enablers are ‘named and shamed’ contemporaneously – presently it can take years to be listed, and names are removed from the list after 12 months – it is unrealistic to assume tens, if not hundreds of thousands of temporary workers will conduct regular checks on those who pay them A slight decrease in the number of deceptive adverts may mean some people do not fall for the schemes. The ‘naming and shaming’ list may also have a marginal impact on the supply side, in that some potential enablers may not risk the listing of reputation, or may fear being reported to their professional body as a result.

Interestingly, it was a listing on 18th August 2022 that triggered TaxWatch’s examination of Gateway Outsource Solutions and its complaint to the ICAEW about its director Paul George Ruocco17. However, while better contact with professional bodies may deter a few potential suppliers, these days promoters are almost never members of the professional bodies – as HMRC itself noted18. This then takes us on to consider other recent approaches to address the supply side.

To address the problems arising from the non-cooperation, delaying tactics by those promoting tax avoidance schemes and their dissipation of assets in order to avoid fines, the DOTAS and POTAS regime has been toughened to allow HMRC to obtain information from promoters earlier than in the past. The Finance Act 2022 authorised HMRC to apply for freezing orders when it has a good arguable case there may be a dissipation of assets to prevent the imposition of a tax penalty. It also enabled the organisation to petition a court to wind-up companies operating against the public interest. This can include persistent non-compliance with anti-avoidance rules, or a repeated failure to respond to HMRC’s requests for information19.

To address the problem of ‘phoenixism’ – the re-birth of a company by people involved in one that has been dissolved in order to avoid tax obligations – the government amended legislation to allow POTAS obligations to be transferred to other scheme-promoting entities controlled by the same individuals. To facilitate this, HMRC proposes better cooperation with the Insolvency Service. It has also suggested giving relevant cases to the Financial Conduct Authority. Finally in this regard, the government introduced legislation which allows HMRC to impose a new penalty on UK-based entities that assist the activities of offshore promoters. In general, these people are more difficult to deal with because of the complex nature of schemes and the UK’s reliance on the authorities elsewhere. The value of the new penalty on the UK promoter can be as high as the total fees earned by all those involved in the development and sale of that tax avoidance scheme – potentially including fees paid directly to the offshore promoter, and any other entities or persons who formed part of the ‘promotion structure’ for the scheme.20

These moves are a step in the right direction, in particular the stiff financial penalties facing UK-based entities in league with overseas promoters contained in the Finance Act 2022. However, to produce a sudden step-change HMRC needs to implement all of these approaches – especially the tougher ones – at speed and at scale. Unfortunately, this seems unlikely.

For example, HMRC has had the ability to charge an enablers penalty since 2017. However, it requires the scheme use to be defeated and an opinion from the General Anti Abuse Rule (GAAR) panel. The first opinion of the panel in respect of an enablers’ penalty was published in October 2022. In addition, while it has been possible to obtain freezing orders and winding-up orders for almost a year, not one of either21 had been obtained by the time we spoke to HMRC in March 2023. This suggests each process either takes a long time or HMRC did not have targets in mind when the legislation was introduced.

The speed at which various sanctions and financial penalties can be imposed by HMRC is unlikely to increase anytime soon. This is because the number of cases outstanding at the First-tier Tax Chamber has increased by 52% to 45,000 in the last year – primarily, as a result of it receiving a high number of cases and the time it takes to decide each22.

The scale of implementation is important for if enablers are to be deterred, they need to believe there is a good chance they will face a strong sanction. This seems unlikely, given HMRC has not implemented the tougher sanctions at scale in the recent past.

It did make 75 professional interest disclosures for any breach of its Standards for Agents to professional bodies23 between 2018-19 and 2021-22, but this is will have little impact given most promoters are not members. HMRC has ‘named and shamed’ 27 promoters of tax avoidance schemes24 as of 23rd March 2023. While we will not find out the impact of this until next year, it is unlikely to put a stop to the problem of mass-marketed avoidance schemes given HMRC’s belief new companies continue to join this illicit market as others leave.

As for the use of sanctions that have a greater chance of deterring, HMRC has issued fewer than six financial penalties for enablers of defeated tax avoidance schemes25 since 2017. Similarly, it opened only 15 criminal investigations in relation to arrangements that it categorised as disguised remuneration tax avoidance schemes between 1st April 2017 to 8th March 2023. Of these, fewer than five progressed to a charging decision or resulted in a criminal conviction26. Surely, this is a major reason the number of promoters has remained the same in recent years?

As for the ideas in the recent budget, the idea of expediting the disqualification of directors of companies involved in promoting tax avoidance is unlikely to be a game-changer for disqualified directors can simply find others to front their companies. The proposal to prosecute those who refuse to stop promoting schemes is more promising – especially if it contains strong sanctions including imprisonment. However, even if it is proposed the new law will cover schemes in operation now, it is unlikely to be applied at the appropriate scale anytime soon. The consultative and legislative processes take a while, and not everything gets through it – as advocates of compulsory professional indemnity insurance for tax advisers will remember. Similarly, the proposal could be shelved afterwards – as happened recently to the plan to create a single enforcement body to monitor the treatment of employees by umbrella companies and others.

Unless HMRC decides to change its criminal investigation efforts from focusing on “very serious evasion and organised crime”27, the number of enablers prosecuted is unlikely to change dramatically. In sum, he main reasons the number of promoters is not declining is because enforcement action takes too long, many of the actions are weak and stronger sanctions are rarely applied. What needs to happen is for HMRC to use its wide-ranging set of powers – including criminal investigations – at speed and at scale. Perhaps then the government will be able to do what George Osborne’s loan charge failed to do, shut down disguised remuneration schemes. Hundreds of millions of pounds a year in lost tax revenue are at stake.

This story was featured in The Times

 

1 Spring Budget 2023, HM Government, 15 March 2023, https://www.gov.uk/government/publications/spring-budget-2023/spring-budget-2023-html

2 Use of marketed tax avoidance schemes in the UK (2020 to 2021), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2020-to-2021

3 Use of marketed tax avoidance schemes in the UK (2020 to 2021), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2020-to-2021

4 Use of marketed tax avoidance schemes in the UK (2020 to 2021), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2020-to-2021

5 Tax avoidance loan schemes and the loan charge, HMRC, updated 9 February 2022, https://www.gov.uk/government/publications/loan-schemes-and-the-loan-charge-an-overview/tax-avoidance-loan-schemes-and-the-loan-charge . For a more detailed discussion of the law with regards to tax avoidance see TaxWatch’s briefing: Is Tax Avoidance Legal? Available from: http://13.40.187.124/is_tax_avoidance_legal/

6 Ray McCann, President of the Chartered Institute of Taxation in answer to Q.105. Oral Evidence: The conduct of tax enquiries and resolution of tax disputes, House of Common Treasury Sub-committee, HC 733, 10 December 2021, https://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-subcommittee/the-conduct-of-tax-enquiries-and-resolution-of-tax-disputes/oral/93722.html

7 Budget 2016: George Osborne’s speech, Gov.uk, 16 March 2016, https://www.gov.uk/government/speeches/budget-2016-george-osbornes-speech

8 Managing tax compliance following the pandemic: HM Revenue & Customs. SESSION 2022-23. National Audit Office. 16 December 2022. HC 957. https://www.nao.org.uk/wp-content/uploads/2022/12/managing-tax-compliance-following-the-pandemic-report.pdf

9 HMRC Investigations Handbook 2016/17 (Bloomsbury, 2017), M. McLaughlin, (ed). p147

10 New powers for HMRC: fair and proportionate? House Of Lords, Economic Affairs Committee, 19 December 2020, p11.

11 Raising standards in the tax advice market, HMRC, 10 March 2022, https://www.gov.uk/government/publications/raising-standards-in-the-tax-advice-market-hmrcs-review-of-powers-to-uphold-its-standard-for-agents

12 The Rt Hon Jesse Norman MP, the then Financial Secretary to the Treasury in: Tackling promoters of mass-marketed tax avoidance schemes, HMRC, updated 23 March 2020, https://www.gov.uk/government/publications/tackling-promoters-of-mass-marketed-tax-avoidance-schemes

13 Use of marketed tax avoidance schemes in the UK (2020 to 2021), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2020-to-2021

14 Use of marketed tax avoidance schemes in the UK (2020 to 2021), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2020-to-2021

15 Use of marketed tax avoidance schemes in the UK (2020 to 2021), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2020-to-2021

16 In addition, Meredith McCammond of the Low Incomes Tax Reform Group suggested: “The list will also do nothing for those who may have little choice to be paid by a non-compliant umbrella company if they want the work.” ‘HMRC adds three AML schemes to its tax avoidance blacklist’, Contractor, Simon Moore, 31st January, 2023, https://www.contractoruk.com/news/0015769hmrc_adds_three_aml_schemes_its_tax_avoidance_blacklist.html

17 Director of suspected HMRC tax avoidance scheme continues to be member of professional body, TaxWatch, 02 Februart 2023, http://13.40.187.124/hmrc_name_shame_complaint/

18 Use of marketed tax avoidance schemes in the |UK (2018 to 19), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk

19 Clamping down on promoters of tax avoidance: summary of responses, HMRC, updated July 2021, https://www.gov.uk/government/consultations/clamping-down-on-promoters-of-tax-avoidance/outcome/clamping-down-on-promoters-of-tax-avoidance-summary-of-responses

20 Clamping down on promoters of tax avoidance: summary of responses, HMRC, updated July 2021, https://www.gov.uk/government/consultations/clamping-down-on-promoters-of-tax-avoidance/outcome/clamping-down-on-promoters-of-tax-avoidance-summary-of-responses

21 According to a spokesperson from HMRC, 13 March 2023.

22 Tribunal Statistics Quarterly: July to September 2022, Ministry of Justice. 8 December 2022, Section 8. www.gov.uk/government/statistics/tribunal-statistics-quarterly-july-to-september-2022/

23 During the period 2018-19 to 2021-22. HMRC FOI2022/72035, 05 December 2022.

24 According to a spokesperson from HMRC, 14 March 2023.

25 FOI2023/12152, HMRC, 23 March 2023. HMRC used a legal exemption in the Freedom of Information legislation to avoid providing a more precise answer.

26 FOI2023/08373, HMRC. 08 March 2023. HMRC used a legal exemption in the Freedom of Information legislation to avoid providing a more precise answer.

27 Jim Harra, Chief Executive and First Permanent Secretary, HMRC, in answer to Q 176. The Work of HMRC, Oral Evidence. House of Commons Treasury, 30 November 2022, https://committees.parliament.uk/oralevidence/11972/html/

 

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

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 to HMRC: Prosecute sellers of disguised remuneration schemes

2nd October 2020 by Alex Dunnagan

TaxWatch Executive Director, George Turner, has written to HMRC calling for those who sell disguised remuneration tax avoidance schemes to be investigated for tax fraud. We have previously written to the Economic Crime Unit of the City of London Police, calling on the department to open an investigation into sellers of these schemes for defrauding their clients.

HM Revenue & Customs is holding a consultation and has asked for views on ways to tackle future use of disguised remuneration tax avoidance. The consultation sets out an array of rules that HMRC has introduced in recent years in an attempt to restrict the ability of promoters of tax avoidance schemes to operate effectively.

However, these measures stop short of the one thing that HMRC could do to effectively shut down the sale and marketing of these schemes – the application of existing criminal law to prosecute those who design, operate, and promote dishonest tax avoidance schemes.

There is a myth that appears to have taken hold that the promoters of tax avoidance schemes have done nothing wrong, and that the promotion of a tax avoidance scheme is “not against the law”.

However, under the law, where someone is involved in the promotion or operation of a tax avoidance scheme that is dishonest, criminal proceedings can be brought against them. This was demonstrated in the case of R vs Charlton, when the Crown successfully brought a prosecution against three accountants and a barrister for their roles in the design, operation and promotion of a failed tax avoidance scheme. All of the defendants received custodial sentences.

HMRC’s characterisation of the activities of the promoters of disguised remuneration schemes, which includes “trying to hide their activities from HMRC by not complying with their legal obligations to disclose their scheme”and “ignoring or only partially answering HMRC enquiries”, clearly fit the circumstances under which HMRC should open a criminal investigation under their criminal investigations policy.

Despite this, criminal investigations have been rare, and we are unaware of any promoter being successfully prosecuted for tax fraud.

The letter also highlights the importance of criminal prosecution in order to protect the public from exploitation by dishonest promoters. Users of disguised remuneration tax avoidance schemes often end up being the victims of fraud themselves, with scheme promoters providing knowingly false and misleading information about the legality of these schemes in order to persuade people to join them. However, whilst scheme users have been actively pursued by HMRC, relatively little has been done to confront the lawyers and tax professionals who created the problem in the first place.

The full evidential submission can be found here.

This research was featured in Contractor UK and the Yorkshire Post

Photo by George Turner

TaxWatch calls on City of London Police to investigate fraudulent tax schemes

19th August 2020 by Alex Dunnagan

TaxWatch is calling on the Economic Crime Unit of the City of London Police to open a fraud investigation into the promoters and marketers of disguised remuneration tax avoidance schemes.

Recent press reports have revealed that disguised remuneration tax avoidance schemes continue to be marketed to the public, including the direct targeting of NHS workers during Covid-19 pandemic. These schemes are marketed as “lawful” means of reducing a tax liability despite very clear legal rulings to the contrary.

The fraudulent marketing of schemes leads to contractors handing over substantial fees to dishonest tax advisors on the false belief that what they are doing is lawful.

However, when the schemes inevitably fail, users will be left with crushing financial losses.

Writing to the Economic Crime Unit, Director of TaxWatch George Turner said:

“Now that the legal position on the taxation of disguised remuneration schemes is crystal clear, anyone continuing to design, market, and promote loan schemes can not be doing so in the honest belief that these are anything other than unlawful attempts to evade tax.”

“Promoters continue to perpetrate these schemes because they are able to generate very significant fee income from scheme users, and if HMRC challenge these schemes, the users, and not the promoters, will be held liable for the taxes owed.”

“These schemes are an economic crime which cost the Treasury hundreds of millions a year. Until the promoters of fraudulent tax schemes are prosecuted, they will continue to ruin lives.”

The full text of the letter can be found here.

This was reported on in Law360, Computer Weekly, and Contractor UK.

Photo by Bruno Martins on Unsplash

Loan Charge Parliamentary Debate

20th March 2020 by Alex Dunnagan

A debate was held in the House of Commons yesterday on the Government Response to the Sir Amyas Morse Review of the Loan Charge. Ahead of this we published an explainer on what disguised remuneration is here, and a more detailed briefing here. David Davis, Ruth Cadbury, and Julian Lewis were able to secure the debate on the motion “That this House believes that the Loan Charge is an unjust and retrospective tax; notes that the law on the Loan Charge was not settled until 2017; and calls on HMRC to cease action on loans paid before 2017.”

The Loan Charge is an anti-tax avoidance measure introduced in the 2016 budget to address tax lost to the Treasury from loan based disguised remuneration schemes.

These schemes involved employees and contractors being paid in loans. As loans do not incur income tax, those using the schemes ended up getting their earnings tax free. The only cost to using a loan scheme was the fees charged by the operators of around about 13%.

As a result, loan scheme users ended up keeping far more of their income than those who paid tax in the usual way.

David Simmonds MP lays out the issue in that “the schemes themselves were lawful because it was lawful to receive a loan, but the money the constituent received was tax-free only if it was genuinely a loan”. Simmonds goes on to say that as 20 years have since elapsed, that there was no evidence that these were genuine loans, hence HMRC’s interest in the schemes. He then goes on to say that taxpayers raised the issue with him that they find it hard to believe that anybody thought that they could describe their pay on a tax return as a “loan”, and because of this never have to pay any income tax on it.

HMRC argues that these loans should really be classed as income because no one had any expectation that they should be paid back, and as such should always have been liable to income tax.

The Financial Secretary to the Treasury, Jesse Norman, described these schemes as “contrived tax avoidance in which people are paid in the form of a loan with no interest and no intention or requirement to pay the loan back.” Many of the schemes saw money routed through offshore companies and trusts.

Norman summarised the case for the charge in saying “it has cost the Exchequer hundreds of millions of pounds a year, and that, of course has two effects. It deprives public services of the money they need to operate, and it forces other taxpayers to pay more in order to make up the shortfall.”

The charge has become one of the most controversial pieces of tax legislation in recent times. A cross-party group of MPs, the Loan Charge All-Party Parliamentary Group has led the fight in campaigning against the Charge. In January of last year the Treasury was forced to agree to review the loan charge proposals, following an amendment to the Finance Act tabled by the Liberal Democrats MP Ed Davey. The former Comptroller and Auditor General Sir Amyas Morse was tasked to lead the independent review

A number of recommendations from Sir Amyas’ report were accepted last December, including halving the time period in which the loan charge would apply, from 20 years to ten. However, many campaigners and Members of Parliament do not believe these measures go far enough. MP’s have argued that the law was not agreed upon until 2017, and are urging the government to go further, with one of the key criticisms being the retrospective nature of the charge.

Adam Smith was frequently quoted in the debate, given that the Financial Secretary to the Treasury had written a book on the economist. The Conservative MP for New Forest West, Sir Desmond Swayne, said that following the principals of taxation put forward by Smith, tax should not be retrospective.

The Financial Secretary to the Treasury disagreed with the characterisation of the tax as retrospective. Mr Norman said of the Loan Charge “it taxes a loan outstanding at a future date. It does not change any law previously on the statute book.”

Peter Dowd MP, speaking on behalf of HM Opposition, stated that Smith also argued to “Take from the taxpayer only that which is needed for the public realm”, and that if people do not pay their taxes, everyone else has to pay more.

Dowd went on to frame the loan charge within the conditions HMRC is facing, referencing that “A third of its staff have gone since cuts in 2005 and later in 2010. Any increases in the cash amounts available to HMRC for its running have, in effect, been blocked”.

While Christian Matheson MP argued “nobody in this House disputes the fact that it was tax avoidance”. This does not appear to be a view shared by all, with Paul Holmes MP stating “the people this affects are not tax avoiders”, and Bob Stewart MP describing his constituents who entered into these schemes as “decent and honest”.

Kevin Hollinrake MP said that those people using such schemes should have been aware that entering into a scheme where you can lower or eradicate your tax bill was wrong. In an intervention during the speech of David Davis, Hollinrake said “If something looks too good to be true, it usually is? In my business, we have been brought this kind of scheme a number of times by our advisers over the last 30 years, maybe with a barrister’s letter saying, “Don’t worry. It’ll be fine. You can reduce your tax bill hugely by adopting this scheme.” We have always rejected them because we knew the risk.”

Both the advisers who ran the schemes and HMRC came in for criticism during the debate. It was argued that instead of charging the individuals that took out these loans, that HMRC should instead be pursuing the advisers who sold them. Paul Holmes MP stated, “many people were advised by financial advisers and are now being penalised because of the late realisation and intransigence of HMRC”. David Davis went further, in calling the advisers and employers who facilitated the loans “villains”.

In Norman’s final remarks, he summarised the argument as thus “If one asks the average man or woman in this country, I think they would say, “Everyone should pay their fair share of taxes. People are responsible for their own tax affairs. Real loans get repaid; if someone offered you a loan for which no repayment, no tax and no interest was due, it would probably be too good to be true.” And so it is.”

Despite this – the motion from the Back Bench committee asking that the loan charge only applies to loans taken out after 2017 was agreed to. Where this leaves the government is unclear.

The debate is available on Parliament Live here.

Photo by The New York Public Library on Unsplash

Deposit boxes

Disguised Remuneration Tax Avoidance and the Loan Charge

19th March 2020 by George Turner

19 March 2020 – George Turner

This page provides some basic information on disguised remuneration schemes and the Loan Charge.  You can download our full briefing on these issues here

What is disguised remuneration?

Disguised remuneration schemes are a form of tax avoidance where payments arising from employment are made in some form other than cash or to a person who is not the employee. These payments are not declared as income in the tax returns of the employee or contractor and so no income tax is paid.

These tax avoidance schemes were mass marketed to individuals by tax advisers, lawyers and accountants. Early iterations of the scheme were marketed by Big Four accountancy firms.

What is a loan scheme?

One particular form of disguised remuneration scheme was the loan scheme, which sought to transfer remuneration to employees in the form of loans. These loans were not declared as income, but in reality, there was no expectation on the part of scheme users the loans would ever be paid back. Often these loans were routed via offshore trusts, with the end result that contractors and employees ended up paying no income tax. On top of this companies using these schemes avoided employer’s national insurance and claimed corporation tax deductions for payments made into these schemes. Because the loans remained outstanding for an indefinite period, they could be written off against any future inheritance tax also.

Is disguised remuneration legal?

Under long standing legal principles in tax law, loan schemes should not have resulted in any tax benefit for scheme users or there employers. Government made it clear as long ago as 2004 that it would seek to close down disguised remuneration schemes and would be prepared to use retrospective legislation to do so.

Despite this, tax advisers, accountants and lawyers continued to market the schemes for many years, with some promoters and scheme operators becoming extremely wealthy in the process.

The Loan Charge

In order to recoup tax avoided via loan schemes, the government introduced the Loan Charge in 2017. This put a tax charge on any outstanding loans balances arising from loan schemes on 5th of April 2019. The government estimates that the loan charge will impact 50,000 people, Loan Charge campaigners put the figure at up to 100,000.

The Loan Charge has become one of the most controversial pieces of tax legislation in the UK in recent times. As such, it has sparked a great deal of debate on whether it is an appropriate response.

TaxWatch has produced a briefing on disguised remuneration and the Loan Charge which is available here. This briefing focuses on presenting some of the facts with regards to disguised remuneration schemes, the loan charge, and tax law relating to disguised remuneration schemes.

The Big Tax Case

Between 2001 and 2010, more than £47m was paid to players, managers, and directors of Scottish football club Glasgow Rangers in tax-free loans. These loans were made via an offshore trust, which had been created in order to provide the impression that the loans granted were independent of the club. It was part of the player’s pay agreements that the club would make payments into the trust on their behalf.

After a long legal battle with both sides claiming victory in the lower courts and the Court of Session in Scotland, the case went to the Supreme Court in 2017, which found in favour of HMRC. It is now considered the leading case in the area of disguised remuneration.

In the Court of Session, the court reviewed case law looking at tax avoidance and disguised remuneration going back to 1904. Lord Drummond, giving the judgment made the following observation:

“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.


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