Contractors and Business Owners have been using Loans as disguised remuneration for decades.
Basically, a loan isn’t income so schemes have been created to lend money through various means. HMRC view these as tax avoidance.
How contractor loans work
In a contractor loans scheme you’re paid in the form of a loan from a trust or company, sometimes referred to as a remuneration trust.
You don’t get your payment (or ‘loan’) directly from the company you’re providing work for because it’s diverted through a chain of companies, trusts or partnerships.
The companies that promote these schemes will tell you this will save you tax.
Why these schemes could cost you more
Scheme promoters will tell you that the payment is non-taxable because it’s a loan, and doesn’t count as income.
In reality, you don’t pay the loan back, so it’s no different to normal income and is taxable.
So if you’re using one of these schemes and being paid this way you’re highly likely to be avoiding tax. You could end up paying additional taxes, penalties and interest as well as a fee to the promoter.
Contractor Weekly reported this week that Contractors are now being advised to say that they holding funds in ‘fiduciary capacity’ on behalf of the company.
According to their article calling a loan by a different name doesn’t impress HMRC, it looks like a loan so it is a loan!
Use a number of tax avoidance schemes each year that were intended to offset their tax liability several times over in the hope that at least one will work.
Repeatedly use tax avoidance schemes to shelter the same type of income year after year.
Repeatedly use avoidance schemes to cover the majority of income or gains as they arise.
Often use tax avoidance schemes to cover major life or commercial events.
The new sanctions are expected to include:
Surcharges on repeated or concurrent use of tax avoidance schemes
Being compelled to provide more documents and records
The Finance (No2) Bill 2014, which is due to receive Royal Assent in July, contains legislation which will enable HMRC to demand payment upfront of disputed tax in certain cases, principally involving tax avoidance or deferral. It is estimated that up to 43,000 taxpayers could receive such a demand. Those demands will be issued over an extended period but the first are likely to be issued as early as September 2014.
Taxpayers who have sought tax advantages through tax avoidance schemes that fall within the Disclosure of Tax Avoidance Schemes (DOTAS) are likely to be most affected.
Here is a link to the SRNs (Scheme Reference Numbers) affected – click here
Over the next 2 years HMRC estimates that it will rake in £7 billion through the use of these notices. Of this £7 billion, individuals will weigh in with £5.1 billion. This would equate to each person having a gross income of £262,000.
Last week the Financial Times reported that Ingenious Media, an investment company, warned 1,300 of its investors, including business leaders, entertainers and sporting celebrities, such as David Beckham, to expect substantial tax bills with interest, as reward for using its tax avoidance scheme. (Contractor Weekly)
This is a radical change and many might say its been a long time coming.
It has always struck me as slightly bizarre the DOTAS were registered and allowed to exist.
THE TAX YIELD derived from HM Revenue & Customs investigations into the affairs of small- and medium-sized companies rose by 31% over the last 12 months, according to UHY Hacker Young.
Compliance investigations into SMEs generated £565m for HMRC in 2012/13, up from £434m in 2011/12, with the year ending March 31. Accountancy Age
Some investigations are random and some as a result of HMRC task forces, but many are triggered by risk profiling.
What can you do to reduce your chances of being selected:
1. File your tax returns on time and pay what you owe – If you file late or at the last minute HMRC will think you are disorganised and as such there are more likely to be errors in the return
2. Declare all your income – HMRC get details of bank interest and other sources of income, sometimes they test them and match them to returns
3. Use an accountant – Unrepresented taxpayers are more likely to be looked at, mainly because many of them don’t know what they are doing
4. Trends – if your business doesn’t match the profile of similar business in the same sector or your results suddenly fluctuate it could raise concerns at HMRC, for example, if you suddenly request a VAT refund
5. Tax Avoidance Schemes – if you are using a tax avoidance scheme I am sure HMRC will be looking closely, if they can find a way to challenge the scheme then at some point they will
On the 8th August, HMRC published a leaflet to help you identify the tell-tale signs of avoidance schemes, and warn you of the potential negative consequences of using them.
You are entitled to plan your tax affairs in a way that makes sure you do not pay more tax than you have to. There are many legitimate ways in which you can save tax, or example by saving in a tax-free ISA (Individual Savings Account), making donations to charity through Gift Aid, claiming capital allowances on assets used in your business or paying into a pension scheme. But there is a big difference between using tax reliefs and allowances in the way in which they are intended to be used, and trying to bend the rules to avoid tax.
There are warning signs you can look for which should help you decide whether you are being offered good tax advice about how to plan your affairs or whether you are being sold a tax avoidance scheme.
Here are the warning signs according to HMRC:
it sounds too good to be true and cannot have been intended when Parliament made the relevant tax law (for example, some schemes promise to get rid of your tax liability for little or no real cost, and without you having to do much more than pay the promoter and sign some papers)
the tax benefits or returns are out of proportion to any real economic activity, expense or investment risk
the scheme involves arrangements which seem very complex given what you want to do
the scheme involves artificial or contrived arrangements
the scheme involves money going around in a circle back to where it started
the scheme promoter either provides any funding needed to make the scheme work or arranges for it to be made available by another party
offshore companies or trusts are involved for no sound commercial reason
a tax haven or banking secrecy country is involved
the scheme contains exit arrangements designed to side-step tax consequences
there are secrecy or confidentiality agreements
upfront fees are payable or the arrangement is on a no win/no fee basis
the scheme has been allocated a Scheme Reference Number (SRN) by HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) regime
Last week – 21st May 2013 – Accountancy Age reported that Apple had achieved the impossible, they had 3 subsidiaries that were not tax resident any where on earth!
While the US Senate committee held Apple is “one of the US’s biggest tax avoiders”, it noted the business had not done anything illegal.
In the committee’s report, chair Carl Levin said Apple was using “gimmicks” to avoid tax.
“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” he said. “Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere.
But its not just Apple as reported by the Guardian on Friday 24th May 2013
Apple is the latest company under the spot light for organised tax avoidance. In common with Starbucks, Google, Amazon, eBay, Microsoft and others it routes transactions through low or no tax jurisdictions to reduce its tax bill. Indignant ministers gnash their teeth and the corporate merry-go-round continues.
Basically Unitary Taxation treats a Business as a single unified Business rather than a collection of entities, it then apportions overall global profit to countries based on genuine economic activity, each country sees the report and then charges tax accordingly. It sounds like the perfect solution to me.
The Tax Justice Network have written a report ‘Towards Unitary Taxation of Transnational Corporations‘ (9 December 2012) it explains how Unitary Taxation could work and how it might solve the current tax avoidance problems.
There is no doubting the resolve of HMRC to track down and prosecute tax evaders.
The Government has committed to spend £917m to tackle tax evasion and raise an additional £7bn each year by 2014/15.
HMRC are using 2,500 staff to tackle avoidance, evasion and fraud, there is also a website to help those who want to declare income https://www.gov.uk/sortmytax
In the search for tax evaders, HMRC have a £45m computer system called Connect which in 2011 delivered £1.4bn in tax revenue and the system is getting bigger and better all the time. According to Accounting Web:
It uses a mathematical technique to search previously unrelated information and detect otherwise invisible ‘relationship’ networks. Using Connect, HMRC sifts through information on property transactions at the Land Registry, company ownerships, loans, bank accounts, employment history, voting and local authority rates registers and compares with self-assessment records to spot taxpayers who might be under-declaring or not declaring income.
Last year Connect made links between tax records and third party data from hospitals, pharmaceutical companies, insurers and even gas SAFE registrations. DVLA records and the shipping and Civil Aviation Authority registers help identify owners of cars and planes who declare income that the computer suggests cannot support such purchases.
In addition HMRC have also identified 200 accountants, lawyers and professionals who advise on tax avoidance structures and its currently unclear how HMRC will be dealing with them and their clients.
It is important to remember that most people pay the correct tax, in fact HMRC calculate that 93% of tax due is paid correctly, its only a small minority who try to evade tax.
The general anti abuse rule (GAAR) has now been adopted by many advisers in the UK.
The GAAR will apply to Corporation Tax (and amounts treated as Corporation Tax), Income Tax, Capital Gains Tax, Petroleum Revenue Tax, Inheritance Tax, Stamp Duty Land Tax, and the annual tax on enveloped dwellings.
Heather Self, Pinsent Mason commented. “Many of the examples are complex and contrived – we need more examples of ‘normal’ tax planning, to help show where the boundary will lie.”
The key changes to the legislation relate to the “double reasonableness test”. Nearly all the respondents to the consultation expressed concern about this test. The stated purpose of the GAAR is to counteract “tax advantages” arising from “tax arrangements” that are “abusive”. The tests of “tax advantage” and “abusive” both use concepts of reasonableness and this has been referred to as the “double reasonableness test”.
Accountancy Age reported on the 3rd April 2013:
A LACK OF CLEAR DEFINITION within the incoming General Anti-Abuse Rule is likely to cause “considerable uncertainty”, advisers have warned.
The GAAR, designed to catch and prevent contrived tax avoidance schemes, was included in the 2013 Finance Bill and will take effect once it has received Royal assent in July, although many practitioners have been treating it as if it came in on 1 April.
Chair of the House of Lords committee on the Finance Bill Lord MacGregor said : “There is a misconception that GAAR will mean the likes of Starbucks and Amazon will be slapped with massive tax bills.
“This is wrong and the government needs to explain that to the public. GAAR is narrowly defined and will only impact on the most abusive of tax avoidance.”
The Institute of Chartered Accountants in England and Wales (ICAEW) has reiterated its criticisms of draft legislation for a General Anti-Avoidance Rule, claiming that the proposed GAAR is confusing and that it could be in breach of international obligations by overriding double taxation treaties.
The ICAEW draws attention to Article 27 of the Vienna Convention, which the UK signed in 1971 and which states that “a party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.” ICAEW argues that the GAAR may therefore be unlawful, particularly in the case of around 100 agreements with non-OECD countries.
Records of successfully litigated or settled by agreement GAAR cases
Regular communication with taxpayers and their advisers
DOTAS penalties fall into three categories:
Disclosure penalties: apply to failure to disclose a scheme. There are variations in cases where a Tribunal has issued a disclosure order.
Information penalties: apply to other failures to comply with DOTAS.
User penalties: apply to failure by a scheme user to report a Scheme Reference Number (SRN) to HMRC.
In all cases apart from user penalties (which are up to £1,000) the initial and daily penalty is determined by a Tribunal and could be up to £5,000 per day. Ross Martin have full details on penalties and reasonable excuses.
Its important to note:
Tax avoidance is not the same as tax planning. Tax planning involves using tax reliefs for the purpose for which they were intended. For example, claiming tax relief on capital investment, saving in a tax-exempt ISA or saving for retirement by making contributions to apension scheme are all legitimate forms of tax planning.
So will GAAR work? does it need to be clarified so that we can understand it? I am sure we all agree that everyone should pay their fair share of tax but is GAAR the best way to achieve this?
Good news, the exemption threshold for employment-related loans has been increased for 2014/15 from £5,000 to £10,000, as long as the balance is below this level there is no tax charge for employees or employers.
But there could be bad news for participators (Directors/Shareholders) who have been using one of these techniques to avoid the 25% temporary Corporation Tax charge:
1. Using a Partnership or LLP where the company is a partner or member as a way to get loans
2. Making arrangements that did not qualify as loans but the where value ended up in the hands on a participator
3. Making loans repaying them within 9 months and getting a new loan, the Bed and Breakfast approach
4. Transfers of assets
5. Loans channelled through third parties
New anti avoidance rules are coming, a consultation paper is planned for later this year aimed at minimising the scope for abuse and there will be new legislation in the Finance Bill 2014 and Finance Bill 2015.
Its been a long time coming, back in 2011 HMRC gave employers the chance to settle amounts owed in relation to Employee Benefit Trusts.
So what were EBT’s and how did they work…
The employee benefit trust (EBT) was used for many years as a way of avoiding corporation tax and income tax for employees.
Basically, any cash that was moved from the company account into the employee benefit trust was treated as an expense for the company, thus reducing corporation tax liability. The company could even then loan the cash back from the EBT as required in the future and additionally interest was charged on the employee benefit trust loan creating even further expenses for corporation tax avoidance. The key employees were then able to also either get an employee benefit trust loan, which was constructed so that it was never paid back, or they could take cash bonuses, which were taxed.
Scottish businesses involved in EBT’s could now face a tax bill of £400m
Scottish EBT schemes reportedly received letters warning them that the taxman is pursuing cases against EBTs, adding they had a 20% chance of winning any court case outright, a 60% chance of partial victory and 20% risk of an HMRC victory. A partial victory is likely to see businesses paying around £400,000 for every £1m ring-fenced, while a negotiated settlement would likely lead to payments of £412,000 for every £1m.
