Over the last few years there has been an uprise in the number of people using Tax Schemes to avoid tax; some intentionally whilst others have been caught out by less than scrupulous Promoters of Tax Schemes advertising a “pay less tax” service which they claim is legal. Unfortunately most, if not all, will find these claims to be false, not immediately but after many years and sometimes with devastating consequences.
Isn’t tax avoidance legal?
It’s a common view that tax avoidance is legal and tax evasion is illegal. The problem is that there isn’t a clear definition of what tax avoidance is although some say that it is exploiting a loophole or feature in the tax system. Tax is saved by interpreting the tax rules in a way that was not intended when the law was drawn up and arranging your tax affairs in an artificial way.
A very useful FAQ on tax avoidance can be read at https://www.taxpolicy.org.uk/2022/10/12/avoidancefaq/ although it should be noted that the views are subjective.
These days tax avoidance exploited by way of a Tax Scheme will in all likelihood be found to be illegal at some point in the future meaning that the taxpayer will have to pay the avoided tax plus interest and fines.
What is a Tax Scheme?
A tax scheme is a systematic plan or arrangement put in place with the intention of securing a tax advantage. It is something done on purpose usually for the avoidance or reduction of tax. The scheme would likely have transactions which seem artificial in nature and with no real business purpose.
In the tax marketplace there are an army of professional advisors who spend a career devising tax schemes for the sole purpose of making money out of selling these to taxpayers. They are called Promoters. Once a Scheme is devised there is a process for registering it with HMRC although this does not under any circumstances mean that HMRC have approved the Scheme. Unfortunately a Promoter may tell their clients that HMRC has approved it even though that is untrue simply to secure more sales of the Scheme.
Process for registering a scheme
Once a Promoter has set up a tax scheme under rules referred to as the “disclosure of tax avoidance schemes” (DOTAS) they must register the scheme.
You can read more about DOTAS at:
https://www.gov.uk/guidance/disclosure-of-tax-avoidance-schemes-overview
On registration a scheme reference number (SRN) is issued which has to be provided to the users of the scheme.
A scheme may also get an SRN if HMRC has identified it.
Once an SRN is assigned the scheme is published on the HMRC web site at:
Getting Legal Opinion on a Scheme
Often times a scheme promoter will obtain legal opinion on the validity and legalities of the tax scheme as a tool to use as part of the sales process. You may see schemes promoted that have “KC opinion” on them. KC stands for King’s Counsel; a term used to refer to barristers or solicitor advocates who have been recognised for excellence in advocacy. So having KC opinion about a scheme is seen as a very powerful weapon in overcoming any objections that a client may have to using the scheme.
However, legal opinion is given at a point in time based upon the information provided to the barrister. In addition the KC’s opinion gives no guarantees or assurances for the user of the scheme should an HMRC challenge be brought or an investigation into tax affairs started.
So don’t be sucked in by the opinion given no matter how credible the expert giving it. They will not be beside you when HMRC come calling.
In fact many professional tax experts are now of the view that in the long term all schemes will fail. It is just a matter of time before HMRC get around to reviewing and then challenging them. It is absolutely vital to remember that as a taxpayer you are ultimately responsible for your tax affairs. So unless you feel 100% confident that you fully understand the scheme (and you most likely won’t), how it works and what the consequences of the scheme failing are then avoid tax schemes at all costs.
Your bottom line assessment should be “am I happy to take this risk and will I be able to manage the stress as well as the financial consequences if and when it goes wrong?”.
What happens if HMRC investigate a scheme?
HMRC can start to review a scheme at any time and can start investigating the users of that scheme as part of that process. Obviously, it will be the promoter of the scheme that HMRC contact in the first instance although by the time HMRC start the review the promoter of the scheme may well have moved on. Very soon HMRC will follow up their process with the users of the scheme. Potentially this could result in the taxpayer receiving a follower notice, accelerated payment notice (APN), or both. A follower notice will ask you to settle your tax affairs with HMRC. An APN will be received if there’s an enquiry, dispute or appeal in progress that relates to your tax affairs. The APN will demand payment of the tax disputed with HMRC holding the amount until the enquiry into your tax affairs is complete, or your appeal resolved. The money will be refunded if it’s found that you do not owe it but you have to pay it upfront.
These notices do tend to be aggressive in nature and can cause a lot of stress. If you do receive one the best advice is to get help from a specialist advisor who is used to dealing with these types of notices. Any communications from HMRC cannot be ignored.
The true impact
It may be that you do not owe the tax being demanded by HMRC. However the problem is that you will have to defend your position to prove this and for this it is likely that you will need to appoint an (expensive) expert to assist you. The funding of your defence will be at your own expense. Not only this but the stress and worry of an HMRC investigation can really take its toll mentally. It is not a quick process and can go on for months but likely years. All too often users of schemes in this position try and bring an action against the promoter (the seller) of the scheme but find that they have long since moved on. The ultimate impact for some scheme users has been utterly devastating with the very worst of outcomes. So the best advice is to avoid schemes at all costs. Steer well clear of anything and anyone that claims you can pay less tax. In the long run such claims will likely turn out to be false costing you much more than any tax savings promised.
Reporting Tax Schemes
If you do find yourself in the situation where you are using a scheme then contact HMRC straight away. How to contact them regarding a scheme can be found at:
The HMRC advice is to withdraw from a scheme as soon as possible and settle your tax affairs to avoid a large tax bill building up.
If you do come across a scheme or any tax avoidance or evasion you can report this to HMRC. Details on how to do this can be found at https://www.gov.uk/report-tax-fraud.
Umbrella Company checks
If you’re a contractor and are working under an Umbrella Company, inside of IR35, then it’s essential to check if the Umbrella is not applying any unusual tax allowances that could be queried later. Unfortunately Umbrella Companies are not regulated and there have been some less than scrupulous providers spring up applying rules to the calculation of net pay that HMRC may not agree with. The problem in this industry is that many contractors have been forced to work under an Umbrella Company and often they are forced into using a certain organisation by their agency, sometimes as a result of the umbrella company offering the agency a large incentive to use them.
Too many contractors have found themselves at the wrong end of an Umbrella Company applying an illegal scheme with the result of HMRC pursuing them for the underpaid tax.
If you are in any doubt about if the tax is being calculated correctly on your umbrella company pay then there is a free to use payslip checker that can be found on the Freelancer and Contractor Services Association (FCSA) web site at https://fcsa.org.uk/upload-your-payslip/. This payslip checker service is free to use and available to employees of any umbrella companies. After a payslip is uploaded the results of the check will be sent to you within seven working days.
Tax Investigation Insurance
Whether or not you intend to use tax schemes, or just for general protection it is a sensible idea to have tax investigation insurance in place in case HMRC do decide to start looking into your tax affairs for whatever reason. Tax investigation insurance is widely available directly through insurance providers, your accountant may provide cover as part of the accountancy services or a certain level of cover comes as part of membership of IPSE, the Association of Independent Professionals and the Self Employed. More details can be found at https://www.ipse.co.uk/become-a-member/protection.html.