What are the most common tax avoidance schemes?
Umbrella Payroll Schemes
Umbrella payroll schemes are one of the most common failed tax avoidance schemes. Your pay from the umbrella company is divided into a small payment which goes through the payroll and is subject to PAYE (indicating that you are only paying tax on some of your income) and a much larger payment without any tax or national insurance deducted.
This larger payment comes from a different account than the first payment and usually from overseas.
Your payslip, however, shows the larger payment separately and refers to it as something other than pay such as a loan, credit or investment payment – and this is what poses an issue.
The scheme promoter promises the users of these failed tax avoidance schemes that they can keep up to 95% of your pay without tax or national insurance (and some promoters even claim that HMRC is aware of and have approved the arrangement – even though this is seldom the case). The payment may have even been sent through various companies before it comes to you.
Risk rating: very high risk; these schemes may involve professional negligence, dishonesty and non-disclosure and therefore can cross the line from tax avoidance into tax evasion, at least as far as the scheme promoter is concerned. Many users may have been deceived by the promoter into thinking it was above board and legal, but HMRC is likely to consider that as the scheme was “too good to be true” the user must in some way have been complicit leading at least to civil penalties for careless or deliberate behaviour.
Disguised Remuneration Schemes
Disguised remuneration schemes can come in many different forms, but what they have in common is that the promoters claim that the schemes replace (taxable) income with (non-taxable) payments such as loans out of an employee benefit trust. The Supreme Court decided in the Rangers case that many of these schemes do not work as a technical matter and that the tax avoided is still payable.
If you have used one of these schemes HMRC have put the matter beyond doubt by the loan charge that applies to all disguised remuneration loans that were outstanding on 5 April 2019 and charges tax on all outstanding disguised remuneration loans made since 9 December 2010 at your highest marginal rate i.e. up to 45% in one go.
If you need to report an outstanding disguised remuneration loan in the 2018 to 2019 tax year, and you have not done so already, you now have until 30 September 2020 to file your self assessment tax return.
Do not be distracted by some promoters claiming that the April 2019 loan charge is unlawful retrospective taxation that is open to a judicial review: it is not retrospective and only seeks payment of tax that was due at the time the loans were made or will be due on loans remaining outstanding in April 2019. Moreover, in R (Cartref) v HMRC  EWHC 3382 (Admin) the High Court concluded that the loan charge legislation was compatible with the Human Rights Act 1998 and did not constitute a breach of article 1 protocol 1 (A1P1) or article 6 and in Zeeman and Murphy v HMRC  EWHC 794 (Admin) where the High Court dismissed two judicial review claims challenging the validity of the loan charge legislation on the basis of the Human Rights Act 1998. The High Court agreed with the approach taken in Cartref and found that, in the context of tax avoidance, the loan charge was justified by legitimate policy and was fair and reasonable in all the circumstances. The court considered the claim on the basis of the loan charge legislation as it then currently stood, i.e. applying to loans from April 1999, as the Finance Act 2020, which carves any pre-9 December 2010 loans from the charge, had not yet received royal assent.
Should you require advice and representation to settle with HMRC, click here to instruct Patrick Cannon today. Patrick advises users of failed tax avoidance schemes about settlement with HMRC and also on claims for professional negligence.
Patrick Cannon can also advise on:
- Disguised Remuneration Loan Schemes
- Mis-Sold Tax Avoidance Schemes
- Settlement Of Tax Avoidance Schemes
Frequently Asked Questions
Users of failed tax avoidance schemes need to take steps to resolve their position with HMRC immediately. The first and most important thing to do is to seek professional advice as you may face a civil or criminal tax investigation. You may be able to claim for professional negligence against the scheme provider or your adviser.
In most cases it is best to inform HMRC and in the case of disguised remuneration schemes, you must inform HMRC. HMRC have published reporting guidance if you had loans outstanding on 5 April, 2019.
The basic tax avoidance penalties in the UK are:
- No penalty if you took reasonable care – which includes telling HMRC if you discover a mistake.
- Up to 30% if you have been careless or failed to send in a return.
- Up to 70% if the error was deliberate.
- Up to 100% if the error was deliberate and you tried to conceal it.
Penalties for tax evasion in the UK can be a little different, you can read about them here.