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If you have used a disguised remuneration scheme and had loans outstanding on 5 April 2019, then income tax and National Insurance contributions will apply under the 2019 loan charge.
This treats any outstanding amounts of payments as taxable income for the tax year 2018/19, and imposes reporting and payment obligations on both employers and employees.
You must ensure that the loan charge is settled in accordance with the legal requirements, or face penalties. HMRC has published detailed reporting and payment guidance here. There is also a settlement opportunity and settlement guidance.If you have used an umbrella payroll scheme and paid broadly less than 20% tax on the sums received, then you are at high risk of crossing the line from tax avoidance into tax evasion.
In the case of the 2019 loan charge, you should take steps to report the tax liability and arrange settlement of the outstanding tax and National Insurance contributions. Major changes were made in January 2020 and the loan charge will apply only to outstanding loans made on, or after, 9 December 2010 – see HMRC’s updated settlement guidance.
In the case of umbrella payroll schemes, if you have not been contacted already by HMRC, you should withdraw from the scheme and seek advice on settling your tax affairs with HMRC. Settlement of tax avoidance schemes brings you closure and peace of mind.
HMRC has been steadily getting more aggressive in demanding penalties from users of defeated UK tax avoidance schemes. It also seems to have informal targets to apply more penalties for “deliberate” behaviour (the most serious civil tax penalty), compared with penalties for ‘careless” behaviour.
Settlement of tax avoidance schemes is usually the most sensible course of action.
Data recently published by a fee protection insurance firm suggests that over the last three years, there has been a 64% increase in the number of people penalised for deliberate errors in tax returns. In the same period, there has been a fall in the number of penalties charged for carelessness.
The basic tax avoidance penalties in the UK are:
If HMRC investigates and finds evidence of dishonesty or cheating then you may be looking at a criminal investigation for tax fraud and prosecution, leading to a prison sentence and a fine. The sort of behaviour that this might cover includes claiming that genuine loans were made as part of the scheme when they were not genuine; or the writing of fake work diaries showing the taxpayer having spent time in the business when they were elsewhere.
The penalties for tax fraud in the UK are heavy as this extract from the Sentencing Council’s guidelines show:
Fraud: Cheating the public revenue, common law
Triable on indictment only
Maximum: Life imprisonment
Offence range: 3 – 17 years’ custody
Patrick Cannon’s advice is to take any suggestion of penalties by HMRC very seriously.
If HMRC is looking at charging a penalty, it will usually seek a ‘fact finding’ meeting with you, and ask you to confirm that you have read and understood its Human Rights fact-sheet. It is important that you do not treat this meeting casually.
Patrick Cannon has accompanied clients using the Public Access Scheme to a number of these meetings. The nature and tone of these meetings differ, depending on whether you get an “old school” inspector trying to arrive at a fair settlement, or a more aggressive investigator who is focused on obtaining evidence supporting the charge of a “deliberate” penalty. They may even be seeking evidence of tax fraud, leading to the issue of COP 9 which is a criminal investigation.