What is a tax avoidance scheme? The best description I have come across is an arrangement involving one or more contrived or abnormal steps that enable a tax advantage to be obtained that was not intended by Parliament.
Is tax avoidance legal in the UK?
Tax avoidance is legal (and there are many UK tax avoidance schemes in circulation today), although if defeated by HMRC it may result in the taxpayer not only having to pay the disputed tax, but also interest and tax avoidance penalties.
However, if the arrangements involve an element of dishonesty such as failing to disclose information that is required to be disclosed or cheating then they become tax evasion which is a crime and for which the penalties are severe including jail time and confiscation of assets, as will be explained below.
Common Tax Avoidance Schemes And Tax Avoidance Penalties In The UK
Umbrella Payroll Schemes (the dodgy kind)
Umbrella payroll schemes are common in the UK, 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 that you 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 dishonesty and non-disclosure and therefore can cross the line from tax avoidance to 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 are 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.
Action: if you have been involved in a dodgy umbrella scheme, withdraw from it and seek advice on settling your affairs with HMRC by instructing Patrick Cannon today.
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 last year 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 will apply to all disguised remuneration loans. This will apply to outstanding loans on 5 April 2019, and will charge tax on all outstanding disguised remuneration loans made since 1999 at your highest marginal rate i.e. up to 45% in one go.
If you’ve become part of a disguised remuneration scheme, settling with HMRC before the 5th April 2019 is the best course of action. It’ll give you certainty and peace of mind, and also means that you:
- Do not have to pay the loan charge that comes into effect on 5 April 2019
- Will pay a lower rate of tax on your disguised remuneration loans – the loan charge will add all your loans together and tax them in one year
- Can negotiate a “time to pay” arrangement over 2 to 5 years
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.
Should you require advice and representation to settle with HMRC, click here to instruct Patrick Cannon today.
Penalties For Tax Avoidance
My experience is that HMRC is steadily getting more aggressive in demanding penalties from users of defeated UK tax avoidance schemes and seem to have informal targets to apply more penalties for “deliberate” behaviour (the most serious civil tax penalty) compared with penalties for ‘careless” behaviour.
According to the ICAEW, 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 while 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:
- 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.
Larger fines and prosecution for tax avoidance in the UK
Of course, if HMRC investigate and find 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. In my experience, these fake diaries are often produced by the scheme promoters and sent to the users for signature.
Sentencing Council’s Guidelines
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
My advice is to take any suggestion of penalties by HMRC very seriously.
Increasingly if they are looking at charging a penalty they will seek a meeting with you to do what they call “a fact find” and ask you to confirm that you have read and understood their Human Rights fact-sheet. Do not treat this meeting casually!
I have accompanied clients using the Public Access Scheme to a number of these meetings recently and the nature and tone of these meetings differs depending on whether you get an “old school” inspector trying to arrive at a fair settlement or one of the younger more aggressive breed of investigators who seem to be out to obtain evidence supporting the charging of a “deliberate” penalty or worse, evidence that might enable them to say that they suspect tax fraud leading to the issue of COP 9 or worse a criminal investigation.
Should you require advice and representation about tax avoidance penalties with HMRC, click here to instruct Patrick Cannon today.