In Budget 2014, the Chancellor announced a range of new, tough measures which should remove any remaining temptation from IT contractors who may have considered using an ‘alternative’ tax vehicle through which to process their earnings.
To date, HMRC has been largely unsuccessful in dealing with the growing number of tax avoidance vehicles on the market. Out of 2,000 schemes registered via DOTAS (Disclosure of Tax Avoidance Schemes) since the year 2000, a mere 40 had been successfully challenged in the courts, according to a National Audit Office report published last year.
As we discussed in a recent article, the only way to contract legitimately via an umbrella structure is by signing up to a PAYE scheme. Even so, dozens of mainly offshore schemes, offering rates of return of up to 90%, have been heavily marketed to IT contractors over the past decade, and despite warnings and example cases where HMRC has shown its ability to tax scheme members retrospectively, tax avoidance vehicles have thrived.
However, new measures announced in the 2014 Budget have drastically reduced the attractiveness of a) marketing and b) using these schemes in two significant ways:
Accelerated Payment of Tax
Firstly, the Chancellor has enabled HMRC to collect disputed tax liabilities upfront where registered tax avoidance schemes have been used. In other words, any tax in dispute will be held by HMRC pending the outcome of a tax enquiry (which could last many months and years in some cases).
Under the new rules, HMRC can issue a “notice to pay” to a participant in any scheme notified under DOTAS (or which comes under the scope of the GAAR) where an enquiry notice has been issued. The rules will also apply to schemes which are currently in dispute. Taxpayers will have 90 days to pay, or 120 days if they have asked HMRC to reconsider the amount demanded by the payment notice.
According to the Budget document, the new rules “will also provide HMRC with additional tools to address a legacy stock of an estimated 65,000 avoidance cases.”
In the event that a scheme is deemed to be legitimate following investigation, taxpayers will receive their money back, plus interest.
As the NAO statistics show, it is unrealistic for HMRC to take all potential tax avoidance schemes to court, so they often choose test cases. If a tribunal finds against the users of a test case scheme, there has been no incentive for the users of similar schemes to pay any back taxes.
This has all changed, as new measures will empower HMRC to issue notices to users of so-called ‘follower’ schemes to amend their tax returns and pay any back taxes owed, or face stiff penalties.
Accountants Kingston Smith said: “HMRC’s view, that if a particular scheme fails, then all similar schemes will also fail, is simplistic, but to most taxpayers, those who play with matches cannot complain if they are occasionally burned.”
Reaction to the new rules
The new rules will be introduced via the Finance Bill 2014.
Users of tax avoidance schemes are never going to attract a lot of public support for their cause – particularly as the Chancellor believes these new measures can raise over £5bn for the cash-strapped Treasury.
However, despite this, the increase in HMRC powers has raised concerns in some quarters.
Prior to the Budget, CIOT president Stephen Coleclough said that although his organisation had sympathy for the need to take ‘robust’ action against the massive backlog of mass marketing tax avoidance cases, “handing HMRC almost unprecedented executive powers to decide who falls within the mischief they intend to deal with, without the usual safeguards and appeal rights, is not something which should be done lightly. It should be regarded as an emergency measure to deal with a clearly defined set of cases and it should be time-limited.”
In an interesting piece published in Accountancy Age last week, Cormac Marum argues that “the tax authorities never have been, are not, and never should be the arbiters of the tax law.”