In recent years the news has been inundated with stories of tax avoidance, covering the tax planning practices of big corporates like Amazon, Google, Apple and Starbucks to specific avoidance schemes like Liberty and Icebreaker, whose many high-profile clients have been publicly named. Gary Barlow, George Michael and Katie Melua have all been subjects of headlines relating to their dubious involvement in so-called “aggressive” tax avoidance.
The issue here is that Tax avoidance is not illegal and many of the corporates who are named above are not actually engaged in particularly aggressive tax avoidance. They are planning around very long standing tax legislation that has not kept pace with the realities of our international and digital world. It is also not true to say they don’t pay any UK taxes. They pay millions in VAT, Employment taxes, and Stamp Duty Land Tax for example. At the other end of the spectrum it would be fair to say that there are Tax avoidance schemes that have been constructed to take advantage of the law. However in all cases it is the negative press and public perception that can be most damaging.
At the core of the issue is the fact that the UK has the biggest tax code in the world. Legislation is piled upon legislation, year on year, thousands of tax cases provide guidance and there is a massive volume of commentary on all things tax. This means it is almost impossible for the average tax payer to understand their tax obligations (specialists struggle!), it has left plenty of opportunity for “loopholes” and HMRC did not have the time and resource to tackle all the abuses.
That is changing. Backed up by a wave of press commentary on tax avoidance, HMRC has been granted some far reaching powers to tackle tax avoidance. This started a few years ago with a court decision that gave rise to what is known as the Ramsay principle. This very broadly states that where steps have been introduced into an arrangement that serve no commercial purpose; they can be removed in assessing the tax position. HMRC have won a number of cases regarding tax avoidance schemes on the basis of this in recent years. In addition, since 2004 “schemes” have to be notified to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) rules, before that are implemented
More recently a General Anti Abuse Rule (GAAR) has been introduced into legislation. This will apply to arrangements where HMRC have a strong case to say that the arrangement cannot reasonably be regarded as a reasonable course of action. There are also now, numerous cross border disclosure agreements between Governments so that holding assets and income offshore no longer offers much protection.
In the last Finance Act, HMRC has been granted further powers to clamp down on tax avoidance. Over the next 20 months HMRC will be issuing Accelerated Payment Notices to all taxpayers involved in a scheme with a DOTAS number that are under enquiry. This notice requires the taxpayer to pay the disputed tax in advance. It will be returned to them if the scheme is ultimately proved to be successful. However, this removes the urgency for HMRC to conclude the arrangements. HMRC can also issue Follower Notices. These require the participants in a scheme, where a test case on the arrangement has been lost, to settle the outstanding tax or pay an additional 50% penalty.
Future developments are looking more worrying. The Government is considering granting HMRC the power to directly access tax payers’ bank accounts. Some would argue this is a useful and possibly necessary tool. However HMRC is prone to mistakes and delay and this could cause innocent tax payers undue financial hardship. They are also considering a statutory criminal offence of failing to declare off shore income, even if this is through error rather than deliberate omission.
HMRC’s lesson to the wealthy is now to avoid such schemes that “sound too good to be true” and offer returns that “are out of proportion to any real economic activity, expense or investment”. It is a valid and fair point to make.
However, what they don’t promote is that the tax payer is legitimately entitled to try and arrange their tax affairs in an efficient manner and the Government, whilst publically disapproving of tax avoidance, has slashed the corporation tax rate, made the bringing of funds on shore for business purposes much more tax efficient, introduced and increased a number of tax reliefs, particularly relating to R&D and intellectual property and has generally made the UK a very tax efficient place to do business from.
Katie Melua revealed she was “clueless” about tax when she invested in the Liberty scheme. And she’s not alone. We would always advise seeking tax advice from experienced accountants, who will take you through legitimate ways to save on your tax bill and field any questions you have about the tax system. Even if you are involved in an arrangement or have undisclosed income and are not certain how to move forward, there are a number of approved disclosure facilities that an experienced accountant will be able to guide you through and bring your tax affairs up to date.