The Dangers of using Tax Schemes

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H M Revenue and Customs (HMRC) have today issued a list of the top 10 things that tax scheme promoters don’t tell businesses before they sign up to tax schemes. The list sets out HMRC’s assessment of the risks that people face when they sign up to a tax avoidance scheme, including not only the possible monetary costs and reputational damage of tax avoidance, but also a potential criminal conviction.

This list is being published as HMRC writes to the first promoters who will be caught by new High-Risk Promoters rules. If they don’t change their behaviour, HMRC could name them publicly and fines might be imposed of up to £1 million.

HMRC’s list of the 10 things a promoter won’t always tell you:

  1. Most schemes don’t work. You may be told that avoidance is legal, but if the scheme doesn’t work you’ll have made an incorrect tax return which is not in accordance with the law. You are legally obliged to pay tax that is due and you may be charged penalties if you try to avoid it.
  2. It could cost you more than you bargained for. Avoidance schemes are complex. They can give rise to unintended additional tax consequences, and the fees you pay the promoter do not count as tax paid. So you could end up paying much more than just the tax you’re trying to avoid.
  3. You may have significant legal fees to pay. If the scheme is taken to litigation, you’re likely to have hefty legal fees to pay. Your promoter may ask you to pay into a ‘fighting fund’ up front.
  4. You could face criminal conviction. If you deliberately mislead or conceal information from HMRC you could be prosecuted and convicted.
  5. You could face publicity as a tax avoider. If you are named in court papers when the case is litigated, or in public registers, you could be reported in the media as a tax dodger.
  6. Your scheme is never HMRC approved. Getting an avoidance Scheme Reference Number from HMRC doesn’t mean the department has cleared the scheme. HMRC issues these numbers when a scheme has signs of being designed to avoid tax.
  7. You could be marked out as a high-risk taxpayer. Use of a scheme could mark you out as a high-risk taxpayer, which means that all of your tax affairs will be closely scrutinised in future, not just your claim for relief.
  8. HMRC is likely to beat your scheme in court. HMRC wins eight out of ten cases where taxpayers and promoters take avoidance schemes to court.
  9. The risk is normally all your own. It’s unlikely that a promoter will give you a guarantee that a scheme will work. And they probably won’t be around to support you once HMRC starts investigating your tax affairs. Some promoters set up simply to sell the scheme, and then disband.
  10. You’ll have to pay the tax up front anyway. You won’t get a cash-flow advantage while HMRC investigates a scheme. New legislation means you’ll have to pay the disputed tax up front.

Obviously HMRC have one opinion of the tax strategy market, and scheme promoters will have entirely different views however there is no denying that the landscape has changed significantly over the past few years, and successive legislation has strengthened HMRC’s hand when dealing with taxpayers.  In any event, since new legislation was introduced in December 2010,  we advise caution when dealing with tax scheme promoters as they all provide assurance based on ‘Barrister’s Opinion’ of an interpretation of the tax rules which are usually challenged by HMRC.

In our experience there are plenty of non aggressive ways in which businesses and individuals can mitigate their tax risks without running the risk of the 10 points above. If you have any questions about tax, contact our highly experienced team on 0845 177 5500 or using our on-line contact form, where they’ll be please to help you.

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