As promised in the 2014 budget, HM Revenue and Customs is clamping down on those using schemes whose sole purpose is to allow those involved to avoid tax. Several high profile cases have received a significant level of media coverage, sending a strong message to anyone considering using a similar scheme.
Among those schemes which have been found to contravene the guidelines is the one in which three members of taking That had invested, known as Icebreaker. The scheme was presented as an investment opportunity and the band’s manager Jonathan Wild, along with members Mark Owen, Howard Donald and Gary Barlow, was able to take advantage of tax breaks offered by the government to support those in the creative industries.
They invested in Larkdale LLP, one of 50 partnerships which were arranged by Icebreaker and found to be using a system of unnecessary loans designed to take advantage of tax relief and also to inflate their outgoings which they then offset against the investors’ remaining tax bills.
Although there was nothing technically unlawful about the arrangements, the scheme was found to be breaking the rules governing this type of investment because it was commercially unviable. This was the verdict of Judge Colin Bishop who sat on the tribunal which was held after an investigation originally prompted by an exposé run in the Times newspaper in 2012.
HMRC’s ruling means that the band members have been ordered to repay the tax that they avoided under the scheme, although a final figure has not yet been announced. They have until the beginning of July to appeal, should they choose to do so, but they will be pursued for the repayment of the tax in the meantime, which could lead to millions owed.
Ignorance is no defence
Many of those who have been caught using schemes which are designed to avoid paying the full rate of tax on a person’s income have pleaded ignorance as to the nature of the investment, claiming they did not know that what was being proposed constituted tax avoidance. While this may be true in some cases, responsibility for declaring income and paying tax ultimately lies with the individual.
For anyone who has an accountant or other financial professionals advising them and managing their money, minimising their tax bill is a standard part of the service, so it can be worrying to think that people have been duped into using schemes which could get them in trouble.
For many, the schemes which have attracted the most interest from HMRC were based off-shore or used a system of loans in order to make their income appear lower. For those who have been caught, claims that they weren’t aware that the scheme had not been met with leniency and they have been ordered to make payments which have run to millions of pounds at a time in some cases.
The government has estimated that tax avoidance schemes cost the treasury around £10 billion a year in unpaid tax. If HMRC deems a scheme to contravene the rules then they can shut it down and claim back any unpaid tax from any investors, backdating bills as far as they decide is appropriate.
Aggressive sheltering schemes
Whilst there is a difference between tax evasion and the practice of avoiding tax, if a scheme is deemed to exist for the purpose of allowing investors to avoid paying tax, they could fall foul of the tribunal responsible for establishing whether a scheme is legitimate or not.
So-called aggressive schemes which exploit loopholes in the legislation have been penalised for allowing members to misrepresent their earnings, claim tax relief to which they are not entitled and report losses which may minimise the tax payable through misleading accounting.
For those who are using these schemes, the rules governing how the tax is paid have changed in the wake of the most recent budget. Those who want to invest in schemes which HMRC believe have the potential to break the rules will have to pay tax up front rather than retrospectively, and they will be repaid if the scheme turns out to be legitimate.
Anyone who has concerns about any tax reduction scheme should seek professional advice from a trusted expert. Any investment which appears to be low risk, offering returns which are significantly higher than the alternatives, or guaranteeing percentages which are usually only found with higher risk investments, then doing some extra research into what is involved could prevent you from making a costly mistake.
Another form of tax avoidance which is being targeted by HMRC is Employee Benefit Trusts, which are often offered to those who are in paid employment as well as directors of companies. Some providers claiming that they can reduce your National Insurance contribution and tax liabilities to around 15 per cent of your earnings. This is done by paying employees a nominal basic salary, which is often around or just above the National Minimum wage, and ‘topping up’ this amount with loans to the value of the rest of their salary.
Because the loans aren’t taxable and do not attract National Insurance contributions, this method of payment could appear to reduce your tax bills significantly. However, this is all reliant on the fact that the ‘loans’ are never expected to be repaid as if a loan is written off it becomes taxable. This means that you will technically owe your employer money indefinitely, or that you could be asked to pay back taxes on the sum if the deception is discovered.
Offshore schemes have also been attracting the attention of the taxman, with some of those who have been using the biggest umbrella companies being required to pay back tax dating back for several years. Any company which offers to reduce your tax bill by arranging for your wages or any part of them to be paid through a company based outside the UK will almost certainly be abusing the tax system in one way or another, so it is always best to steer clear if you have any doubts as to their legitimacy.
Still considering using a tax scheme? Read our comprehensive guides for the in’s and out’s of Employee Benefit Trust’s, offshore tax schemes and noticing tax avoidance schemes:
- Offshore tax schemes or UK Limited company?
- EBT – Employee Benefits Trusts
- Offshore Companies
- BN66 – Double Taxation Treaty Abuse
If you have any questions about working through your own legitimate UK limited company, as many hundreds of thousands of contractors already do, please don’t hesitate to call 01442 275789 or email: email@example.com.
If you would like to understand more about setting up your own Limited company and how much you could take home from your latest contract, please visit the following pages:
- How to contract through your own Limited company?
- Take home pay calculator
- Forming your own Limited company