HMRC puts ‘spotlights’ on SME tax avoidance

Previously, I’ve written about tax planning by companies such as Amazon, Google and Starbucks, and the government’s response.

That story is all about international transactions and offshore hubs, but now I want to bring the debate down to a level that AAT members might encounter more frequently in their professional lives, and will need to be able to comment on. Suppose one of your clients, an IT contractor, comes to you and says that one of her professional colleagues has been sold a scheme that reduces his tax to a small proportion of his gross income and that he can take home 90% of his pay.

How would you react to that? Would you say “I don’t do such schemes but it’s your choice if you go and get one”?

Where would you then stand if your client did go and purchase a scheme, but it was found not to work and she blamed you for not stopping her? I think you’d be examining your letter of engagement to see what your exposure was, and your professional indemnity insurance as well.

Shining a light on tax avoidance

In an attempt to nip this sort of problem in the bud, HMRC has developed ‘Spotlights’, a scheme highlighting various tax-planning arrangements that, despite their wide appeal among SMEs and contractors, don’t actually work.

Here’s an example. In Spotlight 26, HMRC says in relation to contractor loan schemes: “Contractors and freelancers are bombarded by promoters who make claims that they can help individuals take home as much as 80% to 90% of their income. Sounds too good to be true. That’s because it is.”

HMRC explains that a contractor would usually receive the contract income directly and pay tax on it. The arrangements in question artificially divert the income through a chain of companies, trusts or partnerships, which pay the contractor in the form of a ‘loan’.

“These ‘loans’are claimed to be non-taxable because they don’t form part of a contractor’s income. However, in reality the ‘loans’ aren’t repaid and the money is used by the contractor as if it were his or her income,” says HMRC.

The HMRC view is that such schemes don’t work. The Taxman strongly advises any contractor or freelancer who has used such a scheme to withdraw and settle their tax affairs, or face litigation and penalty charges.

HMRC is quite stern when it comes to these schemes. It offers three tips on spotting them:

– “If a promoter says that, if you join their scheme, you can take home between 80% to 90% of your income – it’s too good to be true.

– “If a promoter claims that the schemes are HMRC-approved – it’s too good to be true.

– “If a promoter tells you that you don’t have to declare the scheme – it’s too good to be true.”

HMRC started the Contractor Loans Settlement Opportunity to encourage contractors to come forward and pay their missing tax. The original cut-off point was back in January, but it was extended so that contractors needed to make contact on 30 June and settle by the end of September. Now that time has passed, those who have chosen not to settle will have to take a case to the First-tier Tribunal (FTT).

At the beginning of this year, the FTT dismissed the case of IT contractor Philip Boyle, and ruled that the money he received as a loan via a company based in the Isle of Man was “in substance and reality income from his employment” and, therefore, taxable. So it’s perhaps not the best idea to put your hopes in the FTT.

No escape

HMRC is clearly determined to shine a spotlight on such schemes, and others as well. A quick check on Gov.uk reveals that schemes such as those that manipulate the employment allowance are in its sights. We need to be aware of this and to counsel our clients accordingly. Now where’s that letter of engagement?

Michael Steed is co-chairman of the ATT's tax Technical Steering Group and columnist for Accounting Technician magazine.

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