Contractors should hold their nerve and not allow the government’s latest tax avoidance consultation, Raising the stakes on tax avoidance, to change their behaviour over tax planning, as mainstream contractors are unlikely to be affected.
“This is the third of a series of politically motivated tax avoidance initiatives that are less about genuinely addressing the issues of abusive tax avoidance and more about fuelling the media storm over avoidance and frightening taxpayers, like contractors, into paying more tax than they should,” warns David Colom of contractor accountant D J Colom & Co.
“First we had Lifting the Lid on Tax Avoidance Schemes in July 2012 and then we saw the General Anti Abuse Rule (GAAR) introduced in April this year. We can only hope that there will be a genuine two-way process with Raising the stakes.
“That’s because its suggestion, roundly criticised by the professional accountancy and tax bodies, to label tax advisers as ‘high risk’ is highly unfair and should really be addressing the activities of the big accounting firms more than anyone else.”
Little more than a witchhunt, with HMRC as ‘Witchfinder General’
Colom explains: “The contractor end of the tax avoidance spectrum, and the number of scheme promoters, is tiny compared with the UK’s wider avoidance industry. This is dominated by the national and international accounting firms offering highly complex and contrived schemes to largely corporate clients and high net worth individuals.”
The contractor end of the tax avoidance spectrum, and the number of scheme promoters, is tiny compared with the UK's wider avoidance industry
David Colom, D J Colom & Co
The consultation proposes to award HMRC the power to label specific tax avoidance scheme promoters as ‘high risk’. As such, the promoter is required to advertise to its clients its ‘high risk’ status. HMRC has proposed in the consultation that it be awarded far-reaching powers and wide discretion to determine what constitutes ‘high risk’.
Colom’s fear is that, as the consultation stands, HMRC will be a self-appointed judge and jury, able to label any tax adviser as a ‘high risk’ promoter of tax avoidance schemes, which in Colom’s view is the professional equivalent of being burnt at the stake by the ‘Witchfinder General’.
“In order to do this HMRC would need very good reasons, but we’re not being told in detail what these might be. HMRC would be awarded a high level of discretion that, if incorrectly applied, could ruin totally innocent tax advisers’ livelihoods, and cut off contractors from perfectly legitimate tax planning measures.”
HMRC’s view is that there can only be ‘bad’ avoidance scheme promoters
“There are good tax avoidance scheme providers and bad ones,” continues Colom. “From a contractor’s perspective, a good provider is one promoting a scheme that provides good solid tax advice. It should be enabling contractors to mitigate their tax affairs using legal solutions, have been thoroughly tested by a tax counsel who has been properly briefed, and have a large professional administration team to ensure every ‘I’ is dotted and every ‘t’ is crossed.”
In contrast, Colom says that some schemes he has seen, when examined in detail, “should not be touched by contractors with a bargepole. Most schemes come with a tax counsel’s opinion, but what they don’t say is that the counsel was briefed by an unqualified scheme promoter who does not fully understand how the scheme works. Contractors using these schemes are taking huge risks.”
Colom’s experience is that HMRC does not understand, nor is terribly interested in these distinctions. The taxman is only concerned with the tax gap, which is the amount of tax HMRC thinks it should raise and the amount it actually does raise. As a result, any tax adviser that prevents the tax gap from reducing is a ‘high risk’ promoter in its eyes.
“How can HMRC tell the difference between a professional tax adviser with a rock solid scheme and the cowboys in the industry?” asks Colom. “Will it want to, or is the preferred solution to label everyone as high risk because they know that it will change the behaviour of many taxpayers, by scaring people into paying more tax than they should?”
Why is this consultation needed with the GAAR in place?
Colom is also confused as to why this additional layer of legislation is required if GAAR works as it should do, because any high risk promoter of schemes would automatically be caught by the new legislation.
“Highly contrived tax strategies and their promoters can already be challenged and shut down by GAAR,” he explains. “So why does HMRC require even further powers to name and shame promoters?”
Colom believes that the intention is to frighten contractors and their advisers into paying more tax than they should: “GAAR frightens a lot of accountants, and this consultation is the latest part of the campaign to change taxpayers’ behaviour to believe that there is something wrong with legal tax avoidance.”
He urges contractors using conventional tax planning, such as low salaries and high dividends and income splitting, not to let themselves be frightened by either the political establishment and HMRC, or their accountants, into abandoning these strategies.
Colom concludes: “Paying less tax is not risky, or wrong or immoral. If the authors of this consultation can put contractors off making legitimate tax savings, then it has done its job. “Contractors should understand that this consultation is not about stopping illegal schemes; it is all about managing and changing people’s behaviour to stop them entering into legitimate schemes.”