Contractors thinking of joining a tax avoidance scheme would do well to think about recent HMRC tribunal victories over scheme promoters. And the impact this will have in terms of back taxes, interest and penalties for the contractors who used the scheme.
Anyone considering joining a scheme should do so with their eyes wide open to the risks, and be prepared not only to take those risks, but suffer the consequences of their ‘gamble’ not coming off. If they’re not happy to do so, they should avoid such schemes at all costs.
Of course everyone should pay their taxes to ensure the UK continues to thrive as the socially cohesive and sophisticated economic powerhouse that it is. But the law is also made to ensure that taxpayers have the opportunity to reduce some of their tax burden. And that starts with measures that many are surprised to learn are tax avoidance, everyday things like investing in an ISA or paying into a pension pot.
They are at one end of the tax avoidance continuum; at the other end are riskier, more aggressive tax avoidance schemes that can tip over into illegal tax avoidance.
Three such schemes have been defeated in swift succession by HMRC in recent tax tribunals. The Icebreaker scheme has received considerable coverage as it included high-profile participants like Gary Barlow and Gabby Logan. The tribunal judge ruled that the scheme was set up solely for tax avoidance and had no commercial foundations.
A second scheme, the ‘blue box’, included DJ Chris Moyles and used charities to channel money offshore. And the third scheme to be defeated in the space of a week again used charities, alongside inflated share processes and an offshore financial centre.
But there really are fully legal tax avoidance schemes out there that are watertight, because the law allows for a wide range of tax avoidance – and the law is the law.
But as the above cases demonstrate, there are also schemes where the scheme promoter has not done their due diligence and ensured that there is not the slightest chink into which HMRC can lever its case to blow the scheme wide open.
The consequences of joining a scheme that is later defeated by HMRC can be severe. We’ve been shown by contractors in confidence enough terms and conditions and contracts for various schemes to see that ultimately it is the taxpayer that carries the can.
Some packs provided by scheme promoters are truly awful, badly thought through and a contractor would have to be mad to participate. It is likely that they are not lawful, and HMRC will discover this.
Others are extremely competent and thorough, providing detailed assessments of case law and precedent alongside tax counsel opinion and a detailed assessment of risk. Those are the sort of schemes that survive HMRC’s efforts to shut them down, because they are lawful.
However, in each case the paperwork also makes it totally clear who is responsible for paying back taxes, interest and penalties if the scheme is defeated by HMRC. It’s the taxpaying contractor who joined the scheme and not the promoter.
A recent report suggests that some Icebreaker participants are claiming that they were misled, and did not realise they were joining a tax avoidance scheme. This won’t cut any ice with HMRC.
If there were a simple way of changing the law, whereby those who marketed schemes that failed were liable to pay all fees back to their client, then perhaps we would see far fewer of the badly constructed schemes that are likely to fail. If the law also included personal debt transfer for the directors of the company promoting the scheme, we would almost certainly see a lot of the tax avoidance ‘cowboys’ close down.
Irrespective of what measures may ultimately come into force to punish scheme promoters, contractors with an elevated appetite for risk and who are considering a scheme should proceed cautiously.
Not all tax avoidance schemes are the same, and contractors should enter into them with their eyes wide open to the risks and possible consequences.