Tax avoidance schemes at record low

Wednesday 27 November 2013

HMRC’s tougher stance on tax avoidance is paying dividends, according to figures obtained by law firm Pinsent Masons.

The new data indicates the number of tax avoidance schemes being disclosed to the tax authority fell from 121 to 77 between 2011-12 and 2012-13, representing a decline of as much as 36 per cent. Over the eight years since the so-called “early warning system” came into effect in 2004-05, leading to a huge 587 disclosures, the number of warnings has been continually falling.

“The figures show that HMRC is taking a tougher stance on tax avoidance and winning the battle, if not the war, to eliminate elaborate tax schemes,” says Pinsent Masons tax expert Jason Collins.

Earlier this year, the 2013 Finance Act gave HMRC greater powers to compel members of tax avoidance schemes to give information to the promoters of the scheme, who can in turn be forced to turn this data over to the tax authority. It has even run a consultation on new powers that would allow it to name and shame any tax adviser whose behaviour it sees as “high risk”.

Recent months have seen HMRC getting much tougher on tax planning mechanisms that it believes have veered towards avoidance practices, at the same time as it has been opening other avenues for individuals to come forward and settle their tax affairs.

For those with assets held offshore, the tax authority has set up disclosure facilities with jurisdictions such as Liechtenstein and all the UK’s Crown Dependencies and Overseas Territories, including the Isle of Man, Cayman Islands, Jersey and Guernsey. These allow individuals to settle their tax bills on the best possible terms with HMRC and avoid the potential for higher penalties and even prosecution down the line.

It is also looking into the potential for tax avoidance via other means. Disguised employment is a particular topic of interest, as shown by the current House of Lords committee taking evidence on the use of personal service companies. It has already heard evidence on the subject of IR35 legislation, including the complexity and confusion that remains around these rules.

Over the period in which the early warning system has been operating for tax avoidance schemes, artificial and contrived schemes have faded considerably, says Pinsent Masons, as public outcry over corporate tax avoidance has increased reputational risk. Despite this, some are seeking new ways to push boundaries

“Companies and high-earning taxpayers may still look for new ways to minimise their tax bill, but the fact that there were just a fraction of new schemes last year compared to previous years suggests that HMRC is doing a better job at using its understanding of existing avoidance schemes to 'police' the promoters and close loopholes in the law - often before they can be fully exploited,” Mr Collins explains.

He adds that although HMRC has got better at reducing tax avoidance from new schemes, it still has plenty of work to do to encourage taxpayers to come forward to settle liabilities from schemes set up between five and ten years ago. Because existing settlement mechanisms insist on the lion’s share of historic tax being paid, users of historic arrangements are likely to be slow to come forward. Mr Collins even suggests that officials could consider a complete amnesty, on the proviso that those who made use of it would face much harsher penalties for future avoidance.

By Victoria McDonnell

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