Just after the 31st January, HMRC had sent letters opening tax enquiries (a section 9A notice) to a number of users of targeted anti-avoidance schemes. We understand those targeted include those relating to pension arrangements, avoiding the loan charge and disguised remuneration. In some cases, the taxpayer had only filed their SATR days before receiving a section 9A notice. The speed is testament to how HMRC has embraced modern technology and how Risk and Intelligence Service operate in a targeted manner.
Coronavirus has impacted HMRC’s activities and they had reduced the number of new compliance cases started. In April and May 2020, HMRC opened around one-third of the number of compliance cases in comparison to the same period in 2019. HMRC did increase the number of new cases started and in June and July 2020 HMRC opened more than half of the number of cases opened for the same period in 2019. HMRC also undertook fewer criminal investigations and the compliance yield (£7.5 bn) in April to June 2020, was significantly less than the previous year (£15.4 bn). HMRC has to open considerably more enquiries going forward.
HMRC will issue enquiry notices before the 31 January deadline to keep a tax year open for enquiries. An open enquiry negates the need to ‘discover’ an irregularity in a timely manner. Where a tax avoidance scheme has been used and the scheme reference number (“SRN”) is included on the return, HMRC would as a matter of course open an enquiry. If planning has been undertaken and there is no SRN because the planning is considered not to be a disclosable tax avoidance scheme, HMRC’s information powers and ability to analyse that information to identify risks is key to selecting returns to be the subject of an enquiry.
HMRC is committed to reducing the use of avoidance schemes although the Treasury may not have clearly defined such schemes. Where an arrangement is potentially identified as avoidance, HMRC will issue a spotlight. The more recent spotlights may indicate areas where HMRC will target to open enquiries:
- Spotlight 57 concerns an arrangement whereby a business sells its right to its future revenue to the trust. HMRC don’t explain the arrangement well and it would appear they may not actually understand the arrangement.
- Spotlight 56 is a continuation of a theme (spotlight 40, 44 and 51) to discourage the use of disguised remuneration and concentrates on relaying the GAAR panel opinion. That opinion relates to a company rewarding its director through contributions to a remuneration trust, which in turn made loans to the director. The Panel stated “We cannot believe that Parliament intended loans to a person from a trust made out of funds deriving from economic value earned by that person’s activities as a director to escape Part 7A (disguised remuneration)”.
- Spotlight 55 concerns comparison and broker websites marketing umbrella companies. Contractors using certain umbrellas are paid without deduction of tax. HMRC state payments could be loans, annuities, fiduciary receipts, credit facility, shares, capital payments or advances or bonuses.
- HMRC state in Spotlight 54 “that unscrupulous promoters of tax avoidance schemes are targeting workers returning to the National Health Service (NHS) to help respond to the coronavirus (COVID-19) outbreak.”
- Spotlight 53 is also concerned with disguised remuneration: tax avoidance using capital advances, joint and mutual share ownership agreements. HMRC explain how the scheme works and it involves an employee of an umbrella company or connected entity entering a loan agreement, capital advance agreement and a joint/mutual share ownership agreement. The employee receives a capital payment following share transactions. HMRC take this opportunity to highlight the disclosure of tax avoidance scheme legislation and the enabler’s penalty regime.
- The cases of Hyrax Resourcing Limited and Curzon Capital Limited were the subject of spotlight 52. An employee of Hyrax Resourcing Trust would be provided under a contract to an end user. The worker would be paid a minimum wage and the employer would make discretionary awards by way of loan. The creditor rights on loans were assigned to an employer finance retirement benefits scheme.
Disguised remuneration dominates HMRC’s spotlights and there is a subtle emphasis on the risks to promoters. HMRC state in their Annual Report and Accounts 2019 to 2020 that:
“since 2014 we have seen around 20 promoters of tax avoidance leave the market. Now we’re focusing on the 20 to 30 most challenging promoters that remain.”
“During financial year 2019 to 2020 we doubled our resources on this work, with over 350 interventions on promoters and their supply chains. In this year, our Fraud Investigation Service arrested 9 people on suspicion of promoting fraudulent arrangements claiming to get around the loan charge.”
“We have also been contacting customers as soon as we become aware that they may have entered into an avoidance scheme to highlight the risks they face and provide advice about how they can leave the scheme and pay the right amount of tax.”
HMRC had success in a case heard in 2020 where they successfully made information requests on tax advisers selling and engaging in tax avoidance schemes (Qubic Tax and others v HMRC  TC7701). As part of HMRC’s enquiries into Disclosure of Tax Avoidance Schemes and their Promoters of Tax Avoidance Schemes, they opened enquiries and issued Information Notices.
Qubic Tax Ltd received Schedule 23 Data-Holder Notices covering the years 2013-2014 to 2016-17. The information request required details of company sales, debtors and the commission paid to other accounting and tax firms who referred their.
Schedule 36 FA 2008 Information Notices were issued to Qubic Trustees and Orchard Street Service Co Ltd requesting their accounting records. An information notice was also issued to Assethound Ltd concerning its own Employers Benefit Trust and gold bullion scheme that was designed by Qubic to reward the owner of both companies.
The First Tier Tribunal decided that the information requested either consisted of statutory records, for which there is no appeal, or that the information was in fact reasonably required to check the taxpayers’ position.
The information gathered by HMRC would permit them to identify introducers to promoters of tax avoidance schemes. Assuming the introducers also act in relation to the accounting and tax compliance of a client using the scheme, HMRC are able use this information to better identify scheme users.
Not all enquiries are targeted. HMRC do undertake random full enquiries and these are used to measure the tax gap. In 2016/17 there were 2,248 random enquiries. Given there are 31,400,000 income taxpayers in the UK, the number of random enquiries is miniscule. In fact, in 2019/20 there were more prosecutions (4,123) than random enquiries!