One thing every accountant knows is that the man in the pub does not tell the whole truth. We are often contacted by clients who have been chatting, usually to a complete stranger, and have found that this clever person earns a fortune and pays no tax – and it’s all completely legitimate. Despite the fact that there are very few effective legal ways of paying little or no tax on your earnings (and those legal ways usually involve you spending a lot of money in order to qualify for tax relief, so they may be self-defeating) people are being bombarded with offers of pre-packaged tax avoidance schemes that promise the world and cost the earth.
These packages usually involve very complex, elaborate and artificial arrangements. There is a big upfront fee to the promoter and if you want to insure against the failure of the scheme you have to pay a huge amount extra.
The man in the pub probably thinks he has got a really good deal, but what has he actually been told by the scheme promoter? Did the promoter mention the following issues with the Revenue?
The last time the Revenue cracked down on certain tax avoidance schemes they did so retrospectively so that tax relief was lost not only for the current year but also the previous 6 years – a costly outcome.
The Revenue have a hit list of schemes that they will always enquire into and once they have their teeth into it they will want to pursue it to the bitter end, perhaps even resulting in a prosecution for tax evasion in the most serious disputes.
Remember that if your scheme does not work the taxman will not only want his tax back, he will charge you interest and penalties too.
What sort of schemes are on the Revenue’s hit list? Here are some examples of arrangements which the Revenue will expect to investigate:
Investments made in order to obtain trading loss reliefs. These schemes often involve a loan from the promoter. Loss relief can only be given for genuine trading losses and these schemes do not in the Revenue’s view constitute genuine commercial activity. The promoters say that the investors spend enough time on business activities to qualify for loss relief but the Revenue do not agree and have introduced specific legislation to counteract the claims.
Employee benefit schemes. Employers claim a deduction for payments into the scheme before any benefit is paid to the employees. The Revenue’s view is that there can be no deduction unless there has been a benefit to the employee.
Using trusts and other arrangements to reward employees.
Employers claim a deduction for the payment to the trust but do not operate PAYE at that time. In some cases the Revenue may seek to impose an inheritance tax charge on certain close company participators involved in these schemes.
On their website the Revenue list the following indicators that will make them look closely at your claims and they advise taxpayers to consider these points when deciding whether to invest in any sort of scheme:
- It sounds too good to be true.
- Artificial or contrived arrangements are involved.
- It seems very complex given what you want to do.
- There are guaranteed returns with apparently no risk.
- There are secrecy or confidentiality agreements.
- Upfront fees are payable or the arrangement is on a no win/ no fee basis.
- The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.
- The scheme is said to be approved by HMRC (it does not follow that this is true).
- Taxation of income is delayed or tax deductions accelerated.
- Tax benefits are disproportionate to the commercial activity.
- Off-shore companies or trusts are involved for no sound commercial reason.
- A tax haven or banking secrecy country is involved without any sound commercial reason.
- Tax exempt entities, such as pension funds, are involved inappropriately.
- It contains exit arrangements designed to sidestep tax consequences.
- It involves money going in a circle back to where it started.
- Low risk loans to be paid off by future earnings are involved.
- The scheme promoter lends the funding needed.
There are some schemes, such as Enterprise Zone Property Unit Trusts, which the Revenue will in some cases accept. It is necessary however to agree the amount of expenditure in these schemes that can qualify for tax relief. It is worth pointing out that with schemes which rely on capital allowances claims for tax relief, it is likely that the eventual disposal of the property is going to result in a clawback of the tax relief claimed giving an extra high tax liability in the last year. You are therefore deferring your tax liability rather than getting rid of it and if the clawback puts you into a higher tax bracket than before you will be worse off than if you had not invested in the scheme.
Just because the Revenue do not like something it does not necessarily mean that they can successfully dismantle what you have done and claw back the tax relief. However you need to be aware that there is not usually much after-sales service with tax avoidance schemes. The promoters want to make money out of you, not hold your hand if it all goes wrong in the future!
It is possible to use Employee Benefit Trusts and EFURBS in certain circumstances but in our experience the drawbacks of these schemes are not always fully explained. When clients do obtain full details of the schemes we find that they rapidly lose interest!
We do not promote and sell complex tax avoidance schemes at Dodd & Co. We look at our clients’ individual circumstances and offer them personally tailored advice to legitimately save tax. If you are offered any of these tax avoidance schemes please talk to us before you part with your money. You need to be informed of the true costs and the risks of going ahead as well as understanding the potential benefits and your interests will always be our top priority. Unlike the man in the pub, we will give you the full picture!
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