Taxpayers need to know when, in the eyes of HM Revenue & Customs, tax avoidance becomes tax evasion.
As the political temperature rises ahead of the May general election, tax avoidance and tax evasion are back in focus. Or out of focus, given that the lines between them are being wilfully blurred. But there are ways of telling whether the authorities are likely to disallow certain tax arrangements.
The situation used to be clear-cut. Tax evasion, as we all knew, was illegal, and was not the same as tax avoidance. Taxpayers had every right to minimise the tax they paid, by whatever legal means at their disposal. Paying tax is a legal requirement, not a moral issue. That’s why there are no queues to make voluntary payments to the taxman, although this is allowed by HM Revenue & Customs (HMRC).
Tax avoidance used to be the acceptable face of tax planning. Yet it is now being treated the same way as evasion. This is not as the result of new law or parliamentary debate, but from a sense of moral outrage. And HMRC has recently been lambasted in public by members of parliament for not recovering taxes from those that are benefiting from tax-avoidance schemes.
The government has been tackling what it sees as ‘aggressive’ tax avoidance, to raise an extra £7 billion in revenues before parliament is dissolved at the end of March. The Finance Act 2014 gave HMRC extensive new powers to target those who avoid payment by making use of tax law ‘in a way not envisaged by Parliament’. It has been clamping down on providers of aggressive tax schemes, though it says it won’t attack arrangements that rely on statutory exemptions and reliefs.
Most people have little to worry about but, when it comes to tax matters, it is always best to err on the side of caution – and to get expert advice and to steer clear of sophisticated tax-planning ideas. The risks are made clear by Exchequer Secretary to the Treasury David Gauke. “Dodging tax is immoral, illegal and unaffordable,” Gauke maintains. “The minority who cheat are increasingly finding that they have made a big mistake.”
Tony Müdd, Divisional Director, Tax & Technical Services at St. James’s Place, says he has no issue with that stance. “But, and it’s a big but, individuals remain entitled to plan their tax affairs in such a way as to ensure they do not pay more than they need to,” he says. “So it is essential that taxpayers understand when, in the eyes of HMRC, tax avoidance becomes evasion.”
There are signs to look for to help decide whether tax advice is good or should be avoided. The first relies on the evergreen principle that if a scheme promises something that sounds too good to be true, then it probably is. Rather than make a tax bill disappear, there is the risk of the launch of an in-depth enquiry by HMRC. This could go on for years and end up in the courts with considerable expense – for legal fees as well as payment of the disputed tax, interest and substantial penalties.
It’s worth noting that HMRC does not in fact approve schemes, even though some are presented as ‘approved’. The arrangements may have been given a scheme reference number (SRN) under the ‘disclosure of tax avoidance schemes’ (DOTAS) rules. But that only means that the provider has complied with the legal obligation to inform the authorities about the scheme – not that it has been approved.
There are other warning signs. One is that the tax benefits or returns are out of proportion to any real economic activity undertaken. Another is that the arrangement involves money going round in a circle back to where it started. And a third is that the provider contributes or arranges funding to make the scheme work.
“If nothing else, a taxpayer should be aware that using a tax-avoidance scheme will mark him or her out for special attention,” Müdd warns. “While morality should be subjective – when it comes to tax, any taxpayer who is not aware of this new world order risks becoming HMRC’s ‘next man’.”
Finally, with tax avoidance very much in the political spotlight in the countdown to the May election, it is worth remembering too that the tax year-end is fast approaching – and the run-up to 5 April is a good time to review tax affairs. There is still time to check if more tax is being paid than needed, assess if structures set up in the past are still suitable and weigh up available options.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.