HMRC’s Counter-Avoidance Directorate was established to challenge anyone who has participated in tax avoidance schemes. The formation of this team has enabled HMRC’s operational and policy resources to unite into a single centre of expertise and is responsible for challenging avoidance schemes, issuing Accelerated Payment Notices (APNs), Follower Notices, and dealing with any representations thereon.
If you’ve engaged in planning, which is perceived by HMRC to be tax avoidance, you’re now far more open to scrutiny than ever before. The introduction of APNs, Follower Notices and the Targeted Anti-Avoidance Rule has given HMRC increased powers to attack such schemes and- obtain the tax payments HMRC believes are due, without being tied up in litigation.
New legislation even prevents you from using the fact that you have sought advice as a defence, where those people giving the advice are connected with the transaction itself. Despite this, new avoidance arrangements continue to be developed and promoted.
It has, therefore, never been more important to seek independent advice where you, or HMRC, believe you have been involved in a tax planning arrangement.
HMRC is generally willing to reach a settlement in relation to any unpaid tax. This will usually be done by the person making a formal disclosure of the unpaid tax but where tax avoidance is concerned, HMRC will often announce settlement opportunities specific to certain tax avoidance arrangements.
One of the most widely publicised attacks on tax avoidance arrangements in recent years is the Loan Charge, which targeted individuals (and their employers) who had received remuneration in the form of loans going back as far as December 2010.
HMRC introduced the disguised remuneration 2020 settlement opportunity as a way for individuals and employers to settle their use of disguised remuneration schemes. The settlement allows all liabilities to be settled (some of which may not have been caught by the Loan Charge, such as inheritance tax) and enables open enquiries, or years with assessments, to be closed so that all areas of the scheme use can be considered resolved.
If done correctly, settlement in this way should allow the distribution of any funds that remain within the scheme and the winding up of any trusts still in existence, removing the need for the payment of ongoing trustee fees.
In April 2022, HMRC announced a further settlement opportunity, this time for users of remuneration trust tax avoidance schemes, some of which may not fall into the disguised remuneration 2020 settlement opportunity.
The term ‘remuneration trust’ in this instance refers to trusts which are established by businesses to provide a ‘tax free environment’ for the stakeholders, and potentially employees, but aren’t considered Employee Benefit Trusts (EBT) or Employer Financed Retirement Benefits Schemes (EFRBS).
This new settlement opportunity is only available to individuals and companies where the scheme meets certain criteria, as set out in HMRC’s settlement terms. The terms are complex, and should be carefully considered, as there are a number of potential options and different tax consequences, depending on the facts of the scheme used. We can help determine whether you meet the criteria, and the option you would fall under.
Broadly speaking, the opportunity is targeted at users of schemes where a trust is established by the individual or company, but funds are transferred to a primary administrator rather than a bank account under the control of the trust. That primary administrator will then typically transfer those funds to a director, other employee, a shareholder of the company (or for an unincorporated business, the business owner or an employee), or a personal management company controlled by them.
One key point to note is the potential for settlement on the basis the loans were distributions, provided the proportion of loans made to shareholders matches their shareholding. This means tax and NIC savings for both individuals and the company, when compared with settlement on the basis of earnings. This is in contrast to previous settlement opportunities relating to trusts.
In further contrast, and reducing the incentive to settle, HMRC has confirmed that penalties could be charged as part of the settlement. However, this will ultimately depend on the knowledge and behaviour of the users of the scheme, and the advice they received.
Payment by instalments is available where required and HMRC has confirmed in the settlement terms that it will not expect payments of more than 50% of an individual’s disposable income (unless they have a very high disposable income). These are better terms that are likely to be offered should the scheme be defeated at Tribunal. Furthermore, HMRC has made it clear that, in the event a court rules in the future that tax is due on an alternative basis to the scenarios outlined in the terms, those terms will be withdrawn and any scheme users that have not already settled will be expected to pay tax in accordance with the court’s ruling.
This would seem to be a reference to the conflicting First Tier Tribunal cases of Marlborough DP Limited, and Strategic Branding Limited, which were both heard in 2021. The judge in the latter case ruled payments received were subject to PAYE, while in the former the Judge decided the ‘connection test’ to an employee was not met. This presumably led to HMRC’s offer of settlement on the basis the loans are distributions.
The decision in Strategic Branding Limited is the subject of an appeal to the Upper Tier Tribunal (the result of which will be binding on the First Tier), but, at the point of writing, no date has been set. Nevertheless, even if the hearing does not take place before the settlement opportunity ends, there is still a tight window in which to take advantage. As things stand, applications must be made to HMRC by 31 July 2022, and the applicant (or their adviser) must complete tax calculations and submit them with the application.
These calculations are likely to be complex, and we would advise anyone wishing to make an application for the settlement opportunity to seek professional advice.
We have considerable experience in reaching settlements for our clients and mitigating any penalties that HMRC may seek to charge.
APNs are demands for tax that HMRC believes is due, following the use of a tax planning arrangement. They are designed to prevent taxpayers from retaining the use of tax HMRC considers should have been paid. APNs will be issued if the following three conditions are met:
If the dispute is resolved in your favour then HMRC will reimburse the payment with a small amount of interest. APNs cannot be appealed, although representations can be made if the APN has been issued wrongly or is incorrect in some way. Penalties of up to 15% of the amount due will apply if the APNs are not paid in time.
Follower Notices are issued if you have been involved in schemes similar to those that have been successfully challenged by HMRC. HMRC issue Follower Notices inviting you to take corrective action to deny the tax advantage claimed by using the scheme, rather than continue with a case that HMRC is now certain it will win.
Representations can be made if you believe the Follower Notice is invalid. However, if corrective action is not taken in time, penalties of up to 50% of the unpaid tax can be applied. HMRC has been applying harsh failure to take corrective action (FTTCA) penalties particularly in cases where HMRC believes there has been a significant delay in taking corrective action.
We can review your planning and give you an honest and impartial assessment of your chances of successfully challenging HMRC, both in terms of any existing enquiry and also APNs and Follower Notices. We will then recommend either continuing the challenge or settling with HMRC.
If you have been issued with penalties in respect of either the late payment of APNs or FTTCA, we can confirm if those penalties are fair and proportionate in the circumstances of your case and, where appropriate, make robust representations for you.
Should we recommend a settlement, and you agree, we are well placed to negotiate this with HMRC, and agree on a favourable payment plan where required.
Hi Mark, we’re very happy with this result. Thank you for your assistance in this matter.
Instructing Solicitor
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