Financial Matters

With David Frederick FCCA | Marcus Bishop Associates | marcus-bishop.com

The Net Of Tax Avoidance & Tax Evasion

HM Revenue and Custom’s (HMRC) decision to name two Belize registered companies as promoters of a tax avoidance scheme in the UK, has reignited the tax avoidance v tax evasion debate. Moreover, it has reminded taxpayers of their risk if they get entangled in this web. The taxpayer is liable for the lost taxes and not the tax avoidance scheme promoter.

The two companies identified by HMRC had the same registered business address in Belmopan, the capital of Belize, were promoting and marketing a tax avoidance scheme known as the Umbrella Remuneration Trust (URT). The scheme used complex, offshore, financial arrangements so that income tax and national insurance contributions were not correctly paid.

The Trust received contributions from the scheme users, UK companies and self-employed people who claimed the contribution as a deductible corporation tax or income tax expense. When the money was transferred back to the user, no taxes were paid.

Mary Aiston, HMRC’s Director of Counter Avoidance, said: “These cynically marketed tax avoidance schemes don’t work in the way the promoters claim and users can end up with big tax bills. We will continue to take strong action against those who promote and market tax avoidance schemes and remain committed to supporting taxpayers to steer clear of or exit tax avoidance.”

The action by HMRC is, or maybe wholly justifiable with these two companies plus many more including UK registered companies. However, the real source of the matter is the legislation surrounding IR35, since 2000 and its expansion in April 2021 to the private sector. Since 2021, more owner-managed service companies have fallen into IR35. Consequently, many have also become prey to an interesting range of practices by the umbrella companies that these previously independent contractors have been forced to operate under.

The former Chancellor, Dennis Healey, described the difference between tax avoidance and tax evasion as being “the thickness of a prison wall”. This stemmed from the Duke of Westminster case in 1936 when the judge, Lord Tomlin, said: “Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax”

HMRC does not provide an operational definition of tax avoidance or tax evasion. It is often muted that tax avoidance is the exploitation of tax legislation to reduce a taxpayer’s tax liability. Thus, according with Lord Tomlin’s ruling. Whereas tax evasion is the deliberate non-payment of tax payable by a taxpayer. HMRC do not differentiate between tax avoidance and tax evasion. HMRC regard actions to reduce a taxpayer’s liability with suspicion unless they deem it accords with the intended spirit of the tax relief. This has become increasingly the case since March 2011 when HMRC issued ‘Tackling Tax Avoidance’ which set out their approach to the problem of tax avoidance.

Some umbrella companies are effectively marketing tax avoidance schemes as effective tax planning. Whilst the area may be blurred, the two are not synonymous or interchangeable. This perceived lack of clarity has entangled many owner-managed service companies operating under IR35 into the net of tax avoidance schemes. Consequently, some have been saddled with financial penalties and tax liabilities. This was the £27,000 shock tax bill that landed at the door of one such taxpayer.

Taxpayers should consider the maxim, if a tax scheme sounds too good to be true, it probably is. Moreover, users of umbrella companies need to look beyond paying the least tax and maximising their take home salary in their selection process.