Different types of tax avoidance schemes
The chances are that even if you did all your due diligence which may have included:
- asking the promoter for financial illustrations showing your projected disposable income
- obtaining brochures and promotional material
- requesting (but never receiving) legal counsel's opinion about the scheme
- receiving emails explaining that the scheme was perfectly legal and safe and definitely would not be subject to HMRC challenge
- supported by many reassurances that in the extremely unlikely event of any problem with the tax man you would receive free assistance, sometimes involving insurance cover.
So, despite all the above, you find yourself in the "unlikely" situation of a major problem with HMRC that in the extreme could lead to your bankruptcy and publication as a tax defaulter with all the consequences that involves.
All tax avoidance schemes exploit loopholes in the law that were not meant to give rise to an advantage. Eventually, the Treasury closes these loopholes and then has to litigate test cases to see if the avoidance did successfully circumvent the laid-down legislation. In 2004 HMRC introduced the Disclosure of Tax Avoidance Schemes (DOTAS) so that they could challenge such schemes in a timely manner. They perhaps did not bargain that many promoters did not consider their pay schemes to be "avoidance" and therefore did not register. These cases are coming to light now and are leaving some promoters and contractors open to suspected fraud which can lead to criminal prosecution.
Promoters usually have a history of running their schemes for between one and three years during which time HMRC get wind of the scheme and they open a new scheme with a different name and continue trading so they can rake in between 6-12% of the contractors earnings and leaving them open to the wrath of HMRC when they are investigated on an individual basis. There are numerous examples of this.
The early schemes such as the now celebrated Philip Boyle case involved offshore employers, loans in foreign currencies, Employee Benefit Trusts (EBTs), employee salary contracts or contracts for services on a self-employed basis. The details of specific schemes are beyond the scope of this article, suffice to say all of the schemes involve artificial arrangements which are bound to fail. Some of the schemes are clumsy and simple (and might actually prove to be legal when the litigation process is complete) and others are sophisticated and complex.
A little bit more about Employee Benefit Trusts (EBTS) schemes
During the now celebrated BIG case (HMRC v Rangers/Murray Holdings) the Government heralded this case as the precursor to defeating all arrangements involving EBTs. However, HMRC eventually suffered a humiliating defeat on the main issues. We were not surprised that the taxpayer succeeded and for the simple reason that genuine EBT schemes were perfectly legal up to a change in the law in April 2011 (with anti-forestalling backdated to December 2010). This differs from the EBTs included as a tax avoidance device in contractor pay schemes which include trust arrangements as a possible artificial step in the arrangements. Ironically HMRC recognises aspects of the scheme as legal when it suits them so they can charge the individual to Inheritance Tax (IHT) whilst still subjecting their loans to income tax and national insurance.
Whatever type of scheme you have been involved with, time is now running out because the cost of not bringing this situation under control may become beyond your reach and whilst tax specialists cannot solve your problems with HMRC they can certainly help you to weather the storm, reduce your stress and anxiety levels and negotiate the best result possible in what are dire circumstances for you and your family.