HMRC enquiries and tribunals: What to do now

Unfortunately there are many politicians, HMRC officers etc who do not actually know the difference between Tax Evasion and Tax avoidance. We have words such as Tax avoision and aggressive tax avoidance, which really are made up to frighten the legitimate industry of using all legal ways neccessary in order that your client pays the least possible tax.

For HMRC to talk about a "crack down" on tax avoidance is totally illegal and the new government should say so.

I can forsee many more "Arctic" cases with umpteen pounds of our money wasted.

I've no idea whether it's illegal to talk about tackling avoidance. I do know that the LibDems promised to find more than £12bn by cracking down on tax concessions and loopholes. Some was to come from restricting pension contribution reliefs and some from a so-called mansion tax on £2m-plus houses. The rest would be found, they said, through an assault on Britain's tax avoidance industry.

The mansion tax has been kicked into the long grass (and there's plenty of long grass surrounding most mansions) but I reckon tackling avoidance is still on the agenda.

So if it is illegal to talk about it, then presumably it soon won't be.

Should have made myself clearer. As tax avoidance is legal any "crack down" would, by definition, be illegal. To try and stop someone going about their legal business, which is basically what HMRC are doing, in order to fill the treasury coffers has to be daylight robbery.

Let's turn this round somewhat. Tax evaders, who steal from HMRC, treasury coffers etc, are prosecuted because what they are doing is illegal. So in theory we should be able to stop HMRC going about its lawful business as they are stopping us going about ours'.

I think it would be helpful if Ronnie could indicate the provisions under which penalties as high as 200% of unpaid tax might be charged.

See Schedule 10 FA 2010

You seem to be getting your wires crossed here.  Lots of apparently legal tax avoidance becomes illegal when it is not implemented properly and doesn't work, usually because its far to complicated and has no relationship to commercial reality.  Any subsequent covering up becomes "fraudulent concealment".  Furthermore you only have to look at tax cases to see that many arrangements sold as legal by enterprising tax planners are over turned by the courts at which point they become illegal. 

I was talking to a barrister a few months ago (not a tax one!) who had done one of those dodgy charity schemes and couldn't understand why HMRC was on his back.  He thought it wasn't his fault, he'd paid someone to do it and he did as he was told.  Unfortunately nobody explained to him the full extent of the risks he was taking and the fact that his tax return and keeping the records to support it, was his responsibility.  By the time HMRC had investigated ,the person who had sold him it was nowhere to be seen, an all to frequent occurence.

While people, even barristers, continue to do this "legal tax avoidance" without understanding what they are getting into and what their responsibilities are, HMRC should get stuck in and crackdown to its hearts content.  The tax avoidance industry carries alot of responsibility for this.  Where is the industy regulated kite mark that tells the unwary punters they are being sold bona fide approved "legal tax avoidance".  It doesn't exist for obvious reasons.  The smart punters know this and reckon if they do a few schemes and one or two slip through they are quids in. The Lib Dems understand that the sooner the system is tightened up the sooner the deficit will start to come down.

Johhny

Thanks for reference to Schedule 10 of FA2010 - ie relating to offshore income.

Again confusion reigns.

If a scheme to pay less tax doesn't work then it isn't tax avoidance. Shimple

If a tax payer pays for a tax evasion scheme thinking it is a tax avoidance scheme, then they have to accept the consequences of their actions. No doubt the tax payer will inform HMRC who sold them the scheme and they will be dealt with accordingly.

GB over the years has tried to get HMRC to believe that there is no difference hence all the confusion.

I will give you an example, which some find confusing.

Tax Payer claims £5200 in accounts for wife wages. (not dividend)

If Wife does banking, invoicing answers phone, perhaps only working a few hours per week. This can be thought of as Tax Avoidance because you wouldn't normally pay anyone that sort of money for the work done.

If wife does no work in business but tax payer claims the expense that is clearly Tax Evasion.

"If Wife does banking, invoicing answers phone, perhaps only working a few hours per week. This can be thought of as Tax Avoidance because you wouldn't normally pay anyone that sort of money for the work done."

Surely though, if the taxpayer conceals the fact that he is overpaying, it's evasion n'est-ce pas?

Taking that a stage further, what would you define as concealment? Does failure to spontaneously disclose* a material fact constitute concealment? I don't actually know the answer, so, to me at least, this is a thoroughly grey area.

(*Note for pedants like me - yes, I know it's a split infinitive, it's deliberate)

Until HMRC check a tax avoidance scheme how do they know if it works and is legal or not?   The point is that it is sold as legal tax avoidance and thats what punters think it is.

I don't think most practitioners would recognise your example of wife's wages as avoidance.  If a service has genuinely been performed it is a "simple" question of fact what the value of the service was.  If the value is overstated it could be due to an error, lack of care or deliberate with appropriate penalty consequences.

The question of concealment is a difficult one and the easiest way to avoid having to get into it is to be as transparent as the law requires.

Firstly there are no rules as to how much you can or cannot pay someone, just ask some top ranking civil servants.

As for "putting the wife on the books" the "Arctic" case proved beyond any doubt that you can pay your wife whatever you want (whether salary or dividend). The extent to which HMRC went to show that this was basically Tax evasion (although they didn't call it that but would have done if they had won) was clearly to make a point.

I used the "wife" scenario as it shows how HMRC think.

IR35 is another classic. A Limited Company is a legal entity and it's no good HMRC saying we don't like it so we are going to take it away. Again it shows how GB has altered HMRC way of thinking.

The point I am making is that there is a clear difference between Tax avoidance and Tax evasion ad HMRC under GB's guidance have been trying to erode that difference by stealth.

How will HMRC know unless they are sent details of a tax avoidance scheme? Do you honestly think a dodgy tax scheme seller will send it to HMRC? If a punter is stupid enough to fall for these schemes then they deserve all they get. One wonders who these peoples' Accountants are or are you saying that it is their Accountants who are selling these schemes? If it is, surely HMRC would know who they are.

Now if you're talking about the "big boys" who pay clever dicky accountants to avoid paying vast tax bills, then HMRC will never be able to do too much to dent their millions. Now the bankers don't have to worry about avoiding tax, they just award themselves massive bonuses from our money.

You're right of course to say that 'there are no rules as to how much you can or cannot pay someone' but there are certainly rules that say how much of what you pay is tax deductible, which is I think the point here.

I also think that we agree on the boundary between evasion and avoidance. Evasion requires some sort of deception. Avoidance that relies on concealment for its success is actually evasion. Avoidance, however outrageous or contrived, is still avoidance as long as is it is completely transparent.

I'm not sure that there has been any significant shift in the boundary over the last few years. Or, if there has, whether GB had a deliberate aim to shift it. It's water under the bridge now anyway. The significant action now would be for the new government to publicly announce that HMRC were being instructed to ease up on resisting avoidance. Hands up if you think that's going to happen.

Anon Firstly I disagree with the amount that can be tax deductable. I go back to the wife scenario. If the wife or anyone else for that matter was paid £20K for opening the mail and was put through the PAYE scheme and the tax and nic was duly paid HMRC wouldn't bat an eyelid. On a PAYE investigation they wouldn' even ask what they did. That I know for a fact. The problem comes when you just use the wife's personal allowance and don't pay any tax or nic. HMRC don't like that.

GB openly admitted that he wanted every tax payer to pay the "right" amount of tax. The problem here was his "right" was different to most other peoples. Again this is where the "Arctic" case showed just how far HMRC were prepared to go to prove that legal wasn't "right". Of course the Courts decided that even GB wasn't above legal.

Concealment, funny old word. There can be a number of reaons why tax payers conceal things and they are not all connected with tax evasion/avoidance. I will assume that we are talking about concealing income, etc. etc. If a tax payer conceals anything so as not to pay tax then that is tax evasion.

If the object of any scheme is to pay less tax and it is contrived (i.e. created), then it is clearly tax evasion. If you tax plan e.g. you buy a van before the year end (although you don't need one) to take advantage of "nothing to pay for 12 months" and 0% finance, that is clearly tax avoidance.

There simply are no grey areas.

The reason why the '£20K for opening post' in your scenario isn't allowable in full is that there's a duality of purpose. It's paid not only for the purposes of the trade but also to benefit the wife and to reduce personal tax liability; neither of these are trade purposes.Technically it's possible to disallow the wages and to insist on PAYE being operated on the full amount! The HMRC officer you encountered may have taken the view that as PAYE was being operated, no great harm was being done. Or he/she may simply not have been on the ball that day.

I think in fact that we all support every tax payer paying the "right" amount of tax. The "right" amount of tax is of course the amount laid down by the law approved by Parliament for which most of us voted. (Er...OK, let's not debate that one).

Concealment in my view is a lot broader than lying or omitting income, broader even than being 'economical with the truth'. If you reasonably suspect that what you are doing would be viewed by HMRC as offensive, then you need to lay all your cards face up and say, in effect; 'here are the full facts, if you don't like it, we'll see you in court.' If on the other hand you rely on HMRC not knowing the full facts, then is that still avoidance, or has it crossed the line?

Finally your van scenario is in my view not even avoidance. The motivation behind buying early was to save cost, not to save tax (and there is a distinction). The fact that there is a tax saving is incidental rather than primary.

Enjoying the debate BTW - maximum respect!

The "Arctic" case was very clear in refuting HMRC's standing that the wife had to be paid an economic wage for her duties. I understand what you are saying but as there is no mechanism for deciding who gets what for what pay there can be no duality. As you quite rightly said the Inspector wasn't bothered because PAYE was operated. That was my point!

If the decision to purchase the van, when one was not needed, was purely to get 100% tax relief then that is tax avoidance. If a tax payer makes a decision to reduce their tax bill legally in order to increase cash flow to either expand or buy plant then that is a purely commercial decision and should not be "cracked down" upon.

It is up to the legislators to decide what is legal and what is not and not HMRC.

Perhaps we're looking at two different 'Arctics' but as far as I can see Jones v Garnett was all about settlement legislation (S660A ICTA 88) and not allowability of a deduction. There are a stack of cases on duality of purpose and none of them support the view that a trader can expect a full deduction for a payment that is not wholly and exclusively for the purpose of the trade. Such as paying your wife (/husband/civil partner) loadsamoney for notmuchwork.

Similarly your 'white van man' could not claim capital allowances at all if the van were not required, sooner or later, for the purposes of the trade. (Vans tend not to be used privately so it's not usually a contentious point. Mind you, around here there's a proliferation of those huge American double-cab pickups that seem to be more of a fashion accessory than a work tool!)

Arctic does prove one thing - namely that the will of Parliament is irrelevant if the law is drafted poorly. Still I suppose that if all law was drafted perfectly, a great many lawyers would be out of a job. And we wouldn't want that...

You are quite right, the case was to do with settlements (that was the only way HMRC could challenge the Joneses) . However the way in which HMRC conducted their attack showed that they were totally against "putting the wife on the books". This was born out by the fact they won one of the appeals on the grounds that the wife was receiving money for doing nothing. This was subsequently over-turned. There may be many cases that HMRC challenge but the principal of paying someone what you like stands and HMRC will accept that as long as PAYE has been operated. Very hypocritical. 

The Van was actually blue and was traded in before the client had to pay for it. It was purely used to reduce the tax liability.

From your postings it appears to me that you class tax avoidance as tax evasion and that anything that is not a commercial transaction falls into that category. We obviously have a different comprehension of what tax avoidance is.

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There is certainly a difference between evasion and avoidance. I just don't think that in practice the demarcation is clear-cut, expecially when humans get involved and start ignoring the instructions they have been given. If you look at many of the avoidance tax cases the decision of the first tribunal on questions of fact is rarely overturned. So it pays to ensure that the details are right. If they're not it's curtains - and if clients start trying to cover up mistakes then it's a potential fertiliser/ventilator interface scenario.

I like to stay off the moral high ground - it makes you too much of an easy target!

Very best wishes

That is the point. The difference is clear cut. It was GB influence on HMRC that tried to merge the two. Unfortunately this has caused much confusion amongst some agents.