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Broken green umbrella in park on rainy day| AccountingWEB| Umbrella company falls foul of DOTAS disclosure
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Umbrella company falls foul of DOTAS disclosure

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Most of us are familiar with the Disclosure of Tax Avoidance Schemes (DOTAS) system – if at all – only from the perspective of a consumer. The first tier tribunal (FTT) case of IPS Progression Ltd examines the system from the viewpoint of a scheme promoter.

5th Apr 2024
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This case (TC09071) offers fascinating insights into the nuts and bolts of the system, and on occasion shows both sides (promoter and HMRC) struggling to master its minutiae.

Background

Between 2016 and 2018, IPS was an umbrella company providing payroll services for individuals whose personal services were made available to end users. They employed what was essentially a somewhat crude contractor loan scheme.

Each week, the end users paid IPS an hourly rate for the personal services of each employee. From this, IPS retained 15% as its management fee. The remaining 85% was paid over to the individual employees, shown on their payslips as three elements:

  • Salary paid – an amount equal to the national minimum wage for the hours worked;
  • Rolled up holiday pay – 12.07% of the salary paid, since no actual holiday pay was available for weeks when no work was done; and
  • ILO bonus – the residue, in the form of a loan.

PAYE tax and NIC were operated only on the first two elements.

Each employee was provided with:

  • An employment agreement;
  • A loan agreement providing that IPS would loan “certain monies” to him, with interest accruing at 2% over the HMRC official rate and (theoretically) repayable on demand at 60 days’ notice; and
  • A bonus agreement suggesting the company could pay a bonus which, it was implied, might pay off the debt and interest represented by “ILO Bonus” sums.

IPS’s promotional material, promising “returns of 85% of your contract value”, attracted 1,593 employees to the scheme, generating management fees of around £3.6m.

The challenge

The directors of IPS decided that they were not required to submit Form AAG1 notifying HMRC of the scheme. HMRC felt otherwise.

Among correspondence (prolonged by the Covid-19 lockdowns) with IPS’s accountants, HMRC wrote in 2018, 2021 and 2022, each time warning of its intention to “apply to the tribunal for the determination of a penalty under s 98C TMA in respect of [IPS’s] failure to comply with its obligation under s 308(3) FA 2004”.

Finally, on 14 April 2022 HMRC applied to the FTT. The company submitted Form AAG1 on 25 April 2022.

The hearing

The issue was whether a penalty was due since IPS had failed to make disclosure within the strict time limit of five working days after first becoming aware of any transaction caught by DOTAS.

IPS argued that the scheme was not “notifiable arrangements” under DOTAS, that IPS was not a “promoter” of those arrangements, and that therefore such no notification was due.

Notifiable arrangements?

The judge found that there was no realistic likelihood that loans would be redeemed using bonuses. What could conceivably fund them?

  • Not the amounts already paid out as “ILO Bonus” (which genuinely did stand for “in lieu of bonus”!).
  • Not IPS’s 15% management fee which, presumably, covered its actual costs (including a small element of employer’s NIC) and profit.
  • Not other income streams: IPS had obtained a lending licence from the FCA, and suggested that a separate business of lending to customers with impaired credit scores could have supplied the funding. However, that licence was only obtained after the scheme had been running for 16 months and no actual lending business was ever set up by IPS.

The only form in which a “bonus” could realistically be paid was by cancellation of an employee’s loan debt and accrued interest. During the two years of the scheme, only 13 (of the 1,583 total) employees were alleged to have received a “bonus” and, based upon the evidence, this was indeed merely cancellation of some debt.

Even if the company had chosen to pay bonuses in this manner to every single employee, it would not have sufficed to clear all of the constantly accumulating debt plus interest, since PAYE would have to be deducted, leaving only part of the “bonus” available to reduce debt.

The evidence pointed to:

  • No plausible method by which bonuses could be awarded or the loans repaid;
  • Evidence statements suggesting that employees did not expect bonuses to be paid;
  • The likelihood that no employee would have tolerated receiving the bulk of his earnings in the form of a loan which might actually be called in; and
  • The simple fact that no loans were repaid even when employees left IPS’s employment.

The judge concluded that IPS “never intended to establish a genuine bonus scheme and never intended that the loans would be repaid”. The entire structure “served no purpose other than to provide a justification (whether or not valid or effective in law) for not paying tax on part of the employees’ earnings”.

The scheme constituted notifiable arrangements.

A promoter?

IPS’s only business was “the provision to other persons of services relating to taxation”, its arrangements were designed so employees received part of their otherwise taxable earnings tax-free, and IPS was “responsible for the organisation and/or management of the arrangements”.

IPS was clearly a promoter, and so had obligations under DOTAS.

To be continued

So far, so straightforward. IPS was required to make DOTAS disclosure, and had not done so on time. In the next article we will examine the penalty, and observe an astonishing last-minute attempt by IPS to escape its fate.

Read the second part of the tribunal: Penalty of £900k for tax avoidance scheme promoter

Replies (16)

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By Paul Crowley
05th Apr 2024 15:10

No urgency.
I read the Taxation Magazine summary.
Was it your idea to post half of a story? Odd decision.

Thanks (3)
Replying to Paul Crowley:
Richard Hattersley
By Richard Hattersley
05th Apr 2024 16:02

Hi Paul,

Part two will be released early next week. The case was complex and rather than pruning the article so it's a digestible length for busy tax advisers, we took the decision to split it in two. This way the author has the freedom to explore the technical parts of the case without feeling constrained by a word count.

Thanks (3)
Replying to Richard Hattersley:
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By Justin Bryant
05th Apr 2024 16:29

Yes, he can also make great play of my interesting point below (that other less good publications overlook and RT agrees with - I think).

Thanks (0)
Replying to Richard Hattersley:
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By Paul Crowley
05th Apr 2024 16:37

An odd decision.
It is just a tax case.
No mention that it is incomplete until you get to the bottom end.
Are you planning more like this, as I now wonder if I need to go to the bottom before starting to read other articles.
What exactly is wrong with longer articles?

Thanks (5)
Replying to Richard Hattersley:
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By FactChecker
05th Apr 2024 18:08

Have to say I'm with Paul on this ...

- article opens with the taster promise to "examine the system from the viewpoint of a scheme promoter" ... which sounded novel and therefore interesting;
- but as I read through, it rapidly became apparent that (as it says at the end) "IPS was clearly a promoter, and so had obligations under DOTAS" ... which must have been obvious (on the facts given here) very early in the case;
- hence the sense (by this reader anyway) of unfulfilled novelty was not mollified by discovering at the last minute that I was expected to 'tune in, same time, same place, next week' if I wanted any of the interesting aspects.

If that was the plan all along then I'd have appreciated it being flagged at the start; if not, then couldn't it have been held back until complete?

BTW it does seem a much shorter article than usual (at least for tax cases).

Thanks (5)
Replying to Richard Hattersley:
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By johnthegood
07th Apr 2024 06:19

Richard Hattersley wrote:

Hi Paul,

Part two will be released early next week. The case was complex and rather than pruning the article so it's a digestible length for busy tax advisers, we took the decision to split it in two. This way the author has the freedom to explore the technical parts of the case without feeling constrained by a word count.

Yes, as busy tax advisers we have a very short attention span!

Suggestion Richard - next time just publish a complete article, this one is just annoying

Thanks (5)
Replying to Richard Hattersley:
Richard Hattersley
By Richard Hattersley
09th Apr 2024 13:55

You can read the second part of this tribunal here: https://www.accountingweb.co.uk/tax/hmrc-policy/penalty-of-ps900k-for-ta...

Thanks (0)
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By Justin Bryant
05th Apr 2024 15:34

The interesting point is the £900k penalty could probably have been avoided under s118(2) TMA 1970 with an early protective DoTAS disclosure. See:
https://www.accountingweb.co.uk/any-answers/interesting-re-s162-tcga-199...

Thanks (1)
Replying to Justin Bryant:
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By Paul Crowley
05th Apr 2024 16:35

The penalties are always way to generous to the non compliant.
Every tax schemer has a very high incentive to pretend that he thinks DOTAS does not apply. Dead easy to get rent a barrister to give a dubious opinion that is wrong. Less people buy DOTAS notifiable schemes. The penalties really should look to be relevant to the lost tax in addition to the sales price of the scheme.
Loan charge scams have been dead in the water for so long that any belief that DOTAS does not apply is just not credible, and makes fools of the users.

Thanks (4)
Replying to Paul Crowley:
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By Justin Bryant
05th Apr 2024 17:38

Are you joking? Have you read the case? Do you really think that a £900k penalty is way too generous? Maybe you're getting confused with BBL fraudster penalties (which seem more or less non-existent).

Thanks (0)
Replying to Justin Bryant:
By Ruddles
05th Apr 2024 18:57

I agree with Paul. These promoters (together with unregulated R&D ‘advisers’, SDLT cowboys etc) need to be put out of business. Statutory limits notwithstanding, a penalty closer to £3.6m would have been more appropriate.

Thanks (6)
Replying to Justin Bryant:
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By Paul Crowley
05th Apr 2024 19:53

Totally agree on the BBL fraudsters.
The money gets taken, not even taxed on taking the money out, and nothing happens unless they volunteer and go to an insolvency practitioner. Even then nothing material happens.
Much safer than robbing a bank.

But loan schemes that late in the day? HMRC will never recover the full loss.

Thanks (3)
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By CMED
05th Apr 2024 17:59

This may be a bit of a naïve question, but why don't we go back to people being employed or self employed?

Thanks (3)
Replying to CMED:
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By Paul Crowley
05th Apr 2024 19:37

Brilliant

Thanks (1)
Replying to Paul Crowley:
the sea otter
By memyself-eye
06th Apr 2024 12:04

Irony?

Thanks (0)
Replying to memyself-eye:
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By CMED
07th Apr 2024 13:17

I thought that!

Thanks (1)