HMRC Spotlights Tax Avoidance Schemes

by Robert Lee, Tax-News.com, London

28 August 2009

HM Revenue and Customs (HMRC) has highlighted six tax avoidance schemes which it warns may not stand up to legal scrutiny should participants in the schemes be challenged by the department.

While HMRC does not typically comment publicly on its avoidance activities, it occasionally publishes a selection of tax schemes which “are not likely to have the legal effect desired by those thinking of using them,” under its 'spotlights' series of publications.

“Customers will be put on notice that we are monitoring the use of such activities,” the department states. “Where they are discovered, and subject to the particular facts, we will make a challenge and seek full settlement of liabilities through enquiry and litigation according to the Litigation and Settlement strategy.”

The six schemes recently identified by HMRC involve the use of goodwill, artificial VAT leasing structures, pension schemes, employment liabilities and losses, remuneration through trusts, and retirement benefit schemes.

The schemes highlighted by HMRC are shown below:

Spotlight 1: Goodwill - companies acquiring businesses carried on prior to April 1, 2002 by a related party

'We are aware of arrangements to claim Corporation Tax relief for goodwill under the corporate intangible fixed asset regime where a company has acquired a business that was carried on by a related party before commencement of the regime (April 1, 2002). The rules of the regime exclude goodwill in these circumstances, so no relief is available. We are challenging any such claims with a view to litigation. When challenged companies have typically accepted HM Revenue & Customs adjustments, which has meant that a case has yet to be heard in court. Therefore legislation was announced at Budget 2009 to confirm the rules. The legislation will apply from April 22, 2009 and will be deemed to have always have had effect for the purposes of applying the legislation after that date. We will continue to challenge past claims.'

Spotlight 2: VAT artificial leasing

'We are aware of schemes using an artificial leasing structure to exploit possible differences of interpretation by EU member states of a lease with an option to purchase. The scheme user acquires a new pleasure craft which purportedly has 'VAT paid status' while, in reality, paying little or no VAT. The user provides the funds, directly or indirectly, that are used to purchase the asset. We will challenge examples of this scheme falling within our jurisdiction and recoup the tax that has been avoided.'

Spotlight 3: Pensions schemes artificial surplus

'We are aware of schemes that purport to enable a member of a registered pension scheme to remove funds from the scheme tax-free. These involve contriving to create a funding surplus through the surrender of rights by a member. They sometimes involve cases where provision is made under a separate unconnected trust for the surviving spouse or other dependants of the member. A surplus created by a reduction in liability caused by a member surrendering rights in a scheme, and the consequential payment made in these circumstances, will be regarded as an unauthorised payment in respect of the member, and will attract tax charges on the member on the amount paid by the scheme administrator.'

Spotlight 4: Contrived employment liabilities and losses

'Ministerial announcements on January 13, and April 1, 2009 gave notice of legislation that will be included in Finance Bill 2009 that will close down artificial and aggressive personal tax avoidance schemes. These schemes seek to abuse tax reliefs available for employment-related liabilities and losses by way of entering into employment arrangements where such liabilities or losses are triggered by deliberate acts or omissions. The details of the arrangements mean the users will not in fact incur any real liabilities or losses.'

'The legislation will be effective from January 12, 2009 in relation to both announcements and we are working to identify all users of the schemes to collect all tax that users of the scheme intended to avoid. The legislation will have no impact on those using the reliefs who are not attempting to avoid tax.'

Spotlight 5: Using trusts and similar entities to reward employees - PAYE (Pay As You Earn) and National Insurance contributions (NICs), Corporation Tax and Inheritance Tax

'We're aware that companies have been seeking to reward employees without operating PAYE/NICs by making payments through trusts and other intermediaries that favour the employees or their families. The arrangements usually seek to secure a Corporation Tax deduction, as if the amounts were earnings at the time they are allocated, and also defer PAYE/NICs or avoid them altogether. Our view is that at the time the funds are allocated to the employee or his/her beneficiaries, those funds become earnings on which PAYE and NICs are due and should be accounted for by the employer.'

'In addition our view is that an Inheritance Tax charge may arise on the participators of a close company. Unless the participators are excluded beneficiaries and have not had funds applied for their benefit, such as the receipt of a loan, a charge to Inheritance Tax arises on participators of close companies at the time the funds are paid to the trustee by the close company. Relief is only available to the extent that a deduction is allowable to the company for the year in which the contribution is made. Later payments of earnings out of the trust that may trigger a deduction to the company would not qualify for relief.'

'Participators affected by this may need to self-assess a liability to Inheritance Tax. There is further technical advice on Inheritance Tax on Contributions to Employee Benefit Trusts on the HMRC internet site.'

'We are actively challenging examples of such arrangements and considering legislative options to end further usage of these schemes.'

Spotlight 6: Employer-Financed Retirement Benefits Scheme ('EFRBS')

'We are also aware of schemes where companies claim a Corporation Tax deduction for employer contributions to an EFRBS scheme on the basis that either (a) the contribution to the EFRBS or (b) a subsequent transfer to a second EFRBS is a 'qualifying benefit'. This would allow the company to secure a Corporation Tax deduction before any benefits are actually paid by the scheme to the employee. Our view is that neither transaction involves the provision of a 'qualifying benefit'. Whilst it has been argued that there may be some ambiguity in the law around the meaning of the phrase 'transfer of assets' since it does not state to whom the transfer is to be made, in our view the context resolves any ambiguity. The law defines 'qualifying benefits' and such benefits are plainly, from the context, benefits that if paid under the terms of an EFRBS might fall within the employment income charge. So in that context, a 'transfer of assets' should be interpreted as a transfer that could give rise to such a charge. This will primarily mean a transfer of assets to the employee but also includes a transfer to a member of the employee's family. Neither an employer contribution to an EFRBS nor a transfer between EFRBS gives rise to a possible employment income tax charge on the employee. So there is no 'qualifying benefit' entitling the employer to a deduction.'

HMRC warns that is considers Spotlights 5 and 6 to be ineffective, meaning that tax returns where these schemes have been used will be most likely to be investigated, and full settlement of tax due, plus penalties and interest, will be sought.

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