The Contractors Loan Settlement Opportunity is the latest attempt by HM Revenue & Customs (HMRC) to entice alleged tax avoiders into agreeing deals without the need for expensive legal proceedings.
The HMRC Counter Avoidance team has started writing to contractors who signed a contract of employment with an offshore company or trust, to receive a large proportion of their income as a ‘non-taxable’ loan, either directly from the offshore company or through an intermediary. HMRC believes the loan element is taxable and is highlighting the department’s Tribunal success in the Philip Boyle case as proof that such tax avoidance schemes do not work.
According to HMRC £430m is owed by users of these types of avoidance schemes, with each user owing approximately £11,000 a year in tax.
On announcing the settlement opportunity, Jennie Granger, HMRC Director of Enforcement and Compliance, said:
‘Many people regret ever getting involved with complex aggressive tax avoidance schemes and HMRC is providing an opportunity for contractors to come forward and straighten out their tax affairs.
This is an important opportunity and we are working hard to encourage users to withdraw from such schemes. We also want to ensure they’ve understood our position. They can choose to continue to litigate for a better outcome but they risk a worse result. HMRC has a strong track record of winning tax avoidance cases in court, with around 80% of decisions in our favour. The costs for users are high, potentially resulting in penalties, charges and significant legal costs for scheme users.’
The settlement opportunity applies to schemes used before the Disguised Remuneration rules were introduced in April 2011. HMRC is writing to approximately 16,000 scheme users.
What do the letters say?
I have repeated an extract below:
Contractor Loans Settlement Opportunity – Arrangements used up to 5 April 2011
We are aware that you have used arrangements to receive income from a non-UK employer in the form of a loan instead of part of your salary. The promoters of these arrangements said that the amounts described as loans were not subject to tax as income, although they may have been treated as benefits in kind. We do not agree and we are inviting you to settle your tax liability now.
HMRC strongly believes that these arrangements do not work and the amounts described as loans are taxable.
We are committed to challenging these arrangements through the Tribunal and Court process where we cannot reach agreement through this settlement opportunity. We have a successful record in anti-avoidance litigation.
Choose to settle now and you can put your involvement with these arrangements behind you; please contact us by 9 January 2015.
We are inviting you to settle your tax liability before your case reaches the Tribunal by paying income tax and late payment interest on the amounts received as loans. We have identified a number of challenges which we would put forward at Tribunal. If successful these would mean that you are liable to tax on these amounts, and national insurance contributions may also be payable.
The letter goes on to talk about applying for a personal calculation of tax and interest, as well as payment options.
HMRC is making clear the settlement opportunity is not available to:
- Contractors who are already subject to HMRC’s Criminal Investigations policy.
- Contractors who are already subject to HMRC’s Civil Investigation of Fraud procedures.
- A UK employer who has used an Employee Benefit Trust (EBT). In those circumstances, the EBT settlement opportunity should be used instead.
Whilst interest is going to be charged from the original due date until it is paid, HMRC is not intending to charge penalties on those contractors who make use of the settlement opportunity.
The form of the settlement varies depending on whether the contractor is already under enquiry with HMRC.
Typically HMRC will seek a contract settlement, which is legally binding on both the contractor and HMRC. This means that the outcome of any future legal proceedings will not change the settlement, whether HMRC prevails during litigation or indeed if the tax avoidance scheme promoter ultimately wins. Where a contract settlement is agreed, HMRC will expect payment of the lump sum incorporating the additional taxes and interest, within 90 days. However, if the contractor is unable to pay within such a short time frame, HMRC will consider time to pay arrangements.
It is rather more complicated if the contractor is already under enquiry with HMRC. In such cases, HMRC will usually issue a Closure Notice for the additional tax it believes is due, as well as assessments for other affected years. Appeals can be made against such a Closure Notice and assessments within 30 days of issue. Once the appeals have been made, the additional tax due is normally negotiated and the appeals determined. Interest is then charged separately and reflected on the contractor’s regular tax statement from HMRC.
This is a specialist area of tax and Abbey Tax employs two former HMRC Inspectors who are experts in this field – Jacqui Mann and Nigel Nordone. If you need help obtaining and understanding the settlement figure from HMRC, need to negotiate time to pay or even just want to make sure HMRC has followed the correct procedures for pursuing the extra tax, then please ring 0845 223 2727 and ask to speak to either Jacqui, Nigel or myself. Alternatively, please feel free to e mail us at email@example.com
Author: Guy Smith, Tax Investigations Manager on the ReSource Tax and VAT Consultancy Team
E mail: firstname.lastname@example.org