Whilst it may be colder outside as winter descends in earnest across the UK, HMRC has decided to turn up the heat on contractors who have continued to participate in alleged tax avoidance arrangements.
In July earlier this year, HMRC launched the Contractor Loan Settlement Opportunity (CLSO) and 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. The CLSO covers years up to 5 April 2011 and expires on 9 January 2015.
However, HMRC has now begun to issue formal enquiry notices to contractors who participated in schemes after 5 April 2011.
The enquiry notices are being sent out by the HMRC Counter Avoidance Team and I have repeated an extract below:
Check of Self Assessment tax return – year ended 5 April 201X
Thank you for your return for the year shown above, which we received on XX/XX/XXXX.
Every year we check a number of returns to make sure that they are correct and that our customers are paying the right amount of tax. I would now like to check your return. My check will be made under Section 9A of the Taxes Management Act 1970.
I have sent a copy of this letter to your adviser, XXXX.
What I will be checking
Consideration of your return leads me to believe that you participated in a contractor loan tax avoidance arrangement in the period of enquiry (‘the arrangements’). It is my understanding that the arrangements use offshore partnerships and partnership benefit trusts to avoid tax. In order to investigate the arrangements I need the information and documents which are detailed on the attached schedule. Please supply the documents and information on the schedule by XX/XX/XXXX.
I will be checking the whole of your return.
The list of information and documentation requested by HMRC is comprehensive with typically 24 pieces of information and 15 documents requested.
An extract of the information usually requested is listed below:
- I understand that the arrangements have not been declared under the Disclosure of Tax Avoidance (DOTAS) rules. Please explain with full reference to the DOTAS legislation as to why you believe the arrangements do not fall within the DOTAS rules.
- The full name and address of the individual or entity who notified you of the existence of, or introduced you to the arrangements.
- Details of all fees paid by you in relation to the arrangements, listing when and to whom the payments were made.
- Why did you decide to enter into these arrangements?
- What did you consider were the advantages of entering into these arrangements rather than providing your services directly to a customer?
- Were you provided with promotional literature, written details or verbal presentations to give you more information about the arrangements? If so, who provided this, in what capacity and when?
- Details of any assurances that you were given that the scheme had been approved by HMRC. Copies of any correspondence dealing with such assurances should be provided.
- Details of any assurances that you were given that details of the scheme had been submitted for legal/counsel opinion and said to comply with tax legislation. Copies of any correspondence dealing with such assurances should be provided.
- Have you been advised of any fees, commissions or incentives paid to an individual or entity in connection with your participation in the arrangements beyond any fee paid by you to the individual or entity who introduced you to XXXX arrangements? If so, what is the extent of your knowledge of any such arrangement(s) and what amounts are you aware have been paid or are due to be paid?
- Full details of all companies, partnerships or individuals to whom services have been provided either directly or indirectly while involved in the arrangements. Details should include name, address, periods of work, duties provided, details of how you came to work for them and the names and addresses of any agencies or other third parties involved.
These 10 points alone give an indication as to the depth of information requested and are also phrased in such a way to encourage a response which will help the investigating tax inspector determine the behaviour of the contractor. Taxpayer behaviour is an important feature of enquiries because it helps determine the level of financial penalty charged by HMRC and the number of other tax years which can potentially be brought into the enquiry.
When the CLSO was published, HMRC made clear at paragraph 4.3 that ‘If you receive an enquiry notice relating to a different arrangement you’ve used after the tax year ended 5 April 2011 then you can ask HMRC to discuss paying the tax to resolve these years too. HMRC may not settle on the same basis as the earlier years but this will depend on how you used the arrangements and the law in place at the time.’
In other words, even if a contractor receives an enquiry notice, there is still a chance to secure favourable settlement terms from HMRC but time is of the essence with 9 January 2015 rapidly approaching.
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 understanding your options and want to listen to an impartial voice, 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