A recent publication from HM Revenue and Customs (HMRC) and extensive discussion in the tax and property press have again brought tax avoidance schemes into the spotlight. As a taxpayer, it’s important to be aware of the whole picture when it comes to of tax avoidance schemes. You also need to know what to do if HMRC investigates you.
Suppose you are a taxpayer, including a landlord, contemplating potential tax-saving methods. You need to know that you might face penalties, interest, and unexpected tax bills if you knowingly or unknowingly participate in a tax avoidance scheme.
What are tax avoidance schemes?
HMRC states that “tax avoidance means manipulating the tax system to obtain a tax benefit that Parliament did not intend. It frequently includes artificial and contrived transactions that exist primarily to create this benefit, serving little or no other purpose.”
There are warning signs that a scheme could be one of tax avoidance, such as:
- It sounds too good to be true;
- The transactions involved have no commercial purpose
- Payments are diverted through a chain involving companies and trusts, and
- It has a HMRC Scheme Reference Number (SRN).
When a scheme has an SRN, it indicates that HMRC has identified it as a potential tax avoidance case and is currently investigating it. HMRC does not “approve” schemes.
You usually need to disclose the scheme to HMRC via your tax return and therefore, you need to be aware of the tax avoidance scheme.
What are the implications of using a tax avoidance scheme?
If you are involved in a tax avoidance scheme and HM Revenue and Customs (HMRC) launches an investigation into your financial affairs, you will likely receive an “accelerated payment notice.”
This notice mandates that you pay the tax you try to avoid upfront, and you must do so within 90 days of receiving it. Should this happen, it would put a lot of financial pressure on you.
Furthermore, be aware of additional consequences, including legal costs, penalties, and interest.
Understanding this issue is crucial because you may be caught in what you might think is legitimate tax planning, which turns out not to be.
HMRC Tax Avoidance Spotlight – what you need to know if you are
HMRC has recently published Tax Avoidance spotlight 63, which affects landlords.
The warning addresses a well-publicised scheme in which individual landlords save taxes by transferring their properties into a Limited Liability Partnership (LLP) with a limited company as a member.
HMRC says that the scheme does not work, and they have highlighted the legal reasons for this.
Those involved in the schemes outlined in Spotlight 63 are advised to contact HMRC to discuss settling their position.
Also in recent months, various news articles have brought attention to certain high-profile schemes involving using a trust to hold property. In these arrangements, the individual landlord serves as the trustee, while their limited company acts as the beneficiary.
While these schemes have not yet been addressed in an HMRC Tax Avoidance Spotlight, some tax and legal experts have expressed concerns about their potential tax avoidance classification and overall effectiveness.
Proponents of these schemes have defended the “Substantial Incorporation Structure” approach, which suggests a need for further clarity and understanding.
It may be beneficial for landlords to stay informed and seek professional advice, as it appears that HMRC is monitoring these schemes closely. Engaging in open discussions with tax professionals can help landlords navigate these complex matters and make informed decisions.
How to protect yourself
Consulting with an independent, qualified accountant or tax adviser is essential if you are considering a scheme. We are well equipped to assist you, especially if you suspect you are already involved in a tax avoidance scheme. This step will help clarify your situation and ensure you are on the right track.
What if HMRC investigates you
Dealing with tax disputes can be a stressful experience, but there is a way forward. Engaging directly with HMRC allows you to work through any disagreements in your case. This process often involves having conversations to gather all the relevant facts, ensuring that the correct technical treatment is applied.
If you’ve come to realise that you may not have paid the right amount of tax, taking the proactive step of making a voluntary disclosure to HMRC can be a wise choice. Doing this before they approach you might help to lessen any penalties you face. In fact, this has been our experience so far.
We understand that navigating these issues alone can feel overwhelming and time-consuming, especially without specialist knowledge. That’s where our dedicated team comes in. With years of experience in handling tax disputes and disclosures for both businesses and individuals, we’re here to support you. You don’t have to face this alone.
Next Steps
You can find the full government guidance on tax avoidance schemes here.
If you are working with Myers Clark, please consult us before pursuing such schemes.
If you are not yet working with us, here’s how we can make you feel calm and confident about your tax.