Tax Planning: My arrangements are legit sir

Doctors, surgeons, medical staff, dentists and barristers have been widely sold tax planning arrangements. Other professions and entrepreneurs were also targeted but it appears those with ‘medical’ careers were severely promoted to.

As a firm devising a tax planning arrangement, you would want to market arrangements efficiently. You need clients who can afford to pay your fees unless the arrangement generates a tax refund from which you take your fees. You also need to encourage those acting for clients to work with you gaining the user’s trust and confidence in what you promote.

Gaining the trust of a potential user is not going to be too difficult. What you need is their adviser to be supportive. It may be that a few lunches, golf or a day at the races may be enough to build some support although most will be encouraged if they get a cut of the fee. Where a commission is offered and accepted, an adviser is automatically conflicted. Will the adviser continue to act in the best interest of their client or be too heavily swayed by the pot of gold they may uncover?

Other items on the wish list include:

1. A Queen’s  (now King’s) Counsel opinion,
2. Supporting case law,
3. A proven track record, and
4. HMRC approval.

Many years ago, I used to seek lots of QC opinions. I would draft instructions and I would draft the opinion for QC to amend. There was plenty of scope to influence the opinion.

Finding case law to support arrangements adds a layer of confidence that the planning has been tested. The Dextra and Sempra cases were widely used when promoting employee benefit trusts and retirement benefit schemes. Back in 2006, it was highly unlikely that HMRC would attack EBTs following those cases.

A track record is helpful to convince a prospective user the planning is legitimate and ‘unchallenged’ or ‘not successfully challenged’. Those explaining structures such as the remuneration trust and employer remuneration trust set out the robustness of the arrangements. Following cases regarding employee benefit trusts, the explanation extended to explain how HMRC had unsuccessfully challenged arrangements and the courts had provided clarity on what was acceptable. As time passed with no newer cases, confidence that HMRC accepted the arrangements grew.

Those taking part in arrangements didn’t necessarily do so with fully knowing the risks. A qualified tax adviser had (and still would have) a professional responsibility to set out the risks associated with arrangements. They should also be transparent with conflicts and whether being paid commission. However, with all the excitement of saving tax, a user may have not considered the risks or become aware of the commission arrangements. Many users may have received written advice although when they are spoken to, they appear to have relied on the spoken word. This is not surprising given a tax report is probably not everyone’s favourite read.

HMRC may not be so sympathetic to users of such arrangements. In 2000, Dawn Primarolo warned those engaged in ‘a game of cat-and-mouse’ between tax planners and the Revenue that the government would stop the abuse. She told MPs: ‘This is the warning: we will not hesitate to act against any equivalent schemes that are designed to obtain a tax deduction that is not justified by the true substance of the transaction.’ Over the past two decades, lots of legislation has been introduced to deter or prevent the development, use and promotion of tax avoidance schemes. HMRC has actively set out their approach on avoidance and provides guides on how to identify avoidance. The latest guide: ‘Tax avoidance – don’t get caught out’ sets out how to recognise what is avoidance. There is a list of named by HMRC tax avoidance schemes and some personal stories. I can see the list could be a tool for business development – if your name is not on the list, it can’t be tax avoidance!

With HMRC having been clear on its approach to tax avoidance, an officer is unlikely to have much sympathy for users who subsequently face tax, interest and penalties. They would have also faced the fees for entering the arrangements and some fees for negotiating and settling with HMRC. It does appear that professional services stand to do relatively well from those that implement arrangements, for which I am both truly sorry and grateful.

There may be some hope for users of arrangements who wish to regularise their tax affairs. Assuming the user is fed up with the ongoing HMRC correspondence (which seems endless), they (or an agent) can approach HMRC to enter a settlement. The process will normally require an agent approaching HMRC explaining the history, mitigating factors, computations and a proposed settlement. Following this ‘disclosure’, negotiations will be likely.

A client entertaining a disclosure will often enquire whether they will have to pay all the tax. Selecting a particular method to calculate the tax may result in lower liability over another method. The key will be persuading HMRC which is the correct method to be adopted. For example, where HMRC consider the arrangement is disguised remuneration, they often seek PAYE. However, factors may indicate the income is a dividend or a loan to a participator, which are taxed differently. HMRC will not simply write off a chunk of tax although on some lucky occasions, it has become apparent that HMRC have not protected their ability to recover taxes. Broadly, where HMRC are precluded by legislation from recovering the tax, there is no obligation for the taxpayer to pay. Officers do offer voluntary restitution. We have even known an officer to imply that the settlement could only be entertained alongside voluntary restitution. This is incorrect!

Clients are often concerned whether they have to pay all the tax at the time of settlement and whether HMRC will seek to recover by forcing asset sales. HMRC will generally enter payment arrangements where the taxpayer does not have liquid funds. If there are assets that could be sold, although the disposals may be inappropriate, HMRC may also accept deferred payments i.e. when assets are sold or when better to sell those assets. Payment arrangements greater than thirty-six months, will often require additional financial information to be provided to ascertain affordability. Payment arrangements greater than thirty six months is possible although each taxpayer’s circumstances need to be considered.

A HMRC officer may also be less open to negotiations where they are aware the acting agent was in place when the user entered the arrangements. The officer may naturally form a view that the agent was influential in the user agreeing to use the arrangements. The officer may also be aware that the agent has received fees for compliance work, commissions from the arrangement and is subsequently receiving fees for assisting with trying to regularise the users tax affairs. Making tax disclosures, understanding the management of taxes and dealing with HMRC is a specialist area. Most professional bodies advise their members to ensure they seek appropriate specialist advice or introduce such an adviser.

An independent specialist will be better placed to present a disclosure to HMRC, will be able to give the user an honest view on what a settlement may look like and identify whether the overall liability can be mitigated. Such an adviser has probably dealt with other similar cases and can therefore also draw on those experiences to ensure a fair approach is taken by HMRC.

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