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There is uncertainty. The uncertainty could be interpretation of legislation, poor implementation, poor advice and even a difficult HMRC officer. The information HMRC receives and how they process that information to identify risks is becoming increasingly sophisticated. HMRC are employing data analysis to improve how they identify those not paying, in HMRC’s view, the correct amount of tax. We look at a property entrepreneur, a project manager, a performance artist, an offshore trust, and a take away business with hindsight to see how HMRC identified them as having potential tax irregularities.

By admin
18 Jan 2022
Manage Tax Risk

I want to pay the least amount of tax I can but how do I structure my affairs efficiently? I have been told about a great planning idea and it sounds robust, but is it? I have received money, which I have not told HMRC about, will they find out about it? I have hidden assets, can HMRC find them?

There is obviously tax planning that is unlikely to result in HMRC challenge. Then there is planning that is likely to be pushing the boundaries and then there is of course the deliberate act of intently and knowingly not paying the correct amount of tax. At one end of the spectrum, you may get locked up subject to whether code of practice 9 is available to you and at the other you may suffer an enquiry but unlikely to be too painful. In the middle and it’s a large middle, there is uncertainty. The uncertainty could be interpretation of legislation, poor implementation, poor advice and even a difficult HMRC officer.

Case study one: property entrepreneur

Our client had open enquiries spanning nine years. HMRC had grown increasingly impatient given the failure to provide information and issued schedule 36 notices. When those notices were not answered, HMRC raised assessments totalling £2.4m in respect of the early years (up to 2013). We were engaged to appeal the assessments and did so. With the Tribunal hearing looming we reviewed primary records and made representations. During our review we raised concerns about certain transaction that would normally appear in a suspected serious fraud case. HMRC accepted the representations, and the early years liability was agreed at around £130,000. HMRC subsequently issued Code of Practice 9.

COP9 or the contractual disclosure facility provides a taxpayer the opportunity to make a full and complete disclosure of tax irregularities within a period of up to the preceding twenty years. As part of the disclosure process the taxpayer needs to accept there has been a deliberate act resulting in the non-payment of tax.

Main issues included:

  • Lifestyle exceeded declared income
  • The use of an employee benefit trust where the loan had been written off
  • Investment into projects deriving from offshore settlements
  • Series of dissolved companies that had not accounted for PAYE, NIC and corporation tax
  • Offshore company owning assets utilised by the entrepreneur

The number of entities involved in this case were considerable. Primary source information was obtained, and data analysis commenced to identify transactions that gave rise to actual and potential tax irregularities.

HMRC also had opened enquiries into a number of joint venture partners indicating they had collected information on transactions from other sources which had not been disclosed.

Case study two: Project manager

We were contacted following the consultant receiving an offer for a contractual disclosure facility with no apparent warning. The consultant had operated the provision of specialist project management services to blue chip companies. Income had been significant, but accounts, VAT returns, corporation tax returns and personal tax returns did not reflect the actual turnover. Two companies in succession had ceased to trade over a period of eight years. The companies had struck off without ever submitting returns or accounts. The consultant and the contracting company had few assets and it transpired funds were being used to maintain personal relationships.

Main issues identified:

  • Lifestyle exceeded declared income
  • There were loans/drawings between the wound-up companies and the consultant
  • VAT, corporation tax and income tax had not been declared or paid

The liabilities were in excess of £350,000. However, HMRC accepted to treat the loans written off upon the companies being wound up as capital distributions attracting a lower amount of tax. A long-term payment plan was agreed.

HMRC would have been aware of the struck off companies and those companies would have been connected with the shareholder and director within HMRC’s taxpayer database. HMRC’s stretched resource may account for why it took so long to issue COP9 although the striking off, of the second company may have been the trigger for COP9. The second company would have demonstrated a pattern of behaviour.

Case study three: international performance artists

Specialist accountants to the music industry were engaged by the artist. Following the production of two best-selling albums and associated tours, the intellectual property (‘IP’) was sold to a company owned wholly by the artist. HMRC opened enquiries which concentrated on the disposal of IP as well as studio costs. HMRC had valued IP without consideration of royalty streams and potential up lift in value following new recordings and tours. HMRC contended the value of IP was less than a quarter of that recognised in the accounts. HMRC’s premise was built on several factors although a main point was the subsequent loss of a record deal and tour.

Upon reviewing primary records, it transpired invoices for studio costs were issued from a connected person through various associated entities. The invoices largely duplicated actual expenses and diverted income away from the artist.

Main issues identified:

  • Valuation of IP not supported
  • False invoicing by a connected person

Formal valuations of IP were produced based on royalty streams and considering intended future albums and tours. The valuation was agreed significantly higher than HMRC’s representations. The studio costs were accounted for correctly. We identified the artist had overpaid income tax in previous years and it was possible to amend these to credit their tax account for offset against dividends declared to clear loan accounts.

HMRC identified the disposal of IP from the accounts and tax returns and opened a normal enquiry requesting general information. Part of the information provided identified expenses from the connected person. The connected persons accounts and returns did not include the income.

Case study four: deceased estate with offshore trust

The husband and father of two children had passed away and the family solicitor brought to their attention the existence of an offshore trust settled thirty-two years prior to death. The trust had realised significant gains from the disposal of a business and had subsequently been utilised to fund family lifestyle. It was identified that the trust had been settled by the spouse, a non-UK domiciled person. However, the trustees had not sought tax advice and the family solicitor concerned with the settlement being identified had attempted to redomicile it to Panama (before the Panama papers). During the period since the death, family members had benefited from distributions and the trust assets had significantly increased in value.

Main issues identified:

  • The surviving spouse was not entirely aware she was the settlor of a trust where she retained an interest and had therefore not declared UK source income nor claimed the remittance basis etc.
  • The family wanted to bring an end to the settlement.
  • No trust accounts had been maintained to identify income and gains.

We reviewed historic companies house filings to identify the sale of the insurance businesses owned by the trust. From Companies house information and other sources, we were able to calculate gains that were not taxable upon distribution to a non-UK domiciled person. We were able to identify distributions received in UK bank accounts and compare with the growth of offshore funds to determine within reason what had been remitted to the UK.

HMRC would have likely received information under the intergovernmental agreements exchanging information on beneficial owners of assets held in other jurisdictions. Large sums received in the UK would likely have been reported by financial institutions and connected with the beneficiaries. The Land Registry and SDLT returns would have indicated purchases of property against taxpayers who had modest sources of UK income.

Case study five: Eat out to help out

HMRC investigated a takeaway owner following several undercover transactions. The takeaway operated cash sales for private student parties. All other sales were either processed through an electronic point of sale or through third party sales agents (Deliveroo, Just Eats etc.). It was identified that sales through third party agents linked to a personal bank account and had been omitted from the books and records. Furthermore, it transpired employees were also provided with living accommodation.

Main issues identified:

  • Systematic diversion of income to personal accounts
  • Undeclared cash sales whilst claiming related expenses
  • Undisclosed benefit in kinds provided to employees
  • Understated directors loan account

Revised accounts and tax computations were prepared.

It is likely that HMRC had identified the omissions from connecting information obtained from third party sales agents against submitted accounts and returns. HMRC then undertook test transactions to identify whether purchases were omitted building evidence in case of prosecution.

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