The taxman believes that existing rules are still not strong enough to deal with the many off-the-shelf tax planning arrangements that are heavily promoted by a small number of tax firms. Such firms are often formed specifically for this purpose, do not provide traditional legal, accountancy or financial services and can sail pretty close to the wind.
Raising the stakes
A 42 page document published on the HMRC website confirms its intention to 'raise the stakes' on tax schemes. This comes hard on the back of this year's General Anti-Abuse Rule, which received Royal Assent on 17th July. The document makes it clear that HMRC wishes to attack those firms that promote tax avoidance schemes head on.
For some time a number of firms have promoted different one-size-fits-all tax saving products designed to achieve a tax saving with little or no commercial purpose.
The schemes are often found to be illegal and users could find themselves on the wrong side of the law.
How do the schemes work?
A series of steps are created - sometimes they are extremely elaborate or exotic - which the would-be tax avoider is encouraged to carry out. On many occasions these steps will involve some third party borrowing.
Often, a scheme is designed by bringing together various sections of tax law that may conflict or be unclear. In doing so, they attempt to argue that the end result of completing all the steps is that the result is no tax, and that the scheme is still within the law.
The promoters exploit a weakness in tax law and market it on a massive scale, often where part of the fee is performance related.
Making sure the taxpayer is aware of entitlements and risks
HMRC has indicated that changes designed to combat tax avoidance are not aimed at all forms of tax advice.
Everybody is entitled to organise their affairs to make use of all available allowances and tax reliefs granted by Parliament - this is not tax avoidance. The concern expressed by HMRC is that many taxpayers who are sold off-the-shelf schemes are not aware of the risks they are exposing themselves to.
To make this more complicated and confusing for the taxpayer, these schemes will often be sold with a supposed cast-iron technical analysis.
However, most of the time the explanations are a complete fudge of what the tax laws are really saying. In addition to that there is some evidence that firms have been side-stepping the statutory disclosure regime, and HMRC is keen to stop any mis-selling.
Potential for unlimited fines
HMRC has been successful through the court system in overturning some of these schemes. Not all tax schemes make it to court; often the promoters and HMRC will have a negotiated settlement.
Once HMRC challenges a taxpayer's use of a scheme, it may take several years before the position is settled, often with a tax saving far below that promised. There may be no tax saving at all if HMRC is successful in a test case brought before the court. This tax saving may be wiped out by interest, penalties, the promoter's fee and bank lending fees.
It is essential to obtain professional advice where the tax rules are clearly and fully explained.
Frank Nash is tax partner at Blick Rothenburg
What do you think? Is HMRC being tough enough on tax avoidance? How would you like to see the taxman tackle the issue? Let us know your thoughts in the comment box below.