Tax Avoidance Scheme Investigations

With the government committing more resources to the recovery of tax revenues, HMRC is set to intensify its efforts against individuals and entities involved in using or promoting tax avoidance schemes. These schemes typically exploit tax deductions, credits and exemptions, with the primary purpose of avoiding tax payments.

Individuals might unknowingly be involved in a tax avoidance scheme. Others may have entrusted a professional with their taxes or received guidance from someone claiming to be a professional, which inadvertently led them to participate in a tax avoidance scheme.

HMRC’s view is that the responsibility to ensure you are paying the correct taxes vests with the taxpayer. If HMRC suspects an individual or company is involved in a tax avoidance scheme, it will usually in the first instance send a notification letter.

There are many factors which could raise a degree of suspicion. A sample of such factors is listed below:

• A promoter informing you that a scheme is HMRC approved, is safe, or is compliant.
• Any contract or arrangement which claims to allow you to keep some or all income which would otherwise be taxable.
• Being offered different levels of pay scheme, such as ‘enhanced’ pay schemes.
• Having more than one contract or agreement dictating your income which does not state how your income will be paid.
• Invoices which do not give a full breakdown of your income and deductions.
• Receiving loans or capital advances that are not taxed, nor expected to be repaid.

A tax avoidance scheme can be for any tax, such as:

• Income Tax
• Corporation Tax
• Capital Gains Tax
• Stamp Duty Land Tax
• Inheritance Tax
• Annual Tax on Enveloped Dwellings
• National Insurance Contributions
• Apprenticeship Levy

There are in essence three disclosure regimes:

• The VAT disclosure regime (VADR),
• Disclosure of Tax Avoidance Schemes: VAT and other indirect taxes (DASVOIT),
• Direct taxes (including Apprenticeship Levy), Stamp Duty Land Tax, Inheritance Tax, and National Insurance contributions (DOTAS).

Typically, the responsibility for disclosing a scheme to HMRC falls on the promoter of the scheme. They may sometimes be issued with a "hallmark" to share with others who are using or involved in the scheme. This hallmark is a unique scheme code that must be placed on any related assessment or tax return.

If certain hallmarks are met and no exemptions apply, you are required to notify HMRC about the scheme. If you think you need to make such a notification, seek legal advice before proceeding.

When HMRC examines a company's or individual's tax affairs, it is commonly referred to as an enquiry. An enquiry is a formal tax procedure governed by statute, with fixed time limits. This is one method HMRC uses to investigate self-assessment tax returns.

HMRC does not need to give a reason for making an enquiry and it only concludes when HMRC issues a closure notice.

Fraud or fraudulent activity typically refers to any deliberate attempt to deceive or mislead to evade paying taxes. HMRC may issue a civil or criminal investigation. It can issue a civil investigation using the COP 9 procedure.

HMRC may initiate a criminal investigation into a tax avoidance scheme if it suspects that false, misrepresented, misleading, or altered documents have been used in the scheme or its promotion.

If you are subject to either a civil or criminal HMRC investigation as a result of your involvement with a tax avoidance scheme, you should immediately seek legal advice.

The consequences of using or promoting the scheme vary.

If a promoter is issued with a ‘Stop Notice,’ they are prohibited from further promoting the scheme. Continuing to promote the scheme after receiving a ‘Stop Notice’ can lead to a criminal conviction as well as the imposition of a penalty.

A person participating in a tax avoidance scheme may be required to pay their backdated taxes along with any applicable interest. Additionally, if HMRC incurs any legal fees in connection with the case, the participant could be responsible for those expenses as well.

If the scheme has involved loans, the loans will be viewed by HMRC as income, and the individual or company will be subject to income tax on the full amount of the loans.

It is imperative that you instruct an experienced tax litigation solicitor as soon as you become aware of the prospect of a dispute arising with HMRC.

Our team can provide legal advice and guidance on the appropriate representations to make to HMRC as well as guide you through the complex appeal process. A strict time limit is applied to such matters by HMRC and therefore it is essential that you seek legal advice as soon as possible.