On 21 July 2020, the government issued a call for evidence in relation to disguised remuneration schemes. This is part of the government’s response to the independent loan charge review by Sir Amyas Morse, to which I was an independent adviser.
The aspect of the loan charge review that most shocked me was the extent to which schemes were still being sold that purported to get round the disguised remuneration rules. This is not, in my view, due to a failure of legislation or to an ineffective response by HMRC. Instead, it is the result of the actions of a relatively small but determined band of rogue promoters.
Tax avoidance has a long history – from the bricking up of windows to the Ramsay line of cases and beyond. Over the period of almost 40 years that I have been practising tax, the response of the courts and the government has evolved significantly, as has the attitude of most tax professionals. Indeed, the rules on professional conduct in relation to taxation (PCRT), which apply to all those who are members of the main professional bodies, explicitly forbid members from promoting tax planning arrangements that ‘are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation’.
My perception is that complex tax avoidance structures were widely promoted in the 1990s and 2000s, but on the whole they were properly explained to the buyers, who were generally sophisticated (large corporates or wealthy individuals) and understood the risks they were taking. Most, although not all, of those schemes failed: for the last few years, HMRC’s success rate in avoidance schemes that are litigated has been around 80% or more.
The GAAR, which came into effect in 2013, targeted egregious schemes with the aim of ensuring that even the most ingenious planning would not succeed. And the introduction of APNs and follower notices in 2014 tilted the balance further against scheme users, by requiring the payment of tax in advance of a dispute being heard by the tribunal.
Meanwhile, in December 2010, the disguised remuneration legislation (ITEPA 2003 Part 7A) was announced. I was working at HMRC at the time, and while I did not have any direct involvement in the legislation, I recall the general view being that this would ensure that, even if schemes had previously worked (which HMRC had never conceded) they would no longer do so.
The evidence of the loan charge review was that the new legislation had a significant impact, with the result that ‘larger employers were far less likely to enter into loan schemes’ and that this was ‘likely to reflect the quality of professional advice available to such employers’ (loan scheme report, page 27).
In other words, the promoters did not give up, but moved to selling ever more aggressive schemes, to those less able to judge the merits of what they were being sold. And despite the loan charge legislation of 2016 (about which much has already been written), they are still doing their best to sell disguised remuneration schemes.
There may be some disguised remuneration schemes out there which have a remote chance of success, but personally I doubt it. If those selling the schemes are in a professional body, they are in clear breach of PCRT, and I would encourage anyone who sees an example to lodge a complaint to the body concerned.
What seems to be more likely is that the sellers are offshore or operating through companies which will disappear as soon as an investigation is started; in other words, they will take their money and run.
The legislation is, in my view, effective. HMRC is doing its best to pursue these schemes, but inevitably that takes time and it is the buyer, not the promoter, who is left to pay any tax and penalty.
So, what should we do next?
This is the question that the call for evidence is asking, and I will be taking part in the professional bodies’ response in due course (the consultation closes on 30 September). But my overall view is that we (and by ‘we’, I mean professionals and the government together) need to address this problem on a number of fronts.
We need to make it harder for the promoters to sell; ensure they are at risk of significant financial costs if they promote a hopeless scheme; and also educate potential buyers to recognise the risks they are taking.
The last goal is perhaps the most difficult. I may have been harsh in my article in this journal on the loan charge, when I said that those who entered into loan schemes ‘were, at best, naïve or optimistic in thinking that they would not have to pay tax in the end’, although I did strongly criticise the promoters as well. Having seen the Low Incomes Tax Reform Group’s guide to umbrella companies, I don’t think it is reasonable to expect someone being paid £10 or £11 an hour to spot that some of their tax is being siphoned off in excessive fees to an umbrella company peddling a way to ‘take home more of your pay’.
Those who engage workers also have a key role to play – by ensuring that their supply chain is robust against those who seek to take advantage of their agency workers. How about some sort of kitemark for reputable umbrella companies, for example?
It is all very well to say ‘buyer beware’, but we need to recognise that these schemes are well beyond the pale and work together to do all that we can to stop them. If you have any views on how best to do this, please respond to the consultation – either individually or via your professional body.
On 21 July 2020, the government issued a call for evidence in relation to disguised remuneration schemes. This is part of the government’s response to the independent loan charge review by Sir Amyas Morse, to which I was an independent adviser.
The aspect of the loan charge review that most shocked me was the extent to which schemes were still being sold that purported to get round the disguised remuneration rules. This is not, in my view, due to a failure of legislation or to an ineffective response by HMRC. Instead, it is the result of the actions of a relatively small but determined band of rogue promoters.
Tax avoidance has a long history – from the bricking up of windows to the Ramsay line of cases and beyond. Over the period of almost 40 years that I have been practising tax, the response of the courts and the government has evolved significantly, as has the attitude of most tax professionals. Indeed, the rules on professional conduct in relation to taxation (PCRT), which apply to all those who are members of the main professional bodies, explicitly forbid members from promoting tax planning arrangements that ‘are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation’.
My perception is that complex tax avoidance structures were widely promoted in the 1990s and 2000s, but on the whole they were properly explained to the buyers, who were generally sophisticated (large corporates or wealthy individuals) and understood the risks they were taking. Most, although not all, of those schemes failed: for the last few years, HMRC’s success rate in avoidance schemes that are litigated has been around 80% or more.
The GAAR, which came into effect in 2013, targeted egregious schemes with the aim of ensuring that even the most ingenious planning would not succeed. And the introduction of APNs and follower notices in 2014 tilted the balance further against scheme users, by requiring the payment of tax in advance of a dispute being heard by the tribunal.
Meanwhile, in December 2010, the disguised remuneration legislation (ITEPA 2003 Part 7A) was announced. I was working at HMRC at the time, and while I did not have any direct involvement in the legislation, I recall the general view being that this would ensure that, even if schemes had previously worked (which HMRC had never conceded) they would no longer do so.
The evidence of the loan charge review was that the new legislation had a significant impact, with the result that ‘larger employers were far less likely to enter into loan schemes’ and that this was ‘likely to reflect the quality of professional advice available to such employers’ (loan scheme report, page 27).
In other words, the promoters did not give up, but moved to selling ever more aggressive schemes, to those less able to judge the merits of what they were being sold. And despite the loan charge legislation of 2016 (about which much has already been written), they are still doing their best to sell disguised remuneration schemes.
There may be some disguised remuneration schemes out there which have a remote chance of success, but personally I doubt it. If those selling the schemes are in a professional body, they are in clear breach of PCRT, and I would encourage anyone who sees an example to lodge a complaint to the body concerned.
What seems to be more likely is that the sellers are offshore or operating through companies which will disappear as soon as an investigation is started; in other words, they will take their money and run.
The legislation is, in my view, effective. HMRC is doing its best to pursue these schemes, but inevitably that takes time and it is the buyer, not the promoter, who is left to pay any tax and penalty.
So, what should we do next?
This is the question that the call for evidence is asking, and I will be taking part in the professional bodies’ response in due course (the consultation closes on 30 September). But my overall view is that we (and by ‘we’, I mean professionals and the government together) need to address this problem on a number of fronts.
We need to make it harder for the promoters to sell; ensure they are at risk of significant financial costs if they promote a hopeless scheme; and also educate potential buyers to recognise the risks they are taking.
The last goal is perhaps the most difficult. I may have been harsh in my article in this journal on the loan charge, when I said that those who entered into loan schemes ‘were, at best, naïve or optimistic in thinking that they would not have to pay tax in the end’, although I did strongly criticise the promoters as well. Having seen the Low Incomes Tax Reform Group’s guide to umbrella companies, I don’t think it is reasonable to expect someone being paid £10 or £11 an hour to spot that some of their tax is being siphoned off in excessive fees to an umbrella company peddling a way to ‘take home more of your pay’.
Those who engage workers also have a key role to play – by ensuring that their supply chain is robust against those who seek to take advantage of their agency workers. How about some sort of kitemark for reputable umbrella companies, for example?
It is all very well to say ‘buyer beware’, but we need to recognise that these schemes are well beyond the pale and work together to do all that we can to stop them. If you have any views on how best to do this, please respond to the consultation – either individually or via your professional body.
