19 Nov 2012 | 09:59 am | 2 min. read
•Part of HMRC’s effort to recover more from 50p rate of tax HM Revenue and Customs (HMRC) is stepping up its investigations into taxes potentially underpaid by the directors and senior executives of the UK’s largest companies, warns Pinsent Masons, the international law firm.
According to Pinsent Masons, HMRC’s Large Business Service is investigating directors and senior executives for £400m worth of underpaid taxes – including PAYE, and National Insurance Contributions. This is 43% higher than the £280m under investigation last year.*
Pinsent Masons says the sharp rise in directors’ taxes under the microscope has been driven by the upswing in HMRC compliance activity, as well as investigations into avoidance linked to the 50p tax rate and the temporary special tax on bank bonuses.
Jason Collins, Partner at Pinsent Masons, comments: “HMRC has increased its focus on executives as they are a potentially lucrative source of extra tax revenue – particularly with executive pay rocketing over recent times. HMRC has taken a particular interest in cases where income or an individual’s role at a company has been structured to reduce their tax burden, particularly their PAYE or national insurance contributions.”
“The introduction of new taxes for higher earners, such as the 50p marginal tax rate, mean HMRC will be on increased alert for any new forms of tax avoidance. The 50p tax brought in less than expected, so this may have set alarm bells ringing for tax investigators.”
Jason Collins adds: “HMRC will look at whether ‘abusive’ tax avoidance or evasion has taken place, and will demand extra tax if they feel it is due.”
Pinsent Masons says that the value of tax HMRC has under investigation will have also been boosted by HMRC’s recent increased effort to bring in as much extra tax as possible, and by added powers gained by HMRC to tackle ‘disguised remuneration’ – where pay that would normally be subject to income tax or national insurance is artificially structured in a such a way that these taxes are avoided.
Jason Collins explains: “HMRC has been set some daunting targets to hit in terms of cracking down on tax avoidance, so inspectors will be broadening their scope when identifying taxes that they think have been underpaid.”
“There are things that HMRC previously wouldn’t have looked at too closely, but now it will. HMRC has also been given new tools to tackle disguised remuneration and they haven’t been afraid to use them.”
“However, just because HMRC thinks tax is missing, doesn’t mean that it actually is. £400m is just the figure that HMRC estimates might be at stake, and the amount HMRC will actually collect through their investigation work will be much lower.”
Pinsent Masons adds that the jump in tax under consideration by HMRC suggests that the Government may have been right to change tack on the 50p tax rate.
Jason Collins says: “As the Government has said, and as these figures suggest, the 50p tax rate struggled to produce the yield that was expected. It has proved to be too easy for individuals and companies to find ways of not paying them through tax planning – probably assisted by the expectation that the rate was only intended as a short term measure so planning could merely involve delaying the receipt of income.”
Pinsent Masons says that the taxes of senior employees and directors under investigation by HMRC will include genuine errors made by the taxpayer as well as legitimate tax planning.
Jason Collins says: “Typically the LBS will be looking into executives’ non-payroll benefits packages, which are often an area where individuals can make mistakes with what they report to HMRC.”
*HMRC’s Large Business Service is responsible for the taxes paid by the 770 largest businesses in the UK. “Tax under consideration” may include both potentially underpaid tax and the risk to the Exchequer from companies litigating over amounts of tax they have overpaid. Data as of July 2012.
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