Head of Forensic Accounting (non-lawyer)
Partner, Head of European Network
Senior Tax Manager
Out-Law Legal Update | 04 Oct 2018 | 2:47 pm | 8 min. read
Over the last year a number of new measures have come into force or been announced in the UK to tackle tax avoidance and evasion. Some involve assets and income within the UK and some measures relate to offshore avoidance and evasion, which we have dealt with separately.
More tax is lost to onshore evasion and avoidance than to offshore, but it does not always attract the same level of public interest.
As with offshore non-compliance, HMRC's strategy involves a combination of 'encouraging' recalcitrant individuals to come forward and increasing HMRC's powers to obtain information from third parties who may provide the key to finding those who are non-compliant.
HMRC has invested heavily in its 'Connect' database, which collates data from numerous different sources such as the Land Registry, self assessment declarations, onshore and offshore banks and the electoral roll.
This enables HMRC to direct their investigation resources at those most likely to have tax irregularities. For example, according to press reports, it has led recently to letters to people identified by HMRC as having sold a second home in 2015-16 who have not declared a profit in their tax return. The letters are intended to act as a prompt, giving taxpayers an opportunity to explain why they are not subject to tax or to pay the outstanding tax.
Widening information powers
HMRC has been consulting on a proposal to make it easier for it to get information to investigate non-compliance by a taxpayer from third parties such as financial institutions, accountants, lawyers and estate agents. At present if HMRC wants to get this information it has to get the consent of the taxpayer or the prior approval of the tax tribunal. It is expecting to get more requests for information from overseas tax authorities following the introduction of CRS and it says the current process is too cumbersome and is out of step with the process in other countries.
The government is proposing either to remove the requirement for prior approval by the tribunal for all third party notices or just for notices calling for bank statements, transaction histories and other basic banking information reasonably required to check a taxpayers' tax position. Concerns have been expressed by advisers and others that removing the Tribunal from the equation removes any external scrutiny over whether the information is “reasonably required” by HMRC.
Making businesses take responsibility
Often an individual who wants to evade tax needs help from others, perhaps to change an invoice, make a payment in cash or direct a payment to another entity. The government's answer to this is to put companies and partnerships on the hook if their staff or agents criminally facilitate tax evasion by others.
Although the new corporate criminal offence of failing to prevent the facilitation of tax evasion has applied since 30 September 2017, many businesses have still not taken all the necessary steps to protect themselves from the risks of a criminal conviction.
Liability is again 'strict' so that a rogue employee who helps a tax evader causes his employer to commit a criminal offence as well, even if those running the business knew nothing about it. However, businesses will have a defence if they can show they had reasonable procedures in place to try to stop misconduct. This effectively forces businesses to tighten up their procedures, which should make it more difficult for tax evaders to engage with larger businesses.
By now all businesses should have conducted a risk assessment and should already have policies and procedures in place to ensure that they are not at risk of the offence. However, many businesses have still not completed this process. For businesses with significant numbers of off-payroll workers, employment status can be a particular risk area for the new offence.
The government has been looking at ways to tackle phoenixism whereby tax liabilities in a company are left unpaid when a company becomes insolvent and then the same individuals set up a new company and transfer the business but not the debts.
It is proposing wider powers to transfer liability for the tax debts beyond directors and company officers to a wider range of people responsible for the avoidance, evasion or repeated non-payment of taxes, including shareholders in some circumstances, and making them jointly and severally liable. It is particularly controversial that the government is considering extending HMRC's powers in relation to tax avoidance as well as tax evasion. The consultation closed in June and we are waiting to hear whether or not the proposals will get the go ahead.
At the moment HMRC can require businesses considered to be at high risk of not paying PAYE, NICs, VAT and certain other taxes to give a security deposit. From April 2019 the power to require a deposit is being extended to corporation tax and liabilities under the construction industry scheme of contractors and subcontractors. The government has said that it expects these powers to only be used in a small minority of cases, where people are choosing not to pay the tax, rather than those who are in financial difficulty and so cannot pay.
VAT and the construction sector
In another measure designed to tackle missing trader fraud which appears in sub-contractor chains in the construction sector, a VAT reverse charge is being introduced from October 2019. Missing trader fraud occurs when a supplier charges 'VAT' to its customers and then absconds without paying the VAT to HMRC. Where a sub-contractor is supplying mainly labour, it has little input tax to set off against the VAT it charges on its own supplies, thus building up a large VAT debt and there is a concern it may disappear without paying. The reverse charge will be a significant change for this sector and will shift responsibility for paying the VAT to HMRC to the customer, where the customer is a VAT registered business. It will only apply where the customer is itself supplying construction services so will not affect the end customer. The change is estimated to mean that 100,000 to 150,000 businesses in the construction and building sectors will have to change their accounting systems.
This is yet another example of larger businesses being used to police the tax compliance of individuals and small businesses.
People are increasingly moving away from using cash, with digital payments being used more and more. This is good news for HMRC as it makes it harder to evade tax and launder money if fewer payments are made in cash. The government has therefore consulted recently on how it can remove barriers to digital payments but it also wants to understand more about large cash transactions and why they are used, with a view to potentially legislating in the future to limit their use, as some other countries have done.
Online VAT evasion
The government is concerned that offshore sellers, particularly those from China, individuals and small businesses using online marketplaces such as Amazon and eBay are not always accounting for VAT on their UK sales. Accordingly it has introduced a raft of measures over recent years designed to clampdown on this avoidance, including, in some circumstances, making the marketplace responsible for paying VAT unpaid the trader.
A number of marketplaces - including Amazon and eBay - have signed an agreement with HMRC giving the tax authority access to merchant data relating to sellers and committing to educate their sellers on their tax responsibilities.
The government has also consulted recently on a 'split payment' mechanism to clampdown on VAT non-payment by online sellers. An online payment typically involves the online market place, a merchant acquirer, a payment service provider, a card scheme, and the seller’s bank. HMRC is considering new rules which would make one of these parties (potentially the merchant acquirer) responsible for splitting the VAT element from the gross payment made by the buyer and paying it directly to HMRC.
For a number of years HMRC has been fighting variations of schemes whereby employees or contractors forgo direct remuneration and instead receive loans from a third party such as a remuneration trust and it is argued that there is no remuneration subject to PAYE or NICs, even though the loans are unlikely to be repaid.
The disguised remuneration rules largely stopped these schemes from December 2010, but large numbers of disputes remain in relation to older arrangements. HMRC finally won in the Supreme Court in 2017 in a well publicised case involving employees of Rangers Football Club.
HMRC has a settlement opportunity for those who have used these schemes. This is aimed at employees, contractors and employers. Time is fast running out as those who do not sign up for the scheme by 30 September 2018 will face a new 'disguised remuneration loan charge' from April 2019. This widely drafted provision will impose income tax and national insurance liabilities in relation to any third party employment loan made since 6 April 1999.
Although in most cases the liability for the tax should fall on the employer, employees could be liable for the tax in some circumstances.
Those advising employers, employees and trustees who have been involved in this type of arrangement need to be aware of the consequences for their clients if they fail to act.
Employment status has been a major area of focus for HMRC investigations over recent years. The rise in the 'gig economy' has led to fewer individuals being formally employed and therefore having tax deducted under PAYE. As well as routine employer compliance reviews, there have been clampdowns on particular types of job, including a focus recently on dental associates.
In the public sector, new rules were introduced in 2017 to tackle individuals operating through personal service companies (PSCs).
Under the old ' IR35' rules – which still apply for now in the private sector – when an individual provides services to a client through a PSC, employment taxes have to be paid if the individual would have been regarded as an employee of the client, had the individual not contracted through the PSC. However, the income tax and national insurance contribution (NIC) liabilities fall on the PSC not the client.
Under the new public sector off-payroll working rules, public authorities are responsible for determining the employment status of those they engage through PSCs or other intermediaries. They are obliged to deduct income tax and employee NICs and account for employer NICs in respect of payments to PSCs where the individual would have been an employee if engaged directly by the authority rather than through a PSC. In other words, the risk of employment status being proven sits with the public sector engager, which takes away most of the attractiveness of PSC arrangements for them.
As HMRC considers that the IR35 legislation is not working effectively, and non-compliance is widespread, it is consulting on a proposal to extend the public sector off-payroll rules to the private sector.
Should this change be introduced, one significant added cost for private sector clients engaging individuals through PSCs will be the risk of having to pay employer's NICs (currently 13.8%). There will also be an increased administrative burden as businesses of all sizes will have to more closely consider the tax status of all their off-payroll workers. This could be a significant issue in the construction and financial services sectors, where such engagements are common
Jason Collins is a tax expert at Pinsent Masons, the law firm behind Out-law.com. This update is based on one first published on the Chartered Institute of Taxation (CIOT) blog .
Head of Forensic Accounting (non-lawyer)
Partner, Head of European Network
Senior Tax Manager