Trouble With The Taxman?
If HMRC is asking questions about your employment with an umbrella company or perhaps the use of a wealth management scheme which was promoted to you by an accountant, you should not follow any advice from the company which has caused you to be involved in an HMRC investigation, without first discussing it an independent tax advisor.
If you have received a letter from HMRC, an investigation has been opened because HMRC believes that you have used a tax avoidance scheme, but if you are now told to avoid speaking to HMRC, it will draw you into deeper problems with the taxman, and I will give you the reasons for that.
An abusive tax arrangement must be disclosed to HMRC, and this arises where it would be reasonable to conclude that the main purpose, or one of the main purposes, was to obtain a tax advantage. That is, tax arrangements will be abusive if they cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions.
For example, paying your employment income as part salary and part loan wasn’t a reasonable thing for any umbrella company to do, neither was using a scheme where your income was paid in and out of other companies for no apparent reason, in fact, these arrangements served only to provide you with a tax advantage over someone who was being paid in accordance with the relevant tax provisions, i.e. under prevailing PAYE regulations.
A tax arrangement should be disclosed where;
- it will, or might be expected to, enable any person to obtain a tax advantage
- that tax advantage is, or might be expected to be, the main benefit or one of the main benefits of the arrangement
- It is a hallmarked scheme by being a tax arrangement that falls within any description (‘the hallmarks’) prescribed in the relevant regulations
An abusive tax scheme or arrangement must always be disclosed to HM Revenue & Customs by the promoter* in the tax year it was used. The arrangement may have been used by the promoter of the scheme to pay part of your income as a tax free payment; they may now call that payment a loan and tell you to repay it, but it was not a loan, it was a method by which part of your employment income was disguised as something else, and this helped you to gain a tax advantage, which is what HMRC is looking at, believing that this was the main reason for you using the scheme provided to you.
If or when any company tells you not to speak to HMRC this is cause for suspicion, but worse still, the promoter then falls within all of the above conditions for when a scheme must be disclosed, so this makes things far worse for you. This is because one of the definitions of a hallmarked scheme becomes satisfied, see 7.3.3 Hallmark 1(b): Confidentiality from HMRC, which can be found on page 38 of the published Guidance on Disclosure of Tax Avoidance Schemes (DOTAS), as soon as the promoter tells you not to speak to HMRC, or for that matter an accountant or other tax advisor, about the scheme that they provided to you.
*A promoter, in the course of a relevant business, organises or manages the implementation of a tax arrangement or scheme. A ‘relevant business’ under section 307 of the Finance Act 2004 is described as a business involving a provision of services relating to tax (or where applicable National Insurance contributions). This includes umbrella companies and small businesses where IR35 applies.
Don’t make it worse!
No matter what the promoter says they will now do for you, they should have reported the scheme to HMRC before now and this has left you with a problem, which they will have no qualms about hiding from you. In fact, the only way of satisfying HMRC investigators that you were not a willing participant in that tax avoidance scheme, is to sever all contact with that umbrella company or accountant immediately.
Remember, you may end up in court if you do not pay the tax and National Insurance contributions that you owe. HMRC wins around 9 out of 10 avoidance cases heard in court and if you lose you could face life-changing bills, with legal costs on top of the tax you owe, penalties and growing interest.
Get in touch with me firstname.lastname@example.org for advice on properly managing any tax enquiry into a tax avoidance arrangement that has involved you.