After our big warning story last month, Vanessa Sanders gives some topical advice for doctors who may be involved in, or planning to take up, tax avoidance schemes
Financial Secretary to the Treasury David Gauke could not have been more timely last month as Independent Practitioner Today went to press with its page one story ‘Doctors’ tax shocker’.
He announced: ‘The Government has taken unprecedented steps to clamp down on tax avoidance. Our tough new rules will force high-risk promoters to change their behaviour and help protect taxpayers from unscrupulous advice.
‘Promoters who do not change their ways should be in no doubt – HM Revenue and Customs (HMRC) is taking swift and decisive action to use these new rules.’
Tough new rules
Promoters of tax avoidance schemes will receive notice that they are being monitored and, as such, will be required to comply with requests to change their behaviour.
If a promoter receives such a notice, they will be required to inform their clients – who, as our story showed last month, include a lot of doctors.
However, it will take some time for HMRC to seek out some of these promoters, as not all register for a Disclosure of Tax Avoidance Schemes (DOTAS) number because they do not believe they are selling a scheme. This is where a doctor may fall foul unwittingly of the taxman.
To counteract any tax advantage before it is tested to be allowed, HMRC is either not making repayments of taxes overpaid or is using a new power to collect taxes in dispute. These are called accelerated payment notices.
Accelerated Payment Notices
An Accelerated Payment Notice is a notice issued by HMRC to taxpayers who have used tax avoidance schemes that fall within the DOTAS rules or are counteracted under the General Anti-Abuse Rule (GAAR).
The notices will be issued to request upfront payment of the tax avoided under such schemes where the scheme arrangements are subject to dispute. The idea is to ensure that the disputed tax is held by the Exchequer rather than the taxpayer, thus removing the cash flow advantage.
Before, or at the same time, as issuing an Accelerated Payment Notice, HMRC must issue a Follower Notice.
There are a number of conditions to be met, but principally there must be an open inquiry and HMRC must be aware of a judicial ruling which is pertinent to the disputed tax arrangement.
This Follower Notice forces the taxpayer to take corrective actions to amend their tax return to reflect the judicial decision in a relevant tax case rather than to wait years for their own decision to battle through the courts and the Exchequer loses the use of the tax in dispute.
Both measures are designed to act as deterrents preventing taxpayers relying on schemes for a tax advantage.
These provisions apply to:
- Income tax;
- Corporation tax;
- Capital gains tax;
- Inheritance tax;
- Stamp duty land tax;
- Annual tax on enveloped dwellings.
As taxes creep upwards, increasingly large numbers of professionals like doctors, hit hard by the loss of personal allowances and additional rates of income tax, are tempted into such schemes by claims that schemes are not under dispute, as the promotor holds a counsel’s opinion in their favour.
So how do you know what to look out for?
Ten things you must consider before avoiding tax
1. The consequences are all yours. If the avoidance you have taken is not legal – only decided by the courts, not by you, your scheme promoter or counsel but by a judge having heard all of the facts – you will have made an incorrect tax return.
You, the taxpayer, are obliged legally to pay all taxes that are due. It is likely that you will be charged penalties if you are proved incorrect in your interpretation of the law.
2. The majority of tax avoidance does not work; tax planning is a much better method of keeping taxes under control.
You may be persuaded that some ‘schemes’ do work by being informed that they are in the spirit of the legislation and that there is legal opinion to support the view of the law.
Do not forget there are many differing opinions, which only become relevant when tested in court. You cannot sue a barrister for giving an incorrect opinion.
3. What is your maximum exposure if it all goes wrong? Treat the avoidance as an investment: it can go down as well as up. So if you can’t afford to lose the money and pay the taxes and penalties with interest on top, think again. No promoter will give you a guarantee that a scheme will work. Often firms change name and registered office so they are difficult to track. And your fees are non-refundable.
4. Avoidance schemes are complex. They can give rise to unintended additional tax consequences and the fees you pay the promoter do not count as tax paid. So you could end up paying much more than just the tax you are trying to avoid.
5. You will have significant fees to pay. These are upfront to join the scheme; usually around 10% of the amount of cash handled, plus VAT. Then, if the scheme is litigated, you are likely to have hefty legal fees to defend your stance. Your promoter usually asks for a contribution to a ‘fighting fund. Is this good money after bad?
6. You could face public ‘naming and shaming’ by HMRC in the local press or you may attract publicity as a tax-avoider when named in court papers. It may not do celebrities any lasting harm, but, as a professional, the bar of integrity may be higher and could damage your business.
7. Could you face criminal conviction or potential disciplinary action from the GMC? If you deliberately mislead or conceal information from HMRC, you could be prosecuted and convicted.
8. Schemes are never approved by HMRC. Getting an avoidance scheme reference number merely means that HMRC recognises the scheme has signs of being deliberately designed to avoid tax.
9. It is likely that you will be considered for many years as a high-risk taxpayer. Use of such aggressive tactics will highlight your tax affairs, which will be closely scrutinised in future.
10. HMRC wins eight out of ten cases where taxpayers and promoters take avoidance schemes to court. This is a political hot potato and tax avoidance is to become the drink-driving campaign of the decade.
Basically, if you live and earn in the UK and enjoy the benefits of the NHS, free schools and a police force to be reckoned with, then you will have to pay tax here.
If it looks too good to be true to cut your tax drastically, then it probably is just an illusion.
Vanessa Sanders (right) is a director at specialist medical accountants Stanbridge Associates