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Mark McLaughlin highlights the attitude and approach of HMRC in respect of tax avoidance arrangements.

Introduction

Most of us know and understand the phrase ‘All that glitters is not gold’. That seems to be HMRC’s message to taxpayers in relation to certain forms of tax avoidance arrangements. HMRC’s proactive (some might prefer the term ‘aggressive’) approach to what it regards as unacceptable tax planning will be unwelcome to many. However, at least HMRC are relatively open about the types of planning arrangements they dislike, even if practitioners do not necessarily agree with HMRC’s technical analysis of them. Clients who use such arrangements are publicly warned that they face a possible challenge from HMRC, in the Anti-Avoidance Group section of its website.

Spotlights 

HMRC’s anti-avoidance strategy includes ‘engaging with our customers about our approach to avoidance’. Part of this process involves HMRC publishing Spotlights on its website. These are avoidance activities which, in HMRC’s view ‘…are not likely to have the legal effect desired by those thinking of using them.’ HMRC seek to discourage potential users by indicating that such activities are likely to be challenged, and a full settlement of liabilities sought through enquiry and litigation.

There are presently six tax avoidance ‘schemes’ or spotlights:

1. Goodwill - companies acquiring businesses carried on prior to 1 April 2002 by a related party
2. VAT artificial leasing
3. Pensions schemes artificial surplus
4. Contrived employment liabilities and losses
5. Using trusts and similar entities to reward employees - PAYE and National Insurance contributions (NICs), Corporation Tax and Inheritance Tax
6. Employer-Financed Retirement Benefits Scheme ('EFRBS')

Spotlights 5 and 6 were added on 21 August 2009. HMRC commented that spotlight 5 ‘…may give rise to unexpected tax consequences.’ However, it is worth making the point that HMRC’s technical analysis of spotlighted schemes is only their view of those arrangements. Just because HMRC ‘thinks’ that a scheme is ineffective does not necessarily make it so. However, some schemes (e.g., Spotlight 4) have subsequently been the subject of legislation to counter them. This does beg the question why legislation is necessary to deal with spotlighted schemes, if they were considered to be ineffective in the first place?  

Practitioners should not assume, if a tax scheme is not in the list of spotlights, that it is effective or accepted by HMRC. Spotlights are ‘…selected avoidance schemes’. The risks of a scheme being challenged should be evaluated, and clients should be made aware of them in advance. This applies irrespective of whether HMRC has added the scheme to the list of spotlights.

Signposts

HMRC has also published a list of common features of transactions or arrangements, or 'Signposts', which have been identified as unacceptable in the past, so that they may better identify perceived ‘high risk’ issues. Signposted transactions and arrangements are summarised below.

• Those with little or no economic substance, or which have tax consequences not commensurate with the change in a taxpayer’s (or group of related taxpayers’) economic position.
• Those bearing little or no pre-tax profit which rely wholly or substantially on anticipated tax reduction for significant post-tax profit.
• Those resulting in a mismatch (e.g., between the legal form or accounting treatment and the economic substance; or between the tax treatment for different parties or entities; or between the tax treatment in different jurisdictions).
• Those exhibiting little or no business, commercial or non-tax driver.
• Those involving contrived, artificial, transitory, pre-ordained or commercially unnecessary steps or transactions.
• Those in which the income, gains, expenditure or losses falling within the UK tax net are not proportionate to the economic activity taking place or the value added in the UK (especially where the transactions or arrangements are between associates within the same economic entity and would not have occurred between parties acting at arm's length and/or add no value to the economic entity as a whole).
• Those designed to sidestep the effect of legislation enacted to target particular transactions or arrangements and give them a particular tax result, which otherwise achieve the same result.

Examples of previous transactions or arrangements which HMRC consider to display signposts are listed on its website. (Signposts). In a recent tax planning conference, tax barrister Hui Ling McCarthy commented that the vast majority, if not all, tax schemes will fall within one or more signposts, and that perceived ‘legitimate’ tax planning could also be caught.

Whilst such schemes are at higher risk of HMRC challenge, it does not automatically follow that the planning will be ineffective. However, clients should once again be made aware in advance of the potential implications of an HMRC enquiry, including the possible consequences in terms of additional tax, interest and penalties if HMRC successfully challenged the scheme.

The above article is taken from Busy Practitioner, which is published by Bloomsbury Professional.