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James Bailey highlights a 'hit list' of tax avoidance schemes on HMRC's website, which HMRC considers do not work. 

The Requirement to Disclose Tax Avoidance Schemes

The tax legislation requires those who promote tax avoidance schemes to disclose the details of their schemes to HM Revenue & Customs. (HMRC). There are severe penalties for those who fail to do so, and for those who use schemes which have not been disclosed. Once the scheme has been disclosed, HMRC will allocate it a reference number, and anyone using the scheme is required to include a note in their tax return that they have done so, and to quote the reference number  - see Page Ai  4 of the Additional Information pages in the Self Assessment Return.

When this disclosure regime was first introduced, its main function was to enable HMRC to either attack a scheme if they thought it did not work, or to arrange for legislation to stop it if they thought it did. Each new Finance Act would include legislation blocking schemes which had been disclosed to HMRC during the previous year. There were at least five in the Budget on April 22.

In the case of schemes which it was thought were likely to lead to serious losses of tax, HMRC might issue a Press Release saying they were aware of the scheme, and that in the next Finance Act there would be legislation to stop it, with effect from the date of the Press Release.

New Spotlight on Tax Avoidance Schemes

On 24 April this year, two days after the Budget, HMRC published the first issue of their new information sheet “Spotlights”.  The introduction to this document announced:

“We do not generally comment publicly on avoidance activities. Spotlights will, however, include comment on a small selection of activities of which we become aware. We will identify activities which, in our view, are not likely to have the legal effect desired by those thinking of using them. Customers will be put on notice that we are monitoring the use of such activities. Where they are discovered, and subject to the particular facts, we will make a challenge and seek full settlement of liabilities through enquiry and litigation according to the Litigation and Settlement Strategy.”

The Litigation and Settlement Strategy referred to was announced in 2007, and what this means is that in the case of schemes identified in Spotlights, HMRC intend to take the schemes to court and argue that they do not work, rather than try to negotiate a deal with the taxpayers involved. Such litigation is of course very expensive, and the threat of it should be a powerful deterrent against using any “Spotlighted” schemes.

Conclusion

Before you even consider using a tax avoidance scheme, therefore, check Spotlights on HMRC’s website to see if it has been included in HMRC’s Hit List. There is little point in paying a promoter a large fee for a scheme that will mean you end up with a choice between accepting that it does not work and paying the tax, or spending thousands to fight HMRC in the Courts!

The above is based on an article by James Bailey in Tax Insider (May 2009), TaxationWeb's own publication specifically for our Taxpayer visitors. Tax Insider is a monthly magazine containing numerous tax tips, articles, questions and answers from leading tax experts, aimed at helping taxpayers to save and reduce tax liabilities.    

To download a free copy of Tax Insider, and for details of special offers and how to order, visit: Tax Insider