Celebrities have dominated headlines recently for all the wrong reasons, slapped with ‘tax avoider’ stamps after backing schemes that have retrospectively been deemed as going too far.
While the upshot is likely to have sent the coolest PRs into a panic over the public’s perception of their clients, it is now clear that tax avoidance schemes are firmly on HM Revenue & Customs’ (HMRC) radar. And many view HMRC’s new wide ranging powers – which include demanding payments upfront before a legal tax liability is established – as a profound game changer.
Other powers allow it to take money direct from a bank account, even if the concerned person does not agree there is a liability.
Add in the fact that new data will now reach tax authorities, gathered from intergovernmental agreements, and you can understand why tax planning is now looking much trickier.
Liberty, a £1.2 billion tax avoidance scheme, is the latest to have caught both HMRC and the media’s attention. It generated huge offshore losses, which could be written off against investors’ income tax bills. The Times claims Sir Michael Caine, George Michael, Anne Robinson and singer Katie Melua all poured money into the scheme.
HMRC’s legal challenge went to court in March and is set to go to tribunal, but the new powers will enable HMRC to take the disputed revenue upfront.
This new measure will similarly leave a raft of other celebrities, which The Times reported to include David Beckham, Andrew Lloyd Webber, the Bank of England’s Clara Furse and Sir Bob Geldof, facing a £520 million bill following their investment in the Ingenious Film Partners 2 LLP.
This scheme helped to fund the likes of Life of Pi and Avatar and made losses of £1.3 billion, which investors then offset against other income to reduce their tax bill. However, HMRC believes the film scheme was simply set up to avoid tax.
‘HMRC is now looking for upfront payments from people entering schemes and will have the ability to raid bank accounts if a liability exists. These upfront payments will make life more difficult,’ said Andrew Watt, a partner at Watt Busfield Tax Investigations.
‘A scheme might save you £1 million but you have got to put that money upfront first. It is a significant change that will help to curb people’s enthusiasm for avoidance schemes,’ he added.
He warns of more significant repercussions for some investors in schemes, with criminal investigations a possibility.
‘People need to think long and hard. A scheme does not guarantee you success and there could be possible sanctions on them afterwards,’ Watt added.
Andrew Watters, director and tax specialist at law firm Thomas Eggar, suggests the more artificial a scheme feels, the less likely it is to succeed.
While many expect HMRC to take further action against employer benefit trust schemes, which seek to minimise the income tax and National Insurance charge on employee remuneration, Watters notes this trend could speed up as schemes held outside of the UK will become more visible to domestic tax authorities.
This is the case after the so-called ‘son of Fatca’ tax information exchange agreements signed between the UK and Jersey, Guernsey, the Isle of Man, and Gibraltar. Additional agreements have been signed with other jurisdictions.
‘Financial institutions in these jurisdictions are now under obligation to provide details of individuals who are UK residents who have relevant information,’ Watters said.
Against this backdrop, he notes a likely return to best practice when it comes to tax planning. ‘If you are going to enter into some form of tax planning, it is better to make sure it works when your cards are on the table.’
George Bull, senior tax partner at Baker Tilly, believes recent legal victories and the expansion of HMRC’s powers suggest it is ‘winning a game that for many years has been against them’.
Looking ahead, he expects the information gained from intergovernmental agreements to add a new dynamic. However, he anticipates HMRC will be cautious in the way it uses its new powers in order to avoid diminishing public confidence.
‘They are taking a hard line on avoidance but must also be careful in the way they use direct access to bank account powers,’ he said.