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Finance HM Revenue & Customs, VAT & PAYE

HMRC consulting on closing another tax avoidance loophole

tax avoidanceThe drive to maximise tax revenue continues with another consultation document of very limited duration.
Launched in April with consultations due to end this coming Friday HM Revenue and Customs (HMRC) has this time turned its attention to “arrangements entered into by UK individuals and traders that aim to place profits proper to the UK outside the scope of UK taxation” also known as Profit fragmentation.
The consultation, announced in the Autumn 2017 budget, is the first step to drafting new legislation, aimed at dealing with individuals and smaller enterprises who are deemed to be deliberately allocating excess profits to an overseas entity from which they, or someone else connected to them, can benefit.
Examples are described in the consultation document as service providers, such as an entertainer, asset manager or specialist producer of high value items. One such example cited is a management consultant resident in the UK and providing their services in the UK and overseas, where a proportion of the fees are paid in the UK but the rest is paid directly by customers to an offshore company.
The argument made by users of such arrangements is that the offshore company has no assets apart from access to the skills of the consultant who is exercising their skill from the UK.
HMRC argues that all the income comes from a single underlying activity operating solely from the UK and that therefore it should all be taxed in the UK as the consultant’s profits.
It emphasises that any proposed legislation should be properly targeted and not “weigh inappropriately” on those UK businesses that do pay all their tax in the UK.
It admits that there is existing legislation to tackle at least some of this issue and that the legislation, such as the transfer pricing and Diverted Profits Tax, contains specific exclusions for SMEs. It also admits that it can be difficult to identify persons using such arrangements.
It proposes that the legislation should include a legal requirement for people using such arrangements to notify HMRC. It calculates that it will affect “8-10,000 wealthy individuals who control a small number of businesses” and increase tax receipts by up to £50 million.
Assuming that such legislation is adopted it will be announced in the budget this autumn and is expected to commence from April 2019.
While maximising the tax revenue is perhaps a laudable aim I have to question whether the acknowledged difficulties of obtaining the detailed information required from offshore entities, as HMRC mentions in the consultation, for a relatively small number of targets and potential revenue is the best use of HMRC’s limited resources.
As with the HMRC consultation to prevent directors using insolvency to “game the tax collection system” that I covered in my blog of May 15 the question is whether these two consultations are straw clutching exercises resulting from pressure on HMRC by the Government.
 

Categories
Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

HMRC looking to prevent directors from using insolvency to game the system and avoid paying tax

There are clear signs that HMRC is ramping up its efforts to improve its tax collection rates.
Among several initiatives, about which there will be more in subsequent blogs, it is focusing on what it calls the “misuse” of insolvency as a means of tax avoidance or evasion.
Since the loss of its preferential status on enactment of the Enterprise Act 2002, HMRC has to wait in line alongside other unsecured creditors during insolvency proceedings.
In a consultation document issued in April HMRC is now proposing that it should be able to use litigation to allow an insolvent company’s tax debts to be transferred to the person(s) responsible for the avoidance/evasion or that directors or shareholders should be made jointly and severally liable for the company’s tax debts.
HMRC’s discussion document acknowledges that Insolvency Practitioners (IPs) must still have a duty of care to the interests of creditors as a whole.
Assets realised into cash during insolvency are distributed to creditors by the IP according to strict insolvency rules. Secured creditors, normally banks and other lenders, and then employees as preferential creditors are paid in full before sharing out any remaining balance among unsecured creditors.
Given the payment priority, HMRC like the other unsecured creditors rarely get anything.
However, if HMRC were to pursue directors through the courts the question is who will be liable?
Will HMRC move up the ranking of creditors of the insolvent company which could risk loss to secured and preferential creditors, and heap further losses on unsecured creditors?
Or will directors and shareholders become personally liable for overdue tax?
There is also a worry that if HMRC proposals were approved this would undermine the recent shift in insolvency regulation, which included a moratorium on creditors’ action, to allow time for a restructure and turnaround plan to be devised.
HMRC is clearly redoubling efforts to recover the maximum amount of tax debt it can. This week a Freedom of Information request revealed that its spending on debt collection services had increased by more than 500% in three years, from £6.2m in 2014 to £39.1m in 2017.
phoenix company and tax debtsThe implications on a rescue culture might go further given that HMRC often exercise their blocking vote to reject proposals for a Company Voluntary Arrangement. This generally leaves a Phoenix as the only option.

In other developments around insolvencies

A HM Treasury minister has urged the Financial Conduct Authority (FCA) to take action on the use of phoenix companies, which it has been argued, allow directors of an insolvent company to walk away from their debts to creditors by setting up a new (phoenix) company enabling it to effectively carry on trading under a different identity.
Robert Jenrick, the Exchequer secretary to the Treasury, was responding to a case where a company offering financial advice had used the phoenix option to effectively “walk away” from its previous business taking its clients with it. However, this had enabled its owner to retain his FCA approval and avoid paying compensation to some unhappy clients despite a Financial Ombudsman investigation finding that the previous company had made “completely unsuitable” investments for the complainants, who had then lost money.

Categories
Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Why would any business pay more tax than it needs to?

The subject of tax payment cannot avoid being a political football, especially as an election approaches.
But if there is to be a genuine debate, and genuine clarity about what each political party actually stands for on tax and businesses then there needs also to be clarity about what is and is not legal.
Tax evasion is illegal, tax avoidance is not.
Given that all benefit from the “public goods” such as education and transport infrastructure, and these have to be paid for, no business or indeed no one I know would quarrel with paying a fair amount of tax.
But beyond that it could be argued that a company’s directors have a duty to minimise their business tax bill in order to maximise profits, in other words to avoid paying taxes they don’t have to. That is why people use accountants and other financial advisors.
It is fair enough for politicians to want to close loopholes that allow large corporations to “game” the system and avoid paying their fair share.
However do we really want a tax regime that rests on politicians telling us how much income we are permitted to have, as the Labour Party seems to want to when attacking tax avoidance? Surely that is perilously close to communism?
The press isn’t immune as turnover is often cited instead of profits when referring to tax.
What we would all like to see is a taxation system that prevents tax avoidance by corporations using offshore accounts to keep more than their fair share of profits while still benefiting from the public goods that allow them to operate profitably in the UK.

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Record keeping and HMRC communication

SMEs should be prepared for HM Revenue and Customs (HMRC) to become more aggressive in following up on late payment and tax avoidance.
MPs criticised HMRC this month after it emerged that the difference between the amount it should collect and its actual collection total had increased by £1 billion (from £33bn to £34bn) in the year to April 2013.
The tax gap is also forecast to increase by a further £3bn for the year to 2014.
The House of Commons’ Public Accounts Committee has also criticised HMRC for not doing enough, quickly enough in tackling tax avoidance schemes.
SMEs are arguably easy targets when HMRC is coming under pressure so they would be wise to ensure that their records are all in order and payments up to date.
It is important to keep copies of all filings and communications with HMRC, preferably confirming phone calls in writing and to not ignore any communications from them.
If you are unable to pay a liability, they are helpful and providing you are proactive they will agree payment terms. If you do agree payment terms then stick to them otherwise they won’t believe any other undertakings you give so make sure your cash flow forecasts are realistic.
Independent of making any payments, make sure your various tax returns (VAT, RTI -PAYE and corporation tax) are submitted on time to avoid automatic penalties.
If it is all becoming too much, remember tax is one area where early help from a professional can be invaluable.