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Settlement initiative for users of aggressive schemes
HMRC have pledged not to begin legal action against tax-avoiders who come forward voluntarily to settle their debts with the department.
The new initiative invites users of certain aggressive schemes to resolve disputes with the taxman without risk of litigation.
The avoidance packages covered are broadly of the type the Revenue has a high success rate in closing down: those that seek to create relief much greater than the economic cost borne by the participants.
Taxpayers will be able to make use of the settlement opportunity if they have used a scheme that seeks to use generally accepted accounting practice – or GAAP – to write off expenditure or the value of assets to create losses either for sole traders, or individuals or companies in partnerships; or if they have entered into an arrangement that aims to access film relief legislation for production expenditure.
Avoidance set-ups designed to create losses in partnerships through reliefs such as first year allowance and payments made for restrictive covenants are also covered by the initiative.
Subject to the particular facts of the scheme, only amounts equivalent to the actual cash contribution funded by the participant and expended in the claimed trade will generally be allowed when computing losses or capital allowances, said HMRC.
No relief will be allowed for interest on any loan used to fund contributions to the partnership in excess of the initial cash contribution. Where fees are paid for the provision of the wider funding arrangements, tax advice or litigation protection, it is likely they will not be allowable.
Film partnership sale and lease-back arrangements are not covered by the settlement opportunity, and neither are interest relief schemes that result in a claim to interest relief under S353(1) ICTA 88 that is used as a deduction against general income.
Taxpayers wishing to take advantage should call 03000 530435. The Revenue will write to participants in specific partnerships, companies and individual sole-trader arrangements, and retains the right to reject any case. The department will not consider partnerships under criminal or civil investigation.
The initiative comes against a background of HMRC trying to settle early rather than later, said Baker Tilly’s Mike Down. Taxpayers will not know whether they can take advantage of the facility until they receive a letter: they will have to “wait and see” whether they have been selected, rather than initiate action.
Ray McCann of Pinsent Masons said the Revenue’s latest move was “interesting, and seems to have been prompted by the National Audit Office report last year that criticised HMRC’s inability to reduce the backlog of unsettled tax schemes”.
McCann added that some taxpayers may be attracted by opportunity, but “the history of these schemes may be a blocker”. He expected that “where it looks like HMRC would succeed in litigation, promoters may advise clients to cut their losses on the scheme but some promoters may have concerns about being sued.
“It may also be that, where a partnership is involved, an individual will have difficulty negotiating a unilateral settlement with HMRC; for example, if they have signed up to a partnership agreement that prevents individual action.
“Overall, while the offer suggests the terms will be better than what might be the case in litigation, unless it becomes clear that these are materially better, only those who are fed up with the enquiry or see no hope in their planning succeeding are likely to make an early move. Anyone interested in the offer should seek independent advice,” said McCann
He hoped this was the first part of a broader strategy to clear up the entire backlog. “Having thousands of unresolved schemes is undermining our tax system by obscuring the day-to-day issues facing HMRC and potentially damaging the tax profession in the eyes of the public.”
