Tax avoidance schemes and the unregulated sector

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07 August 2024

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I follow a contributor to LinkedIn whose name is Dan Niedle. Amongst other things, Dan seeks to bring together those who are interested in highlighting what appear to be abusive or poorly advised tax ‘avoidance’ structures (including R+D claims).

There is nothing illegal about tax avoidance, but the name appears to have become inextricably associated with improper and immoral behaviour. However, as one commentator correctly pointed out, if tax is not properly payable, it is not being ‘avoided’.

On the other hand, tax evasion is illegal, full stop.

So here is the issue. The majority of advisers operating in the regulated sector now give tax avoidance arrangements a very wide berth. The reason? The risks around advising on such schemes are significant, and can result in penalties from H M Revenue & Customs (HMRC), and liabilities to clients, should HMRC successfully challenge that the arrangements do not work.

However, anyone can advise on such arrangements, meaning that unregulated and unqualified persons and businesses can construct, and advise on, highly technical and potentially controversial tax avoidance structures. This is compounded by the fact that many of these schemes are used by unrepresented taxpayers and businesses – i.e. those who do not necessarily have, or can afford, the technical support that is needed when considering such arrangements. I am not for one moment suggesting that there are no valid tax avoidance structures available in the unregulated sector, however I share the view that there appears to be a much higher incidence of such schemes being successfully challenged by HMRC, leaving the taxpayer at a significant loss and, all too frequently, the unregulated adviser in no position to compensate the clients.

Labour has already pledged to tackle tax avoidance, and HMRC is acting with ever increasing success in challenging poorly, or possibly negligently or fraudulently, constructed anti-avoidance schemes, and there is a groundswell of opinion that more regulation needs to be introduced to protect the consumer who, typically, ends up being the loser where such arrangements ultimately fail.

So here are a few tips for those who may be considering looking at tax avoidance schemes:

Is the provider regulated? If not, should you speak to someone who is?
Is the provider tax qualified? If not, should you speak to someone who is?
If it looks too good to be true, it usually is.
Does the scheme involve not advising HMRC about the transaction? If so, be very careful that this is not actually tax evasion (illegal)
Does the scheme involve a very long, convoluted explanation to HMRC as to how and why it works? If so, be very careful that this is not simply an attempt to interpret the letter of the legislation in a manner that conflicts with the purpose of that legislation
Past performance is not a reliable measure of the authenticity of an arrangement – “we’ve saved x number of people £’000s” only indicates that people have used the scheme – it does not indicate whether HMRC is aware of, or has challenged, the scheme
A lot of schemes come with a “barrister’s opinion” indicating why the barrister believes the scheme works, based on how the provider has set out the scheme – many such schemes have been successfully challenged by HMRC
A lot of schemes come with a promise of insurance against a successful challenge by HMRC – does it cover the tax and any interest and penalties? does it cover all of the costs of defending the scheme in Court? given potentially how many clients it might impact, will they all be fully covered?
Do you fully understand the various steps involved in the planning?
Do the steps involve arrangements with other businesses connected to the main scheme provider?
Is the person explaining the scheme to you a tax qualified individual, or a salesperson?
Are there high profile individuals and influencers who are being paid to promote the product?
And finally …. have you measured the risk against the reward, and can you afford for it to go wrong?

My advice will always be to speak to someone who is tax qualified and is regulated, even if only for a second opinion. More rigour and regulation is long overdue in this market, and hopefully the Government will move quickly to protect consumers. In the meantime, unfortunately, you do need to act to protect yourselves.