What happened?

MCashback developed new software and approached Tower Group PLC for funding. Via a number of newly formed LLPs, investors paid 25% of £143 million to buy the software and the remaining 75% was met by interest-free loans provided indirectly by MCashback itself. The investors then claimed capital allowances enabling tax relief on 100% of the purchase price of the software equating to a potential £40 tax refund for every £25 invested.

What was the issue?

The substantive issue was whether the entire £143 million purchase price for the software was allowable expenditure under the Capital Allowances Act 2001, or only the actual cash invested.

HMRC argued that the loans advanced to the investors to fund the purchase of the software were ‘artificial’ and only constructed in order to ‘accommodate’ the purchase price of the software thus substantially increasing the ‘tax relief available’.

The decision?

The Supreme Court unanimously held that the interest-free loan was not used as expenditure for the acquisition of software rights as it “went in a loop back to the lender” to enable the taxpayer to “indulge in a tax avoidance scheme”. Consequently, the LLPs could only claim allowances on the value of cash invested.

Summary

There is no question that HMRC is pursuing these types of ‘arrangements’ more vigorously in recent years and this is in part due their revised approach known as ‘litigation strategy’ introduced back in 2007.

We are now seeing the legal outcome of these disputes – and HMRC have scored a victory.

So are we seeing the end of ‘tax avoidance structures’?

Probably not however the Scheme providers and those who invest in them can certainly expect more attention from HMRC and should be prepared to litigate.

This is a post from: Blog Classic.

HMRC succeeds against tax avoidance structures

These are the results of a campaign launched by the Revenue in May 2011 when over 40,000 letters were sent to businesses urging them to bring any under declared tax into order by 30th September 2011.

HMRC’s campaigns are also focusing on VAT dodgers who are not registered in spite of earning in excess of the threshold as well as offshore bank accounts and medical professionals.

The incentive for traders to approach HMRC is that in most cases penalties will be restricted to 10%.

In certain circumstances HMRC can seek penalties of up to 100% of any tax owed.

It is of course vital that businesses keep proper records to allow their tax liabilities to be accurately calculated but even where records simply do not exist HMRC may be persuaded to accept a taxpayers estimates or other reasonable methods in arriving at a profit figure or a loss figure.

The important thing is to take action in advance and demonstrate a willingness to bring your affairs up to date.

This is a post from: Blog Classic.

Taxman arrests five after crackdown on plumbers, and VAT fraudsters

The updated version does not appear to make fundamental changes and retains the stance of avoiding ‘package deals’ and ‘splitting the difference’ in all or nothing disputes.

HMRC have however now revealed that they intend to work more closely with their ‘customers’ and want be seen as less confrontational.

Also of interest is the recommended use of dispute resolution methods and working together with taxpayers during any litigation with HMRC.

Summary

It is certainly interesting to see HMRC encourage more interaction with the Taxpayer and using expressions like ‘non-confrontational’.

The change in sentiment is not entirely surprising as since HMRC launched their ‘litigation strategy’ back in 2007 the ‘Tax Tribunal Service’ has replaced the ‘General Commissioners’ as the authority in deciding disputes between the Revenue and the Taxpayer.

Whereas procedurally speaking the ‘General Commissioners’ followed a relatively ‘informal’ path the new system is anything but with the process being more involved and taking substantially longer.

All of this can’t be helping HMRC especially if the dispute is considered to be a relatively minor issue.

Putting an ‘arm around the Taxpayer’ thus seems like the sensible thing to do.

This is a post from: Blog Classic.

Will the Tax Man ‘cut a deal’?

HMRC announced in July a new taskforce to tackle fast food outlets who have evaded taxes, following a June taskforce targeting London restaurant sectors.

This is the fourth taskforce launched by HMRC since May 2011 and we are told that this is to be followed by a further nine taskforces in 2011/12, with more to follow in 2012/13.

The attention comes as a result of the Government’s well publicised £900m spending review to tackle tax evasion, avoidance and fraud.

Restaurants are seen as a ‘higher risk’ area by HMRC given that they are often cash businesses and depend on labour. Where a restaurant’s turnover is above the VAT threshold there can be substantial amounts of VAT collected as the two principal costs of a restaurant – food and labour – are generally ‘non-vatable’.

This is a post from: Blog Classic.

Fast food VAT evaders targeted by HMRC

It was therefore not entirely surprising that the Revenue have now published proposals – in the form of a consultation document – to revise the system.

Although HMRC say that these changes are necessary to deal with ‘taxpayers who are simply using the system to cause delay’ – there is little doubt that these proposals will have wider repercussions.

Under the proposed system taxpayers will also have the opportunity to make a voluntary disclosure to HMRC at any time under a ‘contract to disclose’.

Where HMRC have approached an individual the taxpayer will be asked to confirm in writing whether they want to take advantage of the assurance of immunity from prosecution.

If the offer is taken up then an extended period of ’60 days’ is to be provided to allow the taxpayer to take professional advice and to prepare an ‘outline disclosure’.

HMRC will then offer to work together with the taxpayer to seek to agree the best way forward which would include making a full disclosure and agreeing payment of any liabilities.
Careful consideration of these proposals will show that the way HMRC conduct investigation of fraud is about to change with more onus placed on the taxpayer.
Clearly the approach sought by HMRC in cases of suspected fraud is to move away from the one-system-fits-all to being tailored towards the individual circumstances of the taxpayer. This for one should be welcomed whilst bearing in mind that it will be more important than ever to get the right advice from the outset.

This is a post from: Blog Classic.

A contract for criminal immunity

Background:

Autocleanz engaged with individuals under service contracts which contained two ‘key’ conditions supposed to ensure that these individuals were treated as self-employed. Firstly, it included ‘a substitution clause’ allowing an individual to appoint a substitute in their place and secondly, it excluded ‘mutuality of obligation’ which provides that neither party has to offer work or perform services. However, the Supreme Court confirmed that the contract was a ‘sham’ as it is did not reflect the genuine agreement between the parties. In future Courts will look more closely at the reality of the situation in addition to each party’s bargaining power to decide the status of the relationship rather than relying solely on what is written in a contract.

What does this mean for you?

Businesses need to ensure that the wording and terms of contracts they sign reflect the reality of what takes place. Where there is a difference a business leaves itself open to a potential claim from either HMRC for PAYE or the ‘individual contractor’ or quite possibly both.

This is a post from: Blog Classic.

‘Employee’ or ‘Self-employed’?