Taxman targets evasion by Medical professionals

Medical professionals are being encouraged under a new Tax Health Plan to tell HM Revenue & Customs (HMRC) if they have been evading tax. In effect they are being provided with the best opportunity they will ever have to regularise their tax affairs with the promise of a minimal penalty.

The Tax Health Plan is the first initiative in a new HMRC campaign focused on professionals. It seems that more such focused initiatives will follow. Much as with the Offshore Disclosure Facility and the New Disclosure Facility, this initiative promises a 10% cap on the penalty for previous non-disclosures.

HMRC make the point that these terms are in line with those offered for any full and accurate unprompted voluntary disclosure of tax liabilities. So is there really any incentive to come forward during the 'disclosure window' that closes on 31 March 2010?

I think there is. In effect HMRC are giving medical professionals a last chance to make an unprompted disclosure. From April it will be too late as HMRC will be writing to those professionals it believes have undisclosed income from, for example, NHS Trusts, private hospitals and private medical insurers. It seems that HMRC have been collating details of payments made by such entities that it suspects the recipients have not fully disclosed. From April the penalty will rise from 10% to at least 30% and possibly upto 100% - see: The new penalties regime - making tax taxing.

It's worth stressing that in all such cases there is no tax 'amnesty'. The 10% penalty will be by reference to the tax previously unpaid. This will also be payable together with interest on the late payment.

HMRC suggests that anyone interested in taking advantage of this facility should contact them. I disagree. I advice that more objective advice will be provided by an independent tax expert.

HMRC confuse tax avoidance and tax evasion again

On the Spotlights page of HMRC's website they say that 'Spotlights' is "all about tax avoidance".

"It will help you to understand what we are likely to see as tax avoidance by identifying the types of arrangements or scheme which we are likely to challenge."

I applaud the concept of Spotlights and support much of the content on the page which first appeared in 2009. I am equally aware that HMRC's choice of terminology does not accord with mine or that of most accountants and tax advisers.

I would much prefer to see the words 'tax avoidance' qualified by a prefix of 'abusive' or 'unacceptable'. In effect HMRC are putting the spotlight on structured tax schemes and arrangements that they (and, by implication, the Government) consider to be abusive. There are plenty of inoffensive ways of avoiding an unnecessary liability to tax and of reducing the tax that you might otherwise have to pay. This too is tax avoidance achieved through sensible tax planning.

The other point is that 'abusive' and 'unacceptable' arrangements are not the same thing as deliberate tax evasion or fraud - at least until and unless they are successfully challenged in Court. But the clear message on the Spotlights page is that you undertake such transactions at your own risk. And I've addressed these before on this blog.

Earlier posts (see list below) reveal I'm no fan of structured abusive schemes so, despite my reservations about the terminology used, I am pleased to replicate HMRC's list of "a number of indicators of tax planning to be wary of."

The inclusion of one of these features does not necessarily mean that tax avoidance is involved, but the more of these features that are present, the more likely it is that HM Revenue & Customs (HMRC) would see the arrangements as tax avoidance and challenge your self assessment. If you have doubts about a scheme then you should check with a reputable tax adviser.

Tax planning to be wary of:

• It sounds too good to be true.
• Artificial or contrived arrangements are involved.
• It seems very complex given what you want to do.
• There are guaranteed returns with apparently no risk.
• There are secrecy or confidentiality agreements.
• Upfront fees are payable or the arrangement is on a no win/no fee basis.
• The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.
• The scheme is said to be approved by HMRC (it does not follow that this is true).
• Taxation of income is delayed or tax deductions accelerated.
• Tax benefits are disproportionate to the commercial activity.
• Off-shore companies or trusts are involved for no sound commercial reason.
• A tax haven or banking secrecy country is involved without any sound commercial reason.
• Tax exempt entities, such as pension funds, are involved inappropriately.
• It contains exit arrangements designed to sidestep tax consequences.
• It involves money going in a circle back to where it started.
• Low risk loans to be paid off by future earnings are involved.
• The scheme promoter lends the funding needed.

As they say, a good list of factors, most of which should sound warning bells, even more so if more than one or two are present. The challenge for many accountants is that the promoters of such schemes employ excellent sales people who are well versed in convincing gullible clients that it's worth the risks.

Previous relevant blog posts:

• Were you wasting time advocating this tax scheme?
• The beginning of the end for structured tax avoidance schemes?
• Bending vs breaking tax rules
• Tax avoidance is a card game - the metaphors multiply
• Tax avoidance - what are you allowed to do? A simple guide.
• Tax avoidance schemes - a simple guide
• Naive promoters of tax avoidance schemes
• Five facts all accountants need to know about tax avoidance schemes
• Five more facts all accountants need to understand about tax avoidance schemes

Tax truism - our tax system is more complex than it needs to be

On his President's page in the January 2010 issue of Tax Adviser magazine, CIOT President Andrew Hubbard puts his finger on one of the many problems with our tax system that resulted in me choosing to cease giving tax advice myself.

Andrew says, in the specific context of a merger between two large accountancy practices, but referencing commercial transactions generally:

"It is extraordinary how often most of the big commercial issues can be agreed without too many problems, but then some obscure technical issue - which is of course completely impenetrable to all but the tax experts - comes up and threatens to derail the whole process."

I made a similar point as regards more day to day complexities in my Taxation article in 2008. I indicated that I had reached the limit as to the number of times I could explain to clients that:

• despite being law abiding citizens and in principle deserving of a widely available tax relief, their circumstances took them just outside the qualification criteria;
• there were apparently arbitrary distinctions in the tax code and inconsistencies in HMRC practice;
• there is a continued absence of tax rules to reflect the new working practices of the 21st century;
• we cannot appeal HMRC's refusal to apply a concession or statement of practice (as we are 'taxed by legislation, and often only untaxed by concession');
• tax credit claims can only be backdated by three months. Thus if you unexpectedly make a loss in your business, you cannot claim the tax credits to which you would have been entitled if you made a claim (for no credits) at the start of the year, just in case you made a loss;
• there are different rules for computing income for income tax, National Insurance and tax credit purposes;
• bizarre arguments and distinctions are highlighted in tax cases, albeit that I can sympathise with HMRC to a degree when it is evident that clever tax advisers have encouraged their clients to push the envelope.

Any more suggestions for undue complexities?

New tax rules on pension contributions favour Ministers

Bill Dodwell, head of the tax policy group at Deloitte suggests that HMRC's analysis of the tax gap could have a previously overlooked reason for non-collection: "daft law"

Bill makes the point in the January issue of Tax Adviser magazine after referencing the new extension to restricting tax relief for pension contributions in respect of high-earners. He points out this led to a 115 page document to explain how the rules will work and asks, quite reasonably:

"Didn't it occur to anyone that if the chancellor wanted to restrict tax relief, a simple flat-rate amount would be the solution?"

This tax change was announced in Budget 2009 last March and included what were called 'forestalling measures' which led me to write a piece last May: Pension tax changes that hit high earners NOW.

I remain of the view I first expressed last May that the new rules were refined to reduce the potential impact on ministers and civil servants. In effect this is another example of taxing 'real people' without impacting those in power. But it's been done in such a way that Ministers can deny that they are receiving beneficial treatment - unlike the position with MPs' severance payments and MPs' expenses. With the pension tax changes there is no specific exemption - it's just that Ministers and civil servants are among the very few high earners still in final salary pension schemes and are thus unaffected.

Special tax rules for MPs are wholly indefensible in all but the most extreme cases and those who argue otherwise are clearly unaware of what goes on in the real world.

What now for undisclosed offshore bank accounts?

The deadline for admitting the existence of previously undisclosed monies in offshore bank accounts expired on 4 January. Early indications are that the number of reports made to HMRC under the 'New Disclosure Opportunity' were much lower than the taxman had hoped.

If true this will be disappointing for the taxman and for the Chancellor.

What does the future hold for those who were unaware of or chose to ignore the deadline?

HMRC will, at some stage, write to offshore account holders who are resident in the UK and who are not recorded as paying tax on the interest. Such letters could start to appear as early as next month, later this year or at any time in the next few years.

Anyone receiving such letters would be well advised to take professional advice from tax investigation specialists to assist them in negotiating the best possible settlement - or indeed to make HMRC go away if there really is no undeclared taxable income.

The prospective penalties if HMRC identify unpaid taxes will now be at least 35% of the late paid tax. This will be payable in addition to the unpaid tax and interest charges by reference to when the tax should have been paid. The interest can really mount up if the tax liability has been unpaid for some years.

And the 35% penalty is simply the lowest possible charge going forwards. The maximum penalty payable at the moment is 100% of the unpaid tax. And beware: As part of his Pre-Budget report the Chancellor published a consultation document: "Modernising Powers, Deterrents and Safeguards: Tackling Offshore Tax Evasion". This included a note that:

"For periods prior to April 2009, HMRC will view non-compliance involving an offshore element as conduct of the utmost gravity, and will seek penalties accordingly. The maximum penalty prior to the introduction of the new FA 2008 penalties is 100 per cent"

The Document also suggests that:

"a taxpayer seeking to evade tax by failing to declare the existence of an overseas account or the interest arising from it could be subject to two separate tax-geared penalties. In the most serious cases of tax evasion, the sum of these two penalties could reach 200 per cent of the tax evaded."

These new rules could come into effect next year. The deadline for responding to the consultation is 3 March 2010.

The 'New Disclosure Opportunity' (NDO) was the second so-called tax amnesty operated by HMRC in recent years. The previous 'Offshore Disclosure Facility' (ODF) in 2007 raised more than £400m in revenue when offshore account holders with five major UK banks were given the opportunity to put their tax affairs in order. Now HMRC has access to information from more than 300 banks and has assured us that there will be further such tax 'amnesty' as some misleading reports describe the Disclosure Facilities. To an extent the NDO was required as the ODF had insufficient publicity; a mistake HMRC has attempted to avoid this time around.

And just a word about the separate Liechtenstein Disclosure Facility (LDF) which some very wealthy tax avoiders are hoping will allow them to come clean whilst paying less tax. Er, no. The tax and interest charges will be the same as ever. The penalty charges MAY be lower than normal but only if HMRC are satisfied that the undisclosed funds fully satisfy the terms of that Facility.

Previous blog posts on this subject:

• Offshore bank accounts - HMRC warning video
• 5 tax facts and advice if you have an offshore bank account