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Tax evasion, tax avoidance, tax planning – what’s the difference?

David McManus

David McManus | Personal Tax Manager

Thursday 28th Mar, 2019

This year’s Spring Statement from the Chancellor of the Exchequer was rather overshadowed by Brexit but hidden amongst the various promised consultations appeared an HMRC report titled ‘Tackling tax avoidance, evasion and other forms of non-compliance’.

We thought we’d share with you our view as to where we are now and where HMRC are planning to go next.

Let’s begin by explaining what’s meant by tax evasion, tax avoidance and how they differ from tax planning, along with what non-compliance looks like.

In the broadest sense tax evasion involves cheating the taxman by committing fraud or not paying taxes through activities such as; deliberately not disclosing any or all taxable income, never being registered on the tax system and so on.

Over the last 20 years the lines of distinction between tax avoidance and tax evasion have become blurred. What was once seen as every taxpayer’s right to arrange his or her financial arrangements to minimise their tax liabilities is now seen as being almost unacceptable. There is no doubt that the scale of tax avoidance has grown exponentially. Hence the Government and Tax Tribunals have taken the view that anything which appears to thwart the intention of the tax legislation passed by Parliament will not succeed.

So, what is non-compliance?

The term non-compliance means failing to meet some of the basic requirements of the tax system like filing Tax Returns and business accounts on time, ensuring that those Returns are accurate and paying the correct amount of tax on time. For recruitment agencies this also involves meeting the considerable compliance challenges of the Intermediaries legislation.

The Government’s stated aim has always been to narrow what it calls the ‘tax gap’. That’s the difference between the tax the Exchequer believes should be paid and what it actually collects.

There is no doubt that HMRC’s ‘Strategic Picture of Risk, mentioned in the report is helping to drive a number of new initiatives. The data intensive, analytical and business insight it is gaining from increasing investment in technology is enabling HMRC to focus on a range of business sectors where there is a perceived risk to tax revenues. The report itself lists 156 different measures announced in both Budgets and Spring/Autumn Statements since 2010 to combat evasion, avoidance and non-compliance.

HMRC have already issued big tax settlements

Of particular concern to the contracting industry is the introduction in April 2019 of the controversial Loan Charge which will impose severe penalties on those who entered into historical contractor loan schemes and who haven’t already taken steps to settle with HMRC.

The sums of tax involved in these settlement cases are truly eye-watering because HMRC has succeeded in something of a first by way of retrospective legislation – going back as far as 1999 to recalculate tax liabilities.

For many contractors caught up in these types of arrangement, many of which involved offshore schemes, it has been a bitter pill to swallow given that they were persuaded to join, at the time, because the arrangements were not seen as being tax avoidance. The less sympathetic, including HMRC, take the view that if something seems too good to be true, then it probably is!

Even now however, loan replacement schemes are being marketed to contractors for ways around the Loan Charge – for an appropriate fee of course! HMRC have already given notice that these schemes don’t work and scare tactic or not, the huge weight which they will inevitably bring to bear to defeat the arrangements should not be underestimated.

HMRC are committed to stamping out tax evasion

The Government has committed to provide further funding for HMRC to continue the crack down on tax evasion. The report outlines the steps it has taken to tackle VAT fraud by overseas sellers through online marketplaces.

In common with many governments the UK is very active in the exchange of information with overseas tax jurisdictions through what is known as the Common Reporting Standard and international collaborative attempts to increase the transparency of tax havens worldwide.

The report emphasised the ongoing vigilance and pre-emptive action which would be taken to combat tax avoidance through the use of offshore arrangements. It is clear that this is an area of which we can expect to see and hear more as each Budget is written. Even now with the General Anti Abuse Rule (G.A.A.R.) and the Targeted Anti Avoidance Rule (T.A.A.R.) they can bring some pretty heavy weapons to bear already.

HMRC’s report emphasises the intent of the Government to put compliance at the forefront of its tax strategy.

Know your supply chain

There are serious lessons for everyone in the recruitment supply chain because of the close reliance of its constituent parts to do the right thing to avoid tax liabilities passing along the chain to agencies, providers and clients.

However it is not practical for recruitment agencies to investigate every single scheme or provider used by contractors. This is why many recruitment companies are now choosing to operate an Approved Supplier List (ASL) or smaller Preferred Supplier List (PSL) for their accountancy and payroll providers.

The subject areas commonly covered in a recruitment company’s initial examination of a prospective applicant for its PSL include:

  • Relevant awards and accreditations held, such as Professional Passport or FCSCA;
  • How the employment status of a contractor is determined;
  • What ID and right to work checks are conducted;
  • What audit processes exist around IR35 and SDC;
  • Whether the applicant is subject to any ongoing or recently concluded HMRC investigations, the subject matter and outcomes.

However a PSL list set up, a recruitment company should not rely solely upon the satisfactory completion of a compliance checklist by its prospective provider. The recruitment company needs to audit and verify the statements or answers and satisfy itself that there is evidence to back up the provider’s assurances. The saying that ‘a chain is only as strong as its weakest link’ is a truism but it should be at the forefront of an agency’s approach to partnering. It is clear that working with providers who can demonstrate a track history of resilient and compliant processes is absolutely essential to avoid exposure to the tax liabilities of others.

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Related article - Creating a PSL

Managing a large number of suppliers can be inefficient for any business, because every supplier has different processes and diverse working practices. The recruitment world is no different.  

At the end of the day, supporting an agency's core activity effectively requires any partner selected to provide truly great service. The reality is that umbrella and accounting providers can have vastly different approaches to supporting contractors and agencies.

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