13 Questions you MUST ask about any scheme you are offered
The following is based on a piece originally written by and now replicated with kind permission of Jolyon Maugham QC and first appeared on the waitingfortax blog in 2014. I have shortened it and consequently any errors are mine.
Contractors as a population are seen as easy prey by some who continue to tell you that 90% of your invoice value in your pocket is risk free, 100% compliant, QC approved. The following is a good checklist of questions to ask of any adviser, professional or otherwise, who suggests that you might like to use one of their products.
These questions are designed for you – and not for your adviser – to apply. You should discuss them with your adviser – but you should also try and form your own view. Ask the following questions of the person putting the proposal to you, either YOUR adviser or the scheme provider.
1. Is there a DOTAS number that I will have to put on my tax return? If there is a number that is a strong indicator of high tax risk. If there is no DOTAS ask why not and to see any advice saying it's not required.
2. Is there a promoter reference number for your transaction? Transactions with promoter reference numbers will have been devised by those identified by HMRC as more likely to be engaged in high risk behaviour.
3. Is there a page on HMRC’s website (Spotlight) that deals with this type of transaction? If the Adviser cannot direct you to where the transaction is addressed in HMRC's Manuals it may indicate a higher tax risk.
4. What fee are you being asked to pay? If you are asked to pay a fee calculated by reference to tax saved, that can be an indicator of high tax risk. If your fee is calculated by reference to your adviser’s reasonable hourly rate, that can indicate a lower tax risk. If your adviser is happy to work on either basis, again, that can indicate a lower tax risk.
5. Are you asked to keep the details of the transaction confidential, or sign a Non-Disclosure Agreement? The confidentiality in your tax affairs is generally yours to keep – or waive – and not your advisor’s. If your advisor asks you to keep details of the transaction confidential that may well indicate that the transaction is being sold to others and is a strong indicator of high tax risk.
5A. If you have an existing tax adviser, is he or she putting the transaction together for you – or is your existing tax adviser working with someone new? If it’s the latter, and he or she is going to be paid a commission for your involvement, this creates a potential conflict of interest for your adviser. You should discuss with your adviser whether he or she would be prepared to rebate the commission to you and be paid on his or her normal charging basis. If your adviser is not prepared to do this, this may signal high tax risk.
Why are you transacting – and why are you transacting in this way?
6. Does your transaction advance a non-tax (i.e. either a commercial or a personal) objective? If your only purpose in transacting is to achieve a tax benefit, this is a strong indicator of high tax risk.
7. Is the attractiveness of the transaction a consequence of the tax benefits it delivers? If you would transact without the tax benefits, that is a strong indicator of low tax risk. If you are transacting in part for the tax benefits you may wish to pay particular attention to badges 3 and 11.
8. If your transaction has a non-tax objective, does the manner in which you are carrying out that transaction seem like a natural or obvious way to achieve that objective? Most transactions structured in a natural or obvious way will attract the tax treatment Parliament intends. A transaction which seems overly complicated to achieve a particular non-tax objective, or a transaction which contains steps which do not serve an obvious purpose, indicates higher tax risk.
9. Does the shape of the transaction give you a better tax result than another economically equivalent transaction? What are the tax consequences of achieving your objective through a different route? A transaction that involves you paying less than the maximum amount of tax has some tax risk but a transaction that is tax maximising has none.
10. Does the shape of the transaction advance your pre-tax objectives? If both the transaction and its shape are dictated by your non-tax objectives that is a strong signal of low tax risk.
In tax, as with other things, there is rarely such a thing as a free lunch. The difference between ‘good’ and ‘risky’ tax planning is very often whether Parliament intended the tax result your transaction delivers. So, you should ask yourself:
11. Is it likely that Parliament intended this tax result? It is useful to ask this question alongside 3. above: if Parliament did intend it, it is very likely HMRC’s website will say so.
12. Are you being taxed on the economic or ‘real’ transaction that you entered into – or do the tax consequences attach to some other transaction? If you are being taxed on a transaction that differs from the ‘real’ transaction that is a strong signal of high tax risk.