IR35/ Offshore scheme/ HMRC - potential liability

[pimpernell]

When IR35 came in a lot of freelancers responded to some of the tax planning schemes, offshore or otherwise, that appeared at the time. I was one of them.

I don't want to debate the rights and wrongs of doing this, but I'm sure all of us who did this went through similar thought processes before deciding to do this, weighing the risks. Since IR35 was so unclear (and so apparently unfair), and some of the schemes were advertising attractive returns, were legal in letter, they seemed an easy and attractive solution.

HMRC are now on a drive to close these down, actually quite understandably in my view. Although the only one they have had success with so far, as far as I can gather is the MTM scheme - and others using partnerships and the Double Taxation treaty, this is because they have a hook into a past law made in 1987, that they have now, in their words, "clarified". From the BN66 thread, they seem also to be applying tax penalties retrospectively back to 1987, which is harsh in the least, but as someone said 'they (HMRC) make the rules'. I know this is under judicial review and has been referred to the Human Rights committe.

However, the reality is that UK plc is in pretty bad shape, and Gordie wants to get revenue from wherever he can. They (HMRC) will have a tough job I think, because a lot of the schemes were 'legal'. However the view they are taking is that if the scheme was an 'artificial set up with the express intention of minimising NICs and Income tax' then they are on their target list.

Ok. Preamble over.

What I'd like to know is what are the parameters for the worst case scenario.

I've received a COP 8, and I've trawled the web trying to find out more.

But assuming, for the sake of argument, that the following will happen at some time in the future, after due legal process:

• Such schemes will be deemed as 'tax avoidance' and will be closed down.
• HMRC will apply tax to individuals involved in them retrospectively

And assuming that the scheme providers generally disappear and the likes of you and I (UK freelancers) are left carrying the can. (That's about the worst case scenario that I can think - let me know if there's any more).

How far back can retrospective tax be applied? I've read that its to 2/12/2004. Is that correct?
Can they go back further than that? I know about the 6 year rule, but I think the Paymaster general has said that 2/12/2004 is a backstop. Does anyone know?
Will penatlies and interest be applied from the date of a ruling from some hypothetical future date if HMRC success in court, back to then? So the longer this goes on (and it could be years until these are settled in court) the more punitive the interest and penalties that can be applied?

Forget the morality/ legality argument. My view is that if HMRC can, they will, and indeed they're trying to.

I want to work out a strategy to counter my worst case. It seems that at the inconvenience of tying up money in a CTD (certificate of Tax deposit) I could at least nuillify interest, and if I do that now then interets would only be applicable until now from 2/12/2004.

But I'm really not clear. I know I'm not the only one affected. There may be others out there who haven't had a COP8 yet, and who are taking the ostrich approach to this. I guess whet i'm asking I could ask a tax specialist for but they're expensive, and my feeling is that HMRCs drive could affect a lot of people. It would be good to get some concrete information, about this on a forum.

[malvolio]

This is HMRC and a Brown governemtnwe're talking about. There are no clean answers...

The danger of BN66 is that it is framed in such a way as to make it retrospective, so in theory any tax charges that arise from it can go back to when the original law was made in the mid 80s. Clearly interest will be applied ( I bkleive it has to be, legally), but penalties may be waived (or may not; again, who knows?). Clearly this has not yet been resolved and won't be for a while yet,

However if a scheme is closed by a new law, as most will have to be, then they can't apply it retrospectively; it takes effect from the relevant budget date going forward. Why else are HMRC pushing voluntary declaration schemes if not to get tax in ahead of any compulsory changes...?

[Fred Bloggs]

As far as I can see the only risk free fool proof way is to leave the stinking cess pool that the UK has become, forever.

[xoggoth]

But how does that fit with the general rules, coming in soon, that liability is limited to 4 years if there is no fraud or carelessness? If you accepted advice from bona fide companies who supplied schemes based on proper legal and accounting wisdom at the time how could you be called careless?

[malvolio]

But how does that fit with the general rules, coming in soon, that liability is limited to 4 years if there is no fraud or carelessness? If you accepted advice from bona fide companies who supplied schemes based on proper legal and accounting wisdom at the time how could you be called careless?

We won't know that until someone goes to court. The rules may be clearly stated on the face of it, but as with everything this bunch of dimwits do, key elements are left to subjective assessments.

[Fred Bloggs]

I have a feeling that scheme promoters will have long left the reach of the UK authorities and will be sipping pink gins on the beach in Panama or some other untouchable location. Leaving the poor contractor to pay for the mess.

[pimpernell]

BN66 is an exception, I believe, in as much it was based on interpretation of a decree passed in 1987. Rightly or wrongly, HMRC are saying that "no you (the scheme provider) interpreted that legislation incorrectly, you were wrong, so any beneficiary is liable to tax and NI. So now cough up. Whether they get away with this or not will bedecided in court, I understand at the turn of the year.

Other schemes which aren't caught by this particular piece of legislation or wording are more open to question. Although 'legal' at the time, there's no mistaking the declaraion by HMRC that if the scheme was an aritificial construct, then they will classify it as 'tax avoidance' whaetever the rights and wrongs of their argument.

It may be true that until schemes are brought to court, the actual outcome won't be known. And it may be true that HMRC won't be able to claim tax retrospectively, and until this happens , we're all rather in the dark.

What I'm interested in though is worst case scenario.

I think HMRC in the guise of the paymaster general have said that a backstop for retrospective taxation, for any case they win, would be 2/12/2004. See extract below:

This Bill takes forward the Paymaster General's Pre-Budget Report 2004 announcement that the Government would be prepared to act against tax and National Insurance Contributions avoidance involving employee remuneration. (Written Ministerial Statement made on 2 December 2004 - see House of Commons Hansard Vol. 428 Col 45 WS). The Bill provides for a power to make regulations in respect of National Insurance Contributions ("NICs") that reflect retrospective tax changes that take effect on or after 2 December 2004. Existing NICs legislation does not allow regulations to be made which can take effect that far back. The powers allow for NICs liability to be changed back to 2 December 2004, if necessary. They also allow for consequential changes to contributory benefit and statutory payments where appropriate. This power will be used in the first instance to reflect the employment-related securities anti-avoidance provisions included in Schedule 2 to the Finance (No.2) Act 2005, which received Royal Assent in July 2005 but which took effect from 2 December 2004.

What I'm trying to establish is whether worst case, 2/12/2004 is as far back as HMRC can go (aside from BN66 which as I said is a special case). From the above it seems to be, but if I want to plan for the 'knock on the door', I'd like some certainty.

[pimpernell]

This is HMRC and a Brown governemtnwe're talking about. There are no clean answers...

The danger of BN66 is that it is framed in such a way as to make it retrospective, so in theory any tax charges that arise from it can go back to when the original law was made in the mid 80s. Clearly interest will be applied ( I bkleive it has to be, legally), but penalties may be waived (or may not; again, who knows?). Clearly this has not yet been resolved and won't be for a while yet,

However if a scheme is closed by a new law, as most will have to be, then they can't apply it retrospectively; it takes effect from the relevant budget date going forward. Why else are HMRC pushing voluntary declaration schemes if not to get tax in ahead of any compulsory changes...?

To be honest, UK plc is so cash strapped, I wouldn't be relying on Cameron do repeal or slacken any of the current HMRC drive. Apart from anything else, from the stats I've read, they've successfully gathered £11bn in tax from clamping down, so continuing with this is a no brainer for any government

[centurian]

BN66 is an exception, I believe, in as much it was based on interpretation of a decree passed in 1987. Rightly or wrongly, HMRC are saying that "no you (the scheme provider) interpreted that legislation incorrectly, you were wrong, so any beneficiary is liable to tax and NI. So now cough up. Whether they get away with this or not will bedecided in court, I understand at the turn of the year.

What you state is correct - however it is only an "exception" in that it is the first time they have tried it.

If they are successful, they may decide to tighten IR35 and apply it retrospectively on the basis that they believe the original legislation was clear and we simply interpreted it wrong.

I still don't understand how retrospection can go back more than 6 years though. Perhaps one of the BN66 experts can explain this. Mind you, 6 years will still hurt.

[pimpernell]

What you state is correct - however it is only an "exception" in that it is the first time they have tried it.

If they are successful, they may decide to tighten IR35 and apply it retrospectively on the basis that they believe the original legislation was clear and we simply interpreted it wrong.

I still don't understand how retrospection can go back more than 6 years though. Perhaps one of the BN66 experts can explain this. Mind you, 6 years will still hurt.

Don't see how they can apply anything retrospectively to IR35 since there's been so many court cases already, and according to PCG at least their (HMRC) success rate is pretty limited. Now that would really would be worst case, and would potentially affect every freelancer in the UK.

I can see them wanting to hammer schemes and people involved in them, though. Tax avoidance is anathema to HMRC. They see it as just that - avoidance - i.e. not paying your share of tax. Teachers, nurses and people on PAYE all have no choice, because tax and NIC is taken direct at source. As freelancers because we receive our income gross it's not, so you can see why they (HMRC) are so suspicious. And we live alongside people on PAYE as part of the community. It's socialist doctrine, as oppose to 'every man for himself'. Whatever your personal politics.

It's now been amplified for them by the disclosure rules in 2004, the fact that IR35 sent so many people scurrying (myself included) and in particular current chronic state of the economy.

BTW - i don't work for HMRc, just in case you're wondering.