IR35 vs Tax Schemes

[ChimpMaster]

In addition to the points made above, it's worth reviewing HMRC's Spotlights website. The use of loans as a tax avoidance measure is discussed there, along with HMRC's plans to systematically review/investigate numerous schemes - the purpose of which is to close them down and retrieve taxes/penalties from individuals.

This could be seen as 'retrospective' from an individual's point of view i.e. the individual joined the scheme in good faith, received tax-free (or low tax) payments for many months/years, but will now be asked to pay tax on them by HMRC.

[malvolio]

I don't agree with this either.

HMRC can't amend regulations in the way you suggest, making certain income liable to PAYE and NIC.

They can either ask a Court to decide if some existing piece of legislation applies or they can ask the Government to introduce a provision/measure in a Finance Bill.

Anything that ends up in a Finance Act, enacted by Parliament, is a new law.

BN66, as in Section 58 Finance Act 2008, was a new law.

I'm not getting into the Monpelier case here,., thjre's enough of that elsewhere. But the whole point of that case is that it is not a new law, it is a clarification of the original law, which is why HMRC claim it isn't retrospection. It's up to the MP case to prove how right or wrong they are, and I promsied to keep out of that debate.

But saying they will legislate in the next budget and such legislation will be effective from today's date - the so-called anti-forestalling provision - is not retrospection. If the decide to treat loan income as taxable, they won't give yuo any warning, they'll simply announce it and firm up the legislation at the first opportunity.

[DonkeyRhubarb]

it is a clarification of the original law, which is why HMRC claim it isn't retrospection.

I think things have moved on from this.

Have a read the Result of the Court of Appeal judgment.

Huitson, R (on the application of) v HM Revenue and Customs [2011] EWCA Civ 893 (25 July 2011)

Result

93. I would dismiss this appeal. The judge was not wrong to conclude in his comprehensive, clear and excellent judgment that the retrospective provisions of the 2008 Act are proportionate and are compatible with Article 1. There are no grounds which would entitle this court to disturb it.

94. In the circumstances of this case, the liability of the claimant under the retrospective legislation of s.58 to pay the UK income tax that he would have had to pay, if he had not participated in the tax avoidance scheme, is no more an unjustified interference with his enjoyment of his possessions than the ordinary liability that his fellow residents in the UK are under to contribute, by way of UK tax on their income, towards the costs of providing community and other benefits for the purposes of life in a civil society.

95. In summary, the crucial points on examination of all the relevant circumstances of this case are that the retrospective amendments were enacted pursuant to a justified fiscal policy that was within the State's area of appreciation and discretionary judgment in economic and social matters. The legislation achieves a fair balance between the interests of the general body of taxpayers and the right of the claimant to enjoyment of his possessions, without imposing an unreasonable economic burden on him. This outcome accords with the reasonable expectations of the taxation of residents in the State on the profits of their trade or profession. The legislation prevents the DTA tax relief provisions from being misused for a purpose different from their originally intended use. There has been no conduct on the part of the State fiscal authorities that has made the retrospective application of the amended legislation to his tax affairs an infringement of his Convention rights.

No mention of the word "clarify". It is now a retrospective amendment (ie. change in the law!).

If it quacks like a duck...

[malvolio]

I think things have moved on from this.

Have a read the Result of the Court of Appeal judgment.

Huitson, R (on the application of) v HM Revenue and Customs [2011] EWCA Civ 893 (25 July 2011)



No mention of the word "clarify". It is now a retrospective amendment (ie. change in the law!).

If it quacks like a duck...

Yes. I read that at the time. The law is not being enacted retrospectively, the application of the changed reading of the law is. End result is the same, of course, and obviously I hope the ultimate appeal is successful, but it's not the same thing as creating new legislation and making it retroactive.

[Jerry]

If you go Ltd you'll never face bankruptcy as a result of unpaid tax, or at least it is highly unlikely.

Is this correct? I'm not sure it is.

Say you pay yourself dividends and salary, as most ltd coers do. Then you are found to be a "fail" in terms of IR35 and a large backdated tax bill arrives from HMRC. I think i am right in saying that this is actually a company debt, rather than an individual debt, but that if the company cannot pay, HMRC can and will pursue the individual director? In which case bankruptcy is a real possibility.

The other point i'd like clarity on is another comment made to the effect that only the last year's tax return can be investigated by HMRC. My understanding is that if they suspect an error has been made by the taxpayer (suspect is a very broad word) then they can go back six years.

I run a Ltd Co and it is a constant worry to me. But then employment tax can be just as bad. My Christmas present was a bill for £1500 and interest of £3500 from the Norwegian tax authorities for underpaid tax on money i earned as a permanent employee 13 years ago. They say that as they calculated and demanded the tax then, it is due, although they admit they only obtained my address from the UK authorities last year, twelve years after the year i left the country! My guess is the amount due has crossed some threshold that they are now pursuing.

Tax has become a powerful disincentive in my view. Everyone lives in fear. Errors in underpayment made by HMRC mean even low earners have reason to be frightened these days.

[malvolio]

AIUI...

Investigations can be triggered on last year's returns. If a problem is found, they can then check the previous six year's accounts. If fraudulent activity is suspected, there's no actual limit but practically speaking they can go back 20 years. If a company incurs a debt it can't pay, they can make it bankrupt (and so disqualify its directors) but can't then recover the money from the directors. If it can't pay as a result of illegal activities by its directors such as taking tax liabiities out as income, then they can prosecute the directors personally and recover the money any way they can, including seizing assets

So YourCo provides a fair degree of protection unless you deliberately break the rules. Which is why I keep saying that we need to pay attention to the little things like expenses as well as the biggies like carousel frauds.

[Incognito]

The only things which trump Parliamentary supremacy is the Human Rights Act and the European Treaty, both of which are being contested in the BN66 case (Huitson -v- HMRC and Shiner -v- HMRC).

Nothing trumps Parliamentary sovereignty. EU law is only directly applicable in the UK by means of the European Communities Act 1972. Parliament could legislate tomorrow to change that if it so wished. Whether or not the Courts would accept that would be a constitutional debate and would consider things like whether the populace had been consulted (referendum) or if Parliament had a sufficient majority (say 70%+) that it clearly demonstrated that it had the will of the people (i.e. the electorate). Again the same argument is made surrounding the HRA. Although it is worth noting that the HRA is actually the enabling act for the ECHR within UK law. Parliament has the power to derogate from certain Convention rights in time of emergency and interestingly from a legal point of view, because the HRA doesn't actually enact Article 15 of the ECHR (which is the source of the derogation powers) then it is questionable whether a UK Court could even consider the validity of a derogation order.

[Incognito]

No mention of the word "clarify". It is now a retrospective amendment (ie. change in the law!).

If it quacks like a duck...

I believe it has always been referred to as being retrospective:

Jane Kennedy: I am grateful, Lord Lamont of Lerwick.

I am satisfied that in these unusual circumstances, retrospective clarification of the law is fair, proportionate and in the public interest. That is the human rights test that we must apply.

House of Commons General Committee

You are confusing the word Amendment with Change though. S.58 of the Finance Act 2008 amended the previous legislation by clarifying the law as it stood at the time, i.e. the previous legislation was amended by the insertion of subsections 1-3, however it was only clarifying the law.

Your argument is that S.58 of the Finance Act 2008 amended the previous legislation by changing the law as it stood at the time, i.e. the previous legislation was amended by the insertion of subsections 1-3, and in doing so it has changed the law as it stood back then.

[BlasterBates]

Is this correct? I'm not sure it is.

Say you pay yourself dividends and salary, as most ltd coers do. Then you are found to be a "fail" in terms of IR35 and a large backdated tax bill arrives from HMRC. I think i am right in saying that this is actually a company debt, rather than an individual debt, but that if the company cannot pay, HMRC can and will pursue the individual director? In which case bankruptcy is a real possibility.

The other point i'd like clarity on is another comment made to the effect that only the last year's tax return can be investigated by HMRC. My understanding is that if they suspect an error has been made by the taxpayer (suspect is a very broad word) then they can go back six years.

I run a Ltd Co and it is a constant worry to me. But then employment tax can be just as bad. My Christmas present was a bill for £1500 and interest of £3500 from the Norwegian tax authorities for underpaid tax on money i earned as a permanent employee 13 years ago. They say that as they calculated and demanded the tax then, it is due, although they admit they only obtained my address from the UK authorities last year, twelve years after the year i left the country! My guess is the amount due has crossed some threshold that they are now pursuing.

Tax has become a powerful disincentive in my view. Everyone lives in fear. Errors in underpayment made by HMRC mean even low earners have reason to be frightened these days.

You can insure yourself against IR35 investigations, and even if you don't have insurance there is a huge difference between a bill for unpaid income tax and NI and just NI.

That's a typical argument from the scheme managers, since you have to run the NI gauntlet why not go the whole hog. Well I don't know any contractors who've fallen foul of IR35 but I know quite a few who have or are facing huge bills because they were in a scheme.

[BlasterBates]

Is this correct? I'm not sure it is.

Say you pay yourself dividends and salary, as most ltd coers do. Then you are found to be a "fail" in terms of IR35 and a large backdated tax bill arrives from HMRC. I think i am right in saying that this is actually a company debt, rather than an individual debt, but that if the company cannot pay, HMRC can and will pursue the individual director? In which case bankruptcy is a real possibility.

The other point i'd like clarity on is another comment made to the effect that only the last year's tax return can be investigated by HMRC. My understanding is that if they suspect an error has been made by the taxpayer (suspect is a very broad word) then they can go back six years.

I run a Ltd Co and it is a constant worry to me. But then employment tax can be just as bad. My Christmas present was a bill for £1500 and interest of £3500 from the Norwegian tax authorities for underpaid tax on money i earned as a permanent employee 13 years ago. They say that as they calculated and demanded the tax then, it is due, although they admit they only obtained my address from the UK authorities last year, twelve years after the year i left the country! My guess is the amount due has crossed some threshold that they are now pursuing.

Tax has become a powerful disincentive in my view. Everyone lives in fear. Errors in underpayment made by HMRC mean even low earners have reason to be frightened these days.

You can insure yourself against IR35 investigations, and even if you don't have insurance there is a huge difference between a bill for unpaid income tax and NI and just NI.