Discovery assessment season - unexpected bills from HMRC

[Clairol]

My personal view is that these so called "plans" will put you in a much worse position as far as the April 2019 loan charge is concerned. That may not be what you want to hear. But I think that is a very fair assessment. And I've put "plan" in quotes as not even Baldrick would call them any of them one.

In short, there are at least three reasons for that:

1. HMRC have included a lot of targeted anti-avoidance legislation that stops "plans" that try to side step the rules working. They are updating these when they hear of new "plans". My view is that these "plans" never worked in the first place but it's like HMRC are double underlining some stuff to make sure people can see it doesn't work. I would also expect that HMRC get feedback on the dodgy schemes that people try to promote to them.

2. HMRC have a lot of information on who has these loans. Clearly they have this for open years but they will also have some information for other years. They have also substantially beefed up what individuals with loans have to tell them after April 2019 (and this will mean that they get more information to follow up with). Every time there is a settlement for a scheme that they had no information on, they will add it to their list and find out more.

3. The general anti-abuse rule (GAAR) is in place. This basically says that if you try to do something that gets around this type of legislation then it is ignored. There are now penalties of 60% of the tax that you avoided where GAAR applies. This is a serious piece of legislation with scary consequences. I am seeing HMRC start to ask people about the implications of these rules in my day job.

I am not aware of any firm suggesting that their clients enter into a "plan" to get around the 2019 loan charge. By "any firm" I mean any firm that I know the name of (and I believe that I am reasonably well connected). My expectation is that any firm that is publicly named would get reported by HMRC to their regulator under the "Professional Conduct in Relation to Taxation". There will of course be many unnamed firms on internet forums who are described as "reputable" who have "plans" but that is a bit like having a chocolate teapot.

In the "good ol' days" there was very little downside of taking part in a tax avoidance scheme (other than eventually having to pay the tax if it didn't work, fees for implementing it, interest on late tax and the mental hassle of HMRC challenging them). That is not true with the April 2019 loan charge. A 60% minimum GAAR penalty and accelerated payment notices (pay now, argue in court in five years time), together with penalties for misreporting and the risk of what you having been told as being "QC approved" is actually a sham or fraudulent.

I think that there is also some confusion about the implications of settling old loans. If tax is paid on the loans (e.g. in respect of open or closed years) then the April 2019 loan charge won't apply. Similarly, if you agree payment terms for historic years with HMRC then the April 2019 loan charge won't apply. The existing legislation is very clear and HMRC have made clear that there is no intention of double tax. More details on settling are being published by HMRC later this year but there is nothing to stop you approaching HMRC now.

The only plan I know that means that there is no April 2019 tax charge is to repay the whole of the original loan (assuming it was not made in a depreciating currency). But that will cost you more than the tax and so in a contractor-type of situation is just silly. Also, it won't change the position for open years and so is even more silly. And if the promoter of the "plan" arranges finance or there is some "plan" to get your money back later then that either creates another tax charge or means an extra 60% GAAR penalty on top of the tax (and any normal penalty on the tax). But don't worry, total penalties are restricted to 100% of the tax (and you pay the tax and interest on late tax).

To give you an example of the kind of "plan" I have seen:

1. You become an employee of the trustee that lends you money. That was said in a public conference by a barrister and HMRC changed the draft legislation to make clear it didn't work.

2. The trust buys an "option" that is almost certain to lose money equal to the outstanding loan (like anyone in the real world would!). You buy a "bet" that is almost certain to "win" money equal to the loan (but no one in the real world would "bet" with you on these terms). So the only "net" winner here is the people charging fees. You "win" and "because it is a bet it is tax-free". You use the money to repay the loan to the trustee. The trustee uses the cash from that to pay the loss on its option. If it accidentally goes wrong (i.e. the trustee wins and you lose) you double your money and do it again (and again, and again until you win). HMRC did not think about changing the legislation for this. In fact, I think I heard that a couple of guys in the policy team had to go to hospital because they broke their ribs laughing so much. And just in case you (and the trustee) are tempted to go to Ladbrokes to have a go at this, you may want to think about how many lots of tax you will have to pay (ignoring the penalties its potentially many multiples of just paying the tax) because it does not work.

So while I sympathise with your position, I think that it is safe to assume that none of the "plans" will actually work.

Thank you so much for this comprehensive response.
I have already decided against the Baldrick style plan on offer from the original scheme provider. I understand it’s time to pay up.

I was more interested to find out if there is any benefit from employing a tax advisor to talk to HMRC on my behalf. Do they ever negotiate on settlement figures? Is a tax advisor going to find any legitimate ways in which I can reduce the tax liability? Is that why so many people are in BIG Group - because they expect to negotiate a discount?

If not I may as well talk to them directly. I have all the figures. Or is that a really stupid thing to do? Am I going to get ripped off again? Lots of people on these threads talk about how untrustworthy the HMRC employees are and I have to say I have found them threatening.

And another thing. It’s only because I contacted HMRC that I found out about the open years. Why hadn’t I been informed about the open years back in the mid 2000’s or subsequently when they were deemed open? All the interest has been accruing but we knew nothing about it. Do we have any recourse on this?

Many thanks for your help peeps.

[Clairol]

Clairol, many people are confused and unsure of how to proceed. HMRC's rhetoric and lackadaisical attitude on this subject have been the cause of the ambiguity over the past 15 years or so. Not to mention their time machine.

But now HMRC have made it very clear and very simple. To repeat what I said in another thread:

All reports post to April 2019 loan charge becoming law.

One way or another the tax will have to be paid.

So if you're not sure what to do now, just wait until 2019 and pay the tax then.

I think waiting, unless one has done the maths, is very dangerous. Certainly for me this will increase the tax liability by mega bucks. The question is when to pay before 2019 and how.

[Iliketax]

I was more interested to find out if there is any benefit from employing a tax advisor to talk to HMRC on my behalf. Do they ever negotiate on settlement figures? Is a tax advisor going to find any legitimate ways in which I can reduce the tax liability?

I don't do contractor loans stuff with HMRC so other people will be better placed to answer. From my perspective, there would seem to be a few angles to this:

1. What is the "right" technical basis for settling? With a contractor loan, I'd guess that is relatively straightforward and well trodden ground. So the reality there is probably little scope for changing the technical basis to try to create a lower liability. Also, you have to understand the various technical arguments and so that means you would need to get a tax adviser. To try to explain what I mean on this. If you were just an employee and got a loan from a trust there are a couple of answers (e.g. the loan was "really" wages, or the money paid to the people who gave the loan (i.e. the loan amount plus their fee) was "really" wages - obviously the first view gives a lower liability). Extend the example a bit and say you were an employee and a shareholder of the company and you may be able to argue that they were "really" dividends. Is that a sustainable technical argument? Does it create a lower liability? One of the advantages of a tax adviser here would be if they have a lot of experience of advising on this type of things, know what has previously been agreed with HMRC and what hasn't been agreed. I would not go to a high street accountant for this type of thing without being completely sure that they actually do this for a living.

2. Will they 'split the difference'? If I buy a car from a dealer I always get a discount. I'll say I prefer the red one that the dealer down the road has and I'm not worried about the higher mileage and say that the cheaper one suits me. Once I think we are getting close to a final price then I'll ask them to split the difference between their price and my price. There is no logical reason for that, other than it getting the price down. My experience is that HMRC will not do this in any way shape or form. If you can come up with a factual or technical argument to reduce the amount due (that's a typo, my loan was actually £10,000 not £100,000 or my point 1 above) then they may or may not accept it. But they won't haggle about the amount you owe.

3. Time to pay. I don't get involved in this but I understand that HMRC do give time to pay where there is genuine hardship. People like TaxAid may be able to help here: What if I can’t afford to pay? « TaxAid My understanding is that it is better to approach HMRC earlier rather than later about this.

If not I may as well talk to them directly. I have all the figures. Or is that a really stupid thing to do? Am I going to get ripped off again? Lots of people on these threads talk about how untrustworthy the HMRC employees are and I have to say I have found them threatening.

I have a lot of experience of working with people at HMRC (I don't work at HMRC and have never done so). I personally find all the people I have dealt with trustworthy. Most, I completely respect for what they do, even if I don't agree with what they are saying (from a policy or technical perspective). I can think of one person out of about 60 people there I know (who I think is completely honest and a very nice person) but who I think is absolutely wrong on almost everything he tries to argue (from a technical perspective). But I have not come across anyone at HMRC who I think is untrustworthy. Again, for my day job I do not deal with contractor loans. I also understand the frame of reference that the people at HMRC are using and so if they stick to the frame of reference then that is fine by me.

If you are the taxpayer though talking to someone at HMRC who wants your money, doesn't understand your facts, you don't understand their frame of reference or the tax legislation and they don't understand why you just can't write a cheque for £x,000 then I can understand that. Similarly, I can understand why you might think of that if the promoter of a scheme that you trusted tells you something that is contradicted by HMRC then that does make them sound untrustworthy (yeah, it works, HMRC have approved it for years - https://www.gov.uk/guidance/income-t...g-spotlight-40 - and then HMRC say that that is completely wrong and, by the way, the law was changed to make that completely clear a few years ago).

There is also the situation where the government has genuinely introduced retrospective legislation (google BN66), Some people also say that the April 2019 loan charge is retrospective. It is definitely not retrospective in the way that BN66 is. But it is retrospective if you think that what the promoter told you when you got your loan was completely right. One trouble with the tax system is that the court process can be a very slow way of knowing what is "right".

And another thing. It’s only because I contacted HMRC that I found out about the open years. Why hadn’t I been informed about the open years back in the mid 2000’s or subsequently when they were deemed open? All the interest has been accruing but we knew nothing about it. Do we have any recourse on this?

Again, not my area but I would expect that HMRC will have sent a letter about those earlier years. You could always ask them for a copy.

[vern19]

What about the situation where a contractor settled for 1 year. HMRC offered a settlement where they agreed earlier years were out of scope and agreed to a contract settlement. I thought a contract settlement was legally binding. Can 2019 loan charge override this?

[jbryce]

I was more interested to find out if there is any benefit from employing a tax advisor to talk to HMRC on my behalf. Do they ever negotiate on settlement figures? Is a tax advisor going to find any legitimate ways in which I can reduce the tax liability? Is that why so many people are in BIG Group - because they expect to negotiate a discount?

Have you joined Big Group? There's a wealth of information on there, and you can also speak to Graham directly.