Taxpayers could face years of backdated charges because HM Revenue & Customs is failing to indicate whether or not certain disclosed tax-efficient schemes are legitimate.
Since 2004, any scheme used to mitigate tax has had to be reported to the Revenue. It is thought that thousands of disclosures have been made so far. These include innovative schemes aimed at reducing tax liabilities on inheritance, income and capital gains.
But accountants say that once the schemes are registered with the Revenue their clients are being left in the dark as to whether they are considered illegal or not, leaving the door open to potential future liabilities.
Derek Murphy, partner at UHY Hacker Young, the accountancy firm, said the Revenue might delay looking at a scheme until enough money was going into it to make an investigation worthwhile. In the worst case scenario, a scheme could be ruled to be unacceptable years after it was set up, and the Revenue could charge backdated tax, with interest.
“It is extremely unfair to put taxpayers in a position of total uncertainty,” said Mr Murphy. “This is preventing them from planning their tax affairs properly for a long period of time,”.
He added that the process surrounding the registration and any treatment of these schemes was “extremely long-winded”.
“The Revenue may be waiting to see which schemes are the most popular, and therefore potentially netting the most tax, before moving to close the schemes,” he said.
The Revenue has recently tightened up loopholes aimed at mitigating tax, such as certain types of trusts used to pass money to the next generation.
John Whiting, tax partner at PricewaterhouseCoopers, also expressed concern over the lack of clarity surrounding which tax schemes were allowed. “People are being left with a nagging concern that the Revenue could bring in instant changes to the tax system at any time,” he said.
Taxpayers who registered schemes in 2004, when the disclosure rules were first introduced, could now face two years’ interest on unpaid tax. The Revenue could also impose penalties if someone were deemed to have purposely and illegally tried to escape their tax liability.
Accountants have called for a pre-approval process that would give assurance to scheme members that their particular plan will work.
Mr Murphy says that under current rules, if the Revenue decides to investigate a scheme, members can expect rigorous checks and in-depth questions as to its purpose. “The Revenue attacks schemes vigorously. Members have to produce reams and reams of information,” he said.
A spokesperson for the Revenue said: “The disclosure regime is not a rulings regime and we do not comment on whether disclosed schemes work or not. The objective is to provide clarity and transparency so that where there are unintended loopholes in the law the Revenue can identify risks to the chancellor.”
Many of the schemes being disclosed to the Revenue by individuals and small businesses are technology-based. Mr Murphy said one such scheme involved investment in television screens for black cabs. Another centred around technology to improve the efficiency of television production.
The benefit to investors is that they can write off any costs for tax purposes. So, for instance, if someone put up 20 per cent of the sum of money needed to invest in one of these schemes and borrowed the other 80 per cent, if they were a higher rate tax payer they could claim relief of 40 per cent.
Once a scheme has been set up, members are required to register it with the Revenue and get a registration number, which must be entered on their tax return.
