The problem with tax schemes

Many small business owners will be aware of contentious tax “schemes”.  Perhaps someone will have tried to sell one to them, maybe they’ll have heard about celebrities using them, possibly even a mate (or more likely “friend of a friend”) uses one.

Are they legal?

Well, this is the million dollar question.  You might think there’s a simple yes/no answer.  Reality is tax law is sufficiently complicated and open to interpretation that one intelligent person can read the legislation and think a scheme is fine, whilst another wouldn’t.

But it’s got QC/tax counsel approval?

Whooptidoo.  As above, just because one intelligent person thinks it’s above board doesn’t mean it is unfortunately.  As the schemes typically lead to hardly any/no tax being paid, you can rest assured HMRC put their cleverest bods to try to prove it’s not ok.

Also bear in mind that the scheme provider will quite possibly have asked numerous tax bods for their opinion.  Many may well have said it’s rubbish, but the provider only needs one to agree with them and of course that’s the one they’ll quote.

Are they immoral?

Well, that’s for each person to decide.  Let’s assume for a second that the scheme in question is 100% legal.

Some will think if it’s legal, it’s perfectly acceptable.

Others will say these aggressive tax avoidance schemes are immoral…but they’d happily put money in an ISA, or perhaps invest company cash into a pension to reduce their tax liabilities.

Everyone has a different idea on what’s responsible tax planning vs aggressive immoral tax avoidance.

It interests me that politicians often try to play the moral line…not from a “but they milk their expenses” point of view, more just that it implies they know they can’t stop these things with the law.  Therefore they hope they can rely on peer pressure from the media to stamp it out.

My mate has used one for a while and he hasn’t been caught

Let’s have a think about the timescale of these things.  For the sake of the below, I’ll assume the scheme in question is completely flawed and therefore will not work at all (but this isn’t known at the beginning).

Day one – the scheme provider says you you can take out loads of money without worrying about tax.  You do so.

6 months have gone by – still nothing from HMRC.  You tell all your mates how great the scheme is and recommend they all join (probably pocketing a commission).

12 months have gone by – still nothing from HMRC.  No surprise there, nothing’s been submitted to HMRC yet, so they’re completely unaware of what you’re doing and haven’t even considered whether it’s ok or not.

21 months have gone by – you’ve just filed your first year’s statutory accounts and CT return.  It’s done via self assessment, so these are initially accepted by HMRC and Companies House without question.

33 months have gone by – this is the approximate likely deadline for HMRC to enquire into the first tax return.  You get a scary letter.

So it may well be almost 3 years before you get a whiff from the authorities that what you’re doing is wrong.  Up to that point you assumed all was great, and indeed told all your mates/colleagues so.

Therefore even if your mate has been “successfully” using a scheme for a couple of years, that in no way means HMRC know and are ok with it.

What happens when HMRC do enquire?

This will vary significantly from case to case and depending upon the scheme in question…but the basics will be you getting a scary letter from HMRC asking you to explain various suspicious transactions in the accounts/tax returns.

At this point you forward the letter to your scheme provider.  Quite possibly they’ve gone underground, in which case you’re on your own.  You’ve paid them however much for running the scheme for 2-3 years and paid no/negligible taxes.  If the scheme is flawed, you’ll now need to find a “vanilla” accountant to do bog standard accounts/CT returns as though you weren’t in the scheme.  So, unexpected accountancy fees for you, plus all the taxes you should have paid for the first couple of years, plus probably some penalties and interest.  Sad panda.

Alternatively the scheme provider may well respond, probably advising you not to worry, they’ll deal with it, and to continue as they originally advised.  You run the risk that all they’re doing is prolonging their fee earning potential from you, and delaying you getting things sorted and going back on the straight and narrow.

Don’t be tempted by the newest latest scheme, as often the people behind it will have also been behind the last few latest schemes over a decade or two.  Flog them for a few years, when HMRC sniff round your clients, do a runner.  Come back under a different legal entity, find some new punters, rinse and repeat indefinitely.

I’ve read the above, but I still want to use one of these schemes…

Ok, if you’re insistent, then find a provider who’s been around for ages as they’re less likely to disappear when the going gets tough.  Make sure you either put money aside in case it turns pear shaped, or be prepared to declare bankruptcy/similar if you spend it all and get caught.

Also, you might want to get a neck brace and sleeping pills for all that looking over your shoulder/struggling to sleep at night you’ll likely suffer…!

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