Under draft legislation to tackle tax avoidance set out in the Finance Bill currently before parliament any taxpayer that sends HMRC a document that contains an inaccuracy and the inaccuracy relates to the use of certain tax avoidance arrangements, will immediately be liable for an automatic penalty for carelessnes, reports CCH Daily.
This is a significant extension of HMRC’s current powers and penalty scope.
Normally it is up to HMRC to prove the truth of its assertion that a taxpayer has failed to take reasonable care, but in this particular instance, because tax avoidance arrangements are involved, it will instead be up to the taxpayer to prove to HMRC, or a tax tribunal on appeal, that they took reasonable care.
Such avoidance arrangements can include schemes that represent a worker as self employed when in reality their engagement has all the hallmarks of employment, or that require a worker to set up an intermediary to enable the engager of their labour to avoid such obligations as accounting for PAYE and employers’ national insurance contributions (NICs).
New paragraph 3B of Schedule 24 of Finance Act 2007 defines ‘avoidance arrangements’. Sub-paragraph (2) ensures that this is drawn extremely widely, as it can include any arrangements that have obtaining a tax advantage as their main, or one of their main, purposes.
Although new sub-paragraph (3) of Schedule 24 of Finance Act 2007 provides an exclusion for arrangements which both ‘accord with established practice’ and have HMRC’s acceptance, this is not sufficient to protect low-income, unrepresented taxpayers.
The five conditions which result in arrangements automatically falling within the definition are:
they are DOTAS (disclosure of tax avoidance schemes) arrangements;
they are disclosable VAT or indirect tax arrangements;
the taxpayer has received a counteraction notice in respect of the arrangements and the tax advantage has been counteracted;
the taxpayer has received a follower notice; and
a tax advantage has been counteracted on the basis that an avoidance-related rule applies.
LITRG fears that many people on low incomes are forced into such arrangements or feel they have to agree to them because of a fear of missing out on work.
Anthony Thomas, LITRG chairman, said: ‘We are very concerned that in targeting a wide range of arrangements, such as umbrella companies, personal service companies or similar tax arrangements which individuals are required to sign up to in order to be able to obtain work, this measure seriously risks catching out the wrong party.
‘This provision will make it much more difficult for taxpayers in an economically powerless position to prove that they took reasonable care when coerced into using avoidance arrangements, as they are put to the trouble of proving their innocence and having to defend themselves against a charge of carelessness that HMRC is not required to substantiate.’
Suppose for example that a courier whose daily schedule is directed by a delivery company is required to sign a contract that represents him as self employed, even though the delivery company sets the courier’s hours of work, tells him where to go and imposes on him a tight schedule within which all his set daily tasks are to be completed.
The delivery company hopes by means of this scheme to avoid accounting for PAYE and NIC on the courier’s remuneration, but the scheme is investigated and found to be ineffective.
The courier, who has submitted self assessment returns on the basis that the scheme is genuine, is charged a penalty for submitting an incorrect document, even though he had no choice in the matter – he either signed up to the document, or he got no work from the delivery company.
The plans were first announced at Autumn Statement 2015 and confirmed at Budget 2016 and come into effect in relation to any document that relates to a tax period that begins on or after 6 April 2017 and ends after the date the Finance Bill is passed into law.
It is not clear whether the measures will be held over due to the snap general election.