Having been tasked with implementing the various Covid-19 support payments and being respectful of the impact of the pandemic on its “customers”, HMRC implemented a general moratorium on progressing existing investigations or starting new ones.
However, the moratorium is now at an end, and we have seen a significant upturn in HMRC compliance activities.
The return of investigations
Bolstered by funding in the 2021 budget, HMRC is investing in investigation work, with an increasing focus on suspected tax fraud (also known as COP 9 or CDF enquiries) and large/complex technical enquiries.
There has also been a noticeable upturn in HMRC activity in relation to tax avoidance, with disguised remuneration (“DR”) arrangements continuing to occupy a significant amount of HMRC’s time.
A typical DR scheme involved an employer paying funds to a trust company, where certain employees would be beneficiaries. The trust company would then “loan” some of the money in trust to the relevant employee/beneficiary, thereby avoiding Income Tax and NIC liability on the loaned amount. It’s a very long story, but the planning does not work.
In particular, we are aware that HMRC has opened thousands of enquiries into Income Tax returns for the 2018/19 tax year on the basis that the much-derided loan charge has not been correctly accounted for. Similarly, many employers who should have accounted for and paid over the loan charge in April 2019 have still not done so. HMRC has a list of the errant employers and is now in the process of contacting them.
HMRC has also recently become embroiled in a broader DR issue relating to outstanding loans to beneficiaries. Some of the trusts have subsequently recalled the loans or sold their interest in the loans to debt collection companies, who are now pursuing the beneficiaries for repayment. However, many of the beneficiaries will have paid Income Tax, NIC (and potentially Inheritance Tax) on the loans as a result of settlements with HMRC or the loan charge. HMRC’s comments on the demands sent to beneficiaries can be found here.
HMRC states that the loan charge liability still applies as it is calculated on the loan outstanding on 5 April 2019. Therefore, repaying a loan after 5 April 2019 has no impact. HMRC specifically states that it is “not able to refund any loan charge that you’ve already paid nor alter a settlement agreement”. Therefore, many beneficiaries are facing the prospect of paying considerable amounts of tax and NIC on loans that may have to be repaid.
Each case rests on its own facts, but there may be angles for an action against the trustees for breach of fiduciary duty or similar. Beneficiaries should also consider taking proactive steps to unwind the loans formally to avoid the risk of the trustees selling the debt (or the trustees liquidating, and an insolvency practitioner selling the debt to realise assets). Similarly, trust companies should be considering how they deal with outstanding “loans”, including seeking advice on whether it could be argued that there is no “loan” and therefore relieving the trustee of any duty to collect or seek to realise the asset.
Lisa Vanderheide and Sarah Stenton, directors in our Tax Investigation team, are happy to have a free, no-obligation discussion about existing HMRC investigations for those interested in a second opinion or assistance. Please contact Lisa or Sarah to make arrangements.
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