Argue later but pay NOW says taxman: Shock order means big bills for thousands in avoidance schemes
Celebrities and major companies locked in legal battles over tax-avoidance schemes will be forced to pay up before their cases are resolved, under new rules to be introduced in this week’s Budget.
The rules will hit 65,000 companies and individuals in dispute with the taxman over their use of complex schemes, and could deliver Chancellor George Osborne a much-needed £5 billion boost to the Treasury’s coffers.
The clampdown will mean that claimed tax will have to be paid by October this year, even if a case is still being fought.
The rule change was announced by the Treasury earlier this year, but will catch many by surprise, according to City accountants, because it will be backdated, covering not just new disputes but all outstanding cases of the past 15 years.
The upfront payments of tax will affect TV presenters, footballers, singers and City bankers, as well as major companies, who have joined notorious tax avoidance schemes.
Under current rules, taxpayers who claim big tax reliefs through an avoidance scheme hold on to the cash until a court rules against them. The new system will require them to pay any disputed sums – only getting the money back if the tax tribunal eventually rules in their favour.
David Gauke, the Exchequer Secretary, said in January: ‘Taxpayers and scheme promoters are incentivised to sit back and delay as long as possible, despite evidence that in the vast majority of cases, when the dispute is resolved, tax is due.’
A financier involved with some of the historical schemes said the move was a practical measure for Revenue & Customs, adding: ‘There are lots of old deals. The Revenue has had no stick to beat the investors with, to move the inquiries forward any quicker. It’s quite a draconian measure, but no one is going to have any sympathy with investors in tax-avoidance schemes.’
If, as expected, the measures are in Wednesday’s Budget they will become law in July, at which point the taxman will start issuing notices requiring payment within 90 days.
The move will affect 12,000 people who bought into film schemes or versions of them. Celebrities including Ant and Dec, David Beckham, Gary Lineker, Guy Ritchie, Bob Geldof, Geri Halliwell, Davina McCall and Lord Lloyd-Webber could all be forced to find cash after investing in Ingenious film schemes, which qualified for tax breaks under rules designed to help the UK film industry. Hit movies such as Life Of Pi and Avatar benefited from tax relief.
Ingenious disputes the Revenue’s claim. It plans to fight for its scheme at a tax tribunal in November.
A further 16,000 people will face bills after they arranged to be paid through loans made by offshore companies or employee benefit trusts. Comedian Jimmy Carr used a version of those set-ups but has now unwound the structure.
Meanwhile, about 8,500 homebuyers face bills after trying to avoid stamp duty.
The scale of the sweep of historical tax disputes is unprecedented, and is leading to speculation as to how much it could raise for the Chancellor.
When the Revenue outlined its plan, it remained coy on the possible proceeds, saying: ‘The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at Budget 2014.’
But the figure will comfortably reach billions – with the tax at stake in the Ingenious dispute alone said to be worth £1billion.
Tax advisers suggest that some who entered into such schemes will be furious. Andrew Hubbard, a tax adviser at City accountancy firm Baker Tilly, said: ‘Many people will have entered into avoidance schemes in the past – some of which may well not be seen as particularly aggressive or which may have a reasonable chance of success.’
Ingenious and investors in its plans have been particularly insistent that their schemes provided support for British films rather than purely generating tax advantages.
Hubbard even suggested that someone could bring a judicial review of the proposals on the basis that the new rules give the Revenue too much power. Others are sceptical that a challenge could succeed, not least because the measures already apply in VAT cases.
A key issue is how far the sweep will go. The broadest suggestion is that anyone who has told the taxman about an avoidance scheme under the disclosure regime must pay up.
However, the scope is likely to be limited to schemes where the Revenue has opened an inquiry that has yet to be resolved. It will issue a list of schemes affected before the Finance Bill becomes law.
Because some schemes go back as far as the late-1990s, there will be significant interest to pay on top of the tax due. Richard Rose, a tax adviser at accountancy group BDO, suggests that for pre-2005 cases as much as a quarter of the bill could be made up of interest.
The measure will result in a huge cash inflow for the Treasury, but auditors may warn the Chancellor not to claim the cash as a windfall.Technically the money is already in the national accounts as money the Government believes it is owed.
What is more, in cases where the tax scheme is eventually deemed legal, the Treasury will have to pay the cash back.
That may be of little comfort to those writing a big cheque this October.
Credit: This is money