A continuing onslaught from HM Revenue and Customs against tax avoidance scheme finally seems to pay dividends.
In a decade, HMRC has seen the registration of tax avoidance schemes drop from hundreds a month to just 30 in the last six months of 2012 – a drop from 45 reported a year earlier.
Tax avoidance schemes were generally clever ruses designed to exploit loopholes in tax law, mainly by the wealthy and companies.
Sustained attacks from HMRC against the schemes have led to them going out of favour.
Loopholes closed
Tax advisers cite three main reasons:
- HMRC has acted fast to close legal loopholes to starve the schemes of room to operate
- Bad publicity against individuals and companies accused of tax avoidance and acting immorally has seen clients view tax avoidance as unsavoury
- Britain has entered into tax information sharing agreements with offshore financial centres like Jersey, Guernsey and the Isle of Man that previously offered firms providing tax avoidance schemes the room to operate
Introducing the Disclosure of Tax Avoidance Schemes (DOTAS) was the beginning of the end for tax avoidance schemes.
The new law demanded scheme providers notify HMRC they were selling tax wrappers to wealthy clients and required them to hand over the details of how they worked.
This gave HMRC lawyers the opportunity to identify legal weaknesses and time to act to close the schemes.
Most tax avoidance schemes reported under DOTAS involved some artificial transaction designed to provide a tax loss to the client to set off against taxable income, which reduced the amount of tax they paid.
Tax gap
But as scheme after scheme was challenged before tax tribunals and the courts with HMRC generally winning, clients soon fell out with their advisers and now invest in safer products and markets.
HMRC claims DOTAS is a significant tool for closing the tax gap – the difference between the amount of tax HMRC expects is due less the actual amount of tax revenue collected.
The latest tax avoidance schemes reported under DOTAS covers 17 aimed at paying less income tax, corporation tax or capital gains tax. Seven avoid national insurance contributions and six involve stamp duty land tax.
“These schemes use the law in ways Parliament never intended when passing the tax acts,” said an HMRC spokesman. “This gives taxpayers who can afford to pay for expensive advice a distinct advantage over everyone else.
“Often the transactions are artificial and deliberately intended to reduce the tax someone pays.”
