April 2018 has seen tax avoidance fall firmly under the media spotlight again, with both advisers and their clients facing prosecution and large financial penalties. Simon Littlejohns, Tax Partner at Friend Partnership, sets out practical tax advice for individuals affected by a tax challenge from HMRC.

Simon Littlejohns, Head of Tax at Friend Partnership Ltd

Simon Littlejohns, Head of Tax at Friend Partnership Ltd

Much has been written in the mainstream press over the past few days about the plight of some of the nation’s footballing stars, who are now facing huge tax bills.

HMRC has issued tax demands for many millions of pounds following its successful challenge to the film investment schemes promoted by Kingsbridge Financial.

Whilst most people will have little sympathy for the highly paid footballers there is no doubt that some will have been prey to advisers who may have simply said ‘all is above board, this will save you tax – just sign here’.

They are now paying the price for their earlier inattention to detail.

But it is not just footballers who have been in HMRC’s sights – Karen Millen the fashion designer was just one high profile name from the business world to be made bankrupt recently on the back of a tax avoidance challenge. She was one of many to have taken part in a scheme known as ‘Round the World’, which HMRC found it to be firmly in the tax avoidance category, issuing Karen Millen with a repayment demand for £6 million.

However, whilst it is the footballers and high-profile entrepreneurs that hit the newspaper headlines with their failed tax planning, there are plenty of hardworking business owners ill-advised on schemes that they believed to be legitimate tax planning.

One such example is one of the UK’s largest independent electrical distributors, now facing an unexpected tax bill of almost £700,000.

The company was advised by its accountants (an international mid-tier firm) to implement a scheme that provided tax-free or tax-reduced rewards to employees. The advice was that it was legitimate tax planning.

HMRC disagreed and found the scheme to be tax avoidance, issuing a tax demand for over £692,000.

The electrical distribution business is now bringing a claim against its advisers, stating that they: “…failed to settle with HMRC within a reasonable period and/or to engage meaningfully with HMRC within a reasonable time or at all, despite the fact that the defendant knew and/or ought to have known that the claimants wanted the dispute settled quickly”.

As a tax adviser it is essential to engage early with HMRC on your client’s behalf.

I have seen first-hand the effect that a challenge from HMRC can have on a business as the owners struggle to deal with HMRC and run the business at the same time.  In cases, where a business unfortunately fails under the weight of expected tax demands, those who have no involvement with the planning, such as the business’s employees, may be directly affected.

I have been involved in several situations where my negotiations with HMRC have saved businesses. I have achieved this by ensuring that the liabilities are correct and agreeing achievable ‘time to pay’ arrangements with HMRC.

Unfortunately, for the footballers involved in the ill-fated scheme, the promoters (Kingsbridge Financial) are no longer around to help resolve the issues. This will mean further fees for advisers to help them to agree liabilities and payment terms with HMRC.

How to deal with a challenge from HMRC

If you have been asked to pay back a substantial amount of tax it is worth noting that HMRC doesn’t always get its figures spot on, so there is plenty that needs to be addressed before you write a cheque to HMRC:

  • Has the demand been properly raised and on the correct taxpayer?
  • Is it a personal or company liability?
  • Is the amount demanded correct?
  • Has HMRC taken into account all payments that have been already made?
  • Must the liability be paid in one lump sum?
  • If not, on what basis could payment be made?
  • What evidence, personal and/or company, is there to support any inability to pay?
    • Cash flow forecasts
    • Borrowing capacity reached
    • No free assets

My advice to those potentially affected is to get an adviser on board quickly if you do not have one already. If you have been given tax advice that you feel may have been close to the mark, Friend Partnership would be happy to give you a second opinion – and advise you on the likelihood of a challenge from HMRC.

And going forward, remember the old adage: if it sounds too good to be true, then it most probably is.

Our approach at Friend Partnership delivers effective and legitimate tax planning. We represent our clients thoughtfully and robustly with HMRC and provide solid tax advice that we are confident will work both today, and well into the future.

For more advice, please contact Simon Littlejohns, Tax Partner at Friend Partnership Limited. Call 0121 633 2007 or click here to send an online enquiry.