November 2019 Tax Investigation Round Up

November's round up of the latest tax investigation news and cases:

• Isle of Man cleared over private jet VAT avoidance
• Threat to name and shame aggressive tax dodgers not working
• HMRC turns to real-time data in tax-avoidance clampdown
• HMRC issued massive tax bill to "frighten taxpayer into responding"

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Isle of Man cleared over private jet VAT avoidance

Following claims that the Isle of Man was avoiding aircraft VAT, the Treasury has stated that additional compliance checks should be put in place.

The situation arose when documents were leaked in November 2017, alleging that the customs and excise in the Isle of Man had allowed large businesses and multimillionaires to claim VAT refunds on luxury jets that had been imported from the EU.

The Treasury was invited by the Isle of Man government to conduct a review of VAT rules and procedures in relation to the import of yachts and aircraft, which took place over the course of a year to ascertain whether the system enabled high net worth individuals to import private jets into the EU without paying the corresponding VAT.

The findings were that UK and EU VAT law had been in effect and the allegations were invalid. The further checks will be to ensure that compliance continues to ensure that VAT is properly collected, which has been met with improved compliance procedures put in place by the Isle of Man government.

This investigation has brought to light the convoluted rules and procedures involved in international VAT rules, with the report suggesting that a wider review as a means of clarifying the system could prove fruitful.

This was followed by news that £790m of VAT had been returned to 231 leasing firms who had imported jets since 2011, and in November 2018 the EU published an infringement notice in response to what it referred to as abusive VAT practices in the Isle of Man. The basis of the infringement notice is that VAT is only deductible from aircraft that are used for business purposes, not those that are purchased or leased for private use.

Since then, HMRC has investigated over 300 corporate groups and individuals, with 80% of cases being approved and the remaining 20% undergoing further examination.

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Threat to name and shame aggressive tax dodgers not working

Recently released figures show that the practice of naming and shaming persistent corporate tax avoiders has not brought the desired effect. This approach began three years ago, when the Finance Act 2016 allocated HMRC the ability to put businesses that committed aggressive and long-term tax dodging under special measures.  

Utilising a Freedom of Information request, thinktank TaxWatch discovered that not a single company has been put into special measures since the legislation took effect. This is in spite of the government claiming that the measure would inject over £500 million into the economy each year.  

If a company were to be put into special measures under section 161 of the Finance Act 2016, it could be publicly named and shamed and/or be placed under very strict liability. Despite this, not a single business has been treated in this way. The director of TaxWatch, George Turner, stated his doubt that individuals and smaller companies would be treated with the same lenience.

In response, HMRC told TaxWatch that special measures had not been issued due to the mere threat of them being enough to coax businesses to change their ways. It stated that special measures had been considered for some cases, which swiftly brought about improved behaviours that no longer justified the special measures actually being implemented.

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HMRC turns to real-time data in tax avoidance clampdown

As data capture and analysis tools become more sophisticated, the department is looking into how the information can be used more effectively. Specifically, HMRC says that the live data can be applied to pinpoint individuals and businesses being drawn into schemes designed for the avoidance of tax.

Penny Ciniewicz, the department’s director general for customer compliance, told MPs that HMRC is focusing on companies that promote tax avoidance schemes and allocating greater resources into the tracking down of companies that promote them. Currently, more than 100 investigations into promoters of these schemes are being conducted across the UK.

In order to achieve this, HMRC is utilising in-depth monitoring of Pay As You Earn information and other real-time data, with the purpose of identifying people who are being enticed by tax avoidance schemes. This precedes any contact being made with the individuals in question.

The activity is taking place alongside HMRC’s plans to put in place the loan charge, a tax recovery scheme that has been met with controversy due to it aiming to recover tax avoided through disguised remuneration schemes. This applies to payments received by thousands of people, especially contractors and consultants who disguised the payments as loans that were not intended to be paid back. The loan charge aims to recover the funds either through the payment of outstanding loan charge liability or via a payment plan by 31 January 2020.

The reason that this approach has been called controversial is that many cases will include unpaid tax and National Insurance contributions dating back many years, which could force those affected into financial hardship and even see the insolvency of numerous small businesses. On top of this, campaigners have said that six people contacted by HMRC in regards to disguised remuneration schemes have committed suicide, with 50,000 more people still to face the loan charge when it launches in April 2020.

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HMRC issued massive tax bill to “frighten taxpayer into responding”

When it was found that a man had been buying and reselling used cars under the name Waltham Cars between 2004/05 and 2015/16, HMRC contacted him about taxable profit. The individual, Mr Cussens, failed to respond during the tax investigation, at which point HMRC delivered a figure of £342,943 that required paying.

The figure was based on HMRC taking information from Worldpay, which listed Cussens as the principal of Waltham Cars. HMRC then used the gross figures of Waltham Cars for 2015/16, deducted 50% for expenses and arrived at the profit for the year. This was then applied to the previous eleven years, taking into account the retail prices index in relation to 2015/16, and came to the total figure of £342,943. At the First-tier Tribunal (FTT), Cussens claimed that he had not traded and had no income that would exceed his personal allowance.

The FTT was required to consider whether the assessment was made in line with best judgement, and if this was found to be the case, to consider whether the amount should be reduced pending further investigation.

When it came to evidence being displayed, HMRC put forward no witnesses, which meant that the FTT lacked insight into whether or not the assessing officer had applied best judgement. On Cussons’ side, his father accompanied him to the tribunal and stated that all trading had been under Waltham Builders Ltd, his own company. Cars were bought at auction and then sold for around £200 profit each, which the FTT decided did not tally with the figure presented by HMRC, as a 50% profit margin was incorrect.

In conclusion, the FTT said that the figure of £342,943 was presented to “frighten the taxpayer into responding to requests for information”. The assessments and penalties were discarded and HMRC was informed that it could start the investigations again, providing it used the new information. Meanwhile, Cussens was urged to be more responsive to HMRC communications and not to be “ostrich-like” in the future.