Anti-avoidance: HMRC's spotlights

This is a freeview 'At a glance' guide to HMRC's Spotlights.

What are HMRC's Spotlights and where can you find them?

HMRC’s Spotlights

HMRC describes some specific Tax Avoidance Schemes in the Spotlights section of its anti-avoidance pages. This is to assist scheme users so that they might work out the difference between what it terms as “artificial avoidance schemes” and “ordinary sensible tax planning”. Most of the schemes listed are no longer available: however, if a taxpayer is offered a similar scheme they are advised to obtain a second opinion as to its viability.

HMRC's list of spotlighted schemes is slowly growing.

The Spotlight list includes:

   HMRC publishes the following indicators of “Tax planning to be wary of”:

  • It sounds too good to be true.
  • Artificial or contrived arrangements are involved.
  • It seems very complex given what you want to do.
  • There are guaranteed returns with apparently no risk.
  • There are secrecy or confidentiality agreements.
  • Upfront fees are payable or the arrangement is on a no-win/no-fee basis.
  • The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.
  • The scheme is said to be approved by HMRC (it does not follow that this is true).
  • Taxation of income is delayed or tax deductions accelerated.
  • Tax benefits are disproportionate to the commercial activity.
  • Off-shore companies or trusts are involved for no sound commercial reason.
  • A tax haven or banking secrecy country is involved without any sound commercial reason.
  • Tax-exempt entities, such as pension funds, are involved inappropriately.
  • It contains exit arrangements designed to sidestep tax consequences.
  • It involves money going in a circle back to where it started.
  • Low-risk loans to be paid off by future earnings are involved.
  • The scheme promoter lends the funding needed.

HMRC also comments on "Particular schemes" as follows:

"The schemes featured in Spotlights are generally those which HMRC consider have the widest implications and about which there is the greatest need to warn potential users. They will often be schemes that have been disclosed to HMRC and have been given a Scheme Reference Number (SRN). Please note that the issue of a SRN does not mean either that HMRC ‘approves’ the scheme or that HMRC accept that the scheme achieves its intended tax advantage. These articles are limited exceptions to the usual rule that HMRC do not comment on tax avoidance. No further comment will be made. Only a minority of schemes will appear in Spotlights. In particular, HMRC will not include schemes aimed at very specialised areas, with a limited scope or where HMRC estimate not much tax loss is involved. A scheme that has not featured in Spotlights may still be challenged. You may wish to consider it in the light of the advice above on 'tax planning to be wary of' and consult a reputable tax adviser."

Artificial avoidance scheme or ordinary sensible tax planning?

Those familiar with HMRC’s own guidance in respect of “maxing out” on second home flipping (CGT Private Residence Relief) may well wonder where the line is drawn between an artificial scheme and ordinary tax planning. It can seem strange to the public that one can claim that a holiday home can be capable of being described as a “principal” residence, yet HMRC is prepared to accept this illusion and grant tax relief. It is clear that what is considered as "acceptable" as ordinary tax planning depends largely on the attitude of the Government of the day.

Avoidance or evasion?
Tax evasion is an illegal practice whilst tax avoidance is the use of the existing rules to mitigate tax. Anti-avoidance legislation seeks to block or remove loopholes.

A note on sham
“Sham” is a legal concept, the definition was established in the case of Snook v West Riding [1967] 2 QB 786 at 802: “acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create". 

HMRC has not had much past success in applying sham to tax avoidance cases mainly because the steps involved in the tax schemes where it has litigated the sham point are real steps and have been completed. However, when a scheme follows steps of which the legal effects are then consequently ignored by the parties it will be vulnerable to attack. 

A high-profile case which considered whether there was a sham was the Rangers' EBT case. This has been through the First-Tier Tribunal, Upper Tribunal, Inner House Court of Session and the Supreme Court. It was ultimately decided that is was not a sham, all parts of the transaction were genuine, but this did not stop there being a liability to income tax and NIC on the EBT loans.

Small print and links

Useful guides on this topic

Tax Avoidance Schemes
Better the devil you know? We run through the top favourites (from HMRC approved to contrived and artificial) for Income Tax, Corporation Tax, Capital Gains Tax and SDLT.

Disclosure of tax avoidance schemes (DOTAS)
Advisers be warned FA 2010 brought scheme introducers into the DOTAS loop.

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