An HMRC drive to crackdown on tax avoidance could see advisers challenged if they set up offshore tax entities for clients.
The Revenue wants to prevent UK traders and professionals from avoiding tax by arranging for their UK business profits to accrue in entities resident in territories with a nil or low tax rate.
The new measures, which could impact up to 10,000 wealthy individuals, are expected to bring in up to £50m a year in tax receipts.
The Revenue said that, while it had successfully challenged overseas arrangements and recovered significant amounts of tax, doing so takes considerable time and resource.
To reduce that burden, it wants to introduce legislation which targets offshore schemes directly, especially those which benefit smaller companies and individuals.
It already has other work in place to tackle larger firms.
Today’s (10 April) new proposals, expected to come into effect in April 2019, will see the government tighten up on where professionals house their profits.
Examples of the types of arrangements HMRC will target include UK residents who move their profits to an offshore vehicle, which is paid from the individual’s earnings because of a service contract or because it invests in a partnership through which the individual trades and is entitled to a return.
Another example used is where an individual pays fees to an offshore company for consultancy work, which is deducted from their profits – but the fees paid almost entirely cover their profits. Funds held in the company are then returned to the individual through loans or payments of business expenses.
HMRC said the common feature of all the schemes it will be targeting is that the services rendered and staff are based in the UK and the amount of profit allocated offshore is excessive.
The government said that while current legislation can challenge these arrangements “it would be preferable to introduce targeted legislation and to require the upfront payment of tax while enquiries are undertaken”.
Its proposals will see legislation created specifically focused on these arrangements which will require profits that have been alienated to be added to UK profits.
Another proposal is to introduce requirements to notify the Revenue of the use of such arrangements and for faster payment of tax in dispute.
There could also be “power to enjoy” and “acting together” tests, whereby even if a person is not directly benefiting from the assets in an offshore entity, they may be able to benefit from it in an indirect way such as through loans from family members who do have access to the vehicle.
The “acting together” test would apply where the individuals are not formally connected but are able to act together to ensure funds are allocated in a particular way.
The government is asking for comments on whether its proposals are appropriate, if they will catch all likely targets, and whether they risk covering arrangements where no tax avoidance is involved.
HMRC said there is “no intention of catching activities where businesses are genuinely carried on, wholly or partly, in low tax territories for commercial reasons with genuine commercial substance”.
Today’s (10 April) announcement is the latest evidence of a crackdown on tax avoidance by HMRC. This week it was revealed that tax fraudsters were facing longer prison sentences after a clampdown on tax evasion. The average sentence length for tax fraud has increased by 25 per cent to more than four years.