By Simon Bain
Four out of five wealthy people using tax avoidance schemes like the illegal Rangers football trust are refusing to admit defeat and pay what they owe, I can reveal. But they and their fly-by-night advisers could be running out of tax-dodging road.
One of the more surprising revelations (so far) in the Paradise Papers is that three TV actors were able to escape income tax on their fees by sending them offshore.
Such arrangements are often described as “fiendishly complex” but they follow the same principle as the Rangers trust: high earners funnel their cash into an offshore company which returns it to them as loans with no repayment schedule.
Five years ago comedian Jimmy Carr was unmasked as a user of one variant – a scheme called K2, prompting David Cameron to say avoidance schemes were “morally wrong” and promise a new crackdown.
Carr’s Edinburgh Fringe show running at the time ironically invited people to “leave your conscience at home and come on out for a laugh”.
Promoted by Fife-based adviser Roy Lyness, K2 was said to have sheltered £168 million from the taxman for 1100 people, including £3.3m for Carr, enabling him cut his tax bill to an amusing 1%.
The three stars of TV’s ‘Mrs Brown’s Boys’ exposed in the Paradise Papers were also clients of Mr Lyness.
Meanwhile in July, after a four-year legal battle, the Supreme Court ruled that Rangers had paid its players their salaries as loans from offshore ‘employee benefits trusts’ in order to escape income tax and national insurance.
Last month a vengeful HM Revenue & Customs warned that it was ready to take legal action against the estimated 40,000 users of similar schemes, “using the full range of our available tools”.
According to one close observer, most of those users are sitting tight and sweating it out, as a showdown looms.
“Rangers are not alone,” says tax expert Aidan McLaughlin. “For employees who got loans and never paid them back, if the Revenue doesn’t go after them in the meantime, come April 2019 there will be a new charge brought in requiring the tax to be paid. I don’t think there is any scope for any scheme, with all the tools the Revenue has now.”
Edinburgh-based McLaughlin has advised two clients, who came to him from elsewhere with trust dodges, to settle with HMRC, with no penalty, while they can.
They have still benefited from their scheme, as tax due has been deferred for many years. Promoters have traditionally exploited the lack of resources in HMRC to sell schemes that can save users huge amounts in the years it takes for a legal challenge to be effective.
But McLaughlin says of those in the HMRC spotlight: “Most of them are sticking their heads in the sand, often because they can’t face the consequences which could be bankruptcy. Of those whose cases are under inquiry and not settled, 80per cent are taking the advice of promoters to do nothing. My two clients for instance are still getting emails from the scheme promoter saying the battle goes on, just pay £400 a month into our fighting fund. But lets face it, the tide has gone out.”
Schemes like K2 have been under attack for a while, with one Jersey-based promoter being accused of serious fraud, and its customers finding themselves potentially implicated.
In 2014 the government brought in a ‘general anti-avoidance rule’, which means artificial or contrived schemes are guilty until proved innocent. Next came ‘follower notices’ which demand settlement, and ‘advance payment notices’ where HMRC shoots first and asks questions later.
Last year the government began consulting on drastic new penalties for those who create and promote such schemes – amounting to twice the tax saved for their client.
McLaughlin says: “They have suddenly realised that the fount of all this is the clever guys, the promoters, and they need to hold a gun to their heads. In the last three or four years HMRC has had so much more ammunition, and has hopefully brought people to their senses.
“Even if someone is minded to go down that road now, it is going to be hard to find anyone who will promote new schemes – because they will be personally at risk.”