HMRC clampdown following billions lost to tax avoidance

Are you disclosing a TAD too little?

Do you currently pay the correct amount of tax and National Insurance Contributions (NICs) on your income? Despite government efforts, "increasingly complex and contrived" schemes to avoid paying tax and NICs on income have been operated by employees, "particularly in relation to bonuses in the City of London."

Reports indicate that some well-rewarded employees have received bonuses exceeding £1.5 billion in total – in an attempt to avoid the payment of tax and NICs. Legislation introduced in the Finance Act 2004 made it a legal obligation to disclose such schemes that attempted to avoid the payment of tax.

Despite the reforms introduced to combat such schemes, some employers and advisers continue to devise even more complex schemes. To combat these measures, the Tax Avoidance Disclosure (TAD) regime has been extended with effect from 1 May 2007 to incorporate NICs. The purpose of TAD is to give HMRC early warning of new avoidance schemes being created and assist in the eventual framing of legislation to close loopholes.

Help! Am I avoiding tax?

The target is avoidance, but not all disclosed schemes are avoidance! HMRC issues a reference number for each disclosure. This does not imply HMRC approval, or any acceptance that they work, as the TAD scheme is not a clearance system.

How it works is that your pre-existing TAD must now explain how the scheme works for NICs. The additional impact of the extension now falls on schemes that provide a NICs advantage e.g. a reduction or deferral of a potential NICs liability. Such a scheme is only notifiable if it:

• Is confidential from other promoters – Is the promoter of the scheme wanting to keep the element that gives the NICs advantage secret from others?
• Is confidential from HMRC – Does the promoter want to keep the scheme secret from HMRC?
• Involves fees – Does the promoter receive a fee from the employer for the elements that provide the NICs advantage?
• Is a standardised process – Does the scheme use standardised documentation and transaction processes where the main purpose is to obtain a NICs advantage? Exceptions do apply to some pre-existing schemes made available before 1 August 2006.

What does this mean for the Payroll Department?

Since the announcement, numerous employers and payroll departments have been contacting HMRC to find out if they have to disclose schemes involving salary sacrifice arrangement including: childcare vouchers, holiday pay schemes, bikes and so forth.

HMRC does not expect childcare voucher schemes to need disclosing.

Nothing specifically excludes salary sacrifice arrangements from disclosure. HMRC expects very few such schemes to be notifiable because they fall out at some stage of the tests... Ultimately it is for promoters and payroll managers to decide whether they have to disclose a particular scheme.

What do you need to disclose?

As part of the consideration process, HMRC suggests that you ask yourself these questions when contemplating the need to disclose:

• Is there something new, innovative or unusual about this scheme?
• Is it seeking to use salary sacrifice to provide tangible benefits in ways that schemes available before 1 August 2006 did not?

If the answer is yes to either of the above, then HMRC recommends that you read their "Disclosure Guidance". You may also find it advisable to seek professional guidance, not on just whether such a scheme is notifiable, but also as to whether it actually achieves the tax and NICs advantages anticipated.

If HMRC considers that a scheme does not actually give the NIC benefit the promoter and employer thought, then the employer engaged in avoidance will have to submit supplementary end-of-year returns of NICs now payable. The regulatory assessment undertaken by the government estimates that 500 employers and 10,000 employees may be affected by the introduction of these new TAD requirements.

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