HMRC cracking down on tax avoidance schemes for landlords

Whilst this piece focuses on landlords specifically, it also serves as a general warning to anyone who is tempted to enter into any sort of tax avoidance scheme.

The climate for tax planning has shifted considerably over the past decade, not least due to increased public awareness of, and distaste for, anything that smacks of tax avoidance. Setting aside tax evasion, which is simply illegal, it is important to distinguish between legal but artificial avoidance schemes and what might be termed acceptable tax planning. Paul Harris, Private Client Tax Partner, shares details of HMRCs plans to crack down on tax avoidance schemes for landlords. In HMRC’s own words, “tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law. Tax avoidance is not the same as tax planning. Tax planning involves using tax reliefs for the purpose for which they were intended.”

HMRC regularly publish “Spotlights” on tax avoidance schemes which they will actively challenge. They see this as part of their ‘consumer protection’ role in helping taxpayers to steer away from schemes which may end up with them having to pay much more than the tax they tried to avoid, including penalties.

Since 2010, HMRC have published more than sixty such Spotlights. While many of the schemes they addressed have since fallen away, the “Property business arrangements involving hybrid partnerships” which are covered in the latest issue (Spotlight 63) appear to be very much still ‘doing the rounds’.

In brief, the scheme involves the following steps:

• Individual landlords set up a company and also a limited liability partnership (LLP), and transfer their properties to the LLP
• The individuals and the company are the members of the LLP (meaning it has a corporate member)
• The LLP then allocates profits to the members on a discretionary basis, making sure the individual members are not taken into the higher-rate tax band, with any remaining profits allocated to the corporate member. The corporate member also claims a deduction for finance costs.

As a result the scheme claims to:

• bypass the mortgage interest relief restrictions for individuals, allowing increased deductions for mortgage interest
• reduce the tax payable on profits generated by the property business
• reduce the Capital Gains Tax payable when any properties are sold
• reduce the Inheritance Tax payable on the death of an individual landlord

In HMRC’s view the arrangements are caught by existing legislation and are ineffective. This means that anyone using the scheme risks having to pay more than the tax they tried to avoid, together with interest, penalties and the typically high fees which are charged for using such schemes.

Taking part in such a scheme is certainly not something that we would recommend, regardless of the technical tax position. The up-front fees; the costs and stress of dealing with an enquiry by HMRC; the prospect of additional tax, interest and penalties, and a tarnished record with HMRC, all militate against it.

We expect HMRC to issue further Spotlights as and when they become aware of new schemes being offered. In the meantime, here are some of the warning signs that you might be in a tax avoidance scheme, or that you are being invited to join one:

• It sounds too good to be true
• The benefits of the scheme seem out of proportion to the money being generated or the cost of the scheme to you
• The scheme involves money going around in a circle back to where it started
• The scheme is advertised using misleading claims. These may include claims suggesting a scheme is endorsed or approved by HMRC or that a scheme can increase your take home pay
• You will be paid in the form of loans or other untaxed payments
• Non-compliant umbrella companies are involved.
• HMRC have given a scheme reference number (SRN) – this does not mean it has been approved
• If an arrangement does not have an SRN, this does not mean that the arrangement is not tax avoidance and it could still be investigated

If you have taken part in a tax avoidance scheme, it is essential that you seek early advice – ideally before HMRC contact you themselves – from an independent tax professional. They can assess your exposure to tax, interest and penalties, and work out the best way to approach HMRC to get the matter settled as painlessly as possible. To get in touch with one of our experienced Tax specialists, please call 0330 058 6559 or email hello@scruttonbland.co.uk.