FOI release

Section 9 - Compliance action

Published 23 April 2020

Compliance action 1995 to 1999

Historically, Disguised Remuneration (DR) schemes were primarily targeted at and used by large corporate employers who were advised by their agents and lawyers of the advantages of offering tax efficient remuneration packages. These involved benefits (including loans) provided through a range of inventive devices that attempted to avoid tax and National Insurance contributions (NICs) on employment income. They included paying bonuses and salaries in gold bullion, diamonds, platinum sponges, fine wines or loans in obscure, rapidly depreciating currencies.

When those routes were closed, primarily through legislative changes in the 1990s and early 2000s, the use of Employee Benefit Trusts (EBTs), Employer Funded Retirement Benefit Schemes (EFRBS) and other, similar, trust arrangements became more prevalent. The arrangements were designed to mirror legitimate structures, which made them more difficult to identify and challenge.

HMRC’s investigation into DR schemes in this period therefore focussed on large corporate employers and their bespoke arrangements. HMRC’s main focus in these early DR scheme investigations was to seek fiscal symmetry by matching the Corporation Tax deductibility of the contributions to the EBT/ EFRBS, with the date relevant benefits were provided to the large corporate’s employees and employment taxes paid.

Compliance action 2000 to 2004

DR schemes then morphed and developed over the years as promoters of avoidance identified and exploited the ability to mass market DR schemes. This included selling them to employers and latterly to individuals in what HMRC often refer to as contractor loans arrangements.

The extension to individuals was marketed by some promoters as a way of avoiding the off-payroll working rules, more commonly referred to as IR35. Early DR schemes aimed at contractors started to develop from April 2000 onwards.

During this period the investigation of mass marketed DR schemes were worked on by a lead HMRC investigator. This person was responsible for all aspects of the investigation of the scheme. This included sourcing technical or policy experts needed to assist in formulating HMRC’s technical response.

Once identified, the investigation of DR schemes in this period was generally focussed on the employer. As a creation of the scheme itself, the employer was under the control of, or materially advised by, the promoter of the arrangements. Where HMRC investigations or enquiries were opened into the individual participants, the individuals in question were often advised by the promoter and or the scheme employer to refer all such HMRC contact to them to coordinate an appropriate response. This approach typically enabled HMRC to correspond with one party and their advisors, rather than to each individual participant separately.

Adopting this approach to working schemes, where a relatively small sample of scheme users were reviewed in depth, had positives and negatives for HMRC and individuals. The sample approach enabled us to gain an understanding of how the scheme operated in practice with a limited amount of investigative resource. The alternative, to request documents and information from every scheme user was highly resource intensive and unnecessary in schemes with standardised underlying documents. There were also advantages to the sampling approach for individuals as they would not be required to respond separately to HMRC’s requests for documents and information.

This sampling approach allowed the promoter and or agent to control the narrative of what was happening with the individual. This is because we only direct contact to the promoter and or agent who was able to provide false reassurance about the nature and extent of our investigation to the individual. We recognised that this was happening so in recent years we have changed our approach to both sampling and communications to scheme users, with more regular direct updates.

Compliance action 2005 to 2009

The number of employers and individuals using DR schemes went through a period of rapid growth. Schemes became increasingly designed to be mass marketed, with standardised documentation allowing promoters to reduce their costs and subsequently the costs of entry for those taking them up.

As schemes grew in size, from participants numbering in the tens or low hundreds to high hundreds or even thousands, HMRC’s ability to investigate at employer or individual level became unworkable. As such, HMRC’s approach to challenge such arrangements was to fully investigate a limited number of scheme users in order to establish the facts by obtaining a full set of documentation from those users. Other users were asked to provide standard documents but, due to resources, it was not always possible to pursue or follow up on this information in each individual case.

The introduction of the DOTAS legislation in 2004 required avoidance scheme promoters and those who used the scheme to notify HMRC of their avoidance scheme usage, where certain hallmarks were present. As a result, HMRC were notified of certain DR schemes being marketed from 2005 onwards, with each such scheme being issued a scheme reference number (SRN) which was required to be reported by the user to HMRC on their tax return.

The DOTAS legislation provided us with a better picture of the extent and nature of the different DR schemes being marketed during this period. However, the requirement to notify arrangements under the DOTAS regime did not require users or scheme promoters to provide a full and accurate information about the arrangements. Also, not all DR schemes were notified or were required to be notified.

From 2004 to 2008, a large number of individuals were identified from around 34 different DR schemes. HMRC reorganised its investigations teams so that these schemes were primarily investigated by one team. Previously, cases had been worked across a number of areas.

Where HMRC was able to identify individual scheme users, they received an initial notification of HMRC’s investigation/ enquiry. Further contact with the individual is likely to have happened only if initiated by the scheme user. Given the large number of enquiries and the number of open cases, HMRC did not ask for all documents and pursue information in every case. It was impractical, due to the number of open cases, to litigate on a case-by-case basis.

HMRC frequently relied on the scheme employer and or promoter of the relevant scheme to pass progress updates to their scheme users. As a result many users received less correspondence from HMRC than they would have done for routine tax enquiries.

Compliance action 2010 to 2015

Anti-avoidance rules were introduced in 2011, which also led to the EBT Settlement Opportunity. At that time, the focus of our compliance work was to encourage large corporate employers and employers to settle.

The introduction of those anti-avoidance rules in 2011, was largely effective in discouraging large corporate employers from using DR type arrangements as they complied with the law. However, it did not have the same effect on employers and individuals who continued to not treat the arrangements as giving rise to employment income.

New schemes and promoters entered the market offering even more contrived arrangements that were promoted as being compliant with the 2011 rules. Other alternatives included schemes that aimed to continue to avoid income tax and NICs by moving from an employed to self-employed or partnership model. However, they all generally still involved the use of loans that are not repaid in practice. Some of the new variants try to obscure the fact a loan is used, such as by referring to it as an annuity.

Not all of these newer schemes were notified under the DOTAS regime. As a result, we have relied on intelligence and wider compliance activities to identify these new schemes and users.

During this period, HMRC continued to have limited contact with individual DR scheme users. In late 2012 when the number of DR scheme usages and Tax under Consideration (TUC) were reviewed additional staff were assigned to the work.

During 2012 to 2013 HMRC conducted a review into the effectiveness of its approach to tackling tax avoidance, including its approach to the investigation and litigation of DR schemes. As a result of this review new governance processes were introduced which were designed to ensure that each avoidance scheme had:

• a project control document known as an Issues Management Document (IMD) to better manage and control avoidance risks
• a handling and settlement strategy approved by a cross-HMRC board

In parallel with HMRC’s approach to investigating DR schemes we considered a new settlement handling strategy. The Contractor Loan Settlement Opportunity (CLSO) was offered to individuals in a range of DR schemes that had been used before 6 April 2011. Further detail is provided in the section entitled ‘Settlement Opportunities’.

Compliance action 2015 to 2019

In 2013, as the number of tax avoidance schemes and scheme usage continued to increase and pose a substantial threat to the Exchequer, Counter-Avoidance directorate was formed. This brought together around 1,300 technical, policy and operational experts from across the department into one place in order to concentrate its focus on tackling marketed tax avoidance schemes.

The investigation of existing known DR schemes continued, but with a clearer focus on advancing those cases to resolution through either settlement or litigation. To support the lead investigators of schemes, Counter-Avoidance created new litigation lead roles designed to resolve schemes, through litigation where necessary.

Several DR schemes have advanced to the stage that closure notices have been issued for a number of lead litigation cases with those appeals now before the Tribunal. However, with the introduction of the DR settlement terms in November 2017, a number of these cases have had their appeals stayed or withdrawn as they progressed through the settlement process.

This period also saw the introduction of new powers to tackle avoidance and promoters. This includes the Promoters of Tax Avoidance Schemes (POTAS) regime, which was enacted in July 2014, with the objective of changing the behaviour of a small but persistent minority of promoters. Counter Avoidance set up a dedicated team solely to challenge the activities and behaviours of promoters, including those involved in DR schemes.

The government also listened to concerns raised about the wider supply chain involved in the selling, marketing and promotion of tax avoidance schemes. As a result new legislation, known as the Enablers regime, was introduced to tackle and remove the financial rewards of the small but persistent minority of accountants, lawyers or other advisors who enable an abusive tax avoidance scheme that is subsequently defeated.

Since Budget 2016, we have been focused on communicating with individuals and employers in scope of the loan charge, encouraging settlement and litigating cases ready to go to tribunal.

A timeline for this contact, including number of users contacted is set out below:

• April to August 2018: approximately 42,000 loan charge awareness letters issued
• February 2019: approximately 25,000 letters issued
• July 2019: approximately 23,000 letters issued advising on the loan charge additional information reporting requirements

In addition, approximately 7,000 awareness letters were sent to employers in September 2018 and approximately 9,000 letters were sent to beneficiaries of employer arrangements in December 2018.

Litigation against users of DR schemes

HMRC has challenged the use of DR arrangements from their inception in late 1990s, building on HMRC’s record of challenging earlier schemes designed to pay employment income in other ways that purported to avoid Income Tax and NICs. By way of background, where HMRC’s decision regarding the tax position is not accepted by the taxpayer, the taxpayer can appeal to an independent Tribunal or Court. In addition to the cases below that have proceeded to a final hearing, there are thousands of DR cases where the taxpayer has accepted HMRC’s view and not appealed, or appealed and settled before a final hearing.

Two initial cases concerning DR arrangements, decided in 2002 and 2008 (Dextra Accessories v HMRC and Sempra Metals v HMRC), were inconclusive.

HMRC continued to challenge DR arrangements, and the taxpayer’s appeal in RFC2012 v Advocate General (known as ‘Rangers’) became an effective lead case. The hearings started in the First-tier Tribunal in 2010 and culminated in a Supreme Court decision in 2017. The Supreme Court held unanimously that the contributions into the trust were employment income and subject to Income Tax and NICs. The case was decided under the law as it stood at the time of the transactions (2001 to 2009), and therefore clarified what the law had been at the time, rather than changing the law. The Supreme Court also held that the two earlier cases Dextra and Sempra had been wrongly decided by the lower courts. The issue of whether the employer or employee was ultimately liable to pay the tax was not considered by the court. Many other DR cases were not progressed pending this lead case clarifying the legal position.

There have also been five further cases in 2017 which have concerned similar arrangements where contributions were made into an offshore trust for employees, with loans then made by the trust. Landid Property v HMRC, Allen (Concrete) v HMRC and La Vita Pizzeria v HMRC were heard together, as were OCO v HMRC and Toughglaze (UK) v HMRC. In each of these cases - which relate to years between 2004 and 2008 - the First-tier Tribunal held that the payments were subject to Income Tax and NICs. All these cases concerned arrangements entered into by trading companies rather than contractors. However, the legal principles apply equally to both.

The only case relating directly to contractors is Boyle v HMRC, decided by the First-tier Tribunal in 2013. In that case, concerning years 2001 to 2004, “loans” were made in a rapidly depreciating currency so that any repayments would have been of economically negligible value. The Tribunal held that the loans were not genuine and were subject to Income Tax, on a number of alternative bases.

The question of the ultimately liable person was not the subject of these court decisions. Under the relevant legislation, the ‘liable person’ for the tax is the individual, but an employer may be under an obligation to account for the tax in the first place under the PAYE rules. However, HMRC has in certain circumstances the power to transfer the liability to the individual.

There have been two recent (2019) cases regarding HMRC’s discretion to disapply the PAYE Regulations, so that the liability is transferred to the individual:

• in R(Addo) v HMRC, the High Court agreed with HMRC’s view that HMRC has a statutory discretion to disapply the PAYE Regulations, in circumstances where the PAYE liability would otherwise fall on an end-client when it was the individual who had used the tax avoidance scheme
• in Hoey v HMRC, the First-tier Tribunal also agreed with HMRC’s view that HMRC has a statutory discretion to disapply the PAYE Regulations, and the effect of doing so was to deny the taxpayer a ‘credit’ for the PAYE which should otherwise have been deducted by the employer. The decision is under appeal

Apart from the tribunal and court cases, the General Anti-Abuse Rule (GAAR) Advisory Panel (‘the Panel’) has between 2017 and 2019 considered 9 DR avoidance schemes. The Panel is a statutory, independent, body made up of experts with legal, accountancy and commercial backgrounds. The Panel is not a judicial body deciding if the schemes are effective. The Panel provides external scrutiny to General Anti-Abuse Rule (‘GAAR’) cases by considering whether the tax arrangements entered into are a reasonable course of action, in line with the GAAR legislation.

For each of these cases the Panel has found the arrangements to be not reasonable and therefore abusive. Where the Panel considers that the arrangements were abusive, HMRC can make adjustments to the taxpayer’s tax position, to counteract the avoidance and recover the tax that the scheme sought to avoid. The customer can appeal against those adjustments.

The most common impact, apart from the employer or individual directly involved in the litigation, is for people to settle with us. We do not record why people settle with us and there is usually more than once reason. For example, in late 2017 the loan charge had been enacted and we had won the litigation against Rangers Football Club. We are not able to attribute someone settling to either one of those events above the other.

The FN legislation, introduced in 2014, allows HMRC to issue FNs on the back of court decisions in similar cases of tax avoidance that have found in HMRC’s favour, so reducing the time taken to bring cases to conclusion. FNs cannot be issued unless a number of conditions are met and HMRC is of the view that the scheme used has already been defeated in another person’s litigation. The FN rules are designed to resolve cases where the point at issue has already been decided in another person’s case. The user is faced with a choice: settle now, or continue the dispute and face a penalty if they lose their case.

Across all tax avoidance arrangements, we have issued over 22,000 FNs, with associated APNs totalling just under £1 billion. Around 60% of recipients of a FN comply with the notice and take action to settle their case – the balance continue with their dispute.

In DR, we have issued 3,200 FNs with the vast majority following the Rangers decision. Around 56% of those issued with an FN settled with us.

Compliance staff

As part of the design of Counter Avoidance, 16 operational teams were set up to deal with specific forms of tax avoidance. Half Counter Avoidance’s operational teams were created to investigate use of the wide range of DR schemes.

Table 36 below sets out the number of HMRC staff in DR operational teams covering the period 2015 to 2019 and their full-time equivalents (FTEs). The number for 2019 only represents the staff permanently within Counter Avoidance. Additional staff have temporarily been working within Counter Avoidance on DR work.

Date	Actual	FTE
August 2019	533	481
August 2018	533	474
August 2017	502	446
August 2016	516	456
August 2015	516	457

These figures include all employees in Counter Avoidance who are specifically tasked with resolving DR enquiries. However, not everyone in those teams will be solely investigating or supporting the investigation of such schemes, such as subject matter experts and lawyers.

Additional resource, not reflected in the table above, has also been temporarily secured from other parts of HMRC to assist with the peak of individuals wanting to settle during 2018 and 2019 in advance of the loan charge. This has been as high as around 500 and at June 2019 was over 300 FTE.

Other HMRC employees, both within and outside of Counter Avoidance have also assisted with such investigations as and when required, which are not included above, for example, subject matter experts and lawyers. These numbers are likely to be much smaller than the resource within Counter Avoidance.

In relation to investigations open from 1995 to 2014, which pre-date the setting up of the Counter Avoidance directorate, the data to establish the average number of employees working such investigations is not available. We understand that the resources deployed to such work were lower and more disparately spread across HMRC’s network of compliance teams.

Recognition and reward

We do not reward staff based on debts collected or the number of DR settlements and we will not base rewards on the success of the loan charge.

Go to section 10: Government and HMRC communications about Disguised Remuneration.