AN INVESTIGATION into tax avoidance schemes has revealed that people are regularly introduced to avoidance arrangements via family, friends and accountancy firms, despite being aware that they are ‘unusual’ and ‘at the edge of tax law’.
The HMRC report attempted to understand why people make the decision to enter and exit marketed tax avoidance schemes, interviewing twenty former tax avoiders to discover how they went about doing it.
Participants referred to 15 different tax avoidance schemes, all of which were registered for by users between 2003 and 2013.
Accountancy firms to blame
Members of the public gained access to the tax avoidance platforms through four main sources, including friends and family; advisers with whom they had an existing relationship with; and trusted advisors such as a solicitor or estate agent.
The individuals were also introduced to tax avoidance schemes by accountancy firms with whom they did not have a previous relationship. Typically, these introductions were described as corporate ‘training’ sessions and led by an accountant from a large, reputable accountancy firm.
“I know it sounds a bit cavalier but it wasn’t really… we looked at the scheme and we thought [large, reputable firm] are a firm of accountants; we don’t need to second guess everything they’ve done; we either take their word for it that this kind of scheme has a chance of working or we don’t,” revealed one interviewee in their discussions with HMRC.
‘At the edge of tax law’
The tax avoiders admitted to being aware that the schemes were ‘unusual’ and were ‘at the edge of tax law’, but were persuaded to participate in them through the persuasive language of so-called ‘introducers’, the report found. They are distinct from a scheme promoter but on occasions the two roles were conducted by the same individual.
HMRC outlines three main tactics used by promoters to make the schemes seem more appealing to taxpayers.
The promoters would firstly present a logical argument to the individual to make the scheme seem tax efficient, beneficial and a legal form of avoiding tax.
Introducers would then avoid making the schemes a ‘hard sell’, so would describe the arrangements as an ‘option’ and would refer to the successes of previous schemes to make them seem more appealing to taxpayers.
They would also use credible sales approaches such as formal presentations to make the schemes seem more legitimate.
Promoters would use persuasive language during meetings with taxpayers to differentiate tax avoidance and tax evasion. Taxpayers argued that this “helped them to justify their decisions to invest in a tax avoidance scheme, which was viewed as a legitimate option compared to tax evasion”.
HMRC created a spectrum to illustrate the strength of the participant’s attitudes towards their involvement in tax avoidance schemes.
The most common group in this research was the Justifiers, with a minority of cases falling at either end of the spectrum, either in the Unaware or the Deliberates groups.
‘HMRC are also responsible’
Rebecca Busfield, partner at Watt Busfield Tax Investigations, believes that individuals should be more vigilant over their tax affairs in the future, but has called on HMRC to change the way it educates people over tax avoidance schemes.
“The research does hint that HMRC are also responsible for giving the perception over many years that tax avoidance is tolerated and accepted by allowing schemes to continue and due to the perception that other taxpayers, including companies, are benefiting from and getting away with tax avoidance.
“Given that taxpayers have to sign their tax returns to confirm they believe the information is correct and complete, they should take care over the tax implications related to their investments and get second opinions if anything appears to be too good to be true. Just because something works for a friend, doesn’t mean that it would be appropriate for themselves,” continued Busfield.
The research recommends that HMRC “consider emphasising the moral argument against the use of such schemes”, as well as implementing “stronger consequences” for users of tax avoidance schemes.
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