HMRC's recent actions threaten to blur further the distinction between tax avoidance and evasion, believes Chris Belcher

Last week the BBC reported that HMRC was adopting new tactics in its attempts to crack down on tax avoidance. It had learned that 1,500 people would receive strongly worded letters from HMRC in a “pre-emptive strike” to catch members of a particular tax avoidance scheme before the scheme’s legality was challenged (‘Tax avoiders to get warning shot from HMRC’, BBC News Online, 24 November 2012).

Is it really right that HMRC should be approaching matters in this way?

Avoidance tactics

It is trite but nevertheless true to say that tax avoidance (as opposed to tax evasion) is legal, and it is long established that individuals and companies in the UK have a right to arrange their affairs in such a way as to mitigate their tax liability. However, HMRC is under increasing pressure to raise more tax, and one way it is trying to do so is to clamp down on users of ‘schemes’.

There has been much written in the press recently about the use of tax schemes by individuals, as Jimmy Carr and others will no doubt testify. Perhaps more interestingly, the National Audit Office (NAO) produced a report on 21 November 2012 which estimated that £5bn of tax a year went uncollected as a result of tax avoidance.

The NAO report sets out some quite startling facts. For example, HMRC has 41,000 open tax avoidance cases. There are around 100 schemes disclosed under the Disclosure of Tax Avoidance Scheme (DOTAS) rules each year, but a suspicion that many more schemes go undisclosed. The NAO recommended that HMRC should work harder to influence the market in tax avoidance schemes and should improve its own management information.

It is perhaps no coincidence that, three days later, HMRC’s pre-emptive strike began.

I have not seen one of HMRC’s letters to the taxpayers involved in the as-yet-unspecified tax avoidance scheme. However, the BBC reports that the letter tells taxpayers: “You are in the small minority of people who have made the deliberate choice to avoid tax. We focus our resources on this small minority. The choice that you have made changes the way we view your tax affairs.”

It continues: “Our Specialist Investigations Unit will be carrying out a full investigation into this scheme and they will open an enquiry into your tax affairs.”

Game over

The letter then – apparently – invites taxpayers to give the game up and pay the outstanding tax for which they might be liable.

This is particularly contentious. After all, there is no suggestion that the scheme in question is illegal, so why should taxpayers not participate in it?

It is possible, in time, that HMRC may challenge the scheme and it may even win. But it is equally possible that a test case may never be brought and, even if one is, who is to say that the taxpayer will not win it?

The NAO report notes that, since April 2010, litigation has been begun by HMRC in 110 avoidance cases. Of these, judgment has been received in 60 cases and HMRC has won 51 of those. Admittedly, this is a good success rate, but compared to the vast number of avoidance schemes being operated at any one time, it is a relatively small drop in the ocean.

The scare tactics being used now by HMRC have attracted some negative comment. One writer has likened HMRC’s approach to the police “threatening to pull over and fine motorists travelling at 70mph on the motorway because there might be a chance that in the future the law will change and the speed limit be reduced to 60mph” (Dave Chaplin, ContractorCalculator, 26 November 2012).

It seems HMRC is seeking to blur the distinction between avoidance and evasion. It is threatening taxpayers with an investigation unless they “voluntarily” pay more tax than is actually due under the current law.

I don’t doubt that HMRC’s task in tracking down unpaid tax is a difficult one, but this change in tactics is worrying and it begs the question of which schemes or arrangements might in future become the target of similar letters.

Chris Belcher is a partner and the head of private tax at Mills & Reeve LLP. Contact chris.belcher@mills-reeve.com; www.twitter.com/pc_lawyer