Tax loopholes describe circumstances where the law may not properly provide certainty on the tax treatment and accordingly provide opportunities for individuals and companies to exploit such circumstances and set-up arrangements to use such “loopholes” for the purpose of avoiding tax. Accordingly HMRC have adopted a reactive strategy, implementing legislation or seeking decisions at Tax Tribunals, to prevent tax avoidance.
In recent years most of the tax loopholes have been closed off by HMRC (or at least an attempt has been made to close them off) including the following:
- The definition of income and earnings as set out in the Income and Tax (Earnings and Pension) Act 2003 has been repeatedly amended to include Part 7A which provides for an income tax charge where there is a “reward or recognition, or loan, in connection with an employee’s current, former or future employment”.
- The use of director’s loan accounts as a form of income, has led to the introduction and revision of a charge on the director’s loan account under Section 455 of the Corporation Tax Act 2010.
- The deduction from Corporation Tax, as an expense, of loans made became prohibited under the Finance Act 2011 where such loans were not charged to Income Tax.
- •The ability of an individual to take employment as a company, rather than as an employee, became prohibited in certain circumstances under IR35.
- The transfer of the liability for payment of PAYE/NIC, from employer companies to employees, has been subject to guidance notes published by HMRC providing an explanation of the circumstances in which HMRC will determine the transfer of a tax liability to an employee.
- More comprehensive changes implementing Anti-Avoidance measures, in respect of the use of loans to avoid income tax and other taxes, have led to the General Anti-Abuse Rules implemented by the Finance Act 2013 and the recent legal changes to loan charges implemented by the Finance Act 2017.
However, there will always remain areas of the law where there is uncertainty or the possibility to exploit or manipulate a process which Parliament or HMRC had never previously encountered.
At Francis Wilks & Jones we have considerable experience of negotiations with HMRC, including accelerated payment notices, personal liability notices, appeals to Tax Tribunals or insolvency claims by liquidators.