In theory, what’s not to like about the HMRC Spotlight service? Operated by HMRC, this service identifies and warns individuals and companies against aggressive or illegal tax avoidance schemes. It’s easy to see the potential cost savings, not to mention the protection of reputation, where individuals are dragged into scenarios which look perfectly viable but can conflict with the law.
This article examines the purpose of the Spotlight service and its perceived effectiveness and weaknesses, as detailed by business and accounting experts.
What is the HMRC Spotlight system?
Published on the HMRC website, going back to 2009, you will find various “Spotlight” articles which highlight specific tax avoidance schemes. You may be surprised to learn that these articles will name and shame individuals and third parties as they look to warn taxpayers about what HMRC deems either aggressive or non-compliant tax avoidance schemes. The main objectives of the HMRC Spotlight system are to:-
- Educate taxpayers
- Promote transparency
- Encourage compliance
At this point, reminding ourselves of the difference between tax evasion and tax avoidance is helpful. Tax evasion is illegal, while tax avoidance, which looks to exploit legal loopholes, is not necessarily illegal.
How the HMRC Spotlight system works
Effectively a public information service, the HMRC Spotlight system has a strong educational element. It explains the risks and legal implications of specific tax avoidance schemes while naming and shaming those operating them. The publications go very deeply into the particular schemes.
Interestingly, when you consider that HMRC will only give advice or guidance on proposed activity after undertaking it, these articles explain in detail why the schemes are problematic (after the event). Occasionally, you will find third-party opinions contradicting those of HMRC, but the tax authorities have the final say in the early days. HMRC also publishes regular updates on schemes mentioned in the past, generally emphasising their powers and ability to spot suspect activities.
It’s also interesting to note that where there is a degree of ambiguity and confusion, the merest mention of a specific scheme (or type of scheme) as being suspect should/could be enough to put off the vast majority of individuals and companies. Whether you would call this guilty until proven innocent or simply a very effective deterrent, the Spotlight system certainly attracts a number of varied opinions.
Examples of schemes highlighted in the Spotlight system
Reading through the theoretical basis for the HMRC Spotlight system, you may have a number of ideas about particular types of schemes which have attracted their attention. These are some of the more recent Spotlight warnings:-
- Warning for employment agencies using umbrella companies (Spotlight 64)
- Property business arrangements involving hybrid partnerships (Spotlight 63)
- Dividend diversion scheme used to fund education fees (Spotlight 62)
- Disguised remuneration: remuneration trusts used to reduce profits and disguise income (Spotlight 61)
- Warning for agency workers and contractors employed by umbrella companies (Spotlight 60)
Over the years, we have seen a wide range of strategies highlighted, including using loans to avoid tax, stamp duty land tax evasion and, as touched on above, more recently, using hybrid partnerships and LLPs.
The above list reveals the precise nature of each Spotlight warning; there is no ambiguity or confusion, just a specific description of each scheme.
Criticisms of the HMRC Spotlight system
It will likely come as no surprise to learn that while in theory, the HMRC Spotlight system has many benefits, in practice, well, these could be more forthcoming. A number of criticisms have been levelled at the HMRC Spotlight system, such as:-
Lack of enforcement
Those who have had anything to do with HMRC will likely be aware of the relatively slow pace at which the wheels of enforcement can turn. Many believe that a lack of immediate, decisive action has led to a sense of impunity amongst those operating and using the more dubious schemes. Alternatively, by highlighting, in precise terms, the schemes and individuals in question, many argue this act is an effective deterrent in itself.
The complexity of UK tax regulations
To say that UK tax regulations can be ambiguous is an understatement (as many people can testify). We have seen numerous challenges go to court, HMRC analysis of schemes questioned and sometimes overturned. Unfortunately, there are also situations where individuals and companies are drawn unintentionally into areas of non-compliance. This prompts an interesting fact about UK taxes: the tax regulation book is thicker than all of the Harry Potter novels put together!
Limited deterrent
You could argue that those pursuing aggressive or borderline illegal tax avoidance schemes are unlikely to cease activities unless faced with immediate consequences. Conversely, those who believe they have a legitimate case against the HMRC Spotlight investigation (quasi-ruling) could arguably (legitimately?) continue until proven otherwise.
Awareness of the Spotlight system
Even though the Spotlight investigations/articles are published online for all to see, how many people have read these articles? Individuals and companies are more likely to be made aware of Spotlight issues through their accountants and other professional advisers. The system, a great idea in theory, must be better publicised to the broader business and taxpayer community.
Reactive, not proactive
As we touched on above, if you approach HMRC about the legitimacy of an action you wish to take, they are unlikely to give you any advice and guidance. Instead, they are more likely to take a reactive rather than proactive approach, which could have avoided non-compliance, fines and reputational damage for numerous parties. In reality, the vast majority of schemes highlighted in the Spotlight system are unlikely to have approached HMRC for prior approval.
Resource constraints
It is no secret that HMRC is critically underfunded, looking towards enhanced automation to save money and unable to investigate, in sufficient detail, many cases of potential non-compliance with tax regulations. There is now a huge backlog of investigations, case delays and a growing number of appeals, with the system effectively grinding to a halt. The once more friendly approach from HMRC (albeit many years ago) is a distant memory, but is the tax tiger now toothless as a consequence of resource constraints?
The settlement process
Normally, where there is a degree of non-compliance, there is a definitive ruling and then a negotiated settlement. Occasionally, we have seen instances where individuals and companies have approached HMRC about a settlement after reading Spotlight warnings that may be relevant to their activities. In this scenario, it’s critical that you take professional advice from your accountant as you may have a legitimate defence, and we could help you negotiate a much better settlement. Don’t wave the white flag of surrender before clarifying your position, defences and even extenuating circumstances.
Summary
The HMRC Spotlight system is advantageous and educational, prompting the thought that if a tax avoidance scheme looks too good to be true, then it probably is. That said, the system could be more widely publicised, enforcement much quicker and the complex nature and ambiguity of the UK tax system addressed at an earlier stage.
Limited resources, diminishing funding and a reactive rather than proactive approach mean that the Spotlight system is not held in very high esteem within professional circles. On the plus side, perhaps the only major plus side, does naming and shaming individuals prior to definitive rulings provide a degree of deterrent?
If you require advice on individual or company taxes or are involved in a scheme highlighted by the Spotlight system, please get in touch with us so we can examine your situation in more detail.