The value of legitimate tax efficient products such as Business Relief (BR) and the Enterprise Investment Scheme (EIS) were brought into sharp relief after UHY Hacker Young revealed HMRC has recorded a near 30% increase in cash collected from tax investigations.
For the tax year 2018/19, HMRC collected £13 billion from its tax investigations, compared to £10.3 billion from 2017/18, according to the accounting firm’s research.
Approximately 50,000 people who used loan-based avoidance schemes are having to pay back avoided taxes from the past 20 years, with bills stretching into the hundreds of thousands of pounds.
The firm noted HMRC was becoming more successful at identifying cases for investigation which were likely to result in large amounts of extra tax being collected.
It also partly credited the jump in collection to the fact that any individual who had used avoidance schemes to reduce their income tax bills in the past had to pay any tax owed to HMRC by April 2019 or face extra charges.
This was compounded with HMRC’s offshore tax campaign last year, which required individuals to declare overseas income or gains by September 2018 and pay liabilities owed, or face potentially huge fines.
It doesn’t have to be like this. If the individuals who had attempted to hide their money abroad or avoided taxes through complex arrangements had instead opted for one of the government’s legitimate tax efficient products, they would likely not have had to pay HMRC their backdated taxes owed and any fines and charges given on top of that. Plus, they would have been helping to support British business into the bargain.
The public, Government and HMRC have been taking tax avoidance increasingly seriously over the past decade, making those using convoluted schemes to shield their capital an easy target for tax collectors looking to boost coffers and score a potential PR victory.
Thankfully the UK boasts a number of Government sanctioned arrangements which reward investors with favourable tax conditions for investing into smaller, younger companies that might otherwise struggle for capital. While this puts them into the high risk category, they also offer the opportunity of significant growth and a major boost to UK Plc.
The Enterprise Investment Scheme (EIS) is one example. If invested into an EIS within certain timeframes, 100% of a capital gain can be deferred. Assuming the EIS is held for two years, the investment will usually receive 100% inheritance tax relief (through another Government-supported scheme, Business Relief), and as long as the investment is held for a minimum of three years, 30% income tax relief can be claimed and all growth is tax-free.
Although the original capital gains liability may have to be paid once the EIS investment ends, it could instead be invested in another EIS, deferring it again, while also offering more support to scaling UK businesses. This can be done an unlimited amount of times, until death – at which point the capital gains tax dies as well .
Of course, tax efficiency should not be the only consideration – EIS is notorious for locking in liquidity, and both investment and exit risk are issues that need to be taken seriously by any prospective EIS investor.
However, in comparison to an at-best legally grey tax avoidance scheme, an EIS investment avoids the risk of suffering an HMRC clampdown – potentially over a decade later – and having to pay back the entire original tax charge (which may have already spent), plus any additional fines, not to mention the potential for negative PR.