PSCs, School fees and Pandora papers

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HMRC pokes PSCs again

Last year HMRC ran an educational programme for individuals who are registered as persons with significant control (PSCs) at Companies House. It sent over 2300 letters to selected PSCs of UK companies, as we explained on 27 October 2022.

This month HMRC has reactivated this programme, sending a further 1800 letters to PSCs who haven’t registered for self-assessment, or who declared income of less than ￡100,000 on their latest tax return. If your client is targeted by this campaign, you should receive a copy of the HMRC letter as their tax agent.

Those who haven’t submitted a tax return may not be among your clients, but a recipient of such a letter may approach you for advice. In which case you can help them check whether they do need to complete a tax return.

Just because an individual is a company director doesn’t mean they have to register for SA. If their earnings are taxed under PAYE and any dividend income is covered by their dividend allowance (￡2,000 for 2022/23), a tax return won’t be necessary.

However, when an individual uses the online tool: “Check if you need to send a self-assessment tax return” as the HMRC letter suggests, that will tell them a tax return isn’t required if they have less than ￡10,000 in dividends or savings, and their total income is less than ￡50,000.

This is clearly wrong, as a PSC whose only income is dividends of ￡49,999 will have tax to pay of ￡3,100 for 2022/23.

The other nudge letter sent to those with income of less than ￡100,000 is more concerning, as most SME directors will try to keep their income below that level to preserve their personal allowance. You need to double check with your client that they haven’t taken taxable benefits from their company that you don’t know about, such as loans or assets.

Where your client receives either nudge letter HMRC expects them (or the tax agent) to reply and take any necessary action by?18 August 2023. This deadline has no legislative backing but ignoring it could trigger HMRC to open an enquiry.

Tool to help decide if a tax a return is required

HMRC letter to PSCs who haven’t submitted a tax return

HMRC letter to PSCs with income below ￡100,000

School fees tax saving scheme

HMRC regularly issues Spotlights on tax avoidance schemes which it believes are ineffective and potentially harmful to the taxpayer. This week Spotlight 62 concerns a school fees tax saving scheme which may be marketed to your wealthier clients.

The scheme needs 3 elements:

• Parents of school age child who run their own profitable company.
• Friend or relative (eg Aunt) who is prepared to take ‘B’ shares in that company and put those shares into a trust for the child.
• School who will charge its fees to the trust.

In brief the dividend income paid on the B shares flows into the trust, where it is taxed as the child’s income at lower tax rates and using the child’s allowances, than it would have been subject to in the hands of the parents. The trust pays the school fees out of that lower-taxed income.

The flaw in this scheme is that Aunt needs to buy the B shares, and she almost certainly doesn’t pay a true market value for them. This transaction will require the permission of the parents, as directors and major shareholders of the company, so the parents are effectively setting up an indirect trust for their child.

The whole scheme falls under the disclosure of tax avoidance schemes (DOTAS) rules, and it must be declared to HMRC within?five days?of it being made available or implemented. If you include this scheme on your website or recommend that your clients to use it, you are a scheme promoter and you must declare the scheme to HMRC using form AAG1.

If your client has used this school fees scheme, which was marketed to them by someone else, they need to declare the DOTAS reference number on their tax returns. They should receive a form AAG6 from the scheme promoter which includes that reference number.

Please ask one of our tax experts to check out any tax saving scheme which is presented to you or to your clients.

Spotlight 62: Dividend diversion scheme used to fund education fees

Overview of DOTAS rules

Forms to disclose tax avoidance schemes

Pandora papers nudge letters

The Pandora Papers consisted of 11.9 million leaked documents from 14 offshore financial service companies. These were gradually released by the International Consortium of Investigative Journalists from October 2021 onwards.

HMRC has been reviewing this data and is now writing to around 600 people named in those papers. This is only the first tranche of the total population who will be contacted as a result of this information coming to light.

The HMRC letter asks the taxpayer to review their disclosure of offshore income or gains and warns that if there is an under-declaration the penalties could amount to 200% of the unpaid tax. The individual could also face a criminal prosecution if they make a dishonest disclosure.

If your client receives this letter there are two routes to disclosure:

• Where deliberate behaviour or fraud is suspected use the contractual disclosure facility (CDF) and code of practice 9 (COP 9).
• Where there has been no deliberate offshore non-compliance the Worldwide Disclosure Facility (WDF) could be used.

Using the COP9 route will allow HMRC to recover tax, interest and associated penalties as far back as 20 years. However, the taxpayer would have protection from criminal prosecution for tax offences so long as they make a complete, open and honest disclosure of all deliberate behaviour.

Making either type of disclosure is a complicated process. If you are not experienced in this area, please seek advice from our tax investigation specialists. The PCRT rules state that tax advisers should not undertake professional work which they are not competent to perform unless they obtain appropriate assistance from a suitably qualified specialist.

HMRC Pandora papers letter

Professional Conduct in Relation to Taxation (PCRT)

Contractual disclosure facility (CDF)

Tax Support for your practice

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• a second opinion whenever you provide what you consider to be a significant opinion of your own.

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