HMRC’s Large Business Service is investigating directors and senior executives for £400m worth of underpaid taxes – including PAYE, and National Insurance Contributions, according to figures as at July 2012, obtained by Pinsent Masons under a Freedom of Information (FOI) request. This is 43% higher than the £280m under investigation last year.
Jason Collins, a tax expert at Pinsent Masons, says the sharp rise in directors’ taxes being put under the microscope has been driven by the upswing in HMRC compliance activity, as well as investigations into avoidance linked to the 50p tax rate and the temporary special tax on bank bonuses.
“HMRC has increased its focus on executives as they are a potentially lucrative source of extra tax revenue – particularly with executive pay rocketing over recent times. HMRC has taken a particular interest in cases where income or an individual’s role at a company has been structured to reduce their tax burden, particularly their PAYE or national insurance contributions.” he said.
The introduction of new taxes for higher earners, such as the 50p marginal tax rate, mean HMRC will be on increased alert for any new forms of tax avoidance, Collins added. "The 50p tax brought in less than expected, so this may have set alarm bells ringing for tax investigators," he said.
The 50p top tax rate was introduced by the Labour government in 2010. Chancellor of the Exchequer George Osborne noted in his 2012 budget speech that the increase from 40p to 50p raised just over £1 million and "an astonishing £16 billion of income was deliberately shifted into the previous tax year". The 50p rate will be reduced to 45p from 6 April next year.
Collins says that the jump in tax under consideration by HMRC suggests that the Government may have been right to change tack on the 50p tax rate. "The 50p tax rate struggled to produce the yield that was expected. It has proved to be too easy for individuals and companies to find ways of not paying it through tax planning".
He added that the value of tax HMRC has under investigation will have also been boosted by HMRC’s recent increased effort to bring in as much extra tax as possible, and by added powers gained by HMRC to tackle ‘disguised remuneration’.
The 'disguised remuneration' rules were introduced from April 2011 to tackle arrangements where employers use trusts or other vehicles which seek to avoid, defer or reduce tax liabilities to reward employees.
The rules create a charge to income tax where third party arrangements are used to provide what is in substance a reward or recognition, or a loan, in connection with an employee's current, former or future employment. Where this is the case, that amount is deemed to count as employment income and is taxable through pay as you earn (PAYE).
HMRC has been set a target of increasing tax revenue brought in as a result of compliance activities by a further £7 billion by 2014-15.
However, Collins cautioned that "just because HMRC thinks tax is missing, doesn’t mean that it actually is". He pointed out that £400m is just the figure that HMRC estimates might be at stake, and the amount HMRC will actually collect through their investigation work will be much lower. The taxes of senior employees and directors under investigation by HMRC will include genuine errors made by the taxpayer as well as legitimate tax planning.
HMRC’s Large Business Service is responsible for the taxes paid by the 770 largest businesses in the UK.