Stephen Kenny (pictured below), head of private client tax at UK-based , looks at HMRC’s celebrity tax clampdown and what the new Labour government’s focus on closing the “tax gap” will mean for wealthy taxpayers and their advisors.
Stephen Kenny
The so-called “tax gap” is a hotly debated issue. In these fiscally straightened times, governments of all political stripes are tempted to claim that there are untold billions of pounds of untaxed wealth that has fallen down the back of the sofa, so to speak. Some of the attacks on offshore financial centres can take on this sort of angle. The issue raises the point that even in a liberal democracy, there are limits to how far and high taxes can go before compliance falls off. Arguably, in the UK, the country is already on the wrong side of the “Laffer Curve” and compliance is going to remain a talking point. Regardless, the wealth industry must remain on top of the topic and be ready for changes in policy.
The editors of this news service are pleased to share these views; the usual disclaimers apply to views of guest writers. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com
I have been working in tax for nearly 20 years and rarely has a Budget passed without the government talking about closing the tax gap.
The tax gap is the difference between the amount of tax HM Revenue & Customs, in theory, should be paid, and what it has actually received. The reported tax gap stands at an estimated £39.8 billion ($49.8 billion).
With a new government, come new plans on how to close the gap.
As part of the Labour government’s planned tax crackdown, the Chancellor of the Exchequer has pledged £555 million additional funding per annum in a range of measures to tackle tax evasion and non-compliance. The government estimates that this would generate an extra £5 billion a year by the end of the parliament.
This extra investment into HMRC would include recruiting up to 5,000 new compliance officers to enhance tax enforcement.
Investment is also earmarked for the digitisation of the tax system to improve compliance and customer services – including making greater use of artificial intelligence.
Currently, HMRC collects huge amounts of data from a number of sources but historically it hasn’t put this to the best use. We can expect that HMRC will use these new tools and technology to consolidate the data it receives from various sources to target what they consider to be the highest risk areas.
We can also expect HMRC to use their debt recovery and enforcement powers to collect unpaid tax liabilities. This will most likely include more use of third-party debt collection agencies.
In practice, this increased focus on narrowing the tax gap means that we can expect to see an uptick in tax investigations and disputes and taxpayers will need to be make sure they are comfortable with their tax position and can explain and defend it to HMRC.
HMRC’s celebrity showdown
With the tax authority doubling down on efforts to close the tax gap and tackle tax evasion we can also expect more high-profile individuals suspected of underpaying taxes being brought into the spotlight.
One of many famous names being pursued by HMRC’s investigators is broadcaster and former footballer Gary Lineker.
In December 2024, a long-running dispute over £4.9 million of allegedly underpaid taxes was back in court as HMRC sought to overturn a decision in favour of Lineker by the First Tier Tribunal (FTT).
The Lineker case centres on the applicability of IR35 rules which apply where a business hires an individual to provide services off-payroll via an intermediary – often a Personal Services Company (PSC). The legislation aims to prevent the misuse of such structures to minimise tax liabilities, by ensuring that the individual providing the service pays broadly the same income tax and National Insurance as a normal employee.
Lineker is not alone, however. Numerous other TV personalities – including Adrian Chiles, Loraine Kelly, Eamonn Holmes and Kaye Adams – have found themselves in hot water with HMRC over IR35.
Several other famous figures have also fallen foul of HMRC for different reasons.
Actor Rupert Grint, for example, came under media scrutiny after a run-in with the taxman. In this case, HMRC was successful in claiming that £4.5 million in residual income and bonuses from the Harry Potter films received during the 2011/2012 tax year should have been taxed as income rather than as capital gains. The presiding judge applied the “avoidance test” to determine that one of the main objectives of the arrangement was to shelter the actor’s earnings from income tax.
Jockey Frankie Dettori also made the headlines recently after losing a three year-long battle for anonymity over his involvement in a notorious tax avoidance scheme. The “remuneration scheme” – set up by a former solicitor and barrister and since labelled as a “sham” – allowed wealthy individuals to establish a trust which would, supposedly, reduce their income tax bills.
These are just a few select examples from a long list of celebrities who have bumped heads with HMRC. High-profile cases like these are a clear warning: non-compliance and the use of artificial schemes that serve no commercial purpose will have repercussions. HMRC is serious about closing the tax gap and is prepared to take significant action to recover unpaid taxes and penalties.
What does this mean for the HNW taxpayer?
To understand the impact on the (non-celebrity) HNW taxpayer it is helpful to give a bit of a potted history on tax disputes with HMRC.
Traditionally tax law relied on a quite strict interpretation of the legislation. Over the years this has changed with what is often referred to as the “Ramsay Principle,” which takes a much more purposive construction of tax law in avoidance cases.
This means that when the courts seek to apply the legislation, they should look at the intended purpose of the statute. During that analysis, pre-ordained steps that have no commercial purpose other than to avoid tax should be ignored.
This change in approach has been supported by the introduction of the General Anti-Abuse Rules and several Targeted Anti-Abuse Rules. Rules have also been introduced for disclosing marketed tax avoidance schemes and naming tax avoiders.
With these changes, we have seen a shift in approach to how tax planning works and what is seen as acceptable. We are now in a world where tax avoidance is deemed immoral.
Historically a lot of tax schemes – many of which have been used by high profile celebrities – relied on using the strict letter of the law to achieve a reduction in tax, which was never intended by parliament.
The rhetoric in the lead up to both the election and the Budget focused on the plans to close these tax “loopholes.” That said, many of these loopholes, such as the carried interest rules, non-domiciled rules and business property relief for inheritance tax, are not actual loopholes but were, in fact, the will of parliament.
What steps should taxpayers be taking now?
This heightened focus means that we can expect an increase in enquiries and it is likely that high net worth individuals and those with more complex tax affairs will be in the firing line.
With this in mind, it is important to:
-- Minimise the risk of an enquiry;
-- Limit the amount of time HMRC can open an enquiry; and
-- In the event of an enquiry, be contactable to ensure that it can be resolved as quickly as possible.
Overall, it is critical that taxpayers receive clear advice, and that the advice is documented and the complete and necessary disclosures have been made to HMRC as part of any tax filing. The importance of record keeping and documentation should not be forgotten.
As HMRC ramps up efforts to close the tax gap, wealthy taxpayers and high-profile individuals are likely to face increased scrutiny. Taxpayers and their advisors must take proactive steps to ensure that their affairs are in order – this will be key to navigating what is shaping up to be a more aggressive enforcement landscape.