As part of its efforts to clamp down on tax avoidance schemes, HMRC released a piece of legislation called the Serial Tax Avoidance Regime (STAR). But what is the legislation, who is it aimed at and how may it affect you? 

What is the Serial Tax Avoidance Regime (STAR)? 

HMRC describe this as legislation forming “part of a range of measures to clamp down on tax avoidance, to change the behaviour of those who engage in tax avoidance and to discourage them from using avoidance arrangements in the future”. 

It aims to do this by imposing sanctions and penalties on individuals using tax avoidance schemes to reduce their tax liability which later transpire to be non-allowable. 

The types of schemes that it looks to clamp down on are arrangements:

  • disclosable under the disclosure of tax avoidance schemes (DOTAS) legislation 
  • disclosable, or have been disclosed, under the VAT disclosure regime (VADR) 
  • disclosable under the disclosure of tax avoidance schemes – VAT and other indirect taxes (DASVOIT) legislation 
  • where HMRC have given a follower notice – this will usually be following a decision in another case with the same/similar arrangement, where the decision was in HMRC’s favour
  • where HMRC have given a notice of final decision, stating that the tax advantages arising from those arrangements are to be counteracted under the general anti-abuse rules (GAAR) 

Who does STAR apply to? 

Contrary to the title, the legislation doesn’t just apply to serial tax avoiders. It can, in fact, apply to taxpayers that have only ever used one defeated tax avoidance scheme in the past. 

The arrangements that may be affected are ones that were either:

  • Entered into on or after 15th September 2016; or
  • Entered into before 15th September 2016 and defeated after 5th April 2017. 

How does STAR work?

Warning notice

If HMRC have defeated a tax avoidance scheme that you have used they will issue you with a warning notice within 90 days to tell you that they have put you into the STAR. 

The warning notice will tell you that you are in a 5 year warning period, which is split out into shorter ‘reporting periods’. 

Reporting period

For each reporting period, you will need to give HMRC an ‘information notice’ which includes:

  1. Information about DOTAS, VADR OR DASVOIT arrangements that you have used to achieve a tax advantage;
  2. How the arrangements were used to avoid tax/avoid being obligated to do something; and 
  3. How much tax you will have avoided as a result. 

You will also need to make HMRC aware of any missed returns that should have been filed during the period but were late. 

What are the STAR sanctions? 

If you enter a new scheme in a warning period which is defeated, HMRC may impose any or all of the following sanctions:

1. Charging a penalty

If you have not been given a warning notice before, the penalty would be 20% of the counteracted advantage. 

If you have received one prior notice this penalty would rise to 40% and could be as high as 60% if you have received two or more prior notices. 

2. Publishing your details as a serial tax avoider

Your details may be published if a) you used a new scheme during a warning period and that scheme was defeated and b) you’ve been given 2 or more prior notices. The details published can include:

  • your name and address
  • nature of your business
  • amount of tax you’ve tried to avoid and the penalty you have been charged
  • the period in which you used the scheme
  • any other details necessary to identify you 

3. Stopping you from claiming tax reliefs

You can be stopped from using tax reliefs (including the ones likely to affect a contractor: Capital Gains Tax, Corporation Tax, Income Tax, National Insurance, SDLT, VAT) for a period of 3 years, if all of the following apply:

  • You used a new scheme during the warning period which was defeated;
  • You have received 2 or more prior warning notices;
  • The new scheme, and at least 2 of the prior schemes that resulted in warning notices, all involved the misuse of direct tax reliefs;
  • For the new scheme, and at least 2 of the prior schemes that resulted in warning notices:

o The arrangements were counteracted on the basis of a particular avoidance related rule (which is a tax rule set up in order to avoid tax or obtain a tax advantage, or not having a commercial purpose)

o The misused relied was a loss relief

What does STAR mean for contractors? 

There have been various schemes in the past, whereby there have been promises of an increase in take home pay or the decision making process has been taken from the directors of the company. 

Loan schemes

For example, a scheme set up in order to increase take home pay and reduce tax.

In this case, a scheme may be advertised that a contractor could take home up to 92% of their pay by taking a small salary as PAYE income, and to take a loan of the rest of the income generated (after the deduction of a fee) on which no Income Tax or National Insurance would be paid. The loan was unlikely to ever be repaid. 

HMRC argue that the loans are like normal income and should be taxed in the normal way, with the tribunal agreeing with this viewpoint. 

Decision making schemes

For instance, if the accountancy provider determined the split of salary and dividends for their limited company clients, effectively taking away the decision making process from the directors. 

HMRC successfully argues that the Managed Service Company (MSC) legislation applied and that, as a result, all amounts paid to the company should be treated as employment income.  

You can see more examples of tax avoidance schemes on the HMRC website. 

How can Nixon Williams help you? 

At Nixon Williams we do not endorse the use of aggressive tax avoidance arrangements. With the majority of the available schemes, our belief is that if it sounds too good to be true, it usually is!

We are professional advisors who want to help you get it right, ensuring that you meet your obligations in a compliant way to avoid any nasty surprises in the future. 

We are not here to run the company for you or make decisions on your behalf, as this could fall foul of the MSC legislation. Our role is to provide you with the right information in order to help you make good decisions in a complaint way. 

Full guidance document for the Serial Tax Avoidance Regime (STAR) can be found on the HMRC website.