With the government’s efforts to close the tax gap, high profile individuals like celebrities, athletes and entertainers, are increasingly finding themselves under HMRC’s scrutiny, says Phil Clayton
Gary Lineker is making the headlines once again – this time as a result of HMRC’s continued efforts to overturn the First Tier Tribunal’s (FTT’s) decision on £4.9m of allegedly underpaid taxes. Is this just the beginning of more high-profile cases and famous individuals being taken through the pressures and expenses of complicated HMRC investigations?
The ‘tax gap’ – the difference between the amount of tax that HMRC should, in theory, be paid and the amount that it actually receives – is currently estimated to stand at £39.8bn. Closing this gap has been a stated ambition of many governments despite the challenging nature of the task, and the current Chancellor is proposing significant investment to tackle the problem. Labour’s proposal includes channelling £555m into increasing the number of HMRC officers by 5,000 and modernising its system to clamp down on tax evasion and non-compliance. They estimate this will raise £5bn a year by the end of the parliament.
A key direction of the government’s solution is to expand the use of technology, using data mining and AI to identify anomalies in the tax reporting. These system aim to cross-referenc the financial data received from banks, social media activity and other sources to detect potential underreporting, as well as fraud.
Anyone who has been involved with HMRC’s ‘Making Tax Digital’ initiative over the past decade or so will appreciate that implementing technology-based solutions into the tax system is easier said than done. So HMRC has another important tactic – and this is where Gary Lineker comes in.
Lineker’s complex income streams
High-profile individuals, including celebrities, athletes and entertainers, are increasingly finding themselves under HMRC’s scrutiny. Their income streams can be far more complex – often including international contracts, sponsorship deals and image rights – which make them prime targets for HMRC investigations. These arrangements frequently also involve complicated structures, including offshore accounts, trusts or companies, which can create additional areas for HMRC to review.
These complexities bring with them a higher risk of both unintentional, or deliberate, non-compliance, which can lead to substantial tax liabilities and penalties. And even if there is no suspicion of wrong-doing, HMRC may still wish to investigate these arrangements to understand the structures and confirm the position.
Gary Lineker is just one of many in the sports and entertainment industry to have been the subject of an HMRC investigation, although many more cases are resolved privately without such media coverage.
The recent publicity around Rupert Grint, famous for playing Ron Weasley in the Harry Potter films, shows how complex these areas can be. In this example, the £1.8m dispute centred on whether the transfer of a right in the 2011/12 tax year to a company was a capital gain or income. Judge Morgan, presiding over the case, applied the ‘avoidance test’ to determine that one of the main objectives of the transfer was the avoidance of income tax, before ruling in HMRC’s favour.
There has been a clear shift over the past few decades from tax avoidance being something that was widely marketed – such as a music investment scheme that was reportedly used by some members of Take That, or structures to channel salaries offshore, one of which was linked to celebrities such as Jimmy Carr. The Prime Minister at the time, David Cameron, characterised these sorts of activities as “morally wrong” and the public reaction led to the introduction of the General Anti-Abuse Rules (GAAR).
It has been reported that Gary Lineker has already paid hundreds of thousands of pounds in legal fees
The costs to an individual of an HMRC investigation can be significant. As well as the tax liabilities that arise from a successful case, those caught in the tax authority’s sights also face reputational risks and significant media attention. High-profile individuals may lose endorsements or contracts during the process, and their advisers may risk losing the trust of other clients. Furthermore, the legal and professional costs to battle HMRC are substantial. It has been reported that Gary Lineker has already paid hundreds of thousands of pounds in legal fees.
High profile cases like these send a clear message to the rest of us about the consequences of non-compliance and the use of artificial schemes that serve no commercial purpose. They show that HMRC is serious about closing the tax gap and is willing to go to great lengths to pursue unpaid tax and penalties.
Phil Clayton is director in the private client tax team at PKF Littlejohn