Tax Saving Schemes That Are Too Good To Be True
As a partner in a firm that specialises in tax planning and business advice, I am frequently asked whether I can advise on ways to save tax. Often, I am asked why we do not promote certain schemes which are advertised widely. Well, here is a scheme which is purported to save you corporation tax.
As you should know, since May 2018 all businesses in the UK were required to be GDPR (General Data Protection Regulation) compliant. This means that if they obtain, store or process personal data they have to register with the Information Commissioners Office (ICO) and follow certain rules regarding how they store and use that data.
The first time many businesses heard of this is when they received a notice from the ICO asking them to file a return. The ICO has a useful checklist on its website which allows organisations to assess their reporting requirements. Many businesses do not fall within the regime and simply need to update the ICO of their status. If you have not yet done so, I would recommend you run the checklist on ICO's website.
So how is this related to tax savings? The promoters of the schemes approach company directors and point out that it is believed that up to 75% of businesses in the UK are not compliant with the GDPR regulations. Under the regulations, if companies are found to be in breach of their duties, they could face fines of 4% of earnings. Worse, if a customer sues the company (as has been the case with British Airways and other high profile cases), the claims could reach millions of pounds! In fact, they warn that many legal firms who were involved in bringing PPI claims are now ‘retraining’ and specialising in bringing GDPR claims – of course, on a no win no fee basis!
On the basis of all this, the promoters suggest that in addition to having proper GDPR policies and processes in place, companies should make a provision in their accounts for any potential claims against them. They claim that it is part of a director's "fiduciary duty" to create a "GDPR monetary compensation reserve or fund" to mitigate the risk of a claim affecting the business’s future. This provision will of course reduce the company’s profits and will result in a corporation tax reduction. The promoters claim that they are experts in calculating the amount and value of GDPR claims risks specific to your company. One website I looked at says that they have a ‘unique algorithm’, another actually calls it a ‘magic formula’ which they use to make a claim ‘with legal justification and standard accounting processes’.
The tax reclaim firms claim that they have already completed many cases and have received full approval for everyone from HMRC. Their clients can gain up to two years’ Corporation Tax from HMRC because of their partnership with the firms. We suspect that what they actually mean is that, because up to two years of tax returns can be filed online and refunds are generally issued automatically by HMRC, these returns have not yet been queried by HMRC. Worryingly, one promoter adds an important note to their marketing material. “The GDPR Reclaim is based in law and not accountancy. This Legal Petition does not require any accountant or accountancy. Only qualified GDPR experts and their legal teams can perform this reclaim petition!”
There are a few reasons they don’t want you to speak to your accountant. Firstly, given the realistic risk in practice of a typical company with GDPR breaches being successfully sued (including settling in damages) for that, an independent accounting expert would presumably value the provision at nil.
Secondly, if you are going to make up a provision, you could do it yourself and resubmit your company returns online without paying a hefty fee to the promoter. Once you are into making dodgy provisions, you should never have to pay corporation tax again! There is no end to different areas where companies could be sued or be found to be non-compliant, or where a landlord might feel that a provision is required now against possible future repairs.
Most importantly though, the provision is likely to actually be treated by HMRC as not being wholly and exclusively for the purposes of the trade and they would therefore disallow it. Of course, by the time HMRC opens an enquiry, the firm that promoted the scheme will have disappeared.
Finally, even if the provision and tax refund does work in practice, it is really just a timing difference, as the provision will almost certainly reverse at some later stage and the corporation tax will have to be paid - potentially at a higher 25% rate.
So, to answer the question – many schemes rely on the “not being found out” rule and taxpayer ignorance, and they are indeed too good to be true.
If you have any further questions, please don't hesitate to email me at yedidya.zaiden@raffingers.co.uk or click here to get in touch