Veteran jockey Frankie Dettori is feeling “saddened and embarrassed” after filing for bankruptcy last week, after being unable to resolve a long-running case of tax avoidance with HM Revenue & Customs.
“Bankruptcy is a major decision and its consequences will affect me for many years,” he said in a statement, adding that he would “advise others to take a stronger rein over their financial matters”. (no pun intended, I’m guessing)
Advisers say the fact that the tax authority pursued the 54-year-old flat racer with such relentless determination is in line with its more muscular attitude to tax dodging.
“They can’t be seen to be soft on those avoiding tax — particularly those with such high profile — when the average working person has no choice but to pay it at source,” says Frank Bouette, a partner at city law firm DMH Stallard. “This reflects a marked change we are experiencing in HMRC’s position on those who don’t pay tax due, and a hard line we expect to continue.”
It’s a sobering thought when the numbers of wealthy people looking for tax advice are likely to be on the rise due to frozen tax thresholds.
HMRC has this week revealed that the number of additional rate taxpayers paying 45 per cent tax increased by nearly 10 per cent between 2021-22 and 2022-23 to 600,000 — and this is before the additional rate threshold was lowered from £150,000 to £125,140 from April 2023, says Andy King, financial planning specialist at wealth manager Evelyn Partners. “So expect a huge influx . . . when 2023-24 figures are finalised this time next year.”
Measures to mitigate these higher income tax bills are thin on the ground. The most common option is to pay into your pension, but your standard tax-free allowance, for those who have not started taking taxable cash from their funds, is capped at £60,000 a year. This allowance starts to reduce once you get over £200,000 taxable income. Dettori is thought to have earned between £15mn-£20mn from racing alone in the course of his (incredible) 35-year career.
It’s easy to see how high earners like him might be tempted to hire advisers who offer what seems like a magic tax-reducing pill.
Barrister Patrick Cannon describes tax avoidance schemes as “an arrangement involving one or more contrived or abnormal steps that enable a tax advantage to be obtained that was not intended by Parliament”. They are legal. But if a scheme is spotted, challenged and defeated by HMRC, the taxpayer will not only be on the hook for the disputed tax amount, but will also have to pay interest and penalties.
Dan Neidle, founder of Tax Policy Associates, an independent tax think-tank, describes Dettori’s scheme as “pretty extraordinary”. “Dettori made large ‘tax deductible’ payments to a trust from 2012 to 2017. Then the trust made large ‘non-taxable’ payments back to him,” he explains.
These so-called “disguised remuneration trusts” aim to avoid paying income tax and national insurance contributions by paying part or all of your pay as a loan, salary, advance, grant or annuity. These payments are claimed to be non-taxable, often without explanation.
A similar “remuneration trust” set up by advisers Baxendale-Walker LLP was dismissed in a case between a dental surgeon and HMRC in 2023. The court’s ruling found an intention, “to make things appear other than they were and the documentation was therefore a sham”.
It’s hard to feel sorry for someone who fell foul of a scheme that tax experts say was “total nonsense”. But it keeps happening.
“Dettori is one of a long string of high-earning celebrities who engaged in tax avoidance schemes that were ultimately deemed to be just that — attempts to avoid tax,” says Bouette.
150Tax avoidance schemes named by HM Revenue & Customs
The view of HMRC is that you don’t need to be a tax expert to spot an avoidance scheme, everyone is responsible under UK law for paying the correct amount of tax and, even in the case of bad advice, the ultimate responsibility and risk remains with the individual.
So, if someone offers you a clever-sounding or complex scheme, be wary.
Since April 2022, HMRC has used new powers to name tax avoidance promoters publicly. There are over 150 schemes on the list at the moment, with details of how each scheme claims to work.
You can also refer to HMRC’s general anti-abuse rule (GAAR) guidance and advisory panel opinions. The panel recently ruled that avoiding inheritance tax on a lifetime transfer, by acquiring shares in a company and gifting those shares to an employee trust, is “not a reasonable course of action”.
But the general rule to spot a dodgy tax scheme that might cost you a fortune down the line is if the promoter promises significant tax savings — a sign that it’s “too good to be true”.
Brian Carey, tax partner at UHY Hacker Young, says: “People get taken in by scams for emotional reasons or if something else is going on in their busy lives. This is similar. It’s almost sniffing it out. If it’s that easy, why isn’t everyone doing it?”
Complex structures, involving trusts and companies or an offshore element, such as transferring money to an offshore bank account, are also clear warning bells.
“The offshore angle has no advantage for someone who is UK resident and domiciled — but a ‘dodgy’ tax scheme may suggest that using an offshore structure may make the UK tax disappear,” says Nimesh Shah, chief executive of accountancy group Blick Rothenberg. “Some [failed] tax schemes have used offshore arrangements in colourful jurisdictions in the hope that the monies can simply be hidden and the authorities will never find out — this, of course, isn’t right but the unknowing could be easily sold.”
Beware, too, of endorsements, such as those that say the scheme has been “signed off by HMRC” — the authority will not sign off on a tax scheme — or “backed up by a leading barrister’s opinion”.
“The scheme may well be supported by a counsel’s opinion,” says Shah, “but you need to be sure that this is a credible opinion.”
Finally, think twice if the promoter takes a sizeable percentage cut of any tax savings as their fee. It might be 10 per cent, but some charge more than 25 per cent plus admin fees on top.
If you’re wealthy enough to pay that, you’re probably wealthy enough to seek a second opinion on the validity of the scheme too.
I bet Frankie Dettori wishes he had.
Moira O’Neill is a freelance money and investment writer. Email: moira.o’neill@ft.com, X: @MoiraONeill, Instagram @MoiraOnMoney
