AAT Response to Consultative Draft Legislation contained in THE HMRC CONSULTATION document “Raising the Stakes on Tax Avoidance - Summary of Responses and DraftLegislation” (released January 2014)
1INTRODUCTION
1.1The Association of Accounting Technicians (AAT) is pleased to comment on the draft legislation contained in the HMRC consultation document (condoc) “Raising the Stakes on Tax Avoidance - Summary of Responses and Draft Legislation”, which was released in January 2014.
1.2Previously we had prepared and submitted a response to the earlier consultation “Raising the Stakes on Tax Avoidance”[1], which was issued by HMRC in 2013 (a copy of our earlier response will be submitted along with this response or can be downloaded footnote 1).
1.3In addition to the above we have reviewed the Summary of Responses (released January 2014).
1.4AAT is a professional accountancy body which has 50,000 full and fellow members and 80,000 student and affiliate members worldwide. Of the full and fellow members, there are 3,900 Members in Practice (MIPs) who provide accountancy and taxation services to individuals, not-for-profit organisations and the full range of business types[2].
1.5AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy, the prevention of crime and the promotion of the sound administration of the law.
2VESTED INTERESTS
2.1AAT is responding to the consultation from the wider public benefit perspective of achieving sound and effective administration of taxes.
3 GENERAL OVERVIEW
3.1As stated in our earlier response, AAT endorses HM Government’s commitment to robustly tackling and closing down tax avoidance schemes as well as improving the way that tax avoidance is detected and prevented. We accept the need for legislation in the avoidance arena in order to protect the public purse “from what HMRC acknowledges is a small number of promoters who create, market and sell tax avoidance schemes” (para 2.1 condoc).
3.2However we are concerned when, on the other hand, legislation which on introduction was proposed to apply only to serious fraud cases is to be employed on a more routine basis.
3.3Such ‘mission-creep’ may be detrimental to the tax system if, for example, the law intended to address one particular type of behaviour, in this case the actions of a small number of promoters is, latterly, used more widely.
3.4An example of what AAT perceives to be mission creep is as follows:
HMRC’s statutory ability to undertake inspections of premises without prior notice which was introduced after a January 2008 consultation is now used in routine inspections of corner shops at times when the proprietor is busy with customers. This fact is at odds with the consultation document which, at the time, stated that unannounced visits “are the exception and need higher levels of safeguard to reassure the majority of the population”.
3.5A further, and different, example to underpin our concerns over the introduction of recent legislation is in respect of changes which seek to restrict what in the past was regarded as the utilisation of legitimate, mainstream tax reliefs that were in place to smooth out normal trading ups and downs, is as follows:
Take for instance, a trader who in one year reports a taxable profit of £100,000 and in the following year a £100,000 loss because of, say, flooding. In the past the trader may have felt that the tax system was helping to maintain his business as the tax mechanism was in place to enable him to carry back the loss incurred in the later year for relief against the prior year’s profit. Such a relief was described as tax avoidance in the 2012 Autumn Statement and restricted in the Finance Act 2013. Clearly it is not tax avoidance; it a taxpaying entity is merely availing themselves of the legitimate reliefs and entitlements that available to them under statute.
4PROMOTERS OF TAX AVOIDANCE SCHEMES
4.1AAT notes that “relief from tax or repayment of tax” are included in the definition of ‘Tax Advantage’ in Clause 1(3) under Relevant Arrangements of the Consultation draft PART 1 Promoters of Tax Avoidance Schemes. AAT is aware that this definition is widely drawn and accordingly this is a cause of concern.
4.2The trader referred to at 3.4 (above) would be guided by his accountant who is naturally legitimately expected to bring the availability of a loss relief to the attention of his client’s attention and subsequently process a loss-relief claim at the time of preparing the related tax return.
4.3AAT is very concerned that the definition in para. 2 of the Consultation draft, PART 1 Promoters of Tax Avoidance Schemes is so widely drawn as to include any accountant who advises his client as to obtain tax relief or reduce tax which are defined as arrangements for tax advantage.
4.4Taking our above observation into account it would seem the above scenario (3.4) could bring the advising accountant within the definition of promoter (para. 2 (2) and (3) of the Consultation draft, Part1 “Promoters of Tax Avoidance Schemes”) which defines as a person who in the course of business (the accountant) is responsible for the design of the proposed arrangements in which he has “made an approach”. If this was to be the case it would be wholly inappropriate.
4.5The redeeming feature of the legislation is that it does not apply unless the promoter has met one of the eleven ‘threshold conditions’ set out in Schedule 1. An ordinary accountant would not be concerned by the list, which includes deliberate tax defaulters, breakers of the Code of Practice on Taxation for Banks, dishonest tax agents or ones who have failed in their obligation to disclose a tax avoidance scheme amongst others.
4.6However, AAT is concerned that condition 9 brings into the regime an accountant who has failed to comply with a notice under Schedule 36 of Finance Act 2008 for whatever reason, even pressure of work. Also paragraph 13 allows HMRC to amend any of the above conditions or to add new ones. We feel that this particular condition is too loosely worded and, as a consequence, could give rise to mission-creep in the future.
4.7AAT therefore considers that the legislation needs to provide more protection for the ordinary accountant.
5CONSEQUENCES OF FAILING TO TAKE ACCOUNT OF RELEVANT JUDICIAL RULINGS – FAILURE NOTICES
5.1In response to “Raising the Stakes on Tax Avoidance” AAT recommended that HMRC should use current legislation under section 28A Taxes Management Act 1970 (4.45 of the response document) to close an enquiry where they consider they have won a test case. s.55(4) TMA 1970 enables HMRC to challenge hold-over tax in open enquiries on the basis that HMRC consider circumstances have changed after they have won a related test case.s.29 TMA is available for new ‘discovery’ cases (paras 4.45 and 4.54 of AAT’s Response to condoc “Raising the Stakes on Tax Avoidance”).
5.2AAT notes HM Government’s response at 5.13 of this condoc and also the announcement as part of the December 2013 Autumn Statement of its intention to enlarge the scope of taxes to be covered by the legislation (subject of this review). Paragraph 39 “interpretation of this Part” lists the various taxes and charges to which this draft legislation covers. Government clearly consider that a common legislative code is preferred to embrace all these diverse taxes. Having said that the above legislation is available for the legacy cases referred to in para.5.62 of this condoc.
5.3While AAT understands the approach to the legislation outlined under “Consequences of failing to take account of relevant judicial rulings” we look to view this against the ordinary taxpayer whose return is under enquiry and which HMRC considers to fall within a ‘judicial ruling’ and where HMRC gives a failure notice for failure to amend the return and pay the tax.
5.4Under paragraph 1(1) HMRC may issue a failure notice to a person with an accelerated payment notice. Where the taxpayer does not amend the return to conform with HMRCs view and does not pay the tax, HMRC will impose a penalty based on a percentage of the ‘denied advantage’.
5.5Where the taxpayer considers that the cited judicial ruling does not entirely relate to his case, paragraph 6(3) enables him to make representations to HMRC in accordance with paragraph 7 whereby HMRC may withdraw the failure notice or alternatively notify the taxpayer that they do not agree [Paragraph 7(3)]. Paragraph 8 then imposes a penalty where the failure notice is not withdrawn.
5.6While paragraph 17(1) provides for an appeal against the paragraph 8 penalty, the legislation does not provide grounds for appeal against the failure notice where HMRC does not withdraw their opinion under paragraph 7.
5.7AAT considers that the above (5.4 - 5.6) is unfair to the ordinary taxpayer whose return may be under appeal with HMRC and who is not involved in a marketed tax avoidance scheme. We believe that a vital component of the changes, which is currently missing, is an appeal provision for a taxpayer to use against HMRC failure notice under Schedule 1(1).
6CONCLUSION
6.1While AAT shares HMRC’s general view that there is no inherent presumption that the tax should remain with the taxpayer during a dispute. We believe that the draft legislation should afford more protection to the ordinary taxpayer who is not involved in a marketed tax avoidance scheme.
6.2Government explained that “the Government does not consider it right that the users of these schemes should be able to retain the disputed tax during the period of dispute” 3.4 of condoc “Tackling Marketed Tax Avoidance”
6.3We, therefore, consider that the proposed legislation should be restricted, explicitly, to marketed avoidance cases, in accordance with the Government statement above and not allowed to be broadened out so as toaffect other enquiries (not part of any marketed scheme) where HMRC may not share the appellant’s view on a point of law or procedure.
If you have any questions or would like to consult further on this issue then please contact
AAT at:
email: d
FAO. Aleem Islan
Association of Accounting Technicians
140 Aldersgate Street
London EC1A 4HY
Telephone: 020 7397 3088
[1]A copy of the AAT response to “Raising the Stakes on Tax Avoidance” can be downloaded from the AAT website at
[2]Figures correct as at 31 December 2013