Strengthening tax avoidance sanctions and deterrents: the latest Government proposals

On 17 August 2016 HM Revenue & Customs (HMRC) published the latest consultation documentsetting out the Government’s proposals for further measures to tackle tax avoidance.

What is it about?

In this latest consultation document, the proposed measures are not aimed at the taxpayer who may have entered into a scheme but instead target those who design, facilitate and promote tax avoidance arrangements. The Government is proposing that such people, referred to as ‘enablers’, would be subject to penalties where a tax avoidance scheme they were involved with has been defeated.

The idea behind these proposals is to discourage the supply of tax avoidance arrangements by stopping them at source. These proposals are the latest in a long line of measures to tackle tax avoidance: the first indication that promoters were in the firing line for penalties was in the March 2015 consultation document, Tackling tax evasion and avoidance, where para 3.31 included the following statement:

‘the government will consider whether it should introduce new surcharges or penalties for all avoiders. It should not be worthwhile to seek out and pay for an avoidance scheme and the advice on its use in an attempt to pay less tax than is due. The government will explore how to ensure promoters and users feel the full impact of their scheme being defeated in the courts.’

Who is being targeted?

The Government’s aim is to stop promoters trying to sell tax avoidance schemes by applying a penalty on them when those schemes are defeated.However, it is proposed that the target of the measure is wider than just those who might be usually considered as promoters, ie. those who create, design and promote a tax avoidance scheme. The proposed target of the measure is ‘enablers’ of tax avoidance arrangements, and potentially will include:

‘anyone in the supply chain who benefits from an end user implementing tax avoidance arrangements and without whom the arrangements as designed could not be implemented.’

This is clearly a much wider group than a typical promoter, although in order to apply, a person must benefit from implementing the arrangement. Para 2.9 states that it will therefore include:

  • ‘those who develop, or advise/assist those developing, such arrangements and schemes;
  • Independent Financial Advisers, accountants and others who earn fees and commissions in connection with marketing such arrangements, whether or not their activities amount to the promotion of arrangements; and
  • company formation agents, banks, trustees, accountants, lawyers and others who are intrinsic in, and necessary to, the machinery or implementation of, the avoidance.’

An enabler would include a tax adviser advising a client to implement a tax avoidance arrangement or scheme. It would also include a tax adviser who received, for example, a commission for introducing a client who entered into a tax avoidance scheme. It would appear not to include an adviser who did no more than suggest his client went to speak to someone who promoted tax avoidance schemes, although the document goes on to suggest that such a person might be caught if subsequently they did not make proper disclosure of the scheme.

This wide definition means that in respect of any one tax avoidance scheme and individual taxpayer,there could be multiple enablers.

What is a defeated scheme?

A penalty could only be applied if a particular scheme had been defeated. It is proposed that for these purposes, a defeat will follow the new rules currently in the Finance Bill 2016 aimed at strengthening the existing Promoters of Tax Avoidance (POTAS) rules.

Arelevant defeat can arise in respect of any one (or more) of the following situations:

  • the scheme has been counteracted by the GAAR;
  • a Follower Notice has been issued;
  • the scheme is notifiable under DOTAS or the VAT Disclosure Regimes; or
  • the scheme has been the subject of a targeted avoidance-related rule or unallowable purpose test contained within existing legislation.

This definition is likely to cover most tax avoidance schemes and arrangements. The proposal highlights the increasing importance of the GAAR in UK tax legislation. It follows on from the proposed new 60% penalty on taxpayers (also included in the Finance Bill 2016) if it is subsequently found that any scheme or arrangement was counteracted by the GAAR.

A relevant defeat will arise on a final determination by a tribunal or court. However, it will also apply if the taxpayer and HMRC agree that the arrangements do not work. The relevant defeat would be the trigger for potential penalties on an enabler regardless of what penalties (if any) are levied on the taxpayer who used the scheme. This trigger may have the unfortunate effect of discouraging the settlement of tax avoidance cases.

What are the proposed penalties?

The paper invites views on what level of penalties might be applied, how they might be calculated and whether they might be subject to a cap. Suggested approaches are 1) to base the penalty on the benefit to the enabler, or 2) to base it on the amount of tax sought to be avoided by the taxpayers who were helped by the enabler. Under the latter approach, where a tax avoidance scheme was promoted through various enablers, the actual level of penalty on each enabler would depend upon the number of taxpayers they helped.

It is proposed that any penalty rules would follow the existing penalty rules for careless behaviour set out in Sch 24 of the FA 2007, with potential mitigation of the penalty depending upon the nature, timing and quality of any disclosures made by the enabler about their enabling of the defeated scheme.

It is proposed that the safeguards will include a number of exemptions (presumably with suitable modifications) based on the existing DOTAS tests and which will include:

  • employees, unless there is no other UK-resident promoter;
  • the “benign” test – the person gave advice but was not responsible for the design of any element of the scheme that contributed to the tax advantage;
  • the “non-adviser” test – the person gave advice but it wasn’t tax advice (eg company law or accounting); and
  • the “ignorance” test – the person could not reasonably be expected to have had sufficient information to know whether a scheme was notifiable under DOTAS.

How long is the consultation period?

The consultation runs from 17 August 2016 to 12 October 2016. It looks likely that any draft legislation would be published and included as part of the Finance Bill 2017.

Comment

ICAEW supports reasonable measures by the Government to tackle tax avoidance. The actions of a small minority in promoting what are often highly dubious tax avoidance schemes are a matter of public concern and it is reasonable for the Government to take action against those who promote them.

It is clearly important that any such measures are properly targeted and do not catch the vast majority of reputable firms giving ordinary tax advice.It has been a matter of concern to ICAEW that many promoters appear to operate outside of any professional rules or oversight. As a professional body, ICAEW does not expect its members to be involved in the creation, facilitation and promotion of aggressive tax avoidance schemes.This expectation on members will be enshrined in the forthcoming update of the Professional Code of Conduct in relation to Taxation (the PCRT) to which ICAEW is a signatory. We would therefore not normally expect our members to be the target of these rules.

However, the potentially wide definition of enabler and what arrangements might be caught will present problems for members and could see them potentially caught by these rules. For example, could a member firm be an enabler where it acts as a tax agent and submits a return for a taxpayer, which includes a tax avoidance scheme, which the member did not advise on? While it is clearly not the intention that they are caught, it appears that they could be if HMRC thought that insufficient disclosure was made on the return.

More generally, the UK tax code is extremely long, is highly complicated and is often uncertain in how it applies, the GAAR test being a case in point, all of which will mean that some tax planning by members could fall foul of these rules.It will therefore be vital to ensure that these rules are properly targeted and are reasonable and proportionate. HMRC will need to work with the professional bodies to ensure that, in addition, there are established procedures and guidance to help reputable advisers ensure they discharge their legal and professional duties to their clients (as set out in the PCRT for example),but at the same time do not get caught up within these provisions.

Will these measures drive out of the market those who promote aggressive tax schemes? It ought to drive out UK based promoters and should help to make lawyers think twice before giving an opinion which is used to help market a tax planning scheme. But there is a danger that it may also drive the UK tax avoidance industry even further offshore. There is also a danger that these measures could have unintended consequences. For example, it may force up PII premiums for the giving of any tax advice, potentially pricing out ordinary taxpayers fromreceiving proper advice and thereby damaging overall compliance.