HMRC have launched a consultation 'Strengthening Tax Avoidance Sanctions and Deterrents: A discussion document.' This proposes new penalties for ‘enablers’ of failed tax avoidance arrangements together with a change in the way penalties are applied to users.
The consultation proposes a definition of what constitutes "defeated tax avoidance arrangements" which the three other areas of the consultation rely upon:
Defeated tax avoidance arrangements
The proposal is that the term tax avoidance arrangements will be very wide, such as it is in other areas of tax legislation already. A tax arrangement is proposed to be considered defeated under these rules if:
- it has been counteracted by the GAAR
- its users are the subject of a Follower Notice under Part 4 of Finance Act 2014
- it is notifiable under the DOTAS regime or VAT disclosure regime, which themselves are being strengthened
- it has been the subject of a targeted anti-avoidance rule, for example Phoenix companies.
Penalties for enablers of defeated tax avoidance arrangements
The Government wants to deter ‘enablers’ of tax avoidance through a new penalty regime.
A fairly broad definition of enabler is proposed, based mainly on that used in the offshore evasion measures. This would go beyond promoters to include anyone in the ‘supply chain’ who benefits from an end user implementing tax avoidance arrangements, including:
- Those who develop, or advise/assist those developing avoidance arrangements / schemes.
- Independent Financial Advisers (IFAs), accountants and other who earn fees or commission in connection with them.
- Company formation agents, banks, trustees, accountants, lawyers and others intrinsic and necessary to their machinery or implementation.
Safeguards are proposed to ensure that those who unwittingly enable avoidance are not caught. The example is given of an agent providing general accounting and tax services who submits a tax return on behalf of their client. They would not be liable to a penalty if they can:
- show that they advised their client not to proceed with the arrangements, or
- their client had not discussed the arrangements with them before implementing.
HMRC’s favoured approach is a tax geared penalty with a minimum amount:
- This would not be linked to any penalty being charged on the user of the arrangements.
- Instead the trigger would be the defeat of the tax avoidance arrangements.
- The penalty could be based on either the benefit enjoyed by the enabler or the tax saved by the user.
- A maximum or cap may be required for widely marketed schemes or where there are a large number of enablers.
The option of ‘naming and shaming’ enablers is also proposed.
Penalties for users of defeated tax avoidance arrangements
Although users of failed tax avoidance schemes are potentially liable to penalties under Sch 24 Finance Act 2007, some seek to argue that no penalty is due as they have taken reasonable care based on their view of the law and the advice provided to them.
HMRC propose to modify the existing penalty regime to ensure that penalties can be charged by:
- Describing what constitutes reasonable care: this would involve specifically excluding reliance on generic advice / marketing material and any advice funded by the promoter; and
- Shifting the requirement to prove reasonable care onto the taxpayer.
Further ways to discourage avoidance
HMRC believe that, even if the above measures are introduced, this may not deter the marketing and use of tax avoidance arrangements.
They therefore want to consider the use of ‘real time’ interventions to influence the specific decisions of users and potential users. 14 such interventions are proposed, including requirements for promoters to:
- Inform HMRC of who they are marketing and selling to so that HMRC can send them warnings and alerts directly.
- Supply ‘health warnings’ to existing and potential users.
- Identify other enablers.
- Where a case is taken by HMRC, provide updates to users on how many people have withdrawn or settled.
The consultation runs until 12 October 2016. A response document will be published later this year with any legislative changes introduced in a future Finance Bill.
In recent years HMRC have:
- Strengthened the Disclosure of Tax Avoidance Schemes (DOTAS) rules
- Introduced the Promoters of Tax Avoidance Schemes (POTAS) rules and
- Introduced new civil sanctions for enabling offshore evasion.
Despite this they still feel that there is work to be done. In particular, as announced in this year’s Budget they want to explore options to deter promoters and intermediaries who enable or facilitate tax avoidance schemes.
Our guide (draft) Penalties: enablers of tax avoidance schemes (at present this simply looks at the definition of an enabler).
Consultation document: Strengthening Tax Avoidance Sanctions and Deterrents: A discussion document