Enablers of defeated tax avoidance – the second half
So now you’ve sucked your orange and hopefully avoided the hairdryer treatment from ‘the Gaffer’. In the first half we spoke about the general scope of the rules. In this second half we talk about the potential players and also the amount of any penalty if one is found to be within the ‘enablers of defeated tax avoidance rules’.
The team sheet
The enablers of defeated tax avoidance legislation lists out who might be on the hook for penalties:
- The scheme designer;
- The scheme manager;
- A scheme marketer or Promoter;
- Someone who is an ‘enabling participant’ and
- A financial enabler of the scheme
A person will be a designer of a scheme if – in the course of business – they are responsible to ANY extent for either the creation of the scheme or any part of the scheme.
However, there are two important exclusions. Firstly, only the provisions of ‘relevant advice’ will make one a scheme designer. Advice will only be of this nature if that advice brings the original scheme in to being or suggests an amendment to the scheme to perhaps enhance its ‘efficacy’.
Effectively, this safeguard means if an adviser is instructed to advise on the effects of a series of transactions then they should not be caught unless they suggest how those transactions might be improved.
There is a safeguard also for those who provide advice without knowledge of the greater plan. So in this case ignorance is a defence!
This is the briefest of definitions and states that one is a manager if you are to any extent you are responsible for the organisation or management of a scheme. As there are no definitions this must be taken at its natural meaning.
A person will be deemed to be a scheme marketer where he has made a scheme available to a user or he has communicated information to any person and the scheme has been implemented.
It should be noted that there is a safeguard for those who ‘unwittingly’ pass on any such communications. There is a motive test and one must be passing on the information in a manner intended to get them to sign up for the scheme.
It is perhaps worth noting that one does not need to fall fairly and squarely in to the definition of ‘introducer’ or ‘promoter’ for the purposes of DOTAS or POTAS.
An enabling participant is someone who without their involvement, there would be no scheme. Note the taxpayer is excluded from this definition.
This ‘lynchpin’ must also be aware (or should reasonably have been aware) of their role in the tax arrangements.
Again, the unwitting participant, where it cannot be shown they should have known, is excluded from this definition.
This is one for the banks to be aware of. Clearly, in the world of geared investments such as film schemes – the banks were crucial participants. This is a shot across their bows.
The rules will bite on a person who in the course of their business provides a financial product which forms part of an abusive tax arrangement.
A financial product is defined and includes shares and loans. It is worth pointing out that it does not include a bank account.
Again, a safeguard is provided for the unwitting financier who enters in to a transaction unbeknown to him that it is an abusive tax scheme. However, again, he must show that his ignorance is reasonable.
So, if the scheme is abusive, has been defeated, and you have enabled it then what is the damage?
In the consultation amounts such as 100% of the tax avoided were bandied around. This would have been ridiculous as it would have represented many, many multiples of the financial benefit received by an enabler.
Quite rightly, as we pointed out in our earlier notes on the proposals, the consideration or fees received are the relevant basis for any penalty.
Consideration means that the type of payments which are brought in is quite wide. For example, it will not only entail ‘fees’ but will also include ‘commissions’, ‘benefits’ and other payments in respect of things done which enable the arrangements.
The original proposals seemed to be clear that any employee would not be caught by the rules. However, I cannot see from the draft legislation that such a person is immune. Under the natural meaning of consideration, emoluments from employment would be caught. If that employee was ‘to any extent’ responsible for the design then could he or she be liable?
Penalties must be paid within 30 days of being assessed and notified of the penalty. A penalty must be issued within two years of the defeat of the scheme.
There is a right of appeal against any penalties issued under these enablers of defeated tax avoidance rules.
When the enablers of defeated tax avoidance proposals were announced there was a concern that the rules might be retrospective. Although we see that HMRC / Government seem quite prepared to introduce backward looking pernicious legislation (think APNs, think disguised remuneration loan charges) it seemed relatively clear from the outset that this would not be the case for the enabler provisions.
This is confirmed by the draft legislation which states that the rules do not apply to arrangements which are entered in to prior to Royal Assent. By the same token, any actions taken prior to Royal Assent by someone who would be an enabler under the rules are ignored.
My view is that this means someone could continue to, say, receive commissions from a scheme as long as they didn’t take any further action in relation to the scheme.
In to Fergie time – Conclusion
Conceptually, one can consider that the enablers of defeated tax avoidance rules sit alongside GAAR. It will affect the same type of arrangements. One can foresee where GAAR is used to counteract a scheme (and impose the new GAAR penalty) that those who enabled the scheme may also find a knock at the door. It is interesting that someone could use a scheme to avoid £100 of tax. They could be required to pay this amount with interest. They may suffer a 60% GAAR penalty. The enablers may then also have to pay all their fees to the Exchequer. Quite a result for Hector!
Defence wise, a consistent theme is that ignorance is bliss. As long as ignorance is reasonable!
Will these rules make a difference? As stated, the rules are aimed at the worst excesses of the market. My fear is they will take these changes in their stride aimed with the protection of the corporate veil. Those operating in a more ‘professional’ (and I mean within a professional body) are more likely to be concerned with the Professional Conduct in Relation to Taxation which, with effect from 1 March 2017, will prevent an adviser engaging in such activities.
If you or your clients have any queries in relation to the rules on Enablers of defeated tax avoidance schemes then please get in touch.