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Penalties from the jaws of defeat: HMRC powers to issue penalties to facilitators of failed tax avoidance (Part one)

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Last week a consultation document (“Condoc”) was released by HMRC on new proposals to make facilitators or ‘enablers’ of tax avoidance liable to tax penalties in certain circumstances. These proposals hit the news before the Condoc was even released and left financial commentators with little understanding of tax, with free reign to spin a morning’s news headlines.

So are all accountants, lawyers, IFAs, intermediaries and their dogs going to debtors prison for thinking about tax avoidance? Let’s find out.

This first part talks about the background to the measures, those who may be affected and the type of activities that might be caught. Clearly, these proposals are just proposals at the moment. So anything can happen.

A word on the foreword

Jane Ellison, Financial Secretary to the Treasury states in the ‘foreword’ that there are a “small minority of people in the uk seek[ing] to exploit tax laws in a way that parliament never intended”. This assumedly reveals two points:

  • The measures are to be targeted quite narrowly at those presumably displaying the worst excesses of the market; and
  • That whatever Parliament’s legislation was, it is certainly something other than that which was enshrined in legislation

The first point is backed up by her later assertion that this is a “shrinking but persistent minority”. Can one therefore safely assume that any measures which emanate from this (and the following) Condocs will not affect what one would call ‘proper’ tax planning?

Another word on the introduction

So we find ourselves in the second section before we get to the meat of the consultation. This part begins with a reiteration of the foreword before moving on to highlight some of the increased powers which HMRC already have in their arsenal under both the Promoters of Tax Avoidance Scheme (POTAS) rules, the new sanctions for ‘serial avoiders’ and also the new GAAR penalties. Coupled with extensive information powers and the Accelerated Payment Notice regime then one might think that HMRC had enough in the locker to deal with the ‘persistent minority’. Clearly not.

The introduction then goes on to state that HMRC believe is unfair that, upon propounding that a taxpayer has been negligent in relation to a tax return, they actually need to go to the trouble of proving this. They are therefore lobbying for the burden of proof to be to be shifted to the taxpayer to prove they have not been negligent. However, the consultation then makes a statement that should not go unchallenged and that ‘this is to ensure that penalties are chargeable in all appropriate circumstances where tax avoidance is defeated’.

Of course, this depends on what is meant by ‘appropriate circumstances’ what is meant by ‘tax avoidance’ and what is meant by ‘defeated’.

 

The meat

So we get to the meat of the document. Is it a prime cut or merely a plate of offal?

Part two is entitled ‘Penalties for enablers of tax avoidance’. HMRC admit that the ‘vast majority’ of people involved in providing tax services ‘operate within the spirit of the law and do not enable tax avoidance.’ This is again good news as it points to the fact that these provisions are narrowly targeted and it is a ‘minority that do enable tax avoidance’.

One could reasonably assert that if the ‘vast majority’ of advisers are good eggs then why do we need these new rules – especially bearing in mind the vast array of powers that are held by HMRC at the moment. Surely they need more man power and fortitude on exercising these existing powers. For those that don’t comply, again, it would seem to us that HMRC already have the powers to really call ‘rogue’ firms to heal. However, from our experience, it seems that HMRC are only really interested in pursuing those who will co-operate with them – those who ignore letters and phone calls seem to escape. The path of least resistance.

Of course, there will always be those businesses who will treat HMRC with utmost contempt, ignore any information notices and are quite prepared to close down a business and start again doing the same old thing to avoid any financial penalties.

However, what proportion of the industry do this? Is it really an acceptable solution that HMRC is presented with extra powers so it can essentially transfer penalties to those who perhaps have a more permanent business and have ‘stuck around’ regardless of whether they were a prime mover in the scheme or not. For us, this is the main danger of these proposals.

The note then talks about the efforts of the professional bodies in this area. It seems vaguely positive about this. However, it is a point we will come to later. It also talks about the Banking Code which was introduced in 2009 and ‘discourages’ banks from facilitating tax avoidance (as historically the banks were highly involved in tax schemes).

The note then goes on to talk about the main theme, that introducers and those who have facilitated a scheme ‘bear limited risk or downside’ when a scheme fails. As such, the Government wants to cut off the scheme market on the supply side by bringing in provisions which deter those involved. Of course, this is an understandable move by the Government as it looks to protect tax revenues going forward. Secondly, it seems a sensible tactic in principle. However, our view is that, as it stands, it is flawed and disproportionate.

 

Dramatis personae

So who are the dastardly characters that the Government wish to transfer some of the financial risk on to. Surely it is the people who set up the scheme, market the scheme and ultimately make a lot of the money of selling it. Well, no, it is actually potentially a much wider cast.

The Condoc states that ‘anyone in the supply chain who benefits from an end user implementing tax avoidance arrangements’. In this regard ‘anyone’ seems slightly worrying. However, one can seemingly relax as it seems to be narrowed by ‘who benefits from an end user implementing [the scheme]’ Therefore, if one provides a one-off piece of advice on a particular aspect of a scheme, for a fixed fee, which is not contingent on a client taking up the promoters offer then you’re fine aren’t you? Well, not necessarily, as this is contradicted by the next paragraph which states that ‘those who…advise / assist those developing the scheme’ are included in the definition of ‘enablers’.

If you are someone who receives a commission or a fee in relation to someone using a tax avoidance scheme you are also doomed.

In addition, ‘company formation agents, banks, trustees, accountants, lawyers and others who are intrinsic in, and necessary to, the machinery or implementation’ would also be enablers.

Presumably, any scheme involving any ‘nuts and bolts’ whatsoever will struggle here as banks become more and more focussed on what the entity they are providing facilities for is actually doing. Secondly, these measures may make it increasingly difficult for mainstream tax advisory businesses to obtain banking facilities as banks, not known for assessing risk in a rationale manner, cull such business activities from their portfolio (hope our bank manager doesn’t read this!)

The document goes on to say that ‘many enablers of tax avoidance ‘judge that the business and reputational risks associated with HMRC defeating avoidance arrangements they have helped enable are outweighed by the financial rewards to them’. The issue is, with the ‘persistent minority’ this is probably correct. However, they will probably in the face of a penalty to quote Edwyn Collins rip it up and start again. Again, these proposals seem to be a ‘path of least resistance’ so that a penalty could be slapped on a firm in the ‘supply chain’ with a degree of permanence regardless of how tenuous their link in the chain is. This is not good law.

For me, it would be better that, in relation to the abusive schemes that HMRC really want to call time on, that they actually enforced their powers in relation to the prime movers in the scheme (those implementing and marketing it) including powers to curtail any successor businesses.

Problems with the cast of characters

There are inherent problems with such a wide definition of ‘enabler’.

For instance, what if a client who has been approached by a promoter to enter in to arrangement approaches a tax adviser at a law firm or accountants for an independent view. What if that tax adviser, for a fixed fee (based on his time and expertise), sets out his thoughts and lists the potential risks and benefits. The adviser may not provide a recommendation. Indeed, he may recommend the client thinks twice about entering the scheme. However, as this document reads, he would be an enabler and subject to a penalty (and, wow, it could be a big one – see later). This would be bad law.

A provider of tax schemes has no professionally qualified individual. They engage an independent tax adviser to assist with HMRC enquiries. Again, it would seem that he is an enabler and he will be caught. Bad law.

We will revisit some of these problem cases later on in this note.

Of course, the inclusion of a wide cast of characters is probably at least partly intended to put the wind up as many people as possible. Deterring those who supply the nuts and bolts such as banks and trustees will have a major effect on the industry. However, again, is this the way to draft law?

 

Avoiding avoidance

So you’re all trembling in your boots right? We know that it only applies to a ‘persistent’ ‘shrinking’ and ‘small’ ‘minority’. But are you in the ‘vast majority’ or one of the small number of bad eggs?

This seems to hang on the definition of ‘avoidance’. Clearly, as such, the document will supply is with that long awaited, watertight definition we can set our watches by. Well, not quite.

First of all we are presented with two case studies. The first is a contractor scheme. So perhaps we can assume that a contractor scheme is tax avoidance for the purposes of these rules – and anyone who is an ‘enabler’ in relation to the scheme (see above) is on the hook for an eye-watering penalty.

The second case study appears to be a geared investment partnership – such as the plethora of ‘failed’ film schemes which have gone, and are going, through the courts. So film partnerships are tax avoidance for these purposes and one is doomed if you are an ‘enabler’.

However, more widely, the Condoc only links the penalties with enablers involved in any scheme which has been subject to a relevant defeat.

As such, the definition of ‘defeat’ is highly germane.

A ‘relevant defeat’ is a concept which is set out in Finance Bill 2016 in respect of the POTAS regime. Unsurprisingly, it takes in tribunal and court decisions that have rendered a scheme ineffective in specific circumstances. Such circumstances would be where the scheme has been counteracted under the General Anti-Abuse Rule (GAAR) or is a scheme which is notifiable under DoTAS.

Where a scheme was issued with a Follower Notice then that would also constitute a relevant defeat.

We also see that a scheme which is found to fail by the triggering of a Targeted Anti-Avoidance Rule (TAAR) will also result in a relevant defeat. For instance, a piece of SDLT planning that failed as a result of FA 2003, s75A would appear to be a relevant defeat (assuming it was not within DoTAS or GAAR).

This does seem to suggest that the proposals are aimed at marketed tax schemes (rather than legitimate, proper tax planning) as these will be the ones that will fall within DOTAS and / or GAAR.

The one exception to this could be where a specific, one-off piece of planning did not manage to hold up against a TAAR (or unallowable purpose test).

 

Enabling evasion versus enabling avoidance

Of course, we are now used to the lines being blurred between evasion and avoidance.

However, the document tries to draw parallels between the descriptions of those enabling tax evasion (set out in the 2015 Condoc) and descriptions for those enabling tax avoidance.

This is troubling. Of course, we know evasion is illegal and avoidance is legal. Therefore, the descriptions in 2.12 are only negative behaviours because they are limited to a criminal activity, namely tax evasion and money laundering offences. There seems little value in borrowing the terms from the separate provisions set out for ‘evasion’ type offences.

The consultation does state that there will be ‘appropriate safeguards’ for unwitting parties to avoidance. It will therefore be of interest to see what these are.

 

The second and final part will consider the proposals on how a penalty would be calculated, proposed safeguards and how the rules might commence

 

If or your clients have any queries in relation to this article or other matters then please let us know.

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