The first part talked about the background to the enablers of tax avoidance measures, those who may be affected and the type of activities that might be caught.
This second part will talk about how a penalty may be calculated, proposed safeguards, when the rules may commence and a summary of our thoughts.
Clearly, these proposals are just proposals at the moment. So anything can happen.
The bad, the ugly and the downright expensive
The aim of any new provisions is clear – ‘It should penalise everyone in the supply chain who has enabled avoidance arrangements which are defeated.’ It does this by casting a very wide definition of ‘enabler’ as we have seen above.
It is our view that this is the wrong approach. HMRC should target the key individuals and businesses who are designing and marketing the schemes. It should target business’s whose main activities are the design and sale of tax avoidance schemes. However, there is a sense that HMRC wants as wide an array of potential quarry as possible, rather than focus on the key instigators who are also likely to be those gaining the most financial benefit.
We do not agree that it is a fair approach to potentially pull firms – whether accountants, lawyers, tax advisers or company formation professionals – in to these aggressive proposals who may have provided an entirely ancillary role to any avoidance scheme.
The Condoc highlights some potential bases of issuing penalties. These are as follows:
- The Australian system – fixed penalties of $550k or 200% of the fees received;
- Penalties following Schedule 38 of FA 2012 providing for penalties between £5k and £50k;
- Penalties of up to 100% of the tax at stake (following the proposals re offshore avoidance)
The Condoc then goes on to say that the penalties should be based on ‘the financial or economic gain of the enabler and / or the services they have provided’ but taking in to account the level of knowledge about the avoidance they reasonably had’.
Although the press reports have suggested that the rules might result in 100% of the tax avoided, it seems to me that, if one is looking to neutralise economic gain then one must be using the fees received as the basis of any penalty. As a scheme provider might, say, receive up to 25% of a tax ‘saving’. It is therefore seems that any penalty should be based on this. It would seem where the penalty is 100% of the fee then this would remove the economic gain (as they will have costs of running a business etc). Suggesting that the penalty should be 100% of the disputed tax (in this case easily four times the economic gain) is disproportionate especially when one considers that the activities are not illegal.
We think this is acknowledged by HMRC in the fact that says the ‘favoured approach is similar to FB 2016 for offshore evasion, but designed specifically to deal with tax avoidance’.
We suppose this would enable different penalties to be issued to those dependent on the significance of their role in the scheme. Those who had originated or were running a scheme would potentially have the largest actual exposure to penalties reflecting their largest actual potential economic gains under the scheme. Someone who supplied a small piece of tax advice to the promoters for, say, a fixed fee of £xk would only potentially be on the hook for that fixed fee (or a penalty based on that fixed fee).
It should be noted that the trigger for any ‘enabler’ penalties will be the ‘defeat’ of the scheme and will not require the scheme user to suffer a penalty.
The Condoc sets out by describing that the definition of ‘enabler’ should be wide but there should be ‘safeguards’ built in to the regime so that ‘unwitting’ parties do not get sucked in to the penalty provisions. The Condoc replicates the ones that apply to the DOTAS regime.
One such carve-out is the ‘benign’ test. This would seem to exclude someone who provided advice in relation to the scheme which does not contribute to the tax advantage. The example used here is where an adviser comments on whether two companies are ‘connected’ for tax purposes, as long as the advice ‘goes no further than explaining the interpretation of the words in the tax legislation’.
However, what about circumstances where a client has been approached by a Promoter and wants his adviser to explain the risks of the scheme as described above. Does this adviser have an exposure to the penalties or can he rely on the fact that his advice has not contributed to the tax advantage?
The Condoc then mentions the ‘non-adviser’ test. However, this does not seem at all suitable in achieving HMRC’s objectives. It is our view that, if these rules are to be implemented, someone who provides non-tax advice in the construction of a scheme should be within the scope of the rules as much as a person providing tax advice. He certainly would be an enabler in a real sense.
The final exclusion is slightly worrying. It essentially states that an agent who has completed a tax return for a client would not be liable only if they had either advised the client not to participate in the scheme or they were unaware of the scheme. Can it really be the case that a tax return preparer who simply doesn’t have a view on the scheme, and who doesn’t receive commission, can be in these rules at all? Again, this would be incredibly harsh and of concern if they were.
A ‘line in the sand’ or ‘looking back over your shoulder’?
One thing that is not within the Condoc will be when these rules would take effect from. Will they commence from a date in the future or will they have a retrospective element?
Some of the language in the Condoc suggests the former. The proposals seem to be about advisers and professional making the right ‘choices’ and modifying behaviour. Clearly, one cannot unmake choices which have been made in the past.
Secondly, bringing in such potentially extreme penalties with retrospective effect for assisting a taxpayer in the past with activities which remain perfectly legal would be beyond disproportionate. A few years ago one would easily have dismissed the possibility on this basis alone, however, one would have also have done the same with Accelerated Payment Notices!
One other reason we would suggest that this will not be retrospective (at least not fully) is the fact that the Big 4, large law firms and the banks have all been heavily involved in tax avoidance schemes in the past. Imposing such harsh penalties on the Big 4, now they are setting up their ‘Brexit Consulting’ divisions, would mean the Government had no one left to advise them going forward!
Clearly, the Government has bailed out most of, and still owns some of, the large UK banks. These have been complicit in all kinds of tax schemes over the years – whether film scheme, stamp duty planning etc. It would not seem like a sensible move to cripple them with significant penalties.
The most outcome would seem to be that there will be a ‘line in the sand’.
The horse has bolted
One final point we would like to make is really how have we got to this?
It seems rather puzzling to us that anybody can sell tax ‘products’ (as long as there is no investment aspect) to the general public. In fact, the author of this note was once called by an employee of a large scheme provider who had previously been a time share salesman in Spain.
It seems to me that the Professional Bodies should have pushed for a regulation of the industry a long time ago making it is an offence to advise on tax without having the requisite professional qualifications, appropriate PI insurance and or undertaking adequate Continuing Professional Development. This could easily have been done within the existing framework operated by the Institutes.
However, in our view, the professional bodies have not addressed this situation and we are left with proposals such as these. Unfortunately, the horse has now bolted.
Of course, one can have little argument with the Government for wanting to crackdown on marketed tax avoidance. However, our view is that these proposals seek to do this in the easiest manner possible rather than the most equitable fashion possible.
HMRC has a plethora of powers which it may enforce. It should go after scheme providers (HMRC clearly know who most of them are) and not give up where their attempts to engage with them are repelled.
Our view that these proposals have been created so widely for one of both of the following:
- A deterrent effect: no bank, trustee, large professional firm will not offer any services to a potential avoidance provider. This will not just be in regard to a scheme, but will probably also be in relation to helping them trade at all – eg banks may withdraw their trading bank accounts; and
- A path of least resistance: Clearly, if they wish to implement penalties in relation to a scheme it is rather easier to go after a large law firm, a firm of accountants or a bank. They will have a greater degree of permanence, are more likely to comply and will be insured (though see below). This would be a much easier way to raise revenue for HMRC than allocating thinning resources to chasing ‘cowboy’ scheme providers.
It seems that the provisions are aimed at the worst excesses of the tax market and this will be welcome. However, we will monitor this to ensure that these indicators in the Condoc are translated in to cold hard legislation.
It is our view that penalties should not be ‘tax-geared’ but should be based on the remuneration received in respect of an ‘enablers’ activities. This will deliver true proportionality as someone operating a scheme will suffer more greatly in actual terms under the penalty regime than someone providing a one-off and discrete piece of advice.
Practically, as a result of these proposals, firms providing tax advisory services may find obtaining PI insurer harder (and also read more expensive) as a result of these proposals. We are not just talking about scheme providers – but those providing general tax planning and advisory services. As mentioned above, banks also tend to over react to this kind of thing, and we may see similar firms struggling to find banking relationships for the fear that the bank could become an ‘enabler’.
The rather bloated elephant in the room is obviously our flabby and complex tax code. Rules of thumbs such as ‘Parliament’s intention’ and ‘spirit of the legislation’ are of little practical help, other than telling us that Parliament’s intention is not that which is written down in the tax code. This needs to be addressed with some degree of urgency.
It is for these reasons that the professional bodies must act firmly on this. Unfortunately, we have seen little evidence over the years which makes me think they will do this.
If or your clients have any queries in relation to this article or other matters then please let us know.