Serial Tax Avoiders: STAR Wars?

Introduction –  a long time ago in a galaxy far, far away

 If one had the constitution to make it through Star Wars Episode I: Phantom Menace, you might remember the whole saga was as a result of an ‘inter-galactic’ tax dispute resulting in the blockade of a planet called Naboo.

Indeed, measures announced recently regarding British Overseas Territories suggest a blockade of the BVI and other British Overseas Territories is more likely every day.

Of course, the Serial Tax Avoider Regime has nothing to do with any of that. The references to Star Wars being a thin attempt to get you to read this.

I cannot promise that this will be as exciting as an assault on the Death Star but it will be less irritating than Jah-Jah Binks.

Serial Tax Avoiders Regime (“STAR”) – what is it?

This new regime was first announced at Spring Budget 2015, following two consultations:

1. Strengthening Sanctions for Tax Avoidancewhich ran from 30 January 2015 to 12 March 2015;
2. and Strengthening Sanctions for Tax Avoidance – A Consultation on Detailed Proposalswhich ran from 22 July 2015 to 14 October 2015)

STAR is a special regime that is aimed to change the behaviour of taxpayers, and specifically to deter the ‘serial use’ of avoidance schemes and, one assumes, to prevent any new users being tempted by any such schemes.

Clearly, one by-product of removing the demand for schemes will be to cut off the already diminishing supply of tax scheme providers.

The new STAR regime aims to do this through a series of warnings and, in addition, a phalanx of escalating sanctions.

STAR in the spotlight

In order to get the ball rolling, HMRC must first send a notice to a taxpayer when they ‘defeat’ a tax avoidance scheme. This will have the effect of putting the taxpayer ‘on warning’ for five years.

During this time, taxpayers must each yeardo one of the two following actions:

• confirm to HMRC that they have not used any further avoidance schemes, or
• if they have used such a scheme, then they must give full details of the scheme(s) and the quantum of any tax advantage purported to have received.

There are immediate sanctions for taxpayers who use further schemes whilst under this notice period and HMRC defeat them. Firstly, they will become liable to a penalty of 20% of the understated tax. However, this penalty is escalated for subsequent defeats – with the penalty increasing to a maximum of 60%.

Taxpayers, who use three schemes that HMRC defeats during a warning period will invoke HMRC’s recently in vogue penalty – that is they will be ‘named and shamed’.

Finally, taxpayers who use three or more defeated tax avoidance schemes during their notice period designed to exploit any tax reliefs in a way ‘not intended by Parliament’, will also have their ability to claim certain reliefs deferred for a period of three years.

If they keep their noses clean in this ‘deferral period’ and do not use any more defeated schemes which exploit reliefs, then they may go back and claim those reliefs in relation to the three-year period. This is subject to the proviso that they are not timed out by statute.

A STAR is born – Commencement of regime

 The STAR regime applies to relevant defeats occur after 15 September 2016.

However, clearly some people might have entered in to a scheme before this date and suffered a defeat or defeats after this time.

How does the legislation deal with such ‘transitional’ issues?

The following points are relevant:

• Any arrangements that a taxpayer entered into before 15 September 2016, which were defeated before 6 April 2017 are completely disregarded;
• Any arrangements a person entered into before 15 September 2016 which are defeated after 5 April 2017 qualify as defeated arrangements. This is unless the person made a full disclosure of the arrangements to HMRC, or notified them of the intent to do so, prior to 6 April 2017. These defeats incur no sanctions under the STAR regime;
• Arrangements entered into between 15 September 2016 and 6 April 2017 and that were also defeated before 6 April 2017 qualify as defeated arrangements;
• Arrangements entered into before 15 September 2016 are disregarded for the purposes of naming and shaming, the restriction on claiming reliefs and the penalties.

Entry in to the Serial Tax Avoiders / STAR regime

As one would expect, HMRC must follow a procedure in order to trigger the entry of a taxpayer in to the STAR regime.

HMRC must issue a written notice (a ‘warning notice’) to a person who suffers a relevant defeat. The notice must be given within 90 days of the relevant defeat.

The notice must include the following:

• It must set out when the warning period begins and ends;
• It must specify the relevant defeat to which the notice relates; and
• explain the effect of being within the serial tax avoidance regime

The warning period is five years from the day after the day on which the warning notice is issued unless the person is already subject to a warning period. If the taxpayer is already in a warning period then this is extended to the end of five years from the day after the day on which the relevant defeat occurs.

Serial Tax Avoiders / STAR regime: additional annual compliance

The recipient of a ‘warning notice’ will find themselves on the equivalent of HMRC’s naughty step.  It will also mean that they will have to shoulder an additional compliance burden.

Such a person must send HMRC an ‘information notice’ for each reporting period in the warning period. This must be returned within 30 days of the end of the relevant reporting period.

Broadly, this information notice must state whether the recipient has

• confirm to HMRC that they have not used any further avoidance schemes, or
• if they have used such a scheme, then they must give full details of the scheme(s) and the quantum of any tax advantage purported to have received.

HMRC may, by written notice, require a person to provide a supplementary information notice when a person fails to submit a return that was due during the reporting period.

HMRC may, by written notice, extend the warning period if a person fails to provide an information notice as required or is incomplete.

Serial Tax Avoiders / STAR: naming and shaming

This is not quite the same as a star on Hollywood Boulevard.

HMRC may publish the details of serial tax avoiders if they are given three warning notices in respect of schemes used while in a warning period and which are defeated.

Information must be published within 12 months of the issue of the most recent warning notice and can be published for a maximum of 12 months.

The information that may be published is:

• the person’s name (including any trading name, previous name or pseudonym);
• the person’s address (or registered office);
• the nature of the person’s business;
• the fiscal effect of the defeated arrangements (had they not been defeated), such as information about amounts of tax understated or amounts by which claims, or statements of losses, have been adjusted;
• the amount of any penalty to which the person is liable in respect of the relevant defeated arrangements;
• the periods in which or times when the defeated arrangements were used; and
• any other information HMRC may consider appropriate to publish to make clear the person’s identity.

HMRC can publish the information in any manner they consider appropriate.

Prior to naming and shaming the taxpayer, HMRC must tell the person that they are considering doing so. In addition, they must give the person reasonable opportunity to make representations about whether or not it should be published.

Serial tax avoiders: penalties

A person, who uses arrangements during a warning period that are ultimately defeated, may incur a penalty.

The quantum of the penalty is as follows:

• 20% of the amount of tax understated / overclaimed for the first defeat of a scheme used during a warning period;
• 40% for the second such defeat; and
• 60% for any subsequent defeats.

Such a penalty may be appealed within 30 days of the issue of the penalty notice.

Conclusion

Clearly, being a serial tax avoider is not a club that one wants to join. The consequences are potentially:

• Increased compliance;
• Financial penalties; and
• Naming and shaming

The last of these will be particularly sensitive for clients whose public reputation is particularly important.

It remains to be seen as to whether HMRC will use these powers for scallywags who continue to use relevant schemes. However, what is certain, is that HMRC isslowly becoming ‘more powerful than you can possibly imagine’ in its war on tax avoidance.

If you are at risk of being a serial tax avoider or have any tax issues at all then please get in touch.