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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:
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:
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:
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:
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
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:
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:
Such a penalty may be appealed within 30 days of the issue of the penalty notice.
Clearly, being a serial tax avoider is not a club that one wants to join. The consequences are potentially:
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.