Introduction: Tax avoidance and weaponisation
If you ask the man on the street the following questions:
- Does HMRC have sufficient powers to crackdown on tax avoidance?
- Has HMRC been successful in reducing tax avoidance?
then the answer is likely to be ‘no’ to both.
However, the answer is, by any reasonable measure, yes to both of these
The tax gap is the difference between the amount of tax HMRC believes should be collected and the amount which it actually does. In relation to the second of my two questions, the tax gap is now at £34bn(latest figures 2015/16). Of course, this is a large figure. It represents 6% of the total theoretical tax take. Over the last decade this amount has generally reduced from 7.9% in 2005/6.
However, the amount of the tax gap attributable to tax avoidance is £1.7bn. This is a mere 5% of the tax gap and 0.3% of the total theoretical tax take.
When one compares this to tax evasion (£5.2bn) and ‘criminal attacks’ (£5.1bn). Note that neither of these figures include the ‘hidden economy’ (£3.5bn).
None of these contributors to the tax gap has reduced to any extent over the same period. In terms of return on investment, it is clear that HMRC and the Government should not focus on tax avoidance and tax avoidance alone
However, it is my first question to which the bulk of this note is dedicated. What powers does HMRC have in its arsenal when it comes to tax avoidance?
In a recent appearance before the Treasury Committee, HMRC’s David Richardson (with the rather funky job title, Interim Director-General, Customer Strategy and Tax Design) stated that HMRC have “pretty well got the ‘full hand’ that they have been looking for as a result of measures that have been introduced over the last five or six years”
We will discuss the ‘full hand’ in more detail below.
- The Disclosure of Tax Avoidance Scheme (“DOTAS”) regime
The DOTAS regime was introduced by the Labour Government in 2003. It was originally designed as an early warning system so that HMRC collected data on tax avoidance schemes much more quickly.
Originally this applied to a limited range of products and was originally focused on employment related schemes (similar to those that HMRC and the Government are still controversially attempting to get to grips with).
As the years when by the range of planning that were pulled within its reach widened and the consequences of being within it ramped up.
Taken at its most basic, the rules require the details of a scheme to be disclosed to HMRC in circumstances where, broadly, each of two limbs are satisfied:
- Where the obtaining of a tax advantage is one of the main purposes of entering in to the scheme; and
- Where a prescribed hallmark is satisfied.
Clearly, the first of these will not be triggered where a purely commercial transaction is contemplated. However, the rules are cast widely such that many planning arrangements will be within the first limb.
However, it is the second limb which will only suck in certain types of planning. For example, planning which falls in to the definition of ‘standardised tax product’ will trigger this hallmark. So, plug and play or shrink-wrapped schemes, where essentially only the names and numbers change, will usually be caught by this hallmark. Where the planning is a specific piece of planning determined by a taxpayer’s own particular circumstances or particular transaction then it will not.
In terms of compliance, promoters and scheme users have found that DOTAS is a wedge that is only grows fatter. Initially, the Promoter was required to disclose the scheme to HMRC. In exchange, HMRC would then kindly send the promoter a Scheme Reference Number (“SRN”). This essentially was a serial reference number that the user of the scheme was required to add to his or her tax return.
This indelible stamp of tax avoidance would mean that he or she was almost certain to receive an enquiry from HMRC.
As time went by, Promoters were required to keep lists of their clients and the schemes they had used. They had to supply this to HMRC each quarter. More information for HMRC to challenge the use of the schemes.
However, the use of DOTAS was to perhaps take a more controversial twist. The Government introduced APNs (see below) which are inextricably linked with DOTAS. Essentially, many users of the schemes would have open enquiries. However, due to a lack of resources at HMRC and an overloaded tribunal, these cases did not progress and collecting the tax happened at a glacial pace. Where one had in the past entered in to a DOTAS scheme then HMRC were given the power to issue an APN, an upfront demand for tax. The toss to be argued later down the line.
At the high water mark (2005/06) there were around 600 disclosures under DOTAS. In 2016/17, I understand that this was only 15.
I am surprised it was this many.
What has caused this?
The answer is APNS.
- Accelerated Payment Notices (“APNs”) and Follower Notices (“FNs”)
My view is that APNs were the real game changer in the Government’s drive against marketed tax avoidance.
The linking of APNs with DOTAS meant that one would need to be as mad as a badger to enter in to a DOTAS scheme. You are effectively telling HMRC that you have entered in to a dodgy tax scheme, they will thank you and, in due course, ask you to pay the tax within 90 days.
As it does increasingly, HMRC holds the balance of power here.
There is no right to appeal and, although a taxpayer can make representations, it is perhaps this (cynical) writers experience that these will be rejected (at best) or completely ignored (at worst).
With tongue firmly in cheek, the Officer will refer you to Judicial Review as a way of seeking redress safe in the knowledge that your average man or woman in the street neither has the resources or the inclination to do so.
An inequality of arms.
There have, however, been a number of Judicial Review cases in relation to APNs. Where these have concerned human rights issues these have been unsuccessful. Specific technical or procedural matters have succeeded and APNs have been withdrawn accordingly.
We have previously published an article on APNs and Follower Notices which can be found here.
- General Anti-Abuse Rule (“GAAR”)
The GAAR was introduced in 2013 and was a controversial measure. It is designed to counteract abusive tax arrangements, which might otherwise slip through the UK’s labyrinthine tax code.
It is important to note that the GAAR is not quite a ‘General Anti-AvoidanceRule’. Instead it is triggered where a scheme is ‘abusive’. In order to be considered abusive the planning must fail the so-called ‘double reasonableness test’
The definition of abusive is the same as for the Enablers legislation (see below). As such, GAAR and the Enablers legislation stand shoulder to shoulder in the battle against abusive tax practices. The former targets clients and the latter targets those designing, marketing and orchestrating the planning.
If a scheme fails GAAR then the tax advantage ‘delivered’ by the scheme is counteracted on a just and reasonable basis.
In the original report recommending the implementation of GAAR it stated that there should be no GAAR penalties. To take the flavour of the title of this article, it was stated that GAAR should not be ‘weaponised’.
However, even in the absence of any rulings, the Government decided that penalties were the order of the day. If GAAR bites, and the transactions were entered in to after 15 September 2016, then a 60% penalty may apply.
The first cases are now trickling through the GAAR Advisory Panel, the body of fine men and women who give up their time to provide opinions on whether tax planning is ‘reasonable’ or not.
For further details see our detailed note on GAAR.
- Promoters of Tax Avoidance Schemes (“POTAS”)
Perhaps to assist the tax based limerick writer scrabbling around for a word that rhymes with DOTAS, the Government created the created POTAS regime
This regime is primarily based at promoters of tax schemes – including the designers of schemes and those that make them available. The objective of the regime was to change the behaviour of ‘a small and persistent minority’ of promoters of avoidance schemes.
The rules are very much designed to deter both the development and, consequently, the users of schemes.
POTAS regime involves a series of sanctions which escalate in their impact. There are essentially two key steps:
- a conduct notice: this may be issued by HMRC where a promoter satisfies certain conditions, known as ‘threshold conditions’. It will include various requirements; and
- a monitoring notice: issued by HMRC, where a promoter:
- breaches a requirement in a conduct notice; and
- approval is obtained from the First-tier Tribunal
The second step involves the promoter being subject to a stringent regime including the publication of the fact it is a monitored promoter on its marketing materials and correspondence. Clients must be notified of this fact and the client needs to disclose a reference number on their own tax returns.
For further details see our detailed note on POTAS.
- Enablers of Failed Tax Avoidance Schemes (Enablers)
This legislation stands shoulder to shoulder with GAAR. In fact, ‘copy and paste’ has been used extensively in drafting these provisions.
However, whereas GAAR seeks to bash the user of the scheme, the Enablers rules seek to attack the designers, marketers and other key protagonists in the operating of the scheme.
Whereas a punter may have to pay the tax and interest plus a 60% penalty, an enabler may suffer a penalty of up to 100% of the consideration he or she has received for services provided.
As with GAAR, the Enablers rules apply where the scheme in question is an ‘abusive’ tax arrangement. The definition is almost identical to that as set out for GAAR.
For further details see our detailed note on the Enablers provisions.
- Serial Tax Avoiders regime (“STAR”)
STAR is another regime that is aimed to change the behaviour of taxpayers.
Specifically, this regime is designed to deter the ‘serial use’ of avoidance schemes. Clearly, one by-product of removing the demand for schemes is that it will further stamp out 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.
In order to get the ball rolling, HMRC must in the first instance send a notice to a taxpayer when they ‘defeat’ a tax avoidance scheme. The effect of this notice is that it puts the taxpayer ‘on warning’ for five years.
During this five year period, taxpayers are required each year to either:
- confirm to HMRC that they have not used any further schemes, or
- if they have, give full details of the scheme
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.
- Retrospective legislation
The government has shown that, in cases which it perceives as tax avoidance, they are prepared to utilise backwards facing legislation which pulls the rug out from under the feet of previous transactions.
There are arguments over whether changes are ‘retrospective’ or ‘retroactive’. There are arguments over whether the distinction is even relevant.
It is my view that the such fine and artificial points of distinction are ones which your good old-fashioned scheme designer would be proud of!
For more details on retrospective legislation please see our detailed note.
- Strict liability offence for offshore tax evasion
This might sound like it has nothing to do with tax avoidance as it has ‘evasion’ in the title. However, as it is a strict liability offence it has the potential to bite those who have entered in to non-UK avoidance schemes.
A UK taxpayer will commit an offence if, in relation to offshore income, assets or activities, he or she:
- Fails to give notice of being chargeable to income tax or CGT; or
- Fails to deliver a return which would have disclosed a liability to income tax or CGT; or
- Makes an inaccurate return (in circumstances where, but for the inaccuracy, a greater amount of income tax or CGT would have been payable)
So, for example, a contractor who has used a tax avoidance scheme based in the Isle of Man or elsewhere may find he is also having to fend off assertions from HMRC that this offence is in point.
This is because, as stated above, this is a strict liability offence. As such, it means that the Prosecution do not have to prove any intention to evade tax. Mere carelessness will be enough.
One must therefore fall in to an exemption or provide a defence.
This offence was introduced in the Criminal Finances Act 2017 along with the Corporate offences of failure to prevent the facilitation of tax evasion. You can find further details in relation to both in our detailed notes.
- Exchange of Information and Requirement to Correct (“RTC”)
RTC was introduced in Finance (No 2) Act 2017and, essentially, obliges taxpayers to correct any historic UK tax issues in respect to offshore income, assets and activities. If they fail to act they will face sanctions including punitive financial penalties.
Taxpayers must correct their UK tax position in respect of periods up to 5 April 2017 by 30 September 2018.
The 30 September 2018 deadline coincides with the start date for the Common Reporting Standard when tax authorities in over 100 countries including HMRC begin exchanging data on financial accounts.
Taxpayers with current and historic offshore financial connections should urgently review their UK tax affairs including making sure that any historic planning (including avoidance schemes) with an overseas element is reviewed to check that it has been correctly implemented.
If errors are identified they should be rectified by 30 September 2018.
It may be appropriate to submit disclosures where there is doubt over a technical argument to protect a taxpayer’s position against Failure to Correct penalties in case HMRC argues that additional tax is due.
- The Advertising Standards Agency
HMRC has recently opened another, more subtle and clever, front in its battle with tax avoidance. It seems to have found itself a dutiful foot soldier in the Advertising Standards Authority (ASA).
It is, of course, the advertising industry’s regulator and has the power to withdraw or force the amendment of marketing across a wide variety of traditional and new media. In the first half of 2017, online adverts were the second most complained about medium of all. Interestingly, objections about the financial industry saw it rack up the fourth largest number of complaints.
We have seen three recent rulings:
- a company trading as Knight Wolffe which promoted “tax trusts” aimed at health service professionals. It was rather brazenly using HMRC’s logo on its website and also implying House of Lord approval for the scheme. Of course, completely inappropriate behaviour. A HMRC Spotlight stated that the decision would have a wider deterrent effect by setting “a precedent so other avoidance sellers must not make the same claims about similar schemes”.
- a firm called Williams Gordon was also ordered to withdraw its advert for a contractor loan scheme. Under the terms of the arrangement, contractors would receive a small part of their salary as income on which tax would be paid with the remainder made up by a loan. As well as declaring that participants could “take home up to 92% of your pay”, it also stressed that the scheme was “fully compliant with the necessary HMRC legislation and with all current IR35 policies”. Once again, the ASA determined that Williams Gordon had “misled by omission” and failed to make mention of the many powers which ministers had put in place to counter the sort of tax avoidance which HMRC insisted its schemes practiced.
- Finally, there was a third decision against an SDLT scheme provider called Fiducia. Again, the ASA determined that a number of claims it had made on the website were unsupportable. n this case, it is the nature of ASA’s intervention that is interesting. Rather than having HMRC merely rail against the use of their logo or endorsement, in the papers I have seen, HMRC was actually disputing technical claims about the use of exemptions in the tax code and the Company’s arguments that the scheme was not disclosable under DOTAS. Of course, these are points which HMRC are entitled to, and should, raise. However, the ASA is a completely inappropriate forum to do s
This is an interesting new weapon for a couple of reasons.
Firstly, ASA adjudications are, by the nature of the organisation, frequently of interest to media. The Authority, in other words, cannot only order the withdrawal of offending ads but save HMRC the trouble of spreading the news and scaring off copycats.
Being able to ‘out’ organisations facilitating tax avoidance is something which HMRC has greater difficulty in doing (absent any naming and shaming provisions). However, merely citing an ASA mentioning the relevant firm allows HMRC to escape processes which might be much longer and may even involve multiple court hearings.
The idea being to generate negative PR for these firms and attempt to further diminish the already dwindling supply of such schemes.
11. The Professional Bodies
OK, OK you’ve rumbled me. I’ve added an eleventh.
The fact that the professional bodies who are involved in the provision of tax advice have agreed to amend their codes of conduct to effectively prohibit advice in relation to artificial tax avoidance is another significant development for HMRC.
Of course, this will not curtail the actions of those who operate in the market outside the confines of a professional body which is arguably where the problem lies. However, such outliers are now more and more isolated.
For further developments please read our full article on professional conduct rules in relation to tax.
Conclusion – tax avoidance
Despite what the press and politicians, depending on which side of the house they sit, might have us believe, HMRC clearly has many tools at its disposal. These weapons not only target the users of the scheme but also those promoting, marketing and designing them.
It is through these tools that HMRC has blown apart the marketed tax avoidance industry which, as well as anecdotal evidence, can be seen in the shrinking of the tax gap attributable to avoidance.
It is rather apparent that, rather than being a walk in the park, participating or promoting tax avoidance is like running through no-man’s land with a target on your back!!!
If you have any queries around tax avoidance, or any other matters, then please get in touch