HMRC's new attack on the tax avoidance industry
HMRC is in hyperactive mode right now – consultation documents are coming at us from all angles (even though it's August!) leaving advisors wondering when we can put our feet up and read some fiction. Amongst this flotilla of condocs is one which has caught the attention of the press entitled "Strengthening Tax Avoidance Sanctions and Deterrents" and this edition will look at the proposals contained within it and comment on how they may affect not only tax advisors but a whole range of other professionals.
What are they up to this time?
The government says that it intends to deter people involved in facilitating or assisting in tax avoidance arrangements which are "defeated" by HMRC. The existing deterrents and sanctions are not considered to be strong enough and it is proposed that the designers and promoters of tax avoidance schemes, as well as those people who facilitate, assist or even refer clients, will face heavy fines.
But didn’t the government only recently introduce new civil and criminal sanctions for tax avoiders?
Sort of - following on from HMRC's 2015 consultation entitled "Tackling Offshore Tax Evasion: Civil Sanctions for Enablers", there will be new criminal and civil sanctions for taxpayers, agents and advisors who are involved in tax evasion (not mere avoidance). These will become law when the Finance Bill 2016 achieves Royal Assent.
The difference here is that the new sanctions proposed will apply to people who assist taxpayers in lawful, but ultimately unsuccessful, attempts to avoid tax. This is the revolutionary aspect of the proposal – the ability to punish someone for lawfully going about their business (say, providing tax advice, trustee or banking services) to a taxpayer who intends to lawfully avoid taxation. No one in the "chain of supply" need have a criminal intent and no law need be broken.
Who exactly will be caught and how?
The proposal is that "enablers" - which will be the designers of tax schemes, those who refer clients to such schemes, or who provide banking or finance arrangements, or trustee services or tax or legal or accountancy advice - will face civil sanctions if the "arrangements" they are involved with are defeated by HMRC. The amount of the fine may be linked to the amount of tax avoided or it may be linked to level of "benefit" received by the enabler. Clearly, a tax based penalty will be a major concern for any business with multiple clients as amounts could quickly escalate.
In order to be caught, the arrangement with which you are involved must be "defeated" by HMRC in the courts. There is a definition of "defeat", which limits this to cases caught by GAAR, DOTAS, Follower Notices or those which are "subject of a targeted anti-avoidance related rule (TAARs)". Given that we have so many TAARs on our statute book, this isn’t looking like such a high bar. Furthermore, what happens where HMRC wins some points and the taxpayers others – such as in the recent Ingenious case?
This sounds really unfair…..
HMRC has the proxy power to make tax law and the real power enforce those laws and to collect the tax due. They also have a very powerful and influential role in the interpretation of their own rules, whether by press releases, help sheets or through the HMRC manuals. Often the HMRC view is taken as the law when, in fact, it is only a view.
HMRC already has the power to decide whether a tax scheme is "similar" to a defeated scheme for the purposes of the Advance Payment Notices (APNs) which require a taxpayer to pay an amount equal to a possible tax liability which is yet to be determined by the courts. A failure by the taxpayer to pay on an APN will lead to a 50% penalty in the event that the scheme is eventually decided in favour of HMRC. This acts as a disincentive to taxpayers exercising their rights to justice as they are penalised if they lose, whereas HMRC faces no such penalty.
These new proposals increase the inequality of power for taxpayers and those that assist them should they end up in court against HMRC. If HMRC win then they win big time, collecting the tax, penalties and interest from the taxpayer plus a collection of fines from anyone in the "supply chain" for that arrangement. This raises the stakes significantly for taxpayers and anyone assisting them, but not for HMRC which, rather conveniently, is not penalised if it loses.
What's this stuff about "supply chains"?
The supply chain is the network of people who support the tax avoidance industry and the consultation document notes that offshore trustees, banks and financial advisors all have a part to play. So, if you are the trustee of a trust which is part of a defeated tax avoidance arrangement then, if I were you, I would start checking your insurance coverage as many insurers do not cover civil penalties. Bankers, who are already amongst the most risk averse creatures in the world, will have even more to worry themselves about, especially in respect of accounts opened for offshore trusts, companies or indeed anything which looks out of the ordinary. If you are an IFA who merrily refers clients to boutique providers for those exciting (read "scary") tax avoidance schemes then you should think long and hard about whether you wish to continue. If you are an accountant or lawyer giving tax advice then you have to be very careful about who you advise and on what subject – if you stray into areas which could be "defeated" then this will significantly increase (in common with any other enablers) the costs and risks of doing business. Of course, this is exactly the result that HMRC wishes to achieve.
There is a clear distinction between tax evasion, which is illegal, and tax avoidance, which is not. You are either breaking the law or you are not. If you assist other people in breaking the law then it is right that you face some punishment. However, the boundary between acceptable tax planning and unacceptable tax avoidance is fuzzy and indistinct and it depends so much on the subjective views of the people who have the power to police that boundary. As such, punishing people who, quite lawfully, provide advice or assistance to other people who wish to lawfully reduce their tax burden looks harsh.
The threshold of a court 'defeat' looks like a high bar but in reality it is not. As our tax laws get more complex and difficult to understand we often need the intervention of the courts to help us understand the law. These measures, if enacted, could make tax advisers so reluctant to give advice that it will leave taxpayers with nowhere to turn for advice or representation on their tax matters. Add into this mix the threat that other people in the "supply chain" will be punished for any kind of assistance means the taxpayers with complex tax affairs (of which there are many) may find that they are ostracised by banks, trustees and other financial professionals – leaving them unrepresented, un-banked and bewildered.
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