On Wednesday 17 August, HMRC launched a consultation setting out proposals to impose punitive sanctions on those who design, promote and market tax avoidance schemes, or so-called "enablers". This eAlert examines the key components of the proposals and considers the potential effect on tax planning and advisory professionals.
The consultation looks to place enablers firmly in the cross hairs when avoidance schemes are defeated in court (as defined in the paper). At present, only those individuals who rely on the advice of such advisors face sanction. The proposed "enabler penalty" is equivalent to 100% of the amount avoided in any defeated scheme, a methodology similar to that deployed in relation to the offshore enabler penalty in the Finance Bill 2016. When considering that an enabler could have enabled tens or hundreds of people to try and avoid tax, this number could grow to an eye-watering amount (although a possible cap on the aggregate amount of penalties is discussed in the paper).
The consultation refers to the intention to "root out" those who bend the rules to gain a tax advantage that Parliament never intended, the consequence of which may be that fines are levied as a result of advice that was not, by nature, and at the time, strictly illegal. The notion of imposing fines on individuals on the basis of the (erroneous) interpretation of an Act of Parliament is likely to cause particular alarm.
Separately to the proposals relating to enablers, the consultation paper also seeks input regarding the rules around whether proven tax avoiders have taken "reasonable care" to ensure their tax returns do not contain inaccuracies. At present "reasonable care" is not defined and sufficient desire to do so will assist HMRC when determining an appropriate penalty to a particular offence. A proposed alternative to this is to shift the burden of proof on evidencing "reasonable care" from HMRC to the individual.
This Conservative government, and its predecessor, have made no secret of the root of this political drive. Both the 2015 and 2016 Budget referred to a desire to influence the behaviour of promoters and other intermediaries who enable or facilitate the sale and use of tax avoidance schemes.
It is likely that the consultation will be well received by the tax planning and advisory industry, that is, at least by those who conduct their affairs within the permissible framework. For those advisors who operate at the more aggressive end of the spectrum and thus more likely to provide advice contrary to the spirit of the law, the proposals will undoubtedly prompt them to think twice about their advice to clients.
Enablers will only become subject to enabler penalties (and the possibility of being "named and shamed") in the event that their scheme is defeated in court. Professional advisors will not want to run the risk of their schemes being pored over in open court and thus it seems that it will not be necessary for HMRC to identify significant additional resources to conduct the requisite enforcement action, but rather (it is hoped) rely on the behavioural changes brought about by the proposals.
A significant number of questions will need answering during the course of the consultation process and the period thereafter, a number of which include the applicable definitions, most notably that of an "enabler". Already the Chartered Institute of Taxation has released a comment on the proposals stating that words like "assist" and "facilitate" (used extensively in the paper) are extremely vague. It will be down to HMRC to negotiate these waters to the satisfaction of the tax advisory industry without conceeding significant compromise.
The consultation period closes on 12 October 2016.