Budget 2016: Enforcement and compliance aspects

The chancellor trumpeted an extra £12bn to be collected over the life of this parliament from the latest crackdown on avoidance, evasion and ‘imbalances’ in the tax system. Digging a little deeper, there were few new measures announced in relation to enforcement and compliance – although one notable feature was the return of what, in relative terms, amounts to major announcements in relation to VAT enforcement, which have been notable by their absence in recent times.

 

First off, a consultation will begin in the spring on a new penalty for ‘participating’ in VAT fraud. It is not clear what ‘participating’ is intended to mean, since penalties already exist for fraudulent activity – but perhaps this penalty will apply to those who are not quite engaged in criminal conduct but benefit from providing the ‘picks and tools’ to help the fraudster, for example by trading in fraudulent supply chains. 

 

In a second, perhaps not wholly unrelated measure, the government provided details of legislation to be introduced in the Finance Bill 2016 to make it more difficult for overseas retailers to sell goods in the UK via online marketplaces without properly accounting for VAT, ultimately culminating in the online marketplace being held jointly and severally liable for any unpaid VAT. ‘Fulfilment houses’ (those involved in importing, storing, and unpacking, repacking and delivering goods imported from overseas) have also been invited to comment on a consultation to implement new ‘fit and proper’ standards to improve their due diligence to ensure overseas clients are following the VAT rules.

 

The announcement which perhaps grabbed the most headlines overall was the plan to introduce a soft drinks industry levy, saving the prime minister from the ninja attack threatened by celebrity chef Jamie Oliver. This will apply to larger producers and importers of sugary drinks. It will be interesting to see how the levy is drafted and whether it will operate in a similar way to excise duties. One does wonder whether we have just seen a new opportunity created for fraudsters – sugar levy ‘diversion frauds’, like excise duty frauds but involving clandestine movement of cans of fizzy pop rather than beer!

 

Sticking with excise duties, the alcohol industries were promised a new alcohol strategy, which will modernise alcohol taxes in order to tackle fraud and reduce burdens, with consultations to follow in 2016. Meanwhile, the tobacco industry was promised a consultation on strengthening sanctions to tackle tobacco fraud, following the publication of HMRC’s refreshed anti-illicit tobacco strategy last year.

 

Regarding offshore non-compliance, the Red Book confirmed (again) the plans to introduce a new strict liability offence for failing to declare offshore income and a statutory requirement to correct past offshore non-compliance within a defined period of time. 

 

Nothing, however, was said about the corporate offence of failing to prevent the facilitation of tax evasion. It is understood that the offence will be passed under the government's main legislative programme, rather than under the time allotted for Finance Bills. This approach may be intended to raise the profile of the subject matter, especially with organisations located outside the UK who will also be caught by the offence. 

 

Clearly the new corporate offence and the related new penalty regime for ‘enablers’ of tax evasion will only apply when there has been facilitation of tax evasion. But a slightly worrying statement, especially for the financial and professional services sectors, was the announcement that options were being considered on how to address the issue of those who ‘enable’ tax avoidance schemes, as well. 

 

Sticking with avoidance, the government also announced plans to consider options for clarifying what constitutes ‘reasonable care’ in avoidance penalty cases and whether to widen the VAT equivalent of the DOTAS rules to bring other indirect taxes within their ambit. 

 

There will also be extra ‘incentives’ to settle historic EBT disputes. First, the relieving provisions in FA 2011 Sch 2 para 59 will be removed for the investment growth on the capital put into the EBT if the dispute is not settled on or before 30 November 2016. Second, a new tax charge will be imposed on loans from EBTs which have not been taxed and remain outstanding on 5 April 2019. 

 

Surprisingly, there was nothing which builds on the advance payment legislation, but there was a reference to removing the ‘underlying cash benefit’ from incorrect transfer pricing and encouraging better transfer pricing compliance through the possible introduction of secondary adjustments.

 

In a quirky little measure, a consultation was promised on how the government might leverage compliance by making certain licences and the provision of certain government services conditional on the licensee or user of those services being properly registered for tax.

 

Finally, new measures were announced to tackle perceived tax treaty abuses, including an immediate change to the treaties with Jersey, Guernsey and the Isle of Man in connection with developing UK land, and the proposed imposition of a 20% royalty withholding tax where there is perceived treaty abuse. A big question arises over whether such a tax would be lawful under international law, but it will certainly be easier to pass if the UK votes on 23 June to leave the EU.