The Treasury Sub-Committee has launched a call for evidence on the powers given to HMRC in the past five years to tackle tax evasion and tax avoidance schemes, and is inviting responses by 31 May. Readers are encouraged to provide feedback to the questions posed. A review of the measures introduced in the past five years shows the pace at which change has occurred, and while tackling evasion and aggressive avoidance is a worthwhile cause, it may be better for Parliament to give the current measures time to take effect before adding to the already increased compliance burden of taxpayers and professionals. Professional bodies would no doubt welcome increased dialogue with the government on this subject.
I have created a dispute in my office. It centres around the definition of tax planning and tax avoidance. The reason for the dispute is the publication by the Treasury Sub-Committee of a submission for evidence on the strategies which have been put in place over the last five years to ‘address offshore evasion and reduce the use of tax avoidance schemes’ (see bit.ly/2Ht9Fx1).
The Sub-Committee is looking for evidence in response to any one or more of five questions:
Reflecting on the changes that have been introduced in the two areas of evasion and avoidance, I have been struck by just how much has been done in these two areas, from the introduction of the GAAR in 2013 to the increased reporting requirements and information sharing initiatives, which the UK has been so key in implementing.
Some of the changes have increased the compliance burden on tax practitioners significantly, and the ability to comply has sometimes been hampered (as in the case of the trust registration service) by poor IT and a lack of clarity. However, this call for evidence provides thoughtful advisers with relevant experience to give feedback on the current situation, and potentially shape the government’s strategy over the coming years.
Disclosure facilities have provided the Treasury with an additional £1.4bn (per revenue statistics updated 3 May 2016), and the worldwide disclosure facility and requirement to correct will no doubt be providing additional funds rightfully due to the exchequer. The prospect of higher penalties for offshore disclosures in the future will hopefully bring more taxpayers into line. It seems that from a compliance standpoint, HMRC has ceased to offer the ‘carrot’ for coming forward and are now giving taxpayers the option between a smaller ‘stick’ now compared with a bigger ‘stick’ later.
A stringent penalty regime could in isolation be seen as a deterrent to voluntary disclosure, but with increased information sharing and processing capabilities, unprompted disclosure is preferable to prompted disclosure.
These two powers combined (information sharing on the one hand and a penalty regime on the other) seem to the author to provide HMRC with an effective mechanism to encourage those who are already engaged in evasion to come clean.
There have also been measures introduced to ensure that new offshore interests are reported from the start. These include the various registers introduced (persons of significant control, trust registration service, and the more recently announced register of the beneficial owners of overseas companies and other legal entities that own UK property) and the threat of naming and shaming. If working effectively, these mechanisms should provide the information HMRC needs to trace offshore funds. What is yet to be seen is whether HMRC has the resources to process this data and target their efforts in the right place to recover taxes due.
One concern raised from the tax profession has been that the new registers will just be another list of compliant taxpayers, with non-compliance continuing undeterred. Another concern is at a legislative level. The register of the beneficial owners of overseas companies and other legal entities that own UK property has been made necessary by the introduction of the new IHT rules for UK residential property. It could have been possible to structure the rules, or the collection of tax in such a way that such a register was not necessary. As things stand, HMRC will now need to track every disposal of shares by such non-UK companies, and the death of any shareholder of any of these companies. It is hard to underestimate the additional burden on HMRC were it to do this effectively.
The principle of self-assessment can only be effective if the taxpayer concerned knows he needs to self-assess, and the institution has the means to ensure compliance. If an individual resident and domiciled outside the UK owning shares in such an offshore company dies, the executors would have no reason to suspect there would be a UK tax liability on those shares. The Treasury may have created their own compliance problem through new legislation and, ironically, increased evasion rather than decreasing it.
Tax evasion, while not easy to solve, is at least easy to define. Not so tax avoidance, as the debate in my office confirms. CIOT professional conduct in relation to taxation admits that there is ‘no widely accepted definition’ (para 4.6 of the Professional conduct in relation to taxation, effective from 1 March 2017). What is certainly true is that the stance on tax avoidance has shifted both in public perception and government practice. Indeed, Gov.uk’s guidance on the GAAR explicitly rejects previously accepted court rulings that taxpayers may use any lawful means to reduce their tax bills (though it should of course be noted that the shift has been more gradual, with decisions such as the Ramsay case (W T Ramsay Ltd v IRC [1982] A.C. 300) demonstrating that transactions without a commercial purpose cannot be justified). HMRC published in 2016 its own definition of tax avoidance, which ‘involves bending the rules of the tax system to gain an advantage that Parliament never intended’ (see HMRC’s guidance, Tax avoidance: an introduction, at bit.ly/2s0Z6Gp).
The tools available to HMRC in the area of avoidance also seem to the author to be strong and potentially effective. Together with the introduction of the GAAR, there are strengthened rules on disclosure of tax avoidance schemes, sanctions for serial promoters of such schemes and increased scrutiny for those who repeatedly use defeated schemes. Combined with APNs and follower notices, these look to be a suite of measures that could be used to great effect, both in tackling existing schemes and monitoring or challenging new ones.
The author’s message to the Treasury would be – don’t rush to introduce new measures. The GAAR has only been in place since 2013, which is an age away from the now infamous obiter dicta comments of Lord Clyde regarding the legitimacy of tax avoidance (Ayrshire Pullman Motor Services & Ritchie v IRC (1929) 14 TC 754). While more recent decisions have moved away from this historic stance, this move has been gradual. It will take longer than five years to change 100 years of practice, but that does not mean that the measures are not working, or not effective.
Finding the distinction between legitimate tax planning and unacceptable tax avoidance is an issue on which the tax profession cannot currently agree. One of the reasons for this is that the clear intention of parliament is not always obvious. However, the vast majority of professionals are governed by a professional body with ethical guidelines or codes of conduct in relation to taxation. Many of these were updated in 2015 following the Treasury’s presentation to Parliament on the subject of evasion and avoidance.
This collaboration between professional bodies and Parliament has to be key to progress in the area of unacceptable avoidance. I am sure the author speaks for the profession in welcoming discussions with the Treasury about how such professional bodies could be more effective in ensuring the compliance of their members with their respective codes of conduct.
There should also perhaps be more collaborative discussion on proposed measures to be introduced by Parliament. One example of this is the introduction of the ATED regime to combat a perceived abuse of the SDLT rules by owning UK property in an offshore company. Such ownership was rarely for SDLT purposes but rather for IHT mitigation for non-doms (a point raised in consultation), and the ATED regime did not change taxpayer behaviour in the way Parliament had hoped. It took another four years for measures to be introduced which addressed the IHT point originally raised.
Some individuals seek out tax avoidance strategies, while others feel pressed in to them due to a change of circumstances or other innocent reason. We have seen schemes suggested to our clients by other advisors which would not stand up to scrutiny against the GAAR and have strongly advised against their use. HMRC and the tax profession know who these more unscrupulous firms are, and with perhaps an appropriate forum for discussion, more effective progress could be made so that unsuspecting taxpayers are not adversely affected by involvement in a scheme where they did not appreciate the possible outcomes.
While the definition of tax avoidance is helpful to an extent for domestic affairs, the question becomes more difficult when considering other jurisdictions. Each jurisdiction will always have its own tax rules, as each jurisdiction has its own unique set of goals and problems to address through fiscal rewards and disincentives. Is making use of another jurisdiction automatically tax avoidance? If there was no UK VAT on the sale of new cars in (say) Humberside, I would not be alone in being willing to travel quite some distance to ensure such a saving. If there is a tax difference between jurisdictions for an individual buying a jet, they would no doubt want to take this into account. The numbers are bigger, and we are looking at international rather than national laws, but the principle should hold true.
When looking at the role of the Crown Dependencies and British Overseas Territories, it has been our firm’s experience that the Channel Islands and Isle of Man are in fact the gatekeepers for the Treasury. The vast majority of Jersey Trustees, for example, will not proceed with any transaction without tax advice on the matter. The individual firms are well regulated by their jurisdiction, and the jurisdiction is eager to ensure compliance in order to maintain its standing in the international community. Working with the professional bodies in these jurisdictions could well prove an effective aspect to the overall strategy in tackling tax evasion and tax avoidance.
It is tempting when faced with the problems for evasion and aggressive avoidance to want to give HMRC more and more powers so it has a bigger and bigger ‘stick’. A bigger stick does not necessarily equate to more effective compliance and a smaller tax gap. The IRS has a tax gap of around 16% (see bit.ly/2Hbi4l8), compared with a UK tax gap of 6.5% (bit.ly/2ezIPll)), and arguably has far more powers than HMRC.
The Treasury should ensure that existing powers are being used to their best effect, and that there are sufficient resources to effectively manage these powers and monitor the huge amount of data it is not being provided with. I am sure I speak for the profession as a whole when I say that tax advisers would welcome increased dialogue in these areas, with an appropriate forum to discuss aggressive tax avoidance, and effective powers for professional bodies.
The call for evidence by the Treasury Sub-Committee will feed into legislation that will affect the course of public policy, and tax professionals would therefore be well advised both to read the call for evidence and submit a considered response with supporting data where appropriate.
The Treasury Sub-Committee has launched a call for evidence on the powers given to HMRC in the past five years to tackle tax evasion and tax avoidance schemes, and is inviting responses by 31 May. Readers are encouraged to provide feedback to the questions posed. A review of the measures introduced in the past five years shows the pace at which change has occurred, and while tackling evasion and aggressive avoidance is a worthwhile cause, it may be better for Parliament to give the current measures time to take effect before adding to the already increased compliance burden of taxpayers and professionals. Professional bodies would no doubt welcome increased dialogue with the government on this subject.
I have created a dispute in my office. It centres around the definition of tax planning and tax avoidance. The reason for the dispute is the publication by the Treasury Sub-Committee of a submission for evidence on the strategies which have been put in place over the last five years to ‘address offshore evasion and reduce the use of tax avoidance schemes’ (see bit.ly/2Ht9Fx1).
The Sub-Committee is looking for evidence in response to any one or more of five questions:
Reflecting on the changes that have been introduced in the two areas of evasion and avoidance, I have been struck by just how much has been done in these two areas, from the introduction of the GAAR in 2013 to the increased reporting requirements and information sharing initiatives, which the UK has been so key in implementing.
Some of the changes have increased the compliance burden on tax practitioners significantly, and the ability to comply has sometimes been hampered (as in the case of the trust registration service) by poor IT and a lack of clarity. However, this call for evidence provides thoughtful advisers with relevant experience to give feedback on the current situation, and potentially shape the government’s strategy over the coming years.
Disclosure facilities have provided the Treasury with an additional £1.4bn (per revenue statistics updated 3 May 2016), and the worldwide disclosure facility and requirement to correct will no doubt be providing additional funds rightfully due to the exchequer. The prospect of higher penalties for offshore disclosures in the future will hopefully bring more taxpayers into line. It seems that from a compliance standpoint, HMRC has ceased to offer the ‘carrot’ for coming forward and are now giving taxpayers the option between a smaller ‘stick’ now compared with a bigger ‘stick’ later.
A stringent penalty regime could in isolation be seen as a deterrent to voluntary disclosure, but with increased information sharing and processing capabilities, unprompted disclosure is preferable to prompted disclosure.
These two powers combined (information sharing on the one hand and a penalty regime on the other) seem to the author to provide HMRC with an effective mechanism to encourage those who are already engaged in evasion to come clean.
There have also been measures introduced to ensure that new offshore interests are reported from the start. These include the various registers introduced (persons of significant control, trust registration service, and the more recently announced register of the beneficial owners of overseas companies and other legal entities that own UK property) and the threat of naming and shaming. If working effectively, these mechanisms should provide the information HMRC needs to trace offshore funds. What is yet to be seen is whether HMRC has the resources to process this data and target their efforts in the right place to recover taxes due.
One concern raised from the tax profession has been that the new registers will just be another list of compliant taxpayers, with non-compliance continuing undeterred. Another concern is at a legislative level. The register of the beneficial owners of overseas companies and other legal entities that own UK property has been made necessary by the introduction of the new IHT rules for UK residential property. It could have been possible to structure the rules, or the collection of tax in such a way that such a register was not necessary. As things stand, HMRC will now need to track every disposal of shares by such non-UK companies, and the death of any shareholder of any of these companies. It is hard to underestimate the additional burden on HMRC were it to do this effectively.
The principle of self-assessment can only be effective if the taxpayer concerned knows he needs to self-assess, and the institution has the means to ensure compliance. If an individual resident and domiciled outside the UK owning shares in such an offshore company dies, the executors would have no reason to suspect there would be a UK tax liability on those shares. The Treasury may have created their own compliance problem through new legislation and, ironically, increased evasion rather than decreasing it.
Tax evasion, while not easy to solve, is at least easy to define. Not so tax avoidance, as the debate in my office confirms. CIOT professional conduct in relation to taxation admits that there is ‘no widely accepted definition’ (para 4.6 of the Professional conduct in relation to taxation, effective from 1 March 2017). What is certainly true is that the stance on tax avoidance has shifted both in public perception and government practice. Indeed, Gov.uk’s guidance on the GAAR explicitly rejects previously accepted court rulings that taxpayers may use any lawful means to reduce their tax bills (though it should of course be noted that the shift has been more gradual, with decisions such as the Ramsay case (W T Ramsay Ltd v IRC [1982] A.C. 300) demonstrating that transactions without a commercial purpose cannot be justified). HMRC published in 2016 its own definition of tax avoidance, which ‘involves bending the rules of the tax system to gain an advantage that Parliament never intended’ (see HMRC’s guidance, Tax avoidance: an introduction, at bit.ly/2s0Z6Gp).
The tools available to HMRC in the area of avoidance also seem to the author to be strong and potentially effective. Together with the introduction of the GAAR, there are strengthened rules on disclosure of tax avoidance schemes, sanctions for serial promoters of such schemes and increased scrutiny for those who repeatedly use defeated schemes. Combined with APNs and follower notices, these look to be a suite of measures that could be used to great effect, both in tackling existing schemes and monitoring or challenging new ones.
The author’s message to the Treasury would be – don’t rush to introduce new measures. The GAAR has only been in place since 2013, which is an age away from the now infamous obiter dicta comments of Lord Clyde regarding the legitimacy of tax avoidance (Ayrshire Pullman Motor Services & Ritchie v IRC (1929) 14 TC 754). While more recent decisions have moved away from this historic stance, this move has been gradual. It will take longer than five years to change 100 years of practice, but that does not mean that the measures are not working, or not effective.
Finding the distinction between legitimate tax planning and unacceptable tax avoidance is an issue on which the tax profession cannot currently agree. One of the reasons for this is that the clear intention of parliament is not always obvious. However, the vast majority of professionals are governed by a professional body with ethical guidelines or codes of conduct in relation to taxation. Many of these were updated in 2015 following the Treasury’s presentation to Parliament on the subject of evasion and avoidance.
This collaboration between professional bodies and Parliament has to be key to progress in the area of unacceptable avoidance. I am sure the author speaks for the profession in welcoming discussions with the Treasury about how such professional bodies could be more effective in ensuring the compliance of their members with their respective codes of conduct.
There should also perhaps be more collaborative discussion on proposed measures to be introduced by Parliament. One example of this is the introduction of the ATED regime to combat a perceived abuse of the SDLT rules by owning UK property in an offshore company. Such ownership was rarely for SDLT purposes but rather for IHT mitigation for non-doms (a point raised in consultation), and the ATED regime did not change taxpayer behaviour in the way Parliament had hoped. It took another four years for measures to be introduced which addressed the IHT point originally raised.
Some individuals seek out tax avoidance strategies, while others feel pressed in to them due to a change of circumstances or other innocent reason. We have seen schemes suggested to our clients by other advisors which would not stand up to scrutiny against the GAAR and have strongly advised against their use. HMRC and the tax profession know who these more unscrupulous firms are, and with perhaps an appropriate forum for discussion, more effective progress could be made so that unsuspecting taxpayers are not adversely affected by involvement in a scheme where they did not appreciate the possible outcomes.
While the definition of tax avoidance is helpful to an extent for domestic affairs, the question becomes more difficult when considering other jurisdictions. Each jurisdiction will always have its own tax rules, as each jurisdiction has its own unique set of goals and problems to address through fiscal rewards and disincentives. Is making use of another jurisdiction automatically tax avoidance? If there was no UK VAT on the sale of new cars in (say) Humberside, I would not be alone in being willing to travel quite some distance to ensure such a saving. If there is a tax difference between jurisdictions for an individual buying a jet, they would no doubt want to take this into account. The numbers are bigger, and we are looking at international rather than national laws, but the principle should hold true.
When looking at the role of the Crown Dependencies and British Overseas Territories, it has been our firm’s experience that the Channel Islands and Isle of Man are in fact the gatekeepers for the Treasury. The vast majority of Jersey Trustees, for example, will not proceed with any transaction without tax advice on the matter. The individual firms are well regulated by their jurisdiction, and the jurisdiction is eager to ensure compliance in order to maintain its standing in the international community. Working with the professional bodies in these jurisdictions could well prove an effective aspect to the overall strategy in tackling tax evasion and tax avoidance.
It is tempting when faced with the problems for evasion and aggressive avoidance to want to give HMRC more and more powers so it has a bigger and bigger ‘stick’. A bigger stick does not necessarily equate to more effective compliance and a smaller tax gap. The IRS has a tax gap of around 16% (see bit.ly/2Hbi4l8), compared with a UK tax gap of 6.5% (bit.ly/2ezIPll)), and arguably has far more powers than HMRC.
The Treasury should ensure that existing powers are being used to their best effect, and that there are sufficient resources to effectively manage these powers and monitor the huge amount of data it is not being provided with. I am sure I speak for the profession as a whole when I say that tax advisers would welcome increased dialogue in these areas, with an appropriate forum to discuss aggressive tax avoidance, and effective powers for professional bodies.
The call for evidence by the Treasury Sub-Committee will feed into legislation that will affect the course of public policy, and tax professionals would therefore be well advised both to read the call for evidence and submit a considered response with supporting data where appropriate.
