On 12 August 2013, HMRC published its latest consultation on tax avoidance, entitled Raising the stakes on tax avoidance. The rhetoric is familiar, but what is proposed has the potential to significantly change the way promoters of tax schemes and their clients behave, both in whether to embark on tax avoidance transactions in the first instance, and later whenever it looks clear that the planning is likely to fail. HMRC’s big ideas include designating some promoters as ‘high-risk’, penalties on users of ‘failed schemes’ and tightening up the rules on the information required with a DOTAS disclosure.
In October 2005, Dave Hartnett, then HMRC permanent secretary, said that HMRC’s aim was to stamp out avoidance by 2008. Looking back at articles written by Mr Hartnett at the time, he also revealed his frustration that advisers were not accepting that the decision of the House of Lords in MacDonald v Dextra Accessories Ltd [2005] UKHL 47 meant many employee benefit trust (EBT) schemes failed, and that taxpayers should now pay the tax HMRC asserted was due.
HMRC’s battle against EBTs and tax avoidance in general has been a long one. The disclosure of tax avoidance schemes (DOTAS) regime introduced in March 2004 was a significant step forward in enabling HMRC to spot schemes more quickly and close them down (sometimes very rapidly). This was followed by HMRC’s litigation and settlement strategy (LSS) in 2007, signalling a move to tackle avoidance at source, rather than chase down individual taxpayers one by one. In 2013, the general anti-abuse rule (GAAR) became law, and taken together with the fact that HMRC would seem to be winning all of the tribunal and court tax avoidance cases (with a few notable exceptions), the future for aggressive or abusive tax schemes looks bleak. Attitudes to avoidance have also shifted, especially in the time of austerity since the financial crisis in 2008, and the significantly increased risk of reputational damage through being ‘named and shamed’ – often by politicians and the media – has made many large corporates wary (as well as deeply frustrated that such simple actions as claiming capital allowances are perceived as not paying their ‘fair share’). The ‘big four’ are rumoured to have scaled down their ‘product teams’ and a number of medium-sized firms have also scaled back on their tax planning activities.
However, in HMRC’s view, there are still pockets of resistance, with some promoters and their clients still seemingly willing to ‘take a punt’, on the basis that ‘if a scheme is “legal” and supported by a strong counsel’s opinion, then why not?’ Realistically, such situations have become less common, and it is worrying that HMRC is still bringing forward proposals to radically alter the balance of power between taxpayers and the tax authority, for example, both in this consultation and that published recently in relation to banks. It is hard to believe that current activity levels of aggressive or abusive tax schemes are high enough to justify further cluttering the UK tax code with more legislation, which may in the end be largely unused with few targets to aim at. However, the concern will be that, as with the GAAR, what these rules are supposed to target and what they actually do target may be quite different.
The bigger concern remains HMRC’s seeming inability to make a meaningful reduction in the enormous backlog of unsettled tax schemes. This has been estimated at some 41,000 cases, with film and other partnerships and EBTs making up half of this, and it is no coincidence that special settlement facilities are running for such schemes. Lack of resource on HMRC’s part may be part of the problem, but the complexity of the LSS-based approach and HMRC’s determination to gather every possible piece of information on a scheme has made delay, sometimes lasting years, inevitable. So the current consultation proposes legislative changes that take a different approach on three key areas:
It is the last of these measures which could prove to be controversial and potentially significant for tax litigation in the UK, and perhaps a time bomb for schemes currently under enquiry.
HMRC believes there is a relatively small group of ‘boutique’ promoters, perhaps 20, that persist in selling avoidance schemes. If HMRC is correct, these schemes are badly planned, have little or no chance of success, are hidden from HMRC, and rely upon non-cooperation with HMRC to have any chance of achieving their intended tax outcomes. If this sort of behaviour was common, HMRC would have every right to propose the strongest possible measures to combat such behaviour and reputable advisers would fully support them. But what evidence suggests that, despite everything, this problem persists in a way that justifies legislative changes of the sort proposed?
A degree of tact is needed on HMRC’s part to identify high-risk promoters, while not alienating the great majority of ‘responsible’ tax advisers. Some years ago, a joint project between HMRC and the professional bodies had the loose title of ‘poor work by accountants’, which caused apoplexy among senior members of the profession when this was displayed on a meeting room notice at ICAEW HQ. HMRC has also struggled to remove an air of suspicion that has hung over the agent strategy, which is slowly beginning to dissipate under ‘new management’.
HMRC struggles to define a high-risk promoter by reference to objective criteria. As it points out in the consultation, a promoter that sells schemes and does not disclose them, and refuses to discuss the basis for non-disclosure, is probably much higher risk than one that engages with HMRC but occasionally makes a late disclosure: there is a danger that HMRC labels visible behaviour as ‘high risk’, while ignoring that which is more difficult to detect.
Instead, HMRC suggests that it will take ‘an overall view of the promoter’s business’. Sadly, that sounds very like a random ‘stop and search’ programme, and is likely to be just as unpopular. Publicly designating a promoter as ‘high risk’ puts the promoter’s livelihood into severe jeopardy and lays HMRC open to judicial review proceedings.
The proposed process would move from informal discussions, via a voluntary undertaking, to formal designation. There would then be an appeal process, and it seems likely that the appeal would have to take place before designation could become effective. It all feels like a lot of bureaucracy, probably taking several months, and could leave HMRC open to criticism of unfairness without the most stringent internal safeguards.
HMRC proposes new information requirements in relation to the high-risk promoter regime, with initial penalties for non-compliance of up to £1m and daily penalties of £10,000.
The DOTAS information requirements will also be amended, so that HMRC would in effect receive the same information as the promoter provided to the client, with further disclosure to HMRC if the planning is changed. This will require significantly more detail to be provided to HMRC, and will apply to any scheme notification whether from a ‘high-risk’ promoter or not.
At a practical level, the proposal to introduce a penalty on users of failed schemes is potentially the most far-reaching. A brief review of recent tribunal decisions shows that HMRC’s batting average is high, as it has won almost all of the more important tax avoidance cases in recent years – although there have been a few notable exceptions.
Conceptually, the new proposal is breathtakingly simple. When HMRC wins a case, and the decision is final, it will write to all those with open enquiries inviting them to reconsider their position. Those that choose to fight on will do so in the clear knowledge that they are facing a much more significant downside, in the form of a penalty – perhaps as much as 50% for lack of reasonable excuse if they lose. As matters stand, it seems that HMRC would look to rely upon decisions of the courts prior to the new rules becoming law, so the clock may be ticking on existing schemes that have not yet settled. Thus, like Banquo’s ghost, Mr Hartnett may be gone but it appears he is not forgotten; and using the long-running dispute over EBTs as an example, HMRC would be able to ask a taxpayer that had used a Dextra-type EBT to explain why they were still persisting with their appeal, or to agree that the tax should now be paid. If in the face of this the taxpayer persists, a penalty would be charged in the event that the
appeal ultimately fails.
At a practical level, it may be less straightforward, but in this way HMRC would hope to counteract the mills of justice, which inevitably turn slowly due to the weight of cases. Currently, around 10,000 cases are listed for the FTT each year, but only around 5,000 are settled, so there is a real need to find a way to finally make significant inroads on the 41,000 outstanding scheme disputes.
However, recent experience of HMRC’s standard letters (for example, to some 600 Mansworth v Jelley cases) shows that HMRC will get it wrong in a number of cases. We have seen attempts to enforce assessments for years which have been formally closed, and even attempts to open enquiries well outside the relevant time limits. There is some element of HMRC’s needing to get its own house in order, but assuming it can do so, with these new proposals those still playing the ‘game’ may be finally bowled out. n
The consultation closes on 4 October 2013.
The Raising the stakes on tax avoidance consultation document highlights a fundamental change in emphasis in the approach of HMRC. If the proposals are implemented, they will set a new statutory basis for the working relationship between the tax profession and HMRC. It is therefore worthy of the attention of the whole tax profession and not just those directly affected.
The role of HMRC has been slowly changing, with an increasing focus on collection and, more recently, the maximisation of tax revenues. This has been linked to a blurring of the lines between legislation and HMRC interpretation. Although clarification of HMRC’s view is welcomed, it has created a dilemma where HMRC’s interpretation does not always sit comfortably with the profession’s view.
HMRC, through its litigation strategy, has also robustly litigated cases which previously might have been settled. A line of cases therefore await final determination through the appeal courts, creating uncertainty in many areas.
What is clear is HMRC’s view that the correct amount of tax can only be based upon its interpretation of the law, and any attempt to avoid this interpretation is unacceptable.
On the other side is the tax profession, which owes its duty of care to the client. Many clients no doubt regard this duty as not only ensuring their tax affairs are reported correctly, but also that their liability to tax is legally minimised.
Legal tax advice can range from planning to avoidance, and then to what has recently been termed abuse. It is at the latter that the consultation is clearly aimed and many will support the underlying aim. No doubt, the firms and individuals affected will robustly defend their right to operate within the law; if the outcome is a significant reduction in tax they will consider this completely appropriate. However, the landscape has changed, with public opinion now seeming to be currently against such arguments.
Even more telling from a legal perspective is the growing development by the courts of a ‘purposive test’, where they are willing to consider the purpose of tax legislation rather than its literal wording. This, coupled with the tightening of the DOTAS rules and the introduction of the GAAR, may spell the end of such planning and the firms which promote it.
The question for the tax profession is whether, no matter how heinous the tax avoidance, this warrants targeting firms that act within the law. The answer may well be ‘yes’, but the profession should be under no illusion that a line will have been crossed, and a new era will have arrived for the tax profession if the proposals are implemented.
What is being proposed?
HMRC is consulting until 4 October 2013 on new statutory powers to identify publicly ‘high-risk’ promoters and require disclosure of all material provided to prospective users of notifiable schemes, including full analysis of the tax advantage a scheme is designed to obtain. A new initial penalty of £1m, plus a daily penalty, would be introduced on promoters for non-compliance. Users of schemes already defeated in court by HMRC would also face tax-geared penalties.
Who is being targeted?
Essentially, HMRC is targeting those tax advisers it considers to be ‘high-risk tax promoters’. Such promoters design, market or implement products that, in HMRC’s view, have ‘negligible probability of working’ or demonstrate other undesirable behaviours such as ‘relying on non-cooperation with HMRC to achieve a tax advantage for their clients’ or ‘selling products that rely on concealment and mis-description of elements to succeed’.
Who are ‘high-risk tax promoters’?
HMRC is considering two possible approaches for identifying such promoters. Under potential approach one, primary legislation will set out objective criteria that will designate a promoter as high-risk. Possible objective criteria in this respect are where a promoter:
Under option two, there will still be a legislative code but, in addition to the criteria set out in legislation, ‘HMRC would take an overall view of the promoter’s business and the level of risk when deciding whether or not the promoter is high-risk’. Some examples of the factors that HMRC could take into account, in addition to the legislative criteria, include whether ‘the products appear to have a limited probability of working because they take an optimistic and unrealistic view of the law or are poorly implemented’ or ‘the success of the product relies on non-cooperation with HMRC, concealment or mis-description’.
What are the consequences of being designated as a ‘high-risk promoter’?
Specific new statutory information powers will apply to such promoters, so that HMRC can obtain ‘early information about their products, intermediaries and users’. High-risk promoters may also be named publicly and must notify certain intermediaries, such as independent financial advisers, and users that they have been designated high-risk. Failure to do so will mean that a significant penalty will be levied on the high-risk promoter. There will also be significant penalties for a high-risk promoter who fails to comply with any of the new information powers. In this respect, it is proposed that the initial penalty on the high-risk promoter could be up to £1m, with a continuing failure penalty of £10,000 for each day that the failure continues after the initial penalty is imposed.
HMRC also proposes that taxpayers who ‘use an avoidance scheme that has been shown to fail in another party’s litigation’ should either confirm with HMRC that they accept that the judgment also applies to them and amend their tax return accordingly or, if they believe the litigated case was not relevant to their circumstances, they should tell HMRC why they think it is not relevant but ‘should then be subject to a penalty if they do not have a reasonable basis for their conclusion’. The penalty is significant as it will be geared to the tax advantage gained by the taxpayer. In HMRC’s view, ‘this would remove the incentive that currently exists to delay settlement with HMRC and would encourage taxpayers to settle their case and pay the tax they owe much sooner than at present’.
Will ‘mainstream’ tax advisers be affected?
HMRC states in the consultation document that the tax advisers who are being targeted ‘commonly display behaviours that are detrimental to the fairness of the tax system’. For example, they:
It would appear, therefore, that HMRC is targeting a very narrow class of tax adviser; if this is the case, the consultation proposals would not affect the vast majority of tax advisers. However, as always, the devil is in the detail and those reputable tax advisers providing lawful tax mitigation opportunities to their clients will need the clearest statutory criteria to reassure them that they are not being classified as a ‘high-risk promoter’.
What are the proposals for dealing with ‘follower claims’?
Under the consultation document, when HMRC wins a ‘representative case’ in the courts, other taxpayers ‘who have used the same or very similar schemes’ must confirm to HMRC that they accept the judgment and amend their return accordingly. A heavy tax-geared penalty will apply if the taxpayer fails to make the required adjustment to their return. The problem is that typically tax mitigation or avoidance arrangements are heavily fact sensitive, and it is often extremely difficult or impossible to demonstrate that a ‘representative case’ does in fact cover other taxpayers. However, taxpayers may feel significant pressure to comply, even if the facts and circumstances of their case are different, because of the threat of a penalty (even if they appealed against the penalty, there would still be significant costs in taking a case to an independent tribunal).
Second, HMRC’s intention in the consultation document is to impose this requirement ‘if the litigation process in respect of the avoidance scheme is exhausted’. The process would be exhausted ‘either where HMRC wins in the Supreme Court or, because the taxpayer is refused permission to appeal further, or decides not to after a loss in a lower court or tribunal’. This would appear to remove the possibility of a taxpayer, even if in funds to pursue a case, from actually doing so if the representative taxpayer has simply run out of money to pursue his own case.
What is being proposed on DOTAS?
The proposed changes to the disclosure of tax avoidance schemes (DOTAS) regime would appear to be relatively minor and enable HMRC to receive more information at an early stage to assess the tax effect of notifiable proposals and arrangements. The additional information to be provided would include, for example, all the material provided to prospective users of the arrangement and sample copies of all documents signed by the users as part of the arrangement. Given the relatively minor additional information required, it is perhaps unlikely that the change in this respect will overburden other tax advisers.
Does HMRC need these additional and expanded powers?
Given HMRC’s extensive information powers contained in FA 2008 Sch 36, it is difficult to see why yet further information powers, designed to tackle a handful of tax promoters, is really needed. Public perception of tax avoidance has changed and with it the behaviour of tax advisers, intermediaries and users, all of whom are perfectly well aware of the dangers and pitfalls of entering into tax arrangements that are perceived by HMRC to be aggressive. It is suggested that these proposals are ‘overkill’.
Interviewed by Kate Beaumont for LexisNexis UK legal current awareness service and Lexis®PSL Tax
