The coalition government has harnessed the tide of anti-tax avoidance sentiment to introduce a raft of legislative measures designed to cut off the source of avoidance schemes, to get rid of cash flow advantages for participators in such schemes and, through the GAAR, to make it pointless to enter into aggressive tax avoidance. At the same time, the government has been in the forefront of international efforts to deal with multinationals’ profit shifting and has put extra resources into tracking down and flushing out tax evaders. All in all, the coalition government has done what it said it would do.
Looking back to May 2010, it is 
difficult to remember the time when Jimmy Carr was known just as a comedian, or Starbucks just for its coffee, or Google for – well, just for being Google. In the lifetime of this single parliament, tax avoidance has travelled from the inside pages of professional journals such as this to headlines in the national newspapers.
This article considers the coalition government’s role in this transformation of public opinion, and whether its actions have matched the rhetoric. We will 
do this by looking at each year’s main anti-avoidance measures, with enough detail to paint a fair picture. We will look at anti-evasion measures too.
As an overview, the coalition government started by wanting to reduce the level of tax avoidance, but to do so in a way which would not frighten the horses – the prize stallion being an economic recovery during the course of this parliament. As the recession bit harder, though, and Alexi Mostrous wrote his headline grabbing pieces about Jimmy Carr and others in The Times, public anger steadily mounted against tax avoiders. Initially seen as behaving badly at a time of national economic stress, they were increasingly portrayed as being a major contributor to the budgetary deficit through the billions of unpaid taxes creating the black hole known as the ‘tax gap’.
What role did the government itself play in this process? Did it help to stoke the fires or, to mix the metaphor, did it ride the wave? And whether it stoked or rode, did it take advantage of this mounting public anger by introducing measures which really would reduce the level of tax avoidance?
Our personal answer to this is – ‘all of the above’. Certainly, there have been other players who have stoked the fires and fanned the flames. Richard Murphy of the Tax Justice Network effectively addressed an increasingly receptive audience. Margaret Hodge used her position as chairman of the House of Commons Public Accounts Committee to make repeated headline grabbing attacks on HMRC for what she saw as its shortcomings in tackling avoidance and evasion, and turned on large corporates for what she saw as their shortcomings in paying their appropriate contribution in tax. Whether through opportunism or enthusiasm, the government certainly responded to the new mood by introducing a raft of unprecedented anti-avoidance and evasion measures in the UK’s domestic legislation; at the same time, it took a leadership role in focusing international efforts to tackle avoidance and evasion, including the intractable problems involving profit shifting within multinationals.
Let’s look at what the coalition government has said and done about avoidance, year by year.
A month after the election, in June 2010, the Treasury published Tax policy making: A new approach. In this, the Treasury Secretary David Gauke said that the government wanted ‘a new approach to tax policy making: a more considered approach’. On the specific topic of avoidance, they ‘will take a more specific approach to the risk of avoidance to prevent increasing complexity and reduce the need for frequent legislative change’; and, amongst other things, the government would consider whether a general anti-avoidance rule (GAAR) was required.
As one of the authors of this article was, a few months later, given the task of leading a study into whether a GAAR would be beneficial, perhaps a little background information may be of interest.
The need to rein back aggressive tax avoidance was a concern within this government from its very first days. Clever tax avoidance schemes, some remarkably ingenious, had become rife in the last years of the Blair and Brown governments, and they were indulged in by both corporates and wealthy individuals. In the aftermath of the financial crash of 2008, it became apparent that this sort of activity was going to be socially divisive, as well as fiscally expensive.
A stumbling block to taking a more radical approach was the venerable, and by some still venerated, axiom that the individual is entitled to do anything that is lawful in order to reduce his/her/its tax burden. Proponents of this used, quite effectively, arguments along the line that interfering with the right to do anything lawful to reduce tax would introduce uncertainty into our tax rules and thus erode the attractiveness and competitiveness of the UK economy to investors.
Overcoming this powerful objection was one of the main aims and concerns of Mr Gauke and his colleagues at the Treasury. And, to his credit, Dave Hartnett (then the Permanent Secretary at HMRC) bought into the need to tackle tax avoidance in a way which would not (to use the expression loved by financial journalists) ‘spook investors’.
To revert to the chronology, in October 2010, the government announced in its Spending Review that it had allocated £917m (an oddly precise amount) to HMRC, specifically targeted at tackling tax avoidance and evasion.
In December of that year, the government announced the creation of a study to examine the case for a GAAR. The study leader was given a free hand to conduct the study as he thought fit, with a reporting target of October 2011. A study group of extraordinary talent and experience was established, comprising two professors of tax law, two highly respected senior judges, a former tax partner in a major law firm and the group head of tax of one of the country’s biggest companies.
On Budget day in March 2011, Tackling tax avoidance was published, in which the government expanded on its new strategic approach to tackling tax avoidance. In his Budget speech, George Osborne said: ‘Tax avoidance and evasion mean that we have to ask more from working families. And that is not fair.’ Central to this strategic approach was reviewing areas of the tax system that had been the subject of avoidance, and developing sustainable solutions and creating generic countermeasures to avoidance, rather than focusing solely on closing specific loopholes. As well as a possible GAAR, such generic countermeasures would include ways of reducing cash flow benefits that might flow from the use of avoidance schemes.
The paper acknowledged that targeted measures would still sit alongside the strategic work; and in this context it published a ‘protocol on unscheduled announcement of changes to tax law’. This protocol formalised what had previously been a rather shadowy Inland Revenue practice, known colloquially as the Rees rules (after a contribution by Peter Rees MP in debates on the Finance Bill 1978), covering ‘in-year’ announcements of legislation that would be enacted in a future Finance Act but would apply back to the date of the announcement.
So, within a year of taking office, the coalition government had set out a tax agenda that included tackling tax avoidance in a way that went beyond closing down specific loopholes, taking broader anti-avoidance measures that might include a GAAR and measures to stop cash flow advantages for tax avoiders, pouring significant extra financial resources into the anti-avoidance units of HMRC and, in the Finance Act 2011, creating significant additional data gathering powers for HMRC.
The year ended with the publication of the GAAR Study Report. It recommended a general anti-abuse rule to deter, and counteract if deterrence failed, tax arrangements which set out to achieve an abusive tax result and which could not be regarded as reasonable tax planning. (Of course, this is a great oversimplification – but that was the essence of the study’s recommendation.)
In the 2012 Budget, the new strategic approach really began to take shape. By way of background, the GAAR Study Report led to extensive consultation, some formal and some more informal. During these consultations, the consistent message was that the days of aggressive tax avoidance had to come to an end, because the public would not put up with it and because the avoided tax was needed to pay for public services. As the report put it, its basic premise was that ‘the levying of tax is the principal means by which the State pays for the services and facilities which it provides for its citizens’.
During 2012, this message was amplified by press campaigns, particularly in The Times and The Guardian, and by Margaret Hodge’s PAC, which began to hold its hearings into the tax structures of multinationals, the role of ‘big’ accountancy firms in tax avoidance and the marketing of tax avoidance schemes.
It was in his 2012 Budget speech that George Osborne made his widely reported statement – ‘I regard tax evasion, and indeed aggressive tax avoidance, as morally repugnant’ – and announced that the government had accepted the recommendations of the GAAR Study and would introduce a general anti-abuse rule in FA 2013.
FA 2012 incorporated into domestic law rules to operate the new UK/Swiss agreement, the main object of which was to ‘ensure the effective taxation in the UK’ of UK taxpayers. Taxpayers with assets hidden in Switzerland were offered a means to regularise their tax position, and there were provisions enabling HMRC to obtain Swiss details about a number of UK taxpayers each year.
FA 2012 also contained provisions designed to tackle tax avoidance at source. Schedule 38 empowered HMRC to obtain the files of a tax adviser after that adviser had been determined to be ‘engaged in dishonest conduct’ as a tax agent. Dishonest conduct, in broad terms, meant doing something dishonest with the intention of bringing about a loss of tax revenue, whether or not the loss was actually brought about and whether or not the tax agent was acting on a client’s instructions. Subject to a right of appeal, HMRC was given the power to access the agent’s working papers, going back 20 years.
In his 2013 Budget speech, George Osborne announced: ‘Today I am unveiling one of the largest ever packages of tax avoidance and evasion measures presented at a Budget.’
The big ticket items were the enactment of the GAAR and the publication by HMRC’s new Offshore Coordination Unit of No safe havens: Offshore evasion strategy 2013 and beyond. The GAAR broadly incorporated most of the GAAR Study’s recommendations, which included putting the burden of proof on HMRC and having an independent Advisory Panel, which would draw up binding guidelines for the operation of the GAAR and which would also have to approve counteraction under the GAAR in any case where HMRC wanted to invoke it.
As far as the offshore evasion strategy is concerned, the package included an increased emphasis on automatic tax information exchange agreements, with such agreements put in place with the USA, the Isle of Man, Guernsey and Jersey.
There were also announcements of a future consultation on additional proposals to target promoters of tax avoidance schemes; and, importantly, a commitment to work towards the reform of international tax standards.
This latter issue had been put at the forefront of the G20 leader’s meeting in June 2012, with the British government’s delegation playing a leading role. Responsibility for the detailed work was given to an OECD working party, and during 2013 this working party developed what has become known as the BEPS project – ‘base erosion and profit shifting’. This ongoing work has the aim of preventing or counteracting what President Obama called ‘income-shifting behaviour by multinational corporations’ (in his 2013 Framework for business tax reform).
In his 2014 Budget speech, the chancellor said: ‘Public tolerance for those who do not pay their fair share evaporated long ago – but we have had to wait for this government before there was proper action.’
By ‘proper action’ he meant the introduction of a totally new form of attack on what was perceived to be tax avoidance, in the introduction of ‘follower notices’ and the ‘accelerated payments’ rules. Both of these provisions were designed to address the perceived cash flow advantage said to be enjoyed by tax avoiders, as they delayed payment of their tax until the final resolution of their case in the tribunals or courts.
The follower notice provisions apply where a taxpayer’s tax arrangements are subject to a tax enquiry which has not yet been determined on appeal, but where HMRC believes that there is a final judicial ruling in respect of similar arrangements relating to some other taxpayer. Where HMRC serves a follower notice, the taxpayer has 90 days to object to the notice; if those objections are not accepted by HMRC and the follower notice is confirmed, the taxpayer becomes liable to a penalty unless, broadly speaking, the tax is paid upfront.
The accelerated payments provisions broadly require the taxpayer to pay upfront tax in dispute, when it relates to tax arrangements that have been notified under the DOTAS rules, or when a counteraction notice has been issued under the GAAR. Accelerated payment notices are also applied to arrangements which have been made the subject of a follower notice. Importantly, the power to postpone payment of tax is expressly disapplied in the case of an accelerated payment notice.
We understand that HMRC is operating a rolling programme for the issue of accelerated payment notices to users of tax schemes, with many thousands of notices having already been issued. Anecdotal evidence suggests that many taxpayers are suffering financial distress because of these unprecedented powers. Representations about the potential financial hardship that such notices could bring fell on muffled, if not deaf, ears during the Parliamentary stages of the passage of FA 2014. Reflecting what George Osborne said in his Budget speech, it is clear that Parliamentary sympathy for perceived tax avoidance had indeed evaporated.
FA 2014 also introduced the ‘promoters of tax avoidance schemes’ regime, which in effect hangs an ‘unclean’ notice around the necks of designers and promoters of tax schemes that come within the regime. To qualify, the promoter must, within the previous three years, have met one or more of several threshold conditions set out in the legislation.
Most of the conditions are based upon some sort of culpability, but they also include the condition that the GAAR Advisory Panel has given an opinion notice to the effect that one of the promoter’s arrangements is not reasonable. If the promoter meets a threshold condition, HMRC can serve a ‘conduct notice’; broadly, this requires the promoter to give its clients a full account of risk in connection with their arrangements. If the promoter fails to comply with the ‘conduct notice’ then, with the approval of the tribunal, HMRC can serve a ‘monitoring notice’. HMRC may then publish the fact that the promoter is a monitored promoter.
This brings us to the final Budget and Finance Act of the coalition government. Usually, Finance Acts which are passed into law immediately before the dissolution of Parliament contain routine revenue raising provisions; significant changes to the tax regimes are left to ‘No.2’ Acts passed later in the year, giving Parliament and its committees time to consider and debate such changes.
Not this year, however. FA 2015 includes amendments to the DOTAS rule, to the accelerated payments regime and to the promoters regime. It introduced a new supplementary penalty in connection with offshore asset moves. The most striking, though, is the inclusion of the new ‘diverted profits tax’. This is aimed squarely at the sort of corporate structures and intra-group transactions that are regarded as abusive in that, broadly, they ensure that profits ‘from’ higher tax regimes arise in lower tax regimes. Where those lower tax regimes are in the European Union, it remains to be seen whether this diverted profits tax regime is fully compliant with the Treaty freedoms of the EU.
Much of this article is focused on tax avoidance. However, figures published by HMRC in 2012 estimated that 46% of all unpaid taxes were attributable to tax evasion, amounting to £14bn. Some of the £900m extra funds allocated to HMRC by the coalition government were spent on enhancing HMRC’s criminal investigation and prosecution capacity, and this coincided with the growth in tax information exchanged under international agreements. According to figures published in 2014, the enhanced emphasis by HMRC on counter evasion work has led to an increase in the number of prosecutions from 420 in 2010/2011 to 915 in 2013/2014 (involving 2,650 individuals). It was also reported that 56,000 people had taken advantage of disclosure facilities and that HMRC had approached 20,000 people about their offshore accounts since 2013.
So, as with avoidance, the period of the coalition government has seen a substantially greater use of investigations and prosecutions to counter tax evasion.
So how do we mark the coalition government for their performance in attacking tax avoidance and evasion?
We give full marks for spurring on and harnessing the power of public opinion, to treat tax avoidance as fiscal behaviour that is not to be tolerated. Anecdotally, we understand that this message has been received loud and clear by most of the major corporates; and few, if any, now have the appetite to indulge in anything that could be regarded as aggressive tax avoidance.
We also give full marks for enacting and then leaving the GAAR as it was originally designed. It must have been tempting to ride the tide of public opinion and broaden the GAAR’s scope; but to its credit the government has resisted that temptation.
We give high marks for the effectiveness of the ‘follower’ and ‘accelerated payment’ regimes. They have certainly blunted the appetite of many high net worth individuals who might otherwise have been tempted to enter into sophisticated tax avoidance arrangements, even if only to get the short-term cash flow advantage. But we withhold full marks because we think there must be questions about the fairness of applying these rules retroactively to taxpayers who had no idea that they might be required to pay the disputed tax upfront, rather than waiting for the tax scheme to be tested in the tribunals and the courts.
We give high marks to the government for taking the lead in getting the OECD to tackle the antiquated international tax rules which, so it is alleged, many multinationals exploit to ensure that their group’s profits largely arise (or, at least, are taxed) in low tax jurisdictions.
We give high marks to the government for enabling HMRC to strengthen its counter evasion work (together with a black mark against Margaret Hodge and the Public Accounts Committee for, in our personal opinion, unfairly pillorying HMRC in relation to this).
Alongside the 2015 Budget, the coalition government published Tackling tax evasion and avoidance, setting out its plans for the future. Obviously, we do not know which, if any, of the plans set out will in fact be carried through by the next government. However, its intentions are clear, with ‘plans to find and punish more evaders, deter more avoiders and reassure the vast majority of taxpayers who already pay what they owe’. Amongst the specific plans considered are:
If these proposals are implemented by the next government, it seems to us that the administration of taxation is likely to become far more assertive than we have become used to. The ‘supply side’ of tax avoidance would be much more tightly regulated; and for taxpayers themselves, there would certainly be a significant incentive to be seen to be compliant. And those tempted to avoid tax, in ways which could not be described as unlawful, will find that the economics of avoidance are increasingly unattractive. As for tax evaders, who are after all acting dishonestly by any measure, they will face a greater chance of being discovered and penalised.
Whether this will bring in the £5bn extra uncollected tax targeted by the Conservatives, or the £7.5bn targeted by the Labour Party, remains to be seen. For this, we look forward to reading the article in some future Tax Journal which sets out the end of term report on the next government.
