Strengthening Tax Avoidance Sanctions and Deterrents
- The deadline of 12 October 2016 for responses to HMRC’s consultation document “Strengthening Tax Avoidance Sanctions and Deterrents: A discussion document” will soon be upon us. It is regularly the case that proposals in these documents remain notwithstanding any criticism they may receive as a result of the consultation. This provides a convenient moment to remind ourselves of the significant proposals contained within which are likely to be implemented at some point.
- The motivation for these proposals indicates precisely why most, if not all, of the proposals will in all likelihood remain after the consultation:
“Those who seek an unfair advantage, or who provide the services that enable it, and who then frustrate HMRC’s efforts to identify, investigate and resolve these cases should bear real risks and costs for their choices.”
- The need for brevity precludes a wider discussion of the system at the moment instead the key proposals of this document are considered in this article. These proposals can be divided into those concerned with enablers and those concerned with end users of tax evasion schemes. This article will loo primarily at the proposed impact upon “enablers”.
ENABLERS
- The government identified that enablers of tax avoidance are faced, at present, with very limited downsides for their involvement. As such, the document proposes “raising the stakes” for those who design, market or facilitate the use of avoidance by introducing sanctions for them when the avoidance they have enabled is defeated by HMRC.
- Who then would fall within the category of enabler? The guidance document proposes a wide definition which “includes anyone in the supply chain who benefits from an end user implementing tax avoidance arrangements and without whom the arrangements as designed could not be implemented.” This would, of course, include Independent Financial Advisers, accountants and others who earn fees and commissions related to such arrangements. It would also cover “company formation agents, banks, trustees, accountants, lawyers and others who are intrinsic in, and necessary to, the machinery or implementation of, the avoidance.”
- The documentation geos further and specifically proposes adopting (and tailoring) the definition of enabler based on the broad criteria used for offshore evasion in the 2015 consultation document: “Tackling offshore tax evasion: Civil sanctions for enablers of offshore evasion.”
- The proposal, therefore, is for a broad, inclusive definition of enabler. It may be that the broad definition proposed including lawyers, accountants, banks which have, perhaps, more reputational sensitivity and are subject to their own regulatory provisions will have the desired “chilling effect” on work in the area of tax avoidance.
- As to penalties the government proposes a similar model to that in the Finance Bill 2016 for offshore tax evasion, namely this provides for a penalty of the higher of 100% of the tax evaded, or £3,000. The government also proposes the naming and shaming of enablers, no doubt driven by a desire to discourage those entities with reputation sensitivity from involving themselves in dubious arrangements.
- In one sense the document goes beyond the earlier proposals in relation to offshore tax evasion; offshore tax evasion penalties on enablers will depend upon offences being committed by, or penalties being incurred by, the end user. In contrast, for tax avoidance the proposal is that the trigger for penalties should be the defeat of the tax avoidance arrangement irrespective of the final penalty position of the end user.
- The proposal further suggests that the penalty should not be based on the benefit received by the enabler but by adopting a starting point based on the amount of tax understated by the end user. This could, where the scheme is widely marketed and there are many end users, result in a starting point that far exceeds the actual benefit obtained. Such draconian approaches reflect the government’s desire to discourage and disincentives participation in these arrangements.
- The proposals do highlight safeguards to ensure that those who are unwittingly party to enabling tax avoidance are not unfairly caught by these proposed sanctions. In particular the proposal suggests adopting the exclusion of certain categories of person from sanction under DOTAS (Disclosure of Tax Avoidance Scheme). In particular the consultation document identifies the “benign” test, the “non-adviser” test and the “ignorance” test. For lawyers and accountants the “benign” and “non-adviser” test are particularly relevant. As the consultation document suggests lawyers and accountants will need to be careful to ensure that any advice provided does not contribute to the tax advantage element of the proposed arrangements they were asked to advise upon.
- Finally, the proposal document deals with the proposed approach to users of tax avoidance arrangements. Its most headline grabbing proposal is concerned with circumstances where HMRC seek to impose a penalty against a user for failing to take reasonable care in understating the amount of tax. Currently, the burden is upon HMRC to prove the failure to take reasonable care. The proposals seek to make HMRC’s task far easier in this respect in two way:
- Describing a set of regularly encountered circumstances that would explicitly not amount to taking reasonable care in cases of defeated avoidance; AND
- Reversing the burden of proof so that the taxpayer would have to prove that they had taken reasonable care.
CONCLUSION
- This consultation document contains significant proposals designed to extend sanctions for non-compliance to a wide group of entities for their involvement in tax avoidance. It is likely that even after the consultation the political desire to implement such proposals will not be diminished. The introduction of at least some of these proposals at some point in the future will require very careful consideration by all those who might now be dragged into the category of “enabler” with all the financial, reputational and regulatory consequences that may bring.
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