Guilty by association

All involved in tax avoidance schemes will be penalised

HMRC has recently published a consultation document, ‘Strengthening Tax Avoidance Sanctions and Deterrents: A discussion document’ which proposes sanctions aimed at everyone involved in the birth of tax avoidance schemes which are defeated by HMRC. This follows the government’s announcement at Budget 2016, that it would explore options to introduce negative consequences for those who enable tax avoidance.

Those who introduce users to avoidance schemes or facilitate their implementation bear limited risk or consequences when their schemes are defeated by HMRC, so the Revenue want to change that by raising the stakes for all those involved in the design, marketing or facilitating of tax avoidance by introducing penalties when their schemes are vanquished by HMRC. This would include anyone in the supply chain who benefits from someone implementing tax avoidance arrangements such as:

• those who develop, or advise/assist those developing, such arrangements and schemes;
• Independent Financial Advisers (IFAs), accountants and others who earn fees and commissions in connection with marketing such arrangements whether or not their activities amount to the promotion of arrangements; and
• company formation agents, banks, trustees, accountants, lawyers and others who are intrinsic in, and necessary to, the machinery or implementation of, the avoidance.

Example:

John Combos devises a tax avoidance scheme aimed at contractors and freelancers, requiring them to become employees of a special purpose employer and to receive money in the form of loans. A company is created to become the employer of the contractors and freelancers and Combos offers cash incentives to existing users of the scheme for each new user they sign up. He also offers similar fees to a variety of accountants and IF’s for any business they refer his way.

The enablers of tax avoidance are:

•    Combos being the recipient of the fees for the scheme
•    IFAs and accountants for receiving referral fees
•    company set up to employ the contractors
•    individual contractors who have received referral fees

Although all of the above have a role in enabling the avoidance, currently none of them face sanctions if the scheme is defeated by HMRC. Under new proposals each of them would fall within the scope of the new penalty.

What should the penalty be?

HMRC favour a penalty based on the amount of tax understated by the user of the avoidance scheme to whom the enabler has provided those services, be it directly or indirectly, as a result of the arrangements being defeated. So, if a person has enabled 10 people to implement arrangements which are defeated, and each of those users has understated tax by £1,000, that enabler would be subject to 10 penalties, the starting point for which would be a percentage of the aggregate tax understated of £10,000 (£1,000 x 10). If another person in the supply chain enabled only six users, with a third person enabling four users, then the starting point for these other enablers would be £6,000 and £4,000 respectively.

It may be necessary to have a maximum, or cap on the aggregate amount of penalties, or other safeguards to ensure the total amount of any penalties faced by an enabler remains proportionate to their involvement.

There would be a right of appeal against a penalty decision or alternatively, or even additionally, the enabler could request a review or accept HMRC’s offer to review the issue before any appeal is referred to Tax Tribunal.

Penalties for users of defeated avoidance schemes

Self Assessment already provides for a range of tax-geared penalties for inaccuracies in tax returns which are imposed for failure to take ‘reasonable care’ but HMRC want to strengthen and modify the penalty regime in situations where someone is involved in complex tax avoidance arrangements which HMRC later defeats.

Two options are proposed:

1. Describing what does not constitute the taking of reasonable care

This would describe a set of circumstances or events which are explicitly stated not to represent taking reasonable in cases of defeated avoidance.

A user would be expected to obtain proper considered legal advice from an appropriately qualified person who takes into account the user’s personal circumstances when formulating that advice.

2. Placing the requirement to prove reasonable care onto the taxpayer

Currently, the burden of proof that a person has failed to take reasonable care rests with HMRC. The Revenue believe that this creates an incentive for tax avoiders to make it difficult for HMRC to gather evidence to reveal their true motives behind their decisions that led them to making an inaccurate tax return. Also promoters or others advising taxpayers may withhold information that may lead some taxpayers to take a chance and enter into avoidance arrangements without taking appropriate advice to fully understand the risks.

Rather than HMRC having to elicit information to demonstrate that a person has taken reasonable care, the burden would be shouldered by the taxpayer.

Closing date for comments is 12th October 2016.