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Penalties for tax avoidance scheme promoters

Creative tax ‘planners’ to share the risk

Responses to HMRC’s consultation document, ‘Strengthening Tax Avoidance Sanctions and Deterrents’, which closed in October, appear to strongly support the Revenue’s proposals to make promoters of tax avoidance schemes bear some of the risk.

The proposals contained in the consultation paper were:

  • a new penalty for those who construct, market, sell or otherwise enable the use of tax avoidance arrangements which are defeated by HMRC;
  • changing how the penalty rules work for those who use tax avoidance which HMRC defeats; and
  • to seek views on other ways to discourage avoidance and what further action the government would need to take to change the taxpayer behaviour.

The key elements of the new penalty for ‘enablers’ will be that they:

  • apply to abusive schemes defeated by HMRC
  • impose a fixed 100% fee based penalty on everyone in the supply chain
  • apply to advice provided after Royal Assent to the Finance Bill 2017

‘Enabler’ is intended to include anyone in the supply chain who benefits from a taxpayer implementing tax avoidance arrangements which are later defeated and without whose involvement the arrangements, as designed, could not be implemented. Thus, the focus is on those who benefit financially from enabling others to implement tax avoidance arrangements which fail.

There were a wide range of views expressed to the proposals, with one respondent commenting:

“I am pleased that HMRC is at last taking action against the ‘source’ (the enablers) of aggressive tax avoidance schemes. These people have for too long regarded tax avoidance as a game they play with HMRC. They can earn big fees for no risk. It is the users who carry all the risk. Aggressive tax avoidance is often nothing more than contrived financial engineering.”

However, there were also strongly expressed concerns that, if inappropriately targeted, the measure could inhibit genuine commercial arrangements and impartial advice:

 “…[if the measure is inappropriately targeted] agents and service providers could find themselves subject to penalties both when their role is limited only to the preparation and submission of a taxpayer’s Self Assessment/Corporation Tax Self Assessment returns, and when providing general advice…”

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. The government believes that its proposed changes will make it more difficult for tax avoiders to side-step a penalty for failed avoidance and act as a disincentive to entering into avoidance at all.

Defeated tax avoidance

The consultation covered two aspects of this definition:

Arrangements

A wide definition was proposed for both the penalty for enablers and users of tax avoidance: “any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable)”.

Defeated arrangements

Arrangements would be treated as defeated when there is final determination of a tribunal or court that the arrangements do not achieve their supposed tax advantage or, in the absence of such a decision, there is an agreement between the taxpayer and HMRC that the arrangements do not work.

Defeated avoidance will now be defined as arrangements which take an unreasonable position in relation to the legislation. The draft legislation will provide further detail but the test will be based around the concept of double reasonableness. This is a test of whether arrangements entered into could reasonably be regarded as a reasonable course of action. The enablers’ penalty regime will apply where the defeated arrangements meet this test.

Further ways to discourage avoidance

The government recognises that the avoidance market is not static but is constantly evolving and, with this in mind, HMRC will continue to explore ways to further discourage avoidance which will include:

  • working collaboratively with businesses, individuals, industry and representative bodies to identify opportunities to further shrink the avoidance market
  • exploring how behavioural change techniques can positively affect decisions and choices for enablers and users
  • tailoring communications and engagement with users to support them to make the right choices and decisions including outlining the risks and consequences of entering into these kinds of arrangements

By Andy Vessey

Comments

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9 thoughts on “Penalties for tax avoidance scheme promoters”

  1. Ying Tong

    Did I miss proposals for tax liability insurers?

  2. Alex

    “Further ways to discourage avoidance”

    Lower taxes?

  3. John

    Who could reasonably be regarded as a reasonable person who can reasonably regard, with reason that a course of action was reasonable or not ?
    I would reason that it is unreasonable to expect HMRC to determine reasonableness as they are incapable of reasonability as evidenced by their unreasonable proposals. (see what I did there ?)

  4. Darren

    As a long term contractor, I have had many phone calls (increasing lately) from companies promising to lower my tax bill if I switch to them. I am not an expert on tax law nor will I ever be and I have to trust that what they are doing is within the bounds of the law and is not ‘playing the system’.

    It is certainly not right if I am penalised for placing that trust and I am fully behind new penalties aimed at those after a quick profit at my expense.

    • The Q

      > As a long term contractor, I have had many phone calls
      > (increasing lately) from companies promising to lower
      > my tax bill if I switch to them. I am not an expert on tax
      > law nor will I ever be and I have to trust that what they
      > are doing is within the bounds of the law and is not
      > ‘playing the system’.

      There is the letter of the law, and the spirit of the law.
      Most of these tax avoidance schemes are by definition “playing the system” as they exploit the letter of the law with no regard to the spirit.

      • Steve

        and the spirit of the law is an ephemeral thing. The spirit of the law inhabits only one place and that is the mythical moral high ground which is not recognised under the letter of the law.

        • The Q

          The spirit of the law inhabits only one place, and that is the ACTUAL (not ephemeral) moral ground that drives/constrains each individual, corporation etc in acting in a certain way on certain matters.

  5. Contracting me

    It’s all well and good punishing the providers going forward, but going back to 1999, HMRC are punishing the victims.

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