The UK government issued a discussion document on strengthening tax avoidance sanctions and deterrents on 17 August 2016.

In recent years the UK government has taken steps to tackle tax avoidance by introducing tougher measures and structural reform. Professional tax and accounting bodies have been working on strengthening their document on Professional Conduct in Relation to Taxation and including new standards on acceptable tax planning. The Code of Practice on Taxation for Banks introduced in 2009 discourages banks from promoting or knowingly facilitating tax avoidance by others.

In addition to agents and banks there is a supply chain of advice and intermediation between the developers of tax avoidance schemes and the people who ultimately use them. Currently these people who introduce avoidance arrangements are bearing limited risk when the arrangements are defeated in the Tribunal or Courts by HMRC. The UK government therefore wants to introduce financial sanctions to minimize the financial rewards that these enablers are currently enjoying.

An enabler is anyone in the supply chain who benefits from the implementation of tax avoidance arrangements by the end user, and without whom those arrangements could not be implemented. This includes the developer of a tax avoidance scheme or the people who assist or advise the developer. It also includes Independent Financial Advisers, accountants and other people earning fees and commission in relation to marketing tax avoidance arrangements, whether or not this amounts to promotion of the arrangements. The definition of enabler also includes company formation agents, banks, trustees, accountants, lawyers and others who are necessary to the machinery or implementation of tax avoidance.

The recent consultation on enablers of offshore tax evasion suggested that enablers might be acting as a middleman; providing planning and bespoke advice on jurisdictions, investments and structures; delivering or maintaining infrastructure; providing financial assistance to help move or hide money or provide client accounts or escrow services; or by not fulfilling reporting, regulatory or legal obligations. HMRC considers that many of these also apply to tax avoidance schemes.

A definition of an enabler will therefore be developed based on the same broad criteria as for offshore evasion. The criteria will however be formulated by reference to the tax avoidance supply chain with safeguards for people who unwittingly enable the avoidance. The consultation paper asks for comments on any changes required to the definitions or any other groups that should be included in or excluded from the definition of enabler.

Penalties

The penalty regime would be similar to that introduced in the Finance Bill 2016 for offshore evasion. This provides for a penalty of the higher of 100% of the tax evaded or GBP 3,000, for people who know their actions will, or are likely to, enable a person to carry out offshore evasion or non-compliance. However other approaches would be possible, for example fixed penalties or penalties based on the financial or economic gain of the enabler or the services they have provided to any user, taking account of how much knowledge they could reasonably be expected to have known about the avoidance. The consultation also proposes that there would be an option to name the enablers subject to the penalty.

The defeat of tax avoidance arrangements in the Tribunal or Courts would be the trigger for penalties.

Penalties for users of tax avoidance arrangements

A user of tax avoidance arrangements is likely to have submitted an inaccurate tax return and is therefore potentially liable to penalty provisions for this. The penalty provisions in Schedule 24 FA 2007 apply where the person has failed to take reasonable care and are increased for deliberate inaccuracies or for inaccuracies that are deliberate and concealed.

However failure to take reasonable care can be complicated to establish where a person has entered into complex tax avoidance arrangements. These often involve complex transactions that most people would struggle to understand without expert advice. Many people using tax avoidance arrangements argue that they have taken reasonable care and that the tax return was made on the basis of a reasonably arguable view of the law as it applied to the transactions. They may rely on the marketing material from the providers of the scheme.

The Finance Bill 2016 includes a surcharge and special reporting requirements for serial avoiders and a tax-geared penalty for cases dealt with by the general anti-abuse rule (GAAR).

Where a tax avoidance scheme is defeated HMRC considers that there are some options for ensuring that penalties are chargeable on the user. One option is to describe what does not constitute taking reasonable care; and another is to place the requirement to prove reasonable care onto the taxpayer.

Describing what does not constitute taking reasonable care could involve clarifying which circumstances or events do not represent taking reasonable care where a tax avoidance scheme is defeated. These circumstances and events could be:

• Advice to a third party without reference to the taxpayer’s specific circumstances and use of the scheme;
• Advice commissioned on the basis of incomplete or “leading” facts;
• Advice commissioned or funded by a party that has a direct financial interest in selling the scheme or advice that was not sold by a disinterested party;
• Material produced by parties without the relevant tax or legal expertise to advise on complex tax avoidance arrangements.

The user should have properly considered legal advice from a qualified person taking the user’s personal circumstances fully into account. So advice given to the promoter of a scheme about the principles and structure of the arrangements does not demonstrate that the person whose tax return contains inaccuracies took reasonable care.

Currently HMRC has the burden of showing that a person has not taken reasonable care. This gives tax avoiders an incentive to make it difficult for HMRC to gather evidence of their true motives and the circumstances of their decisions. It may therefore be helpful for the taxpayer to have the burden of showing that reasonable care has been taken.

Comments are invited from interested parties by 12 October 2016.