HMRC target the ‘Tax Enabler’
HMRC have published a new consultation document, ‘Strengthening Tax Avoidance Sanctions and Deterrents: A discussion document.’ The closing date for comments is 12 October 2016.
Enter ‘the Enabler’
Not content with the existing vast swathes of anti-avoidance legislation, featuring such nuclear weapons such as DOTAS, POTAS, APN’s GAAR’s and TAR’S, HMRC has now identified a new tax avoidance peril, the enabler.
‘The vast majority of tax agents, intermediaries and others who provide services in relation to the taxation consequences of commercial arrangements, or who facilitate their implementation, operate within the spirit of tax law and do not enable tax avoidance. But a minority do enable tax avoidance….
There is a whole supply chain of advice and intermediation between those who develop tax avoidance arrangements or schemes and those who ultimately use them in an attempt to pay less tax than parliament intended.’
The idea of the consultation paper is to ‘deter’ the enabler from his/her actions by way of financial sanctions and ‘by minimising the financial rewards those enablers would otherwise enjoy.’
So what IS an enabler?
‘The focus of the proposals in this chapter is on those who benefit financially from enabling others to implement tax avoidance arrangements. This includes but isn’t limited to:
- those who develop, or advise/assist those developing, such arrangements and schemes;
- Independent Financial Advisers, 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.
But surely these persons are already covered in the existing, lengthy and comprehensive, DOTAS and POTAS legislation? No, not according to HMRC.
‘When considering how to define an enabler, two places to look for descriptions of those involved with avoidance are the Disclosure of Tax Avoidance Schemes (DOTAS) and the Promoters of Tax Avoidance Schemes (POTAS) legislation. Each describe promoters and certain intermediaries for their purposes. For example:
- DOTAS describes a promoter as a person who is responsible for the design, marketing, implementation, organisation or management of avoidance arrangements, in the course of a business which includes the provision of services relating to taxation; and
- POTAS describes the intermediary as the person who sits between the promoter and the client and typically provides the client with information in relation to the arrangement.
But the descriptions in these regimes do not describe all of those in the supply chain who enable or facilitate tax avoidance.
The question of sanctions for enablers of non-compliant behaviour is not limited to avoidance. The 2015 consultation “Tackling offshore tax evasion: Civil sanctions for enablers of offshore evasion” 2 outlined a number of ways in which an individual or business might enable someone to evade tax through the use of offshore structures. They include:
- Acting as a “middleman”– arranging access and providing introductions to others who may provide services relevant to evasion
- Providing planning and bespoke advice on the jurisdictions, investments and structures that will enable the taxpayer to hide their money and any income, profit or gains
- Delivery of infrastructure – including setting up companies, trusts and other vehicles that are used to hide beneficial ownership; opening bank accounts; providing legal services and documentation which underpin the structures used in the evasion such as notary services and powers of attorney
- Maintenance of infrastructure – providing professional trustee or company director services including nominee services; providing virtual offices, IT structures, legal services and documentation which obscures the true nature of the arrangements such as audit certificates
- Financial assistance – helping the evader to move their money or assets out of the UK, and/or keep it hidden by providing ongoing banking services
With this in mind, we propose developing a definition of enabler based on the broad criteria used for the offshore evasion measure but specifically tailored to the avoidance supply chain and ensuring that appropriate safeguards are included to exclude those who are unwittingly party to enabling the avoidance in question.’
The hammer blow – penalties
HMRC would, therefore, like to introduce a new system of penalties for the enablers.
‘Penalties for those who enable tax avoidance which HMRC defeats
‘The purpose of a penalty for those who enable tax avoidance is to influence behaviour and discourage the design, marketing and facilitation of avoidance generally. It should penalise everyone in the supply chain who has enabled avoidance arrangements which are defeated.
Finance Bill 2016 provides for a penalty of the higher of 100% of the tax evaded, or £3,000, for those who know their actions will, or are likely to, enable a person to carry out offshore evasion or non-compliance (where the evader is charged with a penalty or is criminally prosecuted)…..Our favoured approach is similar to that introduced in Finance Bill 2016 for offshore evasion, but designed specifically to deal with tax avoidance which HMRC defeats. In favouring this approach the government recognises that careful thought is required where a scheme is widely marketed, as an enabler could have enabled tens or hundreds of people to try to avoid tax and would therefore be subject to the new sanctions in relation to each of those persons.’
Piling on the pressure – ‘name and shame’
Not content with the penalties, HMRC say;
‘The government also proposes to include the option of naming enablers who are subject to this new penalty in the interest of alerting and protecting taxpayers who play by the rules and to deter those who might otherwise be tempted to engage in enabling tax avoidance.
Triggering the enabler penalty
HMRC’s approach is as follows.
‘The government does not propose linking the new avoidance enabler penalty to a penalty being charged on the user of avoidance which is defeated……Instead, the government proposes to use the defeat of the tax avoidance arrangements as the trigger for enabler penalties. This would mean that each enabler of that avoidance arrangement would be subject to penalties in their own right, irrespective of the final penalty position of the user of the arrangements.
For example, if a promoter designs a scheme, engages an Independent Financial Adviser to market the scheme for them, and engages the services of lawyers and bankers to facilitate the actual implementation of the scheme, then each of those persons in the supply chain would be subject to a penalty in relation to each person they enabled to implement the defeated arrangements. For the promoter this would be every user but for others it could be a subset of that population because different users may be advised or enabled by different persons in different parts of the supply chain.’
And now for the sting
‘A person who uses tax avoidance arrangements which are later defeated by HMRC is likely to have submitted an inaccurate tax return, making them potentially liable to penalties under the provisions in Schedule 24 to the Finance Act 2007.
In many cases where tax avoidance is defeated, the question of whether a penalty is chargeable will revolve around whether or not the person has taken reasonable care when submitting their tax return. However, in some circumstances, the knowledge of the person and the nature of the defeated avoidance may be such that higher penalties for deliberate behaviour are appropriate.
Many tax avoiders argue that they have taken reasonable care and that their tax return was made on a reasonably arguable view of the law as it applied to the transactions they entered into. They contend this is based on what they were told by the person who promoted the avoidance, by an Independent Financial Adviser, personal tax accountant, or by any other person in the supply or facilitation chain, i.e. by an enabler of the avoidance arrangements they used, as discussed in Chapter 2. To support this they often rely on marketing or other material provided by those marketing it, or generic, plausible-sounding, statements from an “eminent QC”, which they have also been given by those in the supply chain, endorsing the arrangements and their effectiveness. In the worst examples, advice offered to users is very limited in quality, scope and relevance. Generic marketing material is sometimes presented as financial or tax advice, when in fact it has not been written or considered by anyone with the requisite knowledge or experience. When users do have advice from someone with relevant expertise, it has almost always been commissioned by a party with a financial interest in the avoidance arrangements. This is often a promoter or other intermediary who takes a fee or commission when they sell the scheme or arrangements to a user, so they have an interest in procuring advice that encourages those users to sign up, by saying that the arrangements ‘work’. The advice provided to the users is not provided by a disinterested party, and in many cases is based on a limited or leading commission designed to elicit advice that is favourable for selling the scheme or arrangements.
The burden of proving that a person has failed to take reasonable care rests with HMRC. This means there can be little incentive for a tax avoider to co-operate and they may frequently try to frustrate HMRC investigations by withholding basic information about the arrangements. They may need to seek this information from the promoter who may also be disinclined to cooperate.
When contesting that they have taken reasonable care, they might be slow to produce supporting evidence, or submit incomplete information. This can make it difficult to identify whether a penalty is appropriate. These tactics can lead to drawn out and more costly investigations, prolonging the resolution of avoidance disputes for all parties.
The following case studies set out some of the initial factual information that HMRC can have difficulty in establishing but which is needed in order to consider whether the user had taken reasonable care.
Two options are:
- describing what does not constitute the taking of reasonable care, or
- placing the requirement to prove reasonable care onto the taxpayer’
Levy and Levy comment
In our view, this legislation tackles a virtually non-existent issue. As a result of DOTA/POTAS and the other anti-avoidance regimes, the market for ‘abusive’ mass marketed ‘one size fits all’ type schemes has evaporated. The skilled advisers who originally thought up and designed the actual arrangements, who are the only persons who really matter given that without them there are no ‘schemes’, have now moved into the area of providing bespoke tax advice for their clients. The new legislation is simply cosmetic and designed to show the Governments’ continuing tough approach to what is a very sensitive political issue.
We believe that the focus should now be shifted onto where the real money is – tax evasion. In this respect, we respectfully suggest that HMRC should target not just the ‘small fry’, but those wealthy individuals who seek to evade payment of the taxes lawfully due from them. Not enough is being done in this area.
Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells.