The UK government is proposing to introduce sanctions for enablers of tax avoidance schemes and arrangements. Its consultation document, “Strengthening Tax Avoidance Sanctions and Deterrents” published on 17 August 2016, proposes measures to deter those in the tax avoidance “supply chain” who benefit financially from designing, marketing or facilitating the use of tax avoidance arrangements. The consultation document follows on from the suite of measures designed to tackle avoidance announced by the government in 2015, which will shortly be introduced in the Finance Act 2016, including the special measures regime for companies which persistently engage in tax avoidance.
The Tax Avoidance Supply Chain
The scope of the proposed legislation is extremely wide. An enabler is referred to as “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 definition would in principle include not only the promoters of tax avoidance schemes, but also IFAs, accountants, banks, trustees, accountants and lawyers. It is intended to capture all those who earn commission or fees from marketing such arrangements, as well as those who advise on or are involved in the operation or implementation of avoidance arrangements, although it is noted that safeguards are required in order to exclude those who are “unwittingly party” to the avoidance arrangements.
The Enabler Penalty
An enabler who has an involvement in a tax avoidance scheme that is defeated by HMRC will be subject to a penalty. HMRC have proposed that this new penalty regime should be modelled on the legislation in the new Finance Act 2016 governing penalties for offshore evasion. The penalties for enablers could be based on:
- the financial (or other) benefit that the enabler receives as a result of their services. This could be 100% of the benefit, however the extent of the benefit (especially non-financial) could be difficult to assess; or
- the amount of tax understated by the user as a result of the avoidance being defeated. The penalty would be imposed for each user that the enabler has assisted. The government indicates in the consultation paper that a tax-geared penalty would be its favoured approach.
It is noted that, as penalties could be significant, it may be necessary to provide for a cap to ensure that the penalty remains proportionate. It is also envisaged that there may be a provision for a reduction in the level of the penalty imposed depending on the nature and timing of disclosures made by an enabler to HMRC. This would be consistent with the existing penalty regime applicable to tax inaccuracies or errors in tax returns.
Unlike the penalties for offshore evasion, it is not envisaged that the enabler penalty should be conditional on there being a penalty imposed on the avoider. The trigger will instead be the defeat of the tax avoidance arrangement by HMRC. Arrangements will be “defeated” where they have been held to be ineffective upon final judicial determination (or otherwise by agreement with HMRC) and they are arrangements that:
- have been counteracted by the General Anti Abuse Rule; or
- are subject to a Follower Notice; or
- are notifiable under the Disclosure of Tax Avoidance Schemes or VAT disclosure regimes; or
- are the subject of legislative targeted anti-avoidance rules.
Naming Enablers and Information Gathering
Significantly, there is also a proposal to name enablers that have been fined by HMRC. The potential reputational risk associated with the publication of an enabler’s name is designed to cause considerable concern to any advisors involved in the structuring or implementation of arrangements designed to avoid tax.
A power may also be introduced to enable HMRC to obtain relevant information to identify enablers. It is not clear precisely what this would entail, and how it would widen HMRC’s existing and substantial information gathering powers. We anticipate that this is likely to involve directing an information request to other enablers and users of the scheme in question, with the possible imposition of penalties for non-compliance.
Discouraging the Avoidance Lifecycle
In addition, the government wants to increase “real time” transparency and awareness of the risks involved in tax avoidance arrangements. HMRC’s consultation paper states that if an arrangement could be avoidance, it should be notified to HMRC as soon as possible. Possible further measures which the government is considering introducing include:
- Requiring promoters of tax arrangements to provide users with HMRC information on the risks of avoidance.
- Requiring promoters to tell HMRC about any other parties that will be involved in marketing/facilitating the arrangements.
- Imposing a penalty for promoters and enablers that do not inform users and other enablers when an arrangement becomes subject to challenge by HMRC.
- Requiring users to certify that they understand the risks of proceeding.
- Imposing a charge for delaying/frustrating an HMRC enquiry into an arrangement.
By introducing liability for anyone who assists in the creation or implementation of a structure which avoids tax, it is clear that the UK government is no longer seeking to change only the behaviours of those who intend to use avoidance arrangements. The government has significantly expanded its focus to any person involved in advising on or marketing such arrangements. Through seeking to introduce penalties for professional advisors, HMRC is seeking to impact those who structure and establish avoidance schemes directly.
Difficult issues will inevitably arise over how enabler penalties could be applied, particularly where there are advisers who do not recommend that avoidance schemes be entered into, or who simply implement the arrangements, but who nonetheless may be deemed by HMRC as being involved in the “supply chain”. Similarly, difficult issues may arise where legal advisers may be prevented from demonstrating that they were not enablers, where they would not be permitted to waive legal professional privilege over their communications concerning an arrangement which has been found to constitute avoidance.
Currently, where a taxpayer receives advice concerning arrangements which are found to constitute avoidance based on incorrect advice provided by those in the “supply chain”, it would be open to the taxpayer to commence professional negligence proceedings against the adviser. This would still be possible, although the number of such actions would also be likely to reduce in due course as advisors would be likely to take a more conservative approach to the structuring of tax arrangements under the proposed regime.
Indeed, as HMRC comes under increased political pressure to challenge tax avoidance, the new regime may well have the government’s desired effect of ensuring that taxpayers and their advisors are much more conservative with regard to the structures they enter into to mitigate tax.
The consultation is open for responses until 12 October 2016.