On 12 August 2013 HMRC launched a new consultation document: Raising the stakes on tax avoidance. The consultation is open for a short period, the closing date for comments being 4 October 2013.
The consultation relates to two main proposals: first, a new regime for 'High-Risk Promoters' (HRPs), with implications for intermediaries and clients; and second, a proposal targeting taxpayers who fail to settle with HMRC when HMRC consider that the legal issues in their appeal have been resolved by the courts.
The objective of the new proposals is to "make it significantly harder to market avoidance in the first place."
The proposed HRP regime
Who is an HRP?
During the event launching the consultation, HMRC explained that they estimated there were in the region of twenty 'cowboy' promoters, being "those promoters who have chosen to work outside the professional standards HMRC expects of mainstream advisers" and "advisers who promote tax avoidance schemes and are not or do not want to be transparent with HMRC". To identify these HRPs, HMRC suggest objective criteria, such as:
- "the promoter is offshore in, for example, a UK overseas territory or a crown dependency, but has users that are subject to tax in the UK", or
- "the promoter has failed to notify a scheme under DOTAS, whether or not there was a penalty for the failure".
HMRC favour the addition of "other factors" so that HMRC can take an "overall view" of the promoter's business and the level of risk. These other factors could include:
- "the promoter uses a network of intermediaries to sell its product" or
- "the product appears to be a complex arrangement with a degree of artificiality that is designed to achieve a result not intended by Parliament".
Once a promoter has been identified as a potential HRP it is proposed that HMRC first approach the promoter informally to set out their concerns. This may see the promoter enter into a voluntary undertaking with HMRC to change its behaviour within a specified time, or face designation. However, the process of moving from an informal approach to designation could take as little as three months, particularly if the promoter decides not to cooperate with HMRC.
Whilst HMRC recognise that there will need to be a right of appeal against a HRP designation, the consultation is worryingly open on whether all the consequences of designation (including naming the promoter) should apply immediately or whether some or all should be held back until the determination of any appeal.
The consultation also raises the issue of whether HMRC should be targeting entities or individuals, and suggests that the regime should include provisions dealing with 'successor' or 'associated' entities.
The consequences of being designated a HRP
As well as commanding extensive new information powers (with significant penalties for non-compliance), HMRC will name HRPs. This has two elements: there will be a publicly available list of all designated HRPs maintained on HMRC's website and the HRP will be obliged to (in a prescribed form) inform its clients and intermediaries that it is an HRP. The clients and intermediaries will, in turn, have to confirm to HMRC (again in a prescribed form) that they have been so informed.
The proposed new regime will create a higher standard of 'reasonable excuse' or 'reasonable care', as it will not be possible to rely upon professional advice as part of a defence of reasonable excuse or reasonable care, unless it can be demonstrated that the advice:
- is based on an accurate description of the facts;
- makes no assumptions on matters that may be relevant; and
- concludes that if the case came before the courts, the courts would be likely to decide the matter in favour of the taxpayer.
Encouraging settlement in follower cases
The second proposal in the consultation document is described as "a new way of encouraging faster settlement among users of avoidance schemes that have failed in the courts". This proposal will (broadly) work as follows:
- HMRC would first need to obtain what they consider to be an authority, that is, they have been successful in litigation which is not the subject of further appeal, for example, a final judicial decision in relation to a particular avoidance scheme;
- HMRC would then be able to issue a notice to other taxpayers who have an open enquiry, to the effect that HMRC believes the judgment also applies to them;
- the taxpayer concerned would then be required, within a set period, to either amend their return, or inform HMRC that they do not think the authority was relevant to their case;
- the taxpayer would then be subject to a penalty (linked to the amount of tax in dispute) if they did not have a reasonable basis for such a conclusion;
- if the taxpayer subsequently settles with HMRC, the penalty would be reduced;
- the imposition of the penalty could be challenged by appeal to the tax tribunal.
Although the consultation document is generally couched in terms of members of the same scheme, HMRC have acknowledged that the proposed power to issue a notice does not necessarily need to be so limited provided the facts were sufficiently similar between lead and follower cases.
The proposals contained in this consultation document are the latest attempt by HMRC to influence behaviours and reduce tax avoidance. The proposed HRP regime appears to be intended to disrupt the business of certain tax advisers whose activities HMRC take exception to. Tackling tax evasion and dishonest tax advisers is unobjectionable. In their current form these proposals are intentionally aimed at tax avoidance, which is of course lawful. The proposals will impact upon tax advisers who are conducting their businesses in an entirely lawful manner, their only 'crime' being that their activities do not meet with the approval of HMRC. If introduced in their current form, one can envisage the HRP regime being challenged in the courts, especially if all the consequences of HRP designation apply immediately, notwithstanding that the promoter is in the process of appealing the designation. In practice, being designated a HRP is likely to have an adverse commercial effect on the business concerned and it will be of little consolation to the promoter that its appeal is ultimately successful as by then the damage to its reputation and business is likely to have already been done.
Responses to the consultation can be sent to email@example.com