Last week HMRC published a consultation document entitled "Raising the stakes and tax avoidance".

The consultation document forms part of HMRC's wider anti-avoidance strategy which already includes the Disclosure of Tax Avoidance Schemes legislation (DOTAS) and the general anti-avoidance rule (GAAR). Responses to the consultation paper are due by 4 October 2013. Any changes are to form part of the Finance Act 2014.

There are two targets to HMRC's consultation document: high risk promoters of tax avoidance schemes and tax payers who have utilised mass marketed tax avoidance schemes.

The proposals are likely to be of interest to financial professionals generally and their professional indemnity insurers. Those that advise on tax mitigation structures will need to pay particular attention.

High Risk Promoters

HMRC propose to name and shame so-called "High Risk Promoters". HMRC will identify whether an individual or entity is a High Risk Promoter by applying objective and/or its own subjective assessment of whether or not the promoter's business and level of risk leave the promoter a High Risk Promoter.

The proposed objective criteria include offshore based promoters and where a promoter has failed to notify a tax avoidance scheme under DOTAS.

If an entity or individual is identified by HMRC as a High Risk Promoter they can challenge that categorisation and offer to undertake to reform their behaviour in order to escape that categorisation. However, the consequences of being labelled a High Risk Promoter are far-reaching:

  • The designation will be public. Details are to be published on HMRC's website;
  • The High Risk Promoter will have to tell their intermediaries (such as IFAs) and "users" (their clients) of the categorisation;
  • There will be increased information obligations, including both a specific and continuing information power whereby HMRC can ask the High Risk Promoter for information. This information includes a description of a High Risk Promoter's products, marketing material, and the names and addresses of each user of any promoted tax avoidance scheme;
  • Exposure to penalties for non-compliance. If a High Risk Promoter fails to comply with any information request, the result is a possible fine of up to £1m with a continuing failure penalty of £10,000 per day. A failure to tell intermediaries or users about its categorisation as a High Risk Promoter risks a penalty of £5,000 per user who has not been informed.

The effects of being designated a High Risk Promoter extend beyond that individual or entity to intermediates and users. The consequences for users of engaging a High Risk Promoter include subjecting that user to the risk of an extended time limit of 20 years during which HMRC can assess that user's tax returns.

Tax-payers and mass marked tax avoidance schemes

The consultation document notes that HMRC is often frustrated by the lack of progress following a successful test case dealing with a tax avoidance scheme. Taxpayers who implemented the same or similar schemes to a test case are often not persuaded to pay the assessed tax.

The consultation document's answer to this problem is that once HMRC wins a test case before the Supreme Court, or the taxpayer is refused permission or otherwise does not appeal that test case, the following process will apply to all direct taxes, including capital gains, income, stamp duty land tax, and inheritance tax:

  • HMRC will write to all taxpayers who implemented that scheme inviting them to amend their tax returns and pay the tax or explain why their scheme was different;
  • If a taxpayer seeks to distinguish their scheme, HMRC will decide whether or not it agrees with that analysis;
  • If HMRC disagrees, the taxpayer risks a higher penalty if it is found that they had no reasonable basis to reach their conclusion. The penalty is to be geared to the amount of the tax advantage.

Insurers may be interested in the proposals for High Risk Promoters and may want to consider amending their proposal forms to ask whether or not an individual or entity is a High Risk Promoter or has otherwise been subject to HMRC's voluntary undertakings under those same provisions.

Whilst penalties will not be covered under an insurance policy, firms and their insurers should be aware of the risk were a firm to advise a taxpayer to differentiate its circumstances from a test case, thereby exposing the taxpayer to a penalty that will likely form part of any claim against the adviser and would be covered under the policy.

Over the last 10 years, there have been a number of mass marketed avoidance schemes targeted at stamp duty land tax, income tax and capital gains tax in the form of such schemes as film financing, Enterprise Zone Schemes, employee benefit trusts, and sub-sales of properties. The consultation document is yet a further attempt by HMRC to crack down on such schemes.

Click here to read the document.