HMRC is consulting until 4 October 2013 on new statutory powers to identify publicly ‘high-risk’ promoters and require disclosure of all material provided to prospective users of notifiable schemes, including full analysis of the tax advantage a scheme is designed to obtain. A new initial penalty of £1m, plus a daily penalty, would be introduced on promoters for non-compliance. Users of schemes already defeated in court by HMRC would also face tax-geared penalties.
What new measures are being proposed?
Essentially HMRC is targeting those tax advisers it considers to be ‘high-risk tax promoters’. Such promoters design, market or implement products that, in HMRC’s view, have ‘negligible probability of working’ or demonstrate other undesirable behaviours such as ‘relying on non-cooperation with HMRC to achieve a tax advantage for their clients’ or ‘selling products that rely on concealment and mis-description of elements to succeed’.
HMRC is considering two possible approaches for identifying such promoters. Under potential approach one, primary legislation will set out objective criteria that will designate a promoter as high-risk. Possible objective criteria in this respect are where a promoter:
Under option two, there will still be a legislative code but in addition to the criteria set out in legislation, ‘HMRC would take an overall view of the promoter’s business and the level of risk when deciding whether or not the promoter is high-risk’. Some examples of the factors that HMRC could take into account in addition to the legislative criteria include whether ‘the products appear to have a limited probability of working because they take an optimistic and unrealistic view of the law or are poorly implemented’ or ‘the success of the product relies on non-cooperation with HMRC, concealment or mis-description’.
The consequences of being designated as a high-risk promoter are significant. Specific new statutory information powers will apply to such promoters so that HMRC can obtain ‘early information about their products, intermediaries and users’. High-risk promoters may also be named publicly and must notify certain intermediaries, such as independent financial advisers, and users that they have been designated high-risk. Failure to do so will mean that a significant penalty will be levied on the high-risk promoter. There will also be significant penalties for a high-risk promoter who fails to comply with any of the new information powers. In this respect it is proposed that the initial penalty on the high-risk promoter could be up to £1m with a continuing failure penalty of £10,000 for each day that the failure continues after the initial penalty is imposed.
HMRC also proposes that taxpayers who ‘use an avoidance scheme that has been shown to fail in another party’s litigation’ should either confirm with HMRC that they accept that the judgment also applies to them and amend their tax return accordingly or, if they believe the litigated case was not relevant to their circumstances, they should tell HMRC why they think it is not relevant but ‘should then be subject to a penalty if they do not have a reasonable basis for their conclusion’. The penalty is significant as it will be geared to the tax advantage gained by the taxpayer. In HMRC’s view, ‘this would remove the incentive that currently exists to delay settlement with HMRC and would encourage taxpayers to settle their case and pay the tax they owe much sooner than at present’.
Will the proposed measures to identify high-risk promoters provide sufficient protection for tax advisers and intermediaries who are not promoting high-risk tax avoidance schemes?
HMRC states in the consultation document that the tax advisers who are being targeted ‘commonly display behaviours that are detrimental to the fairness of the tax system’. For example, they
It would appear, therefore, that HMRC is targeting a very narrow class of tax adviser; if this is the case, the consultation proposals would not affect the vast majority of tax advisers. However, as always, the devil is in the detail and those reputable tax advisers providing lawful tax mitigation opportunities to their clients will need the clearest statutory criteria to reassure them that they are not being classified as a ‘high-risk promoter’.
Do the proposals for dealing with ‘follower claims’ risk pressurising taxpayers with genuinely different circumstances into settling their disputes?
Yes. Under the consultation document, when HMRC wins a ‘representative case’ in the courts, other taxpayers ‘who have used the same or very similar schemes’ must confirm to HMRC that they accept the judgment and amend their return accordingly. A heavy tax-geared penalty will apply if the taxpayer fails to make the required adjustment to their return. The problem is that typically tax mitigation or avoidance arrangements are heavily fact sensitive and it is often extremely difficult or impossible to demonstrate that a ‘representative case’ does in fact cover other taxpayers. However, taxpayers may feel significant pressure to comply, even if the facts and circumstances of their case are different, because of the threat of a penalty (even if they appealed against the penalty there would still be significant costs in taking a case to an independent tribunal).
Secondly, HMRC’s intention in the consultation document is to impose this requirement ‘if the litigation process in respect of the avoidance scheme is exhausted’. The process would be exhausted ‘either where HMRC wins in the Supreme Court or, because the taxpayer is refused permission to appeal further, or decides not to after a loss in a lower court or tribunal’. This would appear to remove the possibility of a taxpayer, who is in funds to pursue a case, from actually doing so if the representative taxpayer has simply run out of money to pursue his own case.
Does the proposed change to the prescribed information required under the DOTAS regime risk over burdening all tax advisers while still failing to result in increased disclosure for most promoters who do not wish to share this information?
The proposed changes to the DOTAS regime would appear to be relatively minor and enable HMRC to receive more information at an early stage to assess the tax effect of notifiable proposals and arrangements. The additional information to be provided would include, for example, all the material provided to prospective users of the arrangement and sample copies of all documents signed by the users as part of the arrangement. Given the relatively minor additional information required, it is perhaps unlikely that the change in this respect will overburden other tax advisers.
Does HMRC need these additional and expanded powers?
Given HMRC’s extensive information powers contained in FA 2008 Sch 36, it is difficult to see why yet further information powers, designed to tackle a handful of tax promoters, is really needed. Public perception of tax avoidance has changed and with it the behaviour of tax advisers, intermediaries and users, all of whom are perfectly well aware of the dangers and pitfalls of entering into tax arrangements that are perceived by HMRC to be aggressive. It is suggested that these proposals are ‘overkill’.
What are the implications for lawyers?
As always, lawyers should ensure that, in advising clients, documents that attract legal professional privilege are not disclosed to HMRC. In a wider sense, lawyers should be alive to the necessity of protecting their clients from being identified as high-risk promoters in circumstances where they do not in fact fall within the statutory criteria. In this respect, there is likely to be significant financial and reputational detriment to any client wrongly labelled as a being a high-risk promoter.
Interviewed by Kate Beaumont for LexisNexis UK legal current awareness service and Lexis®PSL Tax.
HMRC is consulting until 4 October 2013 on new statutory powers to identify publicly ‘high-risk’ promoters and require disclosure of all material provided to prospective users of notifiable schemes, including full analysis of the tax advantage a scheme is designed to obtain. A new initial penalty of £1m, plus a daily penalty, would be introduced on promoters for non-compliance. Users of schemes already defeated in court by HMRC would also face tax-geared penalties.
What new measures are being proposed?
Essentially HMRC is targeting those tax advisers it considers to be ‘high-risk tax promoters’. Such promoters design, market or implement products that, in HMRC’s view, have ‘negligible probability of working’ or demonstrate other undesirable behaviours such as ‘relying on non-cooperation with HMRC to achieve a tax advantage for their clients’ or ‘selling products that rely on concealment and mis-description of elements to succeed’.
HMRC is considering two possible approaches for identifying such promoters. Under potential approach one, primary legislation will set out objective criteria that will designate a promoter as high-risk. Possible objective criteria in this respect are where a promoter:
Under option two, there will still be a legislative code but in addition to the criteria set out in legislation, ‘HMRC would take an overall view of the promoter’s business and the level of risk when deciding whether or not the promoter is high-risk’. Some examples of the factors that HMRC could take into account in addition to the legislative criteria include whether ‘the products appear to have a limited probability of working because they take an optimistic and unrealistic view of the law or are poorly implemented’ or ‘the success of the product relies on non-cooperation with HMRC, concealment or mis-description’.
The consequences of being designated as a high-risk promoter are significant. Specific new statutory information powers will apply to such promoters so that HMRC can obtain ‘early information about their products, intermediaries and users’. High-risk promoters may also be named publicly and must notify certain intermediaries, such as independent financial advisers, and users that they have been designated high-risk. Failure to do so will mean that a significant penalty will be levied on the high-risk promoter. There will also be significant penalties for a high-risk promoter who fails to comply with any of the new information powers. In this respect it is proposed that the initial penalty on the high-risk promoter could be up to £1m with a continuing failure penalty of £10,000 for each day that the failure continues after the initial penalty is imposed.
HMRC also proposes that taxpayers who ‘use an avoidance scheme that has been shown to fail in another party’s litigation’ should either confirm with HMRC that they accept that the judgment also applies to them and amend their tax return accordingly or, if they believe the litigated case was not relevant to their circumstances, they should tell HMRC why they think it is not relevant but ‘should then be subject to a penalty if they do not have a reasonable basis for their conclusion’. The penalty is significant as it will be geared to the tax advantage gained by the taxpayer. In HMRC’s view, ‘this would remove the incentive that currently exists to delay settlement with HMRC and would encourage taxpayers to settle their case and pay the tax they owe much sooner than at present’.
Will the proposed measures to identify high-risk promoters provide sufficient protection for tax advisers and intermediaries who are not promoting high-risk tax avoidance schemes?
HMRC states in the consultation document that the tax advisers who are being targeted ‘commonly display behaviours that are detrimental to the fairness of the tax system’. For example, they
It would appear, therefore, that HMRC is targeting a very narrow class of tax adviser; if this is the case, the consultation proposals would not affect the vast majority of tax advisers. However, as always, the devil is in the detail and those reputable tax advisers providing lawful tax mitigation opportunities to their clients will need the clearest statutory criteria to reassure them that they are not being classified as a ‘high-risk promoter’.
Do the proposals for dealing with ‘follower claims’ risk pressurising taxpayers with genuinely different circumstances into settling their disputes?
Yes. Under the consultation document, when HMRC wins a ‘representative case’ in the courts, other taxpayers ‘who have used the same or very similar schemes’ must confirm to HMRC that they accept the judgment and amend their return accordingly. A heavy tax-geared penalty will apply if the taxpayer fails to make the required adjustment to their return. The problem is that typically tax mitigation or avoidance arrangements are heavily fact sensitive and it is often extremely difficult or impossible to demonstrate that a ‘representative case’ does in fact cover other taxpayers. However, taxpayers may feel significant pressure to comply, even if the facts and circumstances of their case are different, because of the threat of a penalty (even if they appealed against the penalty there would still be significant costs in taking a case to an independent tribunal).
Secondly, HMRC’s intention in the consultation document is to impose this requirement ‘if the litigation process in respect of the avoidance scheme is exhausted’. The process would be exhausted ‘either where HMRC wins in the Supreme Court or, because the taxpayer is refused permission to appeal further, or decides not to after a loss in a lower court or tribunal’. This would appear to remove the possibility of a taxpayer, who is in funds to pursue a case, from actually doing so if the representative taxpayer has simply run out of money to pursue his own case.
Does the proposed change to the prescribed information required under the DOTAS regime risk over burdening all tax advisers while still failing to result in increased disclosure for most promoters who do not wish to share this information?
The proposed changes to the DOTAS regime would appear to be relatively minor and enable HMRC to receive more information at an early stage to assess the tax effect of notifiable proposals and arrangements. The additional information to be provided would include, for example, all the material provided to prospective users of the arrangement and sample copies of all documents signed by the users as part of the arrangement. Given the relatively minor additional information required, it is perhaps unlikely that the change in this respect will overburden other tax advisers.
Does HMRC need these additional and expanded powers?
Given HMRC’s extensive information powers contained in FA 2008 Sch 36, it is difficult to see why yet further information powers, designed to tackle a handful of tax promoters, is really needed. Public perception of tax avoidance has changed and with it the behaviour of tax advisers, intermediaries and users, all of whom are perfectly well aware of the dangers and pitfalls of entering into tax arrangements that are perceived by HMRC to be aggressive. It is suggested that these proposals are ‘overkill’.
What are the implications for lawyers?
As always, lawyers should ensure that, in advising clients, documents that attract legal professional privilege are not disclosed to HMRC. In a wider sense, lawyers should be alive to the necessity of protecting their clients from being identified as high-risk promoters in circumstances where they do not in fact fall within the statutory criteria. In this respect, there is likely to be significant financial and reputational detriment to any client wrongly labelled as a being a high-risk promoter.
Interviewed by Kate Beaumont for LexisNexis UK legal current awareness service and Lexis®PSL Tax.
