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Finance Bill 2017: Enablers of defeated avoidance schemes and penalties

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The government’s consultation on the introduction of penalties for enablers of tax avoidance was met with a very powerful response from the tax professional community including replies from both the Law Society and the Bar Council. There have been concerns over what seemed to be wide ranging proposals which could penalise advisers who had given a bona fide opinion with which the court disagreed. Indeed the respondents to the consultation were anxious to pin down such matters as the definition of an ‘enabler’ the extent of the penalty and the circumstances of investigation and instigation. The government has summarised the responses and its intentions in a document produced on 5 December 2016. They have also produced clause 92 and Sch 20 of the draft Finance Bill 2017 to deal specifically with enablers. It is clear that the government has listened and advisers are now much less likely...

What’s the essential outcome of the consultation?

On 5 December 2016, the government published responses to its consultation on strengthening sanctions against tax avoidance and deterrents against enablers of tax avoidance schemes. The government was clearly impressed by the extent of responses and has published a lengthy list of respondents. There are some impressive names in the list, from well-known law firms and accountancy practices to the Law Society and the Bar Council.

One suspects that, with respondents of such calibre, the government was really made to think about the pending penalty regime against enablers and has listened to the comments about its original proposals in the consultation exercise. This process may be a lesson for future opposition to unwelcome proposed legislation. Yet, essentially, the government will persevere with its crackdown on the production and selling of abusive tax avoidance schemes and target in the Finance Bill 2017 those who make profit from giving aggressive tax advice which is shown to be wrong.

The definition in the Bill of abusive tax arrangements is adopted from the GAAR; and, as set out at Sch 20 para 2, they will be abusive if they are arrangements which ‘cannot reasonably be regarded as a reasonable course of action in relation to the tax provisions’ (a double reasonableness definition).

There has been a spate of tax avoidance cases in the courts and tribunals, and HMRC’s comparatively recent campaign of issuing follower notices to taxpayers who had used defeated tax schemes with questionable arrangements. The course of enquiries has brought out some ugly practices and the apparent wholescale peddling of schemes to high earners and major businesses. Clearly, there is without doubt an industry solely dedicated to selling schemes, regardless of their efficacy; and the government has been quick to highlight that several of the respondents to the consultation exercise also lauded the need to prevent aggressive tax avoidance. It is the pressure to come up with new ways to reduce tax bills to generate fees that means that lines are crossed. The government will persevere with penalties against enablers and the Finance Bill 2017 will make provisions to target and to bring an end to profiteering from unrealistic schemes.

So who exactly should be concerned about the outcome of the consultation?

The government has not relented on pursuing any type of professional or individual in the process of selling schemes. However, the government has tightened up the definition of the term ‘enabler’. The original consultation document had targeted everyone in the process of bringing about an ultimately unsuccessful tax avoidance arrangement. Any professional viewing the original list of protagonists in an unsuccessful tax avoidance arrangement would have been worried by the scope of the purportedly blameworthy. Yet, tax professionals are invariably required under their codes of conduct to provide technically proficient advice to the benefit of their clients on pain of being sued for negligence. Often, the tax professional is merely providing a second opinion on tax efficiency.

The government now appreciates such dilemmas and no doubt received some very concerned responses to the consultation exercise. So, it does look now as though professionals and individuals acting in an ethical and secondary capacity are not going to be targeted by the penalty regime. The government states that ‘the vast majority of tax advisers will not be targets’ and that it is after abusive profiteering. It is the profiteering regardless of a scheme’s outcome that will set the tone for the new legislation.

Persons who enable the arrangements are categorised and defined in the Finance Bill 2017 at Sch 20 paras 6–12. We have the term ‘enabler’, who is someone that designs, manages and markets arrangements, as well as ‘enablers of participation’ and ‘financial enablers’. No doubt, come the inevitable appeals against penalties (the appeal process is set out at Sch 20 para 20), judges and lawyers will be scrambling for the Shorter Oxford English Dictionary to pin down the ordinary legal meanings of the various words and terms. For now, though, the Bill sets out the following definitions (although provision is also made to add to the list):

  • A designer is a person who in the course of business is responsible for the design and proposal to implement arrangements. (However, the government has been alert to responses to its consultation to safeguard unwitting participants and to exclude persons unless their advice was relevant to the arrangements and they knew, or could reasonably be expected to have known, that the advice would be used in the design of abusive tax arrangements (the knowledge condition). Schedule 20 para 7(5)(b) excludes an advice as relevant to the arrangements where there is mention in that advice that can be reasonably read as recommending against the arrangements.)
  • A manager is a person who in the course of business is responsible for the organisation and management of the arrangements.
  • Marketers of arrangements make available for implementation or communicate information to the taxpayers explaining the tax advantage.
  • Enabling participants are those who enter into arrangements, without whose participation those arrangements would not result in a tax advantage; and when that participant entered into the arrangements he knew or could reasonably be expected to have known that the tax arrangements were abusive.
  • Financial enablers provide a financial product and it is reasonable to assume that they knew, or could reasonably be expected to have known, the purpose of obtaining the product and to participate in the arrangements.

The types of financial products themselves are set out in the Bill and include the types of loans that featured so significantly in the ‘film finance’ appeals.

How will the penalties be triggered?

The starting point for a penalty will be a defeated, abusive tax arrangement, and a penalty will be payable by each person who enabled the arrangements.

There had been some original concern about what exactly the term ‘defeated, abusive tax arrangement’ means. As mentioned above, Sch 20 para 2 provides a double reasonableness definition: to be abusive the tax arrangements could not reasonably be regarded as a reasonable course of action in relation to tax provisions.

What constitutes a defeat is set out in paras 3–5. Essentially, a defeated arrangement occurs when the tax advantage sought in a document given to HMRC has been counteracted; and the counteraction is final without further appeal or final by way of contract settlement. Further, where HMRC has issued an assessment, the arrangements are defeated if an HMRC assessment is upheld without further appeal. In our previous article, we had mentioned a concern that what the legislation attempts to define as final and what HMRC assumes to be final is still open to conjecture. For example, it should be remembered that taxpayers enter into settlements for various reasons, not least because of cost. An enabler will never be party to that settlement, yet may find himself penalised as a result of cost effective settlements. It is inevitable that such a dichotomy will arise in the first appeals against penalties.

Once an enabler is identified, what kind of penalty is proposed?

The consultation paper had sought responses to a choice between penalties based on tax loss or penalties based on the fees charged by the enabler. Respondents to the proposal stated a dislike for tax based penalties because the tax amount could be disproportionate to culpability (after all, the enabler is not the taxpayer). Also, if several penalties were issued on that basis, the amount recovered by the government may exceed considerably the actual tax loss.

Therefore, the government has decided to issue 100% fee based penalties, which it considers are more proportionate. To quote Sch 20 para 14: ‘For each person who enabled the arrangements … the penalty payable under para 1 is the total amount or value of all the relevant consideration received or receivable by that person.’ The penalty will be notified to the enabler by way of assessment and must be issued within two years of the arrangements being defeated.

The term consideration also excludes the VAT element, on the basis that the penalty only constitutes the gain to the enabler.

Provisions are made to apportion consideration attributable to two or more transactions on a ‘reasonable basis’. It is not entirely clear what this apportionment means, but one imagines that HMRC will attempt to calculate the consideration for the purposes of penalties when an enabler charges a fee for a number of transactions that fail.

There are also special provisions for multi-user schemes (essentially related arrangements), where penalties will only be issued when HMRC reasonably believes that defeats have been incurred in more than 50% of the related arrangements.

HMRC also has discretion to mitigate or even remit the penalty; although we are yet to know any specific criteria for mitigation.

Will there be an appeals process?

The government has provided for an appeals process against the issuing of a penalty and its amount. This process is set out in para 20 of the schedule. The First-tier Tribunal and Upper Tribunal will either affirm HMRC’s decision or substitute the decision for another that HMRC has the power to make.

The very fact that a new raft of individuals, as opposed to taxpayers, will find themselves in the tax appeals process is a very new phenomenon which will play out intriguingly through the court hierarchy. Issues such as civil liberties and the protection of rights to privacy and property under the Human Rights Acts 1998 may well feature. The Bill does not provide a further definition of the word ‘person’ to describe an enabler; so, it is reasonable to assume that persons will include companies and partnerships as well.

Information powers

Similarly, the fact that it is parties other than taxpayers who will come under investigation is an intriguing matter which will engage issues of civil liberties. The present powers in FA 2008 Sch 36 are very intrusive and allow HMRC to obtain documents, inspect premises and to issue third party notices. Schedule 36 powers (like those powers under the Police and Criminal Evidence Act 1984 given to the police to prevent and to investigate crime) are at the very edge of the balance between the protection of revenue and the civil liberties of the individual.

The Finance Bill allows for information and inspection powers against suspected enablers. While the amendment to Sch 36 appears to be merely a tweak to make further powers available to HMRC, one has to consider the class of individuals under investigation. Enablers are not the taxpayers themselves; there is nothing to suggest that they are tax avoiders, evaders or criminals, yet they may find themselves under very intrusive investigation. Given the novelty of the concept of an enabler, it is highly foreseeable that an aggrieved tax practitioner may well seek a high court injunction before allowing HMRC to cross the threshold of his business premises.

Publication of penalties

Such is the political and media pressure to crack down on tax avoidance that the government wishes to go further than simply to remove the financial gain from peddling aggressive tax avoidance. The Finance Bill at para 32 of the schedule allows for HMRC to publish in whatever medium the name, address, nature of business, the amount and number of penalties and any other information that the Commissioners may consider appropriate. This aspect is quite an eye opener. The speed and scope of modern electronic information means that an individual’s character can be brought down very publicly, leading to all sorts of damage to reputation and personal integrity. This is certainly the greatest deterrent, much more than the penalty, as it is potentially career ending.

The Bill does allow for an individual to make representations to HMRC before publication; but the danger is that a person’s reputation could be ruined by over zealous HMRC officers, especially if an investigation had been hard fought. No information may be published after a year when the penalty becomes final; also nil or stayed penalties cannot be published.

What specific responses to the consultation did the government take on board?

No doubt the Law Society and the Bar Council would have been very anxious about the erosion of legal professional privilege (LPP). It is a well established legal principle that this is an absolute right enjoyed by a client when engaging with his lawyer. LLP allows for frank discussions, which remain necessarily private and confidential, not least in a client’s tax affairs. Invariably, the courts protect that absolute right because the principle goes to the very heart of a lawyer-client relationship. Yet, an assertion of tax avoidance by HMRC may bring into play whether what was said between a lawyer and client about tax planning should be disclosed. Indeed, HMRC may want to identify a lawyer as an enabler by finding out what was said.

In the present consultation, the respective legal associations would have put forward very robust defences of LPP. Consequently, Sch 20 para 30 provides for lawyers’ declarations confirming that documents are legally privileged and which must be accepted by HMRC or a tribunal, unless HMRC is satisfied that the declaration is incorrect. It may be as well for tax lawyers to have a few pro formas handy, just in case they are drawn into the enabler dragnet.