The proposals targeting tax avoidance enablers

 

Both the government and general public will have recently witnessed at the House of Commons Select Committee and in high profile court cases the use by certain companies and wealthy individuals of large scale tax planning. There is clearly a great deal of public disquiet about the extent of unpaid revenue and some of the methods used to circumvent the spirit of the law and to reduce tax bills. Tax avoidance has become a political football with the government needing to show it is taking all appropriate steps to stop it, and collect the unpaid taxes resulting.

 

As announced in the Budget, the government wants to influence those involved in assisting tax avoidance and change behaviours, and deter the initiation of tax avoidance. The government has identified what it refers to as a supply chain that ultimately delivers the tax planning. Many of those in this supply chain obtain significant financial rewards for enabling tax avoidance irrespective of the ultimate results of their work. It is the ‘enabler’ of tax avoidance that the government is now targeting with the specific objective of changing the professional and ethical climate of tax planning. 

 

 

The word ‘enabler’ is new to the language of tax avoidance. Previously, the word ‘promoter’ explained the role of those who marketed tax schemes. The term enabler strips away the respectability of professionalism that ordinarily surrounds the tax advisor in his various guises. The government’s pointed language in their recent press release, targeting enablers, makes it clear that the government is targeting the more aggressive side of the tax business; it is those who ‘peddle’ tax avoidance schemes, which are ultimately futile and ‘don’t work’, who are the people in the government’s sights. However, the worry is that the term enabler may also catch those involved in ‘acceptable’ tax planning and advice.

 

The term enabler is meant to be a wider concept than that of a promoter; he can be any part of the supply chain that benefits from the implementation of tax avoidance arrangements. The focus of the crackdown is against those who would financially benefit from enabling the avoidance. The types of enabler are many; anyone from the developer of the scheme to accountants and lawyers. The government’s perception is that most enablers simply don’t care about the consequences of their actions because ultimately they get paid with little to discourage them from encouraging even the most flimsy of tax planning.

 

The consultation document provides case studies identifying the types of individuals in typical supply chains of schemes. All aspects of a chain come under the government’s scrutiny: independent financial advisors, company formation agents, banks, accountants and lawyers including barristers who sign off schemes. Tax experience is not necessary. Anyone involved in the design, marketing or implementation is potentially caught. Only those who are ‘unwittingly party’ to the avoidance would be excused. All of them ostensibly stand to gain even if the scheme is defeated in court, whereas currently there’s no penalty or sanction to deter them from simply carrying on with the next tax planning idea.

 

 

The penalties against enabler will be triggered by the defeat of tax avoidance arrangements. The government intends to include within this term arrangements which have been defeated by the GAAR, have been given a follower notice and are notifiable under DOTAS, or the VAT DOTAS, all of which would generally involve aggressive tax avoidance. But the government also intends to include, worryingly for tax advisers, arrangements which have been the subject of a targeted anti-avoidance rule (TAAR) or unallowable purpose test contained within a specific piece of legislation. Frequently new tax legislation has its own TAAR and most corporate tax advisers will have tackled the unallowable purpose test on the loan relationship code and questioned its application to a set of facts. These provisions can be open to interpretation and there is a grey area where it is sometimes difficult to advise with certainty. It is hoped that the legislation is not capable of applying to advisers who genuinely make a judgment call that differs from HMRC’s or a court’s view. If such advice is potentially able to make an adviser an enabler, advisers may wish to ensure that the notices behind the particular transaction are clearly split out, to make the adviser ‘unwittingly’ party to the arrangements. There may also be concern amongst banks that their services can be used for avoidance.

 

To be ‘unwittingly’ party, the consultation paper suggests that the adviser will need to show that he had advised his client not to implement the arrangements, or that the client had not discussed the issue with him before implementation, or presumably that the adviser had no idea of the client’s true motives. To evidence the adviser’s ‘innocent’ role may cause problems of privilege for lawyers and create possible conflicts of interest in that asserting that the adviser warned the client not to proceed is likely to worsen the implications for the client. The impact may be an increase in insurance premiums, not only to cover the risk of penalties, but also the risk of claims by clients. Furthermore, professional partnership agreements may need to be reviewed to check whether the individual adviser is covered for his liability. Penalties could come back to haunt advisers following retirement, and partnership agreements and insurance will need to deal with that risk, but it is hoped there will be safeguards such as time limits for issuing penalties. Advisers will also need to be aware and alert to all the possibilities of DOTAS, or the VAT equivalent, applying to a set of facts.

 

 

This is a consultation following the Budget announcement. The consultation period ends 12 October 2016. There will be a response paper and any legislative changes will be introduced as part of a future Finance Bill, not necessarily 2017.

 

Dealing with those who are just part of the tax planning process, as opposed to taxpayers themselves, is a sensitive area of public law. The idea of introducing sanctions against enablers, as opposed to the taxpayer, touches a very sensitive nerve between the powers of the state and the civil liberties of the individual.

 

Tax penalties in the past have invariably been related and geared to any tax loss caused by the taxpayer. Creating sanctions against enablers poses a number of questions about the very notion of a tax penalty.

 

The consultation paper itself blends the concepts of tax avoidance and tax evasion in identifying enablers as targets for sanctions. The paper uses a previous consultation on tackling offshore evasion as a model that could be used for tax avoidance scenarios. This intellectual overlapping of tax avoidance and tax evasion paints a picture of enablers of tax avoidance as less like professional advisers and more like conspirators in fraud. As such, there is a sense of the government as it were conjuring up a penalty regime against those who merely encourage taxpayers to complete his tax return in a certain way. 

 

This conceptual trickery poses some difficulties for government in constructing a penalty regime. The consultation paper favours a penalty geared to the tax involved and may be up to 100% depending on the individual’s culpability and the timing, nature and quality of any disclosures. Conversely, the government is also considering penalties based on the enabler’s economic gain, while taking into account the individual’s reasonably expected level of knowledge about tax avoidance. This idea is particularly intriguing and is probably unworkable because of the difficulty in measuring actual economic benefit.

 

 

The government says that they prefer penalties geared to the tax at stake, although they appreciate that, given the potential number of enablers involved in any supply chain, the penalties could add up to more than the tax. Conceivably, one enabler that has ten clients each seeking to avoid £10,000 by defeated tax avoidance may face a penalty of £100,000. Such an outcome raises the issue of proportionality and the government welcomes comments in consultation about safeguards against injustices, for example capping the aggregate amount of penalties. 

 

Importantly, the government will not link any penalty against the taxpayer in defeated tax avoidance to the penalty issued against the enabler. Instead, the government intends to use the defeated tax avoidance as a ‘trigger for enabler penalties’. While this suggestion is designed to send shock waves down the tax avoidance supply chain, there may be a human rights issue that an enabler could potentially be penalised up to 100% of the tax at stake (and more) while the taxpayer may be entirely relieved from a penalty. The government, however, does seek views on this particular approach.

 

What we are witnessing is a government shake down of the tax avoidance supply chain. Their present tone is one of launching investigations akin to civil evasion and criminal enquiries. There is talk of using information powers in FA 2008 Sch 36 to identify enablers or, indeed, the introduction of a standalone power to obtain information against enablers. Such language marks out enablers as an anti-social element that should be brought to book.

 

As a further deterrent, the government wants the option of naming and shaming the enablers.

 

 

As mentioned above, the penalty against the enabler is triggered by the ‘defeat of tax avoidance arrangements’, proposed to be those counteracted by the GAAR, those given a follower notice, those notifiable under DOTAS or VAT DOTAS and those which are subject to a TAAR or an unallowable purpose test.

 

There had been some controversy in the follower notice legislation about when a follower notice should be issued against those who waited the outcome of other court cases to determine their own disputes. However, what HMRC may regard as a conclusive outcome to an area of tax dispute may not necessarily accord with the common law understanding of what is conclusive case law. This same dilemma is faced by the government in trying to pin down the meaning of defeated tax avoidance. 

 

The government wants a statutory definition of the term. The draft legislation in the Finance Bill 2016 defines a defeat as when there is a final determination by a court or tribunal that certain arrangements do not achieve their purported tax advantage. The consultation paper goes on to maintain that there is finality when the taxpayer agrees with HMRC that the arrangements do not work. From a common sense perspective, such a definition may appear appropriate, but it is to be remembered that the targets of penalties are the enablers; they are at best third parties to the court process but more likely strangers to the actual outcome of a particular case. An enabler has no influence on the court case, which can be decided for manifold reasons, not simply because a marketed scheme was found to be unworkable. The enabler can in fact be very far removed from the outcome of a tax case. The idea that their previous advice may end up in penalties being issued against them and in amounts that exceed the tax at stake is quite startling. 

 

The powers of HMRC are bound to come under intense scrutiny in this area. There will be an appeals process against enabler penalties, but it is not apparent whether those appeals will be appellate, in the sense of allowing the taxpayer to submit reasons why the penalty is not due in fact and law, or supervisory in affording the court or tribunal a review of HMRC’s use of their powers. 

 

 

The government has had difficulty with taxpayers alleging they have taken reasonable care when relying on advice, given on a generic basis or by an unqualified promoter, in an attempt to reduce their penalties. The government favours a new approach of defining what does not constitute reasonable care in cases of tax avoidance which is defeated by the HMRC and placing the burden to demonstrate such reasonable care has been taken on the taxpayer. In particular, HMRC does not think the defence of taking reasonable care should apply where the taxpayer is relying on advice obtained from someone who does not know his particular circumstances and is not fully qualified to give that advice.

 

The government also wants those who both use and promote tax avoidance arrangements to be clearer on the consequences and implications and to have an up to date view on risk with a series of proposals aimed at transparency.