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Taking the pledge

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HMRC has set out to alter taxpayer behaviour and is now asking users of settled tax schemes to voluntarily sign an undertaking not to use schemes in the future. 
Letters received state: ‘HMRC hopes that taxpayers who have been involved in avoidance schemes that have proved unsuccessful will change their behaviour. The signing of the letter is a tangible demonstration of this.’ The letters also state: ‘Whether you sign it or not will have no impact upon how HMRC deals with your tax affairs.’ 
The terms of the undertaking attached to the letter and to be signed by the taxpayer are: ‘Following the settlement of the enquiry into my involvement in [named scheme] I hereby confirm, I will not take part in any tax avoidance schemes or arrangements in the future.’
HMRC is clearly of the view that there should be no reason why a taxpayer should not sign such an undertaking. The difficulty with the proposition is that ‘tax avoidance’ is not a clear or absolute term and is still a ‘moving target’. In July 2010, David Gauke described tax avoidance as involving ‘compliance with the letter but not the spirit of the law’. The problem faced by taxpayers is that it is not always clear what the spirit of the law is until it is determined by the courts.
Many taxpayers have participated in enterprise zones, business premises renovation allowance schemes and enterprise investment schemes, believing the ‘incentive reliefs’ were fully supported by the government, but now face tax investigations and potentially accelerated payment notices. In many instances, the reasons for HMRC’s challenge only became clear after the event. In some instances, it is almost impossible to determine what may or may not be regarded as within the spirit of the law without the benefit of hindsight.
The term ‘behaviour’ also has ominous undertones. No doubt HMRC used it in a general way, but those who have dealt with penalties know that it holds a more specific meaning in HMRC’s vocabulary. 
The test for carelessness is a failure to take reasonable care, which is defined as the behaviour ‘of a prudent and reasonable person in the position of the person in question’. HMRC guidance also makes it clear ‘repeated inaccuracies may form a pattern of behaviour which suggests a lack of care’. It is therefore not beyond the bounds of possibility for the undertaking to be used to seek to apply a higher duty of care on the taxpayer and also demonstrate a pattern of behaviour when determining penalties. Remember that in the tax tribunal the rules of evidence are flexible.
If HMRC’s undertaking is taken at face value, there appears to be no specific benefits in signing it. However, the potential that it may come back to ‘bite’ the unwary taxpayer who participates in the next HMRC targeted structure cannot be ignored. This is therefore not an undertaking which should be entered into lightly or without thought of the potential long term consequences.