The new powers tackling promoters of avoidance schemes
Draft legislation for inclusion in Finance Bill 2021 was published on 21 July 2020, the day before Finance Act 2020 received royal assent. The draft measures include detailed proposed legislation to further reduce the scope for promoters and enablers to market tax avoidance schemes and to strengthen the sanctions against those who continue to promote or enable such schemes. The government published a consultation in conjunction with the draft clauses on 21 July 2020 which closed on 15 September 2020. The consultation ran alongside a call for evidence on disguised remuneration wherein the government is seeking insight as to the drivers for any continued use of disguised remuneration tax avoidance, what if any schemes are not presently covered under current legislation and what the government can do to further tackle disguised remuneration tax avoidance with a closing date for comments of 30 September 2020.
The proposed new clauses also form part of the House of Lords Economic Affairs Finance Bill Sub-Committee inquiry (deadline for submissions 7 October 2020) which seeks written evidence on:
• How effective are the existing powers of HMRC in tackling promoters and enablers of tax avoidance schemes?
• What experience do practitioners have of the promoters of tax avoidance schemes (POTAS) rules and the enablers rules in practice?
• How effective will the proposed measures be against those who promote aggressive tax avoidance schemes, and in informing and deterring potential scheme users?
It is evident that significant government time and resource is being channelled into this area, which is of course very reassuring. HMRC is clearly of the view that promoters continue to frustrate and try to circumvent their obligations under POTAS, DOTAS and GAAR, and thus further action is required. Still more powers are expected to be bestowed upon HMRC in the next Budget (which will now be next spring) to tackle those in persistent default. There is no doubt that this is an ever-evolving area that needs to be kept under constant review.
The new rules contained in Finance Bill 2021 apply to three distinct areas of existing legislation, namely POTAS, DOTAS and the GAAR. It should be acknowledged from the outset that there is concern among the professional bodies that any newly drafted legislation ought only be enacted to the extent that it is properly and specifically targeted, so as not to increase compliance burdens on those already conforming.
The new draft rules are framed in the following way.
The government is keen to strengthen the promoters of tax avoidance schemes (POTAS) rules, contained in FA 2014 Part 5, by giving HMRC power to issue a stop notice (to stop the scheme being marketed while HMRC investigate) at an earlier stage and in a wider range of circumstances, as well as enabling HMRC to name and shame where a stop notice has been issued.
The conditions in the draft legislation, incorporating new s 236A into FA 2014, are very widely drawn as they presently stand and the threshold for HMRC to issue a stop notice is very low. The definition of ‘arrangements’ within the new clause would potentially apply to many commercial arrangements simply by virtue of conferring a ‘tax advantage’ (as widely drafted). A similar concern is that the power to issue a stop notice would be based on whether the authorised HMRC officer merely ‘suspects’ that a person promotes arrangements; this is a very low bar which creates scope for its misapplication. Some tweaks might be needed to these rules before they reach the statute book, and we are yet to see how the internal review and appeals process would apply to these new sections, so as to protect those that are explicitly not the target of these new rules. It is important
not to over burden those legitimate and honest advisers who should simply not be within the ambit of the rules.
In addition, the intention is to widen the POTAS rules to include individuals who control, or significantly influence, entities that carry on promotion activities. This should prevent errant scheme promoters from using a corporate vehicle to circumvent the existing rules.
The legislation also introduces a range of technical amendments in relation to conduct notices, including extending their application up to a maximum of five years (currently two years) to take into account the promoter’s behaviour, and further conduct notice threshold conditions have been added.
As the draft legislation stands, it is notable that noncompliance with DAC 6 may lead to the issue of a POTAS conduct notice, which is especially surprising given that some DAC 6 hallmarks do not even require any tax avoidance or advantage motive. This will no doubt add to the current anxiety over the looming onerous compliance obligations of DAC 6.
The draft legislation would also introduce yet more HMRC information powers under the FA 2004 Part 7 disclosure of tax avoidance schemes (DOTAS) and enabler regimes.
The DOTAS changes would enable HMRC to act more promptly where promoters fail to disclose or provide information about their scheme within 30 days, primarily by introducing a new information notice which could be issued in a broader range of circumstances. If the information required is not forthcoming or insufficient, HMRC would have the power to issue a scheme reference number (SRN), which in turn may be published.
Advocating and legislating for the use of early intervention tactics is a good policy; however, under the current draft rules, there would be no right of appeal against a new information notice under FA 2004 new s s31D, so even compliant advisers would need to safeguard themselves against the potential for these new rules to inadvertently bite.
F(No.2)A 2017 Sch 16 would be amended to enable HMRC to use its Sch 36 information powers as soon as a scheme has been identified. Advisers would need to be more vigilant than ever in ensuring that HMRC strictly adheres to the limits of these powers and only requests such information that is reasonably required.
The ambit of the general anti-abuse rule (GAAR) in FA 2013 Part 5 would also be amended, so that it would apply to partners and partnerships who enter abusive arrangements. This is intended to operate on a similar basis to the representative partner approach that currently exists for enquiries conducted under TMA 1970.
Interaction with PCRT
The professional bodies are frustrated by the perceived need for yet more legislation targeted at a small number of boutique firms or individuals that bring the profession into disrepute. Over the past few years, the Chartered Institute of Taxation (CIOT) and other professional bodies have spent a significant amount of time and effort on the professional conduct in relation to taxation (PCRT) rules to ensure they set a minimum industry standard on professional behaviour expected of their members when undertaking tax work, such as forbidding tax planning on a generic basis. Failure to comply with PCRT may expose a CIOT member to disciplinary action. The problem, of course, is that scheme promoters may not be affiliated with a professional body.
Tackling disguised remuneration
As discussed, the new draft provisions sit alongside the call for evidence on tackling disguised remuneration. Appreciating this context is important in understanding the perceived need for and scope of the proposed new rules. Back in 2016, the government announced the introduction of the loan charge which it intended would draw a line under disguised remuneration schemes. The subsequent Morse review that looked into the controversies surrounding the loan charge highlighted concerns that such schemes were unfortunately still being used and henceforth the government set out that further action would need to be taken. In fact, reportedly as late as December 2019, over 20,000 new schemes had emerged with 8,000 of those in 2019/20. The recent HMRC call for evidence in tackling disguised remuneration focuses not only on promoters but on how to disrupt the employment supply chains where such schemes are being used and how to help taxpayers avoid schemes. To its credit, HMRC is hosting a series of virtual roundtables on this call for evidence to better understand how to tackle the continued use of schemes.
The tax gap
The National Audit Office (NAO) entitled report Tackling the tax gap, published on 22 July 2020, examined the effectiveness of HMRC’s approach in reducing the tax gap. The tax gap is certainly diminishing; however, given the inevitable significant fiscal impact of Covid -19, the House of Commons Public Accounts Committee inquiry furthered the work of the NAO questioning senior members of HMRC and HMT in relation to inroads being made to further reduce the tax gap on 7 September 2020.
It should be borne in mind that the tax gap attributable to avoidance is low compared to the gap attributable to error and non-payment, and evasion is the real issue which is a criminal offence. In relation to taxpayer error, the NAO highlighted that significant tax is lost as a result of mistakes, undoubtedly attributable to the complexity of the tax system so adding more legislation arguably is not the answer. Anti-avoidance legislation trying to squeeze diminishing returns from this area might be a vote winner and grab the headlines, but perhaps it is time for a change of direction or the compliant risk being overburdened.
Where does this leave us?
The reality is that there are still determined profiteers from certain schemes who are able to quickly bring these schemes to market, realise a hefty profit and then disappear. As some of these individuals or outfits are committing fraud and undertaking serious criminal activity, it is questionable as to whether yet more legislation will discourage their behaviour. Perhaps a better way to tackle this residual abuse would be for HMRC to more effectively use the information it has available via RTI and take more effective enforcement action. HMRC could consider applying a PAYE or VAT security notice at an early stage.
Ultimately, we need to see a clear and strong public message that these promoters can no longer get away with such tactics (HMRC spotlights arguably do not reach their intended audience), perhaps coupled with more leniency for whistleblowers. HMRC should also work harder to ensure that the unwary taxpayer is not fooled by these schemes. HMRC s counter avoidance and fraud investigations teams need to communicate and work on a more rapid response. Efforts should be concentrated on better policing, as many tax evaders may still undertake illegal activity on the basis that they are unlikely to be caught.
Offshore Structures and Onward Gifts
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
Increased Investment in Personal Tax Compliance in the UK
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
Case note: Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC)
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, taxpayers need to be vigilant about evidential requirements that HMRC must fulfil in order to discharge their burden of proof. Read JHA’s latest insight into the First-tier Tribunal’s decision in Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC).
If you require any further information about the Kittel, Mecsek, and Ablessio principles, or any other allegations by HMRC of fraud or fraudulent abuse, please contact Iain MacWhannell (firstname.lastname@example.org).
Preparing for the Possibility of a Domicile Enquiry
Helen McGhee, a director and chartered tax advisor at Joseph Hague Aaronson, explores who might be vulnerable to an HMRC enquiry on domicile and how best to deal with such enquiries.
The Kittel Principle - Sweet Sixteen
The following is an article written by David Bedenham about HMRC’s wide-ranging application of the ‘Kittel principle’. The current focus appears to very much be on the labour supply industry and the allegation of ‘Mini Umbrella Company Fraud’ (or ‘MUC Fraud’). This article highlights the need for taxpayers to get specialist advice at an early stage when faced with a Kittel decision. If you have any queries about Kittel-related issues or similar denials of input VAT or assessments to VAT, please contact Iain MacWhannell (email@example.com).