“Tax avoidance advisers to face tougher penalties from Treasury”: will the proposals work?

Now I know what it’s like to be on the receiving end of a deluge of tax condocs.

I’m not going to comment here on the Making Tax Digital documents that came out on Monday 15 August. This is partly because I don’t find it the most fascinating aspect of the tax system, but mainly because I’ve given the “Bringing business into the digital age” document to my resident businessman, with a warning that digital record-keeping is going to apply to him and an instruction to read it so we can discuss in due course.

The consultation document on avoidance that appeared today (Wed 17 August), heavily plugged in the early morning radio headlines, is a different matter. More specifically, this discusses proposals to impose penalties on those who “enable” tax avoidance which is subsequently defeated by HMRC. The penalties are intended to be fairly hefty, based on the amount of tax that would have been saved by the people who were “enabled”.

I should say at the outset that these are early thoughts, before I go off for a week of music-making. And I should also emphasise that I really did want to like it: most of my working life has been spent tackling avoidance in one way or another, so it’s a subject dear to my heart.

However, having been left bemused by the headlines I got down to the detail of reading it and hit some (not entirely unexpected) problems.

The early chapters sent a couple of shivers down my spine. In paragraph 2.29 there’s a rather quaint reference to a “benign” test which includes the following: “Provided the advice goes no further than explaining the interpretation of words used in tax legislation, the person would be within this exemption.” I’m not and have never been a tax adviser, but given the wrangles I’ve seen over the interpretation of tax legislation I’m guessing this definition won’t be an easy one to apply.

In chapter 3, I paused over the discussion of placing the onus on the taxpayer to show they’ve taken reasonable care (rather than on HMRC, as is currently the case). I think this was mainly due to a lack of clarity in the wording, but I was left unsure whether this was a proposal to shift the burden in all potential cases where there might have been a lack of reasonable care, or just in cases of “avoidance which is defeated by HMRC”.

This brings me to chapter 4 – the crux of the document, which contains the proposed trigger for the enabler penalties. I had been holding my breath to see what this might contain, given that avoidance is a notoriously difficult concept to define in a way that will hold water in the courts. Instead, over the years, a number of proxies have developed which are of use in certain circumstances:

  • The Disclosure of Tax Avoidance Scheme (DOTAS) rules – dating back to 2004 – determine which schemes must be disclosed to HMRC.
  • The 2013 General Anti-Abuse Rule (GAAR) defines an egregious subset of avoidance schemes and has been recently beefed up with penalties.
  • And scattered across the volumes of tax legislation there are numerous more specific anti-avoidance rules, often relying on tests of whether something was done for tax rather than commercial reasons.

Unsurprisingly, the condoc had not found a novel way of cracking the problem of defining avoidance, but had fallen back on an amalgam of these proxies (plus the new “follower” regime which I will skip over here).

This is not the first time this approach has been taken in recent years*. First we had the rules on “advance payments” – stipulating that if someone undertakes an avoidance scheme, they must pay the tax upfront and then argue to get it back (as opposed to the normal rule whereby tax is only paid once it’s been shown to be due). Then we had a regime for Promoters of Tax Avoidance Schemes (POTAS), which singles out the most egregious promoters for “special measures”. Most recently, in this year’s Finance Bill, we had the Serial Avoiders Scheme, which does the same for those who repeatedly aim to avoid tax themselves. All of these use some combination of the proxies mentioned above.

The problem I have is this. Firstly, there’s a risk we forget that the concepts in the bullets above do not define avoidance but are an assortment of proxies. Some go a bit wide, some go narrow, and they are apples and pears. It’s one thing to use a set of proxies like this to make people pay tax upfront, with the liability to be decided (if necessary in the courts) afterwards; or to use them to frame specific regimes like POTAS and Serial Avoiders, which are hedged around with checks, balances and safeguards. It’s another thing entirely to use them to define when a new (and substantial) penalty is to be applied – where the courts would typically look for a very strong legal underpinning.

Secondly, the regimes that have used this amalgam of proxies to define their targets – and indeed the GAAR itself – are very new. They are therefore untested, both in terms of practical application and in terms of court decisions.

I’m not saying this with a scintilla of sympathy for the promoters/enablers. Rather the reverse: the risk is that, in piling more pressure on foundations that are shaky and untested, the edifice may come tumbling down. This would only be to the benefit of those the proposals seek to attack.

There is, of course, the argument that this is all about deterrence rather than actually designing rules to be applied in practice. Leaving aside whether this is good practice in framing the law, we then have to look at the likely behavioural response of “enablers” to this new penalty regime. One immediate concern is that they will become even more determined for their punters not to settle with HMRC without going to court, as that will trigger the penalty. But an even more obvious response – hat-tip to my husband – is that they simply go offshore, leaving HMRC worse off in terms of any ability to influence.


* Though, pace paragraphs 4.4-6 of the condoc, I couldn’t locate a previous use of the final bullet (specific anti-avoidance rules) in the basket of tests above.


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