On 5 November 2014, HMRC issued a press release entitled “10 things a tax avoidance scheme promoter won’t always tell you”. This list was published ahead of the policy paper “Promoters of Tax Avoidance Schemes” on the 10th December.
HMRC’s attack is coming from all angles and despite the optimism of the minority that they won’t be successful, it doesn’t look likely to ease. There are a number of considerations for example, whether approaches or challenges are fair or could have been managed better by HMRC.
Ahead of our pontification on the things a tax avoidance scheme promoter apparently doesn’t tell someone and the risks involved to them, our attention has been caught by the information in the paper released on 10th December.
The policy refers to the legislation relating to promoters of tax avoidance schemes introduced in the Finance Act 2014 (Section 234 to 283, and Schedule 34 to 36). The legislation allows HMRC to issue conduct notices to promoters and subsequently monitor promoters who breach a conduct notice. Promoters caught are subject to new information powers and penalties which will also apply to intermediaries that continue to represent them after the monitoring commences and will also catch successor entities of promoters.
What we have noticed is that the predicted impact to the exchequer as certified by the Office of Budget Responsibility indicates a growth from £5m to £35m between 2014/15 and 2015/16 (and thereafter the impact is £35m to 2017/18). We are not sure how much faith and reliance is placed on government numbers by the public even if certified although the dramatic increase possibly indicates that the forthcoming tax year brings with it some excitement for high risk promoters still, well, still promoting.
According to the release, approximately twenty promoters were considered to be within the scope of the 2014 legislation. Assuming that it is prudent to only target those promoters still promoting, it appears relatively easy to think of a number who may be the subject matter of conduct notices.
Morally, tax planning has never felt inappropriate so long as the concept has merit (normally supported by a Queen’s Counsel opinion) and the willing party undertaking the planning is informed of the risks. The first and foremost problem is whether the risks have been communicated to the willing party. Given communication works both ways, we suspect that often written advice or opinions have been shared and either not read or not understood.
HMRC’s ten things a tax avoidance scheme promoter won’t always tell you are set out below with a little commentary:
“Most schemes don’t work”
For a party having implemented a scheme, it is damning start to the list. However, someone forgot to define a scheme. It might be reasonable to consider a scheme to be a series of transactions without a real economic impact other than for the purpose of avoiding tax. However, HMRC regard what the tax industry and case law has regarded as legitimate tax planning as a scheme – look at their approach on Employee Benefit Trusts (EBT)! Given the dispute in the courts on EBT, hasn’t HMRC got a responsibility to clearly legislate against specific transactions or qualify what is a scheme?
“It could cost you more than you bargained for”
This is a very true statement although is it fair in light of the failings of HMRC to clearly define what is acceptable and not acceptable tax planning for at least the last twenty years. For example, legislation has been introduced resulting in higher taxes and penalties for certain types of planning although when that planning was undertaken, it was generally considered acceptable. HMRC contend that they have never considered it acceptable although did they not have a responsibility to bring this to the attention of taxpayers and promoters earlier in some cases?
“You may have significant legal fees to pay”
The cost of defence in any tax case is extensive. For those considering the current settlement opportunities or entering negotiations because of the accelerated payment notices etc. the thought of legal fees is a significant factor in deciding to compromise with HMRC. The commercial acceptance to compromise is made at a time when HMRC has defined its desire to attack most tax planning. However, around or soon after implementation HMRC had knowledge of most planning so why didn’t they act in the taxpayer’s interest to warn them of their stance and allow those using such planning to exit sooner. Has HMRC not failed the taxpayer?
“You could face criminal conviction”
Criminal conviction is only possible where there is a clear intent to defraud the Revenue. It seems highly unlikely that where a scheme has been promoted a user has the intent to defraud unless they intently use the scheme to evade tax (in which case they could have evaded tax in many other cheaper ways). Where a scheme is supported with tax advice and/or Queen’s Counsel’s opinion specific to the user and the user adhered to the planning, it seems unlikely that criminal conviction would be possible.
“You could face publicity as a tax avoider”
The threat of being mobbed by the general public who do not have an understanding of what has been regarded as acceptable planning historically (for a long time) and which is now challenged seems uniquely unfair. It feels entire un-British to publicly shame someone for something the general public probably won’t understand. Is this an abusive approach and is it in light with the policy of treating tax payers fairly?
“Your scheme is never HMRC approved”
HMRC don’t approve that is correct. Although as alluded to they have had plenty of opportunity to raise public awareness of their disagreement to a particular scheme they are notified of. Have HMRC not got a responsibility to raise awareness to the taxpayers sooner?
“You could be marked out as a high-risk taxpayer”
The thought of having HMRC police your affairs more religiously is probably the strongest deterrent to undertaking schematic planning. Most taxpayers would probably prefer to overpay tax than endure communications with some HMRC officers! A test to establish a high risk taxpayer should be provided. It shouldn’t be based on the amount of planning undertaken it should be more subjective and consider the understanding and approach of the individual to tax planning – HMRC accept that promoters may have misled clients so ones misled may not actually be high risk (just ill informed). A call for an independent body to analyse those HMRC consider high risk may be a better proposition. Obviously the body should include members of the tax profession who understand risks.
“HMRC is likely to beat your scheme in court”
Another cheerful comment supported by the fact that HMRC win 80% of cases.
“The risk is normally all your own”
This is an unfortunate truth since scheme promoters or providers may well disappear when the shelf life of a product is over. It appears that a better mechanism may be to advance the dispute resolution program to allow taxpayers to manage the risks, particularly in light of HMRC’s approach. It has probably caused a number of providers to close doors having faced significant costs supporting their clients (as well as those who chose to take the money and run).
“You’ll have to pay the tax up front anyway”
The final risk is that of the accelerated payment notices. This is new legislation and it is likely that in a number of situations, the scheme was entered into before the legislation. Whilst the legislation is an enormous deterrent, the moving goal post at the detriment of the taxpayer has always been considered by many in the tax profession as completely unfair.
To quote David Guake: “The government has taken unprecedented steps to clamp down on the selfish minority who practice tax avoidance, because we are firmly on the side of the vast majority of taxpayers who play by the rules. As a result, tax avoidance is now very high risk.”
The irony is that quite a lot of taxpayers don’t play by the rules as evidence by HMRC’s campaigns targeting: health workers, solicitors, electricians, plumbers, etc.
The reality is that users of schemes have to do something about their tax situation. Commercially it makes sense. However, policy makers and writers of legislation should maybe step out of their box and be forced to understand the alternative views and methods they could adopt to make the tax system simpler and fairer. Maybe the Government should even accept that the avoidance of tax is born out of their own failings in the first place.