HMRC updated its promoters of tax avoidance schemes guidance in September 2015. The breadth of the rules is, in our view, wider than what most would expect and may catch a number of advisers who marketed (using the term loosely) tax solutions PAST, PRESENT and FUTURE.
In this article, we consider who is a promoter and what the potential future developments for the legislation are. We summarise the rules in the appendices, which can be accessed by clicking here.
HMRC expects that few promoters will meet a threshold condition and be issued with a conduct notice. That expectation makes the costly process of introducing legislation all worthwhile doesn’t it?
So what is a few? For example, there are 17,000 members of Chartered Institute of Taxation (CIOT), 144,000 members of Institute of Chartered Accountants in England and Wales (ICEAW) and like a zillion financial advisers and solicitors; then there are those that simply “sale” unregulated (i.e. unregulated by the FSC) products to everyman and his dog (Redknapp’s dog Rosie evidences the applicability of tax planning for pets). One would assume that a “few” needs to be a sufficient number to deter the majority from promoting.
“The objectives of the Promotion of Tax Avoidance Schemes (POTAS) regime are to change the behaviour of a small and persistent minority of promoters of avoidance schemes who exhibit certain behaviours, and to aim to deter the development and use of avoidance schemes by influencing the behaviour of promoters, their intermediaries and clients.”
If the intention of the legislation is to deter the promotion of tax avoidance schemes, publicly identifying monitored promoters would spread the word that HMRC mean business. If only one promoter were named and shamed in a year it might not have a dramatic effect. Although if twenty were suddenly the subject of a monitoring notice, that might make some ripples in the market place. If a few hundred or a few thousand were subject to a monitoring notice, it would certainly make everyone hinting that there is a way to mitigate tax think carefully before speaking.
Fortunately, the regime is “supervised by authorised officers and is subject to strict governance”, which either means it is subject to the usual bureaucratic process for implementation or that a specialised team (one man and his dog Rosie) with super efficiency is ready to pounce.
So who is regarded as a promoter? The definition of “promoter” is set out at section 235 Finance Act 2014. A promoter is carrying on a business as a promoter if it carries on a business that includes or has included the:
- Organisation or
- Management of avoidance schemes
A person is a promoter of a relevant proposal if it:
- Is responsible to any extent for the design of the proposed arrangements
- Makes a firm approach to a person in order to make that proposal available to that person or anyone else
- Makes the proposal available for implementation by anyone
For further information on what constitutes a relevant proposal click here.
A person is a promoter of relevant arrangements if it is:
- A promoter of a relevant proposal that is implemented by the arrangements
- Is responsible to any extent for the design, organisation or management of the arrangements
For further information on what constitutes a relevant arrangement click here.
A person will not be a promoter if their only involvement is to have been responsible to some extent for the design of proposed arrangements or the design, organisation or management of arrangements. Such a person would not be within the scope of the legislation as a promoter of the avoidance scheme if the person:
- Does not provide tax advice
- Could not reasonably be expected to know that the arrangements are an avoidance scheme
Therefore there is an exception where say a professional adviser provides services or a legal or tax opinion in relation to an element of a scheme without knowing the entire arrangements. There is also an exemption for a group company advising within the group.
We envisage that the scope of promoters could therefore include many intermediaries. An intermediary may purport that:
- The structure being promoted is not a relevant arrangement
- They are not providing tax advice
- They were unaware the arrangements were an avoidance scheme
It might be easy for someone to convince themselves that the arrangement is not one which has the main purpose of avoiding tax, although the courts might consider otherwise. For example, if we were to consider historic remuneration planning, the main purpose was to incentivise and obviously the upside of mitigate tax was merely a secondary bonus. What if the courts were to test an arrangement by looking not at the ultimate purpose but instead why the arrangement was used?
As for not providing tax advice, surely anyone commenting on the tax position of an arrangement (even someone else’s arrangement) that holds the motive of deriving a pecuniary benefit is potentially providing tax advice. It is unlikely that an engagement letter or the mere fact another party may provide formal advice will prevent someone who says “if you do this, you will pay less tax” from not being regarded as having provided some level of tax advice.
Being unaware is possible although if someone is aware of the potential tax upside, they would need to regard the arrangement as not a relevant proposal or arrangement. Those who are defiant, and the arrangement is simply a commercial one with an upside, should consider how the courts might perceive it. The courts are likely to want to establish whether there was a potential of the commerciality of arrangements being genuine, which normally requires evidence of the arrangements fulfilling a commercial purpose. Another test might be to determine whether the way arrangements are constructed is solely to obtain a tax advantage.
The tax world has certainly changed at a rapid pace over the past few years. The increase of powers afforded to HMRC have yet to be used in their full force although there is likely to be mounting pressure to demonstrate the might and seriousness against combating tax avoidance. It doesn’t mean that tax planning can’t be done, it just means that care needs to be taken to get the right advice. It also means that more and more enquiries will be opened into those who have undertaken tax planning as HMRC become more informed; it would be prudent to have a discussion with us on whether you or a client are at risk. Call us for a no obligation chat.
Appendix One: Summary of Rules
There are two main steps to the regime:
- HMRC may issue a conduct notice where a promoter meets a threshold condition
- HMRC may issue a monitoring notice where a promoter breaches a requirement in a conduct notice and approval is obtained from the First-tier Tribunal (a “monitored promoter”)
Conduct notices impose conditions about how a promoter must behave. There is no right of appeal against a decision to give a promoter a conduct notice, which can last for up to two years.
Once a promoter is identified, HMRC may issue conduct notices provided one of the conditions (the “threshold conditions”) is met in the previous three years.
The conditions include where the promoter:
- Is the subject of publication as a deliberate tax defaulter
- Is named in a report for a breach of the Code of Practice on Taxation for Banks
- Receives a conduct notice as a dishonest tax agent
- Failed either to disclose a tax avoidance scheme or to provide details of clients to HMRC
- Has been charged with a specified tax offence
- Has been found guilty of misconduct by a professional body
- Failed to comply with an information notice issued by HMRC
- Requires confidentiality
- Requires a contribution to a fighting fund
- Continues to market or make available a tax avoidance scheme after being given a notice to stop following a judicial ruling
A further condition is where a majority of a sub-panel of the General Anti-Abuse Rule Advisory Panel has given an opinion that entering into one of the promoter’s tax avoidance schemes is not a reasonable course of action.
HMRC may also amend any of the conditions or add new ones.
Meeting a threshold conditions can result in an automatic conduct notice. HMRC have discretion where there is a breach of the Banking Code of Practice or disciplinary action by a professional body or regulatory authority.
Before deciding on the terms of the conduct notice, the recipient must be given the opportunity to comment on the proposed terms. A conduct notice will require the recipient to comply with specified conditions, which are reasonable to impose specified purposes. The notices are likely to require the evidencing of behaviour including demonstrating the provision of adequate information to clients and intermediaries as well as contractual relationships with other parties and details of what is being promoted.
There is a right of appeal against a decision of the First-tier Tribunal to approve the issue of a monitoring notice. If a monitoring notice is issued the monitored promoter is subject to:
- Publication by HMRC
- Publication by the promoter of its status on the internet, in publications and correspondence
- A duty on the promoter to inform clients they are a monitored promoter and to provide them with a promoter reference number
- A duty on clients to put the PRN on their returns or otherwise to report the PRN to HMRC
- Enhanced information powers for HMRC supported with new penalties
- Preventing the promoter from imposing confidentiality on clients in relation to disclosure to HMRC
- Limitations to the defences of reasonable care and reasonable excuse against the imposition of penalties
- Extended time limits for assessment on clients who fail to report a PRN to HMRC
- A criminal offence of concealing, destroying or disposing of documents
Appendix Two: Relevant Proposal/Arrangement
A “relevant proposal” is a proposal for arrangements that would be “relevant arrangements” if they were implemented.
The definition is drawn from the ‘notifiable proposal’ definition at s306(2) FA 2004 that applies for the purpose of the Disclosure of Tax Avoidance Schemes (DOTAS) regime.
Arrangements are “relevant arrangements” if:
- They might enable any person to obtain a tax advantage
- That tax advantage is the main benefit, or one of the main benefits, that might be expected from the arrangements
The definition of “arrangements” includes any agreement, scheme, arrangement or understanding of any kind, whether or not legally enforceable, involving a single transaction or more than one transaction.
A tax advantage must relate to:
- Income Tax
- Capital Gains Tax (CGT)
- Corporation Tax (CT)
- Petroleum Revenue Tax (PRT)
- Inheritance Tax (IHT)
- Stamp Duty Land Tax (SDLT)
- Stamp Duty Reserve Tax (SDRT)
- Annual Tax on Enveloped Dwellings (ATED)
Arrangements are also “relevant arrangements” if:
- They might enable any person to avoid or reduce a liability to pay relevant contributions
- The avoidance or reduction of a liability to pay relevant contributions is the main benefit, or one of the main benefits, that might be expected from the arrangements
“Relevant contributions” are broadly Class 1 contributions, Class 1A contributions, Class 1B contributions and Class 2 contributions not collected under Self-Assessment.