In their consultation document Strengthening Tax Avoidance Sanctions and Deterrents, which closed for further responses in October, HM Revenue & Customs (“HMRC”) detailed proposals for a new set of penalties for those enabling the use of tax avoidance arrangements.
The document focuses on which individuals are to be brought within the ‘enabler’ category and the quantum of the penalties to be imposed.
Who is an enabler?
According to HMRC, an enabler is “anybody in the supply chain who benefits from an end user implementing tax avoidance arrangements and without whom the arrangements as designed could not be implemented.”
In terms of a more precise list as to who might fall within this definition, HMRC propose to include the following:
- Acting as a “middleman” – arranging access and providing introductions to others who may provide services relevant to evasion
- Providing planning and bespoke advice on jurisdictions, investments and structures
- Delivery of infrastructure – setting up companies and trusts, opening bank accounts, providing legal services
- Maintenance of infrastructure – providing professional trustee or company director services, virtual offices, IT structures, legal services
- Financial assistance – assisting with movement of funds out of the UK, ongoing banking services
- Non-reporting – not fulfilling reporting, regulatory or legal obligations
Clearly, this list widens the net substantially from the professional tax and accountancy firms and banking institutions previously targeted by HMRC in this regard. The final category on the list in particular brings considerably more within the scope of the enabler sanctions. HMRC also propose to include the option of naming enablers who are subject to the new penalty.
How will the penalty be calculated?
The trigger for the enabler penalties will be the defeat of the tax avoidance scheme (further detail below) and will not be reliant on whether the scheme user faces a penalty. HMRC propose two possible calculation methods:
- A percentage of the benefit enjoyed by the enabler, starting at 100% and mitigated using the usual factors
- Based on the amount of tax understated by the user, E.g. if a person has enabled 10 people to implement arrangements which are later defeated and each user understated their tax by £1,000, the enabler would be subject to a maximum of penalty of £10,000
HMRC accept that it may be necessary to introduce a cap on penalties, should the latter methodology be adopted, where an avoidance scheme is marketed to a wide population.
The proposals also include the introduction of a standalone information power to identify enablers.
How do HMRC define ‘defeated tax avoidance’?
According to the draft legislation in Finance Bill 2016, a relevant defeat is a final determination of a tribunal or court that certain arrangements do not achieve their supposed tax advantage. In the absence of a court decision, an agreement between HMRC and the taxpayer that the arrangements do not work will be sufficient.
A relevant defeat can arise in respect of the following categories of arrangements:
- Counteracted by the General Anti-Abuse Roles in Finance Act 2013;
- Given a Follower Notice under Part 4 of Finance Act 2014;
- Notifiable under DOTAS; or
- The subject of a targeted anti-avoidance rule or unallowable purpose test.
For more information please contact tax dispute specialist partner Gary Gardner at firstname.lastname@example.org