Tax Avoidance Penalties

Yesterday the Government published a Consultation Document which took two big steps to tackle two different, but related, problems.

The first addresses misbehaviour by taxpayers who tend to hear what they want to hear and disregard the rest.

Assume you’re a taxpayer and you have a dodgy tax adviser who tells you that if you engage in a piece of tax planning you can declare your tax liability to be 10 when it would otherwise be 100.

Of course you want to believe him – and so you don’t take the care you should to check whether he’s telling you the truth. What he is telling you is convenient for him to tell you (he charges a fee) and it’s convenient for you to hear it (it reduces your tax liability).

As things stand, if the tax planning doesn’t get challenged, you save 90. If it is challenged successfully you are back where you started, owing 100.  This penalty regime is designed to ensure that you ask the questions you should before you put 10 rather than 100 on your return; to give you reason to exercise caution when confronted by a tax adviser whispering sweet nothings into your ear. If the Government’s proposals are adopted, you might end up paying 190 rather than saving 90.

The second regime tackles that dodgy tax adviser. And those he takes advice from. And those he relies on to execute his scheme. Banks, accountants, solicitors, advisors, IFAs, trustees, and even barristers. The Consultation Document describes these as “enablers” of tax avoiders.

Very often these individuals are subject to no regulation. Its remarkable but true that you have to be regulated to be a dental hygienist but you don’t have to be regulated to offer tax advice. So there can be a complete absence of regulatory control of some enablers.

But the real issue is this. A tax advisor gets his fee for telling you that you can declare 10 rather than 100. He’s in the money from the start. And if you should happen to sue him later, he might have wound himself up, or he might shelter behind the advice given by a barrister, or he might point to the small print in the scheme documentation telling you that (despite the fact he’s charging you a fee) you must take your own tax advice.

So he gets handsome reward and very often without any personal accountability for the consequences. This state of affairs can encourage abysmal behaviour by highly paid professionals – some examples of which I set out here.

And for the taxpayers who are led astray – and many young men and women have made fortunes from their abilities as performers or footballers and lost them in consequence of a decision no worse than a poor choice of financial advisor – this asymmetry is both unavoidable and profoundly unfair. And it places huge pressure on HMRC and on tax collection.

So the problems are very real problems.

And the solutions in the Consultation Document are very real solutions. We must await the draft legislation – it can somtimes deliver less than is promised by the publicity grab of the Consultation Document. But my instinct is that, for behaviour within the compass of the Consultation Document, these measures will prove to be a real game-changer. (Indeed, they may well go too far – but that is a point for another day.) So, looked at in the round, I applaud them.

But let me strike a few notes of caution.

First, the measures look to be targeted primarily at individual rather than corporate avoidance. Individual tax avoidance – the data suggests – is yesterday’s problem. But the same cannot be said to be true of corporate avoidance. I’d like to see an extension of the targeted avoidance behaviour to corporate profit shifting.

Second, the proposed legislative solutions are consistent with the overall pattern of behaviour of the Government. That pattern is to ‘resolve’ often quite difficult, and factually nuanced, problems with legislation rather than with feet-on-the-ground resource. Legislation can be a good tool, but it’s also a blunt tool and it can lead to unfair or otherwise poor outcomes. Over time, our tax system suffers. HMRC is profoundly under-resourced – and legislation can go some way towards protecting against the consequences but not all the way.

Finally, Government needs to do much, much more to address the opacity that surrounds its efforts to tackle avoidance. Until we can see that HMRC is tackling avoidance – until we know that Google or Facebook or Uber is paying the ‘right’ amount of tax – people are going to remain sceptical about the efforts that are, or are perceived to be, being made by HMRC. Until Government tackles this issue, however many legislative steps it takes, I am afraid we are going to go on being sceptical about its conduct. I have addressed that issue at length here.

13 thoughts on “Tax Avoidance Penalties

  1. This should be read out LOUD at the beginning of every TV programme until ALL know about it! I humbly suggest!

  2. It is sensible to tackle individual avoidance than corporate avoidance. The most tax is raised when companies pay no corporation tax and instead pay higher wages – as long as those wage earners pay their individual tax. So I am not surprised corporation tax avoidance is being overlooked. It is like setting the rate to zero (which would be ideal) without all the controversy that would arise if that became official policy and law.

  3. Great post, as usual Jolyon. I was with you 100% until I read the line “…is paying the right amount of tax.”

    The ‘right amount of tax’ is almost as misleading as references to ‘fair amount of tax’. Both imply something other than the amount due according to the law.

    Please don’t misunderstand me. I am not defending those who arrange their affairs to pay less tax through clever schemes etc. Indeed I gave up giving tax advice ten years ago in part because I struggled to balance the need to get paid for advice with the moralities of tax avoidance.

    On this occasion I feel that the value of your otherwise excellent piece is reduced by this comment towards the end.

  4. I dont disagree with the aim of the proposals – in the analogy of drugs, target the dealer not the user. And during my 3 years at HMRC, this was something I advocated.

    And with apologies to lay readers, but we now get into technicalities

    However, the definitions are too wide. Penalties will apply to an ‘enabler’ involved with any TAAR counteracted transaction. Do we actually know what measures are TAARs? They dont come with a big sign that says ‘this is a TAAR’ apart from in condocs/Budget releases.

    S16A TCGA is a classic example of a TAAR – but this is defined as ‘the main purpose, or one of the main purposes, of the arrangements is to secure a tax advantage.’

    Compare that to s137(1) TCGA, here the main purpose/one of main purpose tests is ‘not for the avoidance of tax’.

    Difficult for me to see the difference so that the first is a TAAR (stopping an advantage) and the latter not. Or more accurately, can we be certain that a Tribunal wouldnt see the latter being an ‘unallowable’ purpose test or a TAAR.

    As I heard Stephen Allcock once say, you are not concerned with the law as it stands, but what the Courts will think the law means in 5 years time.

    So if the latter could be considered to have be an ‘unallowable purpose test’, then lets look at this scenario. A person owns two companies and wants to group them and gets clearance from HMRC to do so. But there is a tax avoidance motive that wasnt disclosed in the clearance – this is challenged successfully by HMRC so the enablers are now subject to a penalty. Could a bank that gave a group facility be an enabler? Probably.

    Now, the bank could almost certainly appeal the penalty and be successful, but banks are now so risk averse this will add significantly to costs in their due diligence. They will get their own tax advisers (probably Big 4 so expensive) to review these basic clearances.

    So what would I do differently? – Limit it to the GAAR, and specify those clauses that are considered to qualify as TAARs/unallowable purposes so we can properly test the commercial consequences.

  5. I’m puzzling this a bit. I think targetting of advisers is required somehow, I’m just not sure that this is how. And here’s why.

    I “think” that as things stand a tax geared penalty absent an underlying tax liability falls to be treated as criminal under ECHR jurisprudence. A tax geared penalty on the taxpayer may fall to be treated as criminal but more likely falls to be treated as civil meaning Art 6 and the right to a fair trial are not invoked for the taxpayer, but are for the advisers.??? This hardly seems “equitable”. The taxpayer must fund their challenge against a civil burden of proof, the advisers are entitled to legal aid and a criminal burden of proof?

    The next issue is enforcement against offshore advisers. It seems imossible. Mutual assistance provisions deal with tax and not with penalties absent a tax liability. I can’t see foreign jurisdictions who apply any varient of the Revenue Rule assisting with enforcement against any non-taxpayers.

    So the risk is that the products are driven offshore, albeit with the inclusion of the IFAs in the structure they should be disincentivised from onshore selling of the product.

    From a signalling point of view I can see it being effective. From an enforcement point of view I can see it being a nightmare. And that is before we get into LPP and other rule of law based arguments.

  6. The proposal is, in my opinion, something that is 15 years too late. Many of my clients were taken in (or chose to be taken in) by people and firms who were often not in possession of any tax knowledge, but they had a QC opinion and could use phrases like “100% compliant” without triggering the lie detector. Many of those people have enjoyed the substantial fees they “earned” and the firms they worked for are long since gone.

    I do struggle a bit with some of the proposals though. If your client brings you a scheme to pay 10 and not 100 and you point out the risks and potential problems, but the client goes ahead anyway and the scheme is defeated, is a penalty applicable? If that is the case, the measure will backfire hugely because no tax adviser will EVER agree that ANY tax mitigation measure works (and we have seen EIS/SEIS claims fail recently).

    In that case, a determined client will go to an (even more) unregulated “expert” and we are back where we were 15 years ago, seeing a lot of offshore based salespeople flogging schemes that are hopeless.

    Regulation from ICAEW/CIOT will be pointless as no professional is going to risk a penalty.

    HMRC/HMG may as well take a North Korean approach and set out in great detail the 2 or 3 permitted business models for individuals – employee, sole trader, partnership – and then remove several inches of redundant legislation?

    That banging noise? An unbolted stable door.

  7. If the proposal is implemented, a professional will be subject to what is for ECHR purposes a criminal penalty for giving bona fide legal advice on what he think the correct legal analysis is of a set of facts (if those facts are avoidance facts and if the court disagrees with his analysis).

    The notion that a legal adviser can be subject to penalties in this way for merely doing his job is probably contrary to article 1 of the protocol to the ECHR. It is also contrary to some basic tenets of the rule of law. There is an area of legal activity which the state does not approve of (tax avoidance). In order to discourage it (or ‘influence behaviours’ to use the jargon), it imposes criminal (for ECHR purposes) sanctions on those who do their job of stating whether or not they think the tax avoidance scheme works.

    Instead of undermining the rule of law in this way HMRC ought to apply the rule of law by enforcing criminal law on tax evasion, a much more serious problem than tax avoidance. Because tax avoidance is in the open (declared in tax returns etc), HMRC is simply going for the low hanging fruit with a sledgehammner (excuse the mixed metaphors).

    This won’t be implemented. It is too extreme.

  8. I would perhaps further add that this proposal, being all stick and no carrot, should surely come with a safe harbour, i.e. being able to get a pre clearance from HMRC. We all know how that suggestion has been shot down multiple times over the past 20 years.

  9. I suspect the reason the report focuses upon individual taxation rather than corporate taxation may be because there is an assumption that corporates are less likely to hire a “cowboy” tax adviser, or to follow that advice blindly. That may be good in terms of protecting the more vulnerable from dodgy tax advice, but as you point out, doesn’t direct attention towards the larger areas of tax leakage.

  10. What constitutes a defeated scheme is a ridiculously low threshold. It looks good and sensible but in practice doesn’t work. Consider the small adjustments hmrc are making to film sale and leasebacks at the moment. They would constitute defeated schemes although vanilla s&ls have basically been blessed by the courts. What if the advice is good but the taxpayer can’t be bothered to fight and agrees to split the difference with hmrc and settle. This is a defeated scheme. Additionally Dotas is now far too wide to act as a sensible filter given the financial product hallmark. And yet look at all the consequnecs which now hang off dotas: APNs, serial tax avoidance, potas etc etc And the proposed iht hallmark is so wide it would catch pets. So for me the defeated scheme test which exists for potas and which this proposal is seeking to use is absolutely inappropriate. Incidentally I agree the comments above re criminal penalty.

  11. Who is a dodgy accountant,tax consultant,enabler etc.?How can you distinguish between dodgy and non dodgy?
    Do market forces in the world of tax innovator and flexible accountant apply to such an extent that all advisers will “stretch” to accommodate a client’s tax mitigation(or other) wishes?
    History tells us that all (including the exalted Big 4 and their Law firm equivalents) will stretch to accommodate tax mitigation and flatter the financial position of their clients.Does it matter which party (client,accountant,tax adviser,lawyer or offshore snake-oil salesman) initiate the tax mitigation strategy?The answers is “NO”.The tax loss,the cost of prosecution etc is the same.Society and the public purse are the loser if the scheme succeeds.Legislation to reverse the consequences does not replenish public funds.It closes the gate after the tax saving has left the building.
    Criminal prosecution will be fun but the prisoner will be the client,not the enabler or adviser(no distinction is necessary between dodgy and non dodgy).It is irrelevant in terms of committing an offence whether you had advice that your actions were legitimate,legal,compliant etc.An adviser does not commit the offence.It is the client who activates the adviser’s plan.The fact that the client undertook a criminal course of action after advice is no protection from being found guilty.It may at best help in the sentencing.Wrong advice will not exonerate anyone from conviction.
    Social odium and a simple uncontaminated(by granting tax breaks for social,economic reasons etc) tax system will be a cheaper and more efficient means of operating a tax system.Who is going to be brave enough to implement such a tax regime?Needles in haystacks come to mind.
    I shall continue to dream of a better,simpler,more effective tax gathering and distribution system devoid of mitigation opportunities

  12. Pingback: Summary of updates (15 -21 August 2016) | Company Law and Corporate Governance

  13. Jolyon

    I agree with general thrust of both your key points:
    i)the Boys at the Bar are a disgrace and, in the effect they can have on the finances of the promoters’ clients, they are not perpetratin victimless clients.
    ii) legislation is too often introduced when existing law could be exercised more ffectively

    On the second point, however, what existing legislation could be brought to bear rather than new legislation?

Comments are closed.