Policy paper

Strengthening sanctions and deterrents for tax avoidance

Published 5 December 2016

Who is likely to be affected

The new penalty will apply to anyone who enables someone to use a tax avoidance scheme that HM Revenue and Customs (HMRC) later defeats, and will focus on abusive schemes that no-one could mistake for a reasonable commercial arrangement. The changes to reasonable care will apply to taxpayers who use tax avoidance arrangements that are defeated by HMRC.

General description of the measure

The measure will introduce a new penalty on those individuals or entities who enable the use of tax avoidance arrangements which HMRC later defeats (‘enablers’).

The vast majority of professionals who provide clients with advice on genuine commercial arrangements will not be impacted.

The measure will also provide clarification as to what is considered to constitute ‘reasonable care’ in relation to the application of the penalties charged on taxpayers following the defeat of tax avoidance arrangements. This will prevent tax avoiders from relying on non independent advice to demonstrate that they took reasonable care to avoid inaccuracies in their tax returns arising from their use of tax avoidance arrangements which have been defeated by HMRC.

Policy objective

The government believes that all individuals and businesses have a responsibility to pay the tax they owe. It wants a level playing field for the majority of people who pay their tax, so that everyone pays their fair share. The government’s objective is to influence and promote behavioural change in the minority of tax agents, intermediaries and others who design, market or facilitate the use of abusive avoidance, and benefit financially from their use.

The aim of the measure is to ensure that these enablers can be held accountable for their activities should the tax avoidance they have enabled later be defeated. The aim of the changes to the meaning of reasonable care is to influence the behaviour of would be tax avoiders by ensuring that penalties are chargeable in all appropriate circumstances where tax avoidance is defeated.

Background to the measure

At Budget 2016, the government signalled its intention to explore options to introduce downsides for those who enable tax avoidance. The government also signalled that it would clarify what constitutes the taking of reasonable care in relation to the penalty provisions in Schedule 24 to the Finance Act 2007 (FA 2007), when a person uses tax avoidance arrangements which HMRC later defeats.

The consultation period for this measure ran from 17 August 2016 to 12 October 2016, receiving significant engagement from stakeholders from individuals and businesses to industry representative bodies. A summary of those responses will be published on 5 December 2016.

Detailed proposal

Operative date

The changes relating to reasonable care come into effect at Royal Assent to Finance Bill 2017 and apply to inaccuracies in documents relating to tax periods which begin on or after 6 April 2017 and end on or after the day the act is passed.

The penalty for enablers will apply prospectively from Royal Assent and will apply only to steps taken by enablers after Royal Assent to Finance Bill 2017.

Current law

The current law in relation to reasonable care is included in Schedule 24 to FA 2007.

Whilst there is no current legislative regime dealing specifically with ‘enablers’ the Disclosure of Tax Avoidance Schemes (DOTAS) and Promoters of Tax Avoidance Schemes (POTAS) rules provide definitions of ‘promoters’ and ‘intermediaries’ which are similar to the definition of ‘enablers’ as included in the measure:

• DOTAS describes a ‘promoter’ as a person who is responsible for the design, marketing, implementation, organisation or management of avoidance arrangements, in the course of a business which includes the provision of services relating to taxation
• POTAS describes an ‘intermediary’ as the person who sits between the promoter and the client and typically provides the client with information in relation to the arrangement

Proposed revisions

Legislation will be introduced in Finance Bill 2017 to provide for a penalty on those who enable tax avoidance which is later defeated. Key elements of the regime will:

• define who is an ‘enabler’ to draw the distinction between those who design, market or otherwise facilitate avoidance arrangements implemented from those who solely advise, report or otherwise provide opinion on such arrangements and whose advice does not result in any amendment to the arrangements or any resulting arrangements
• ensure that those who are brought within the meaning of enabler through unwittingly becoming involved in the arrangements are excluded from that definition
• describe the types of arrangements which, if defeated, bring those who enabled those arrangements within scope for penalties
• describe how the amount of any penalty is calculated and assessed and provide a right of appeal against that assessment

Legislation will also be introduced in Finance Bill 2017 to clarify what constitutes the taking of reasonable care in relation to the application of the existing penalty regime in Schedule 24 to FA 2007, in relation to inaccuracies arising in a person’s tax return from the defeat of tax avoidance arrangements they have entered into.

The new legislation will change the regime to presume that a person has been careless unless they can prove they have taken reasonable care and describe circumstances and events which are explicitly stated not to represent taking reasonable care in cases of defeated avoidance.

Examples of such circumstances and events include (but are not limited to):

• advice addressed to a third party or without reference to the taxpayer’s specific circumstances and use of the scheme
• advice commissioned or funded by a party with a direct financial interest in selling the scheme or not provided by a disinterested party
• material produced by parties without the relevant tax or legal expertise/experience to advise on complicated tax avoidance arrangements, typically this would be the sort of material used to market the arrangements and would not amount to advice setting out the legal options necessary for a potential user to assess the efficacy of the scheme or the risks involved

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022

The final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out at Budget 2017.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

There will only be an impact on those individuals who engage in, or enable others to engage in, tax avoidance. These individuals are likely to be on above average incomes. The government expects most of these to be seeking to reduce their liability at higher or additional rates. The measure will impact family formation, stability or breakdown for those groups who engage in or enable others to engage in tax avoidance.

Equalities impacts

This measure will impact those on above average incomes. It will therefore have greater effect on those protected equality groups who are represented in more affluent populations.

Impact on business including civil society organisations

This measure will have no impact on businesses that provide clients with advice on genuine commercial arrangements. It will only impact on businesses that are marketing or using tax avoidance arrangements, and who benefit financially from a taxpayer implementing those arrangements. There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

Initial scoping work on the implementation costs of the operational impact of the measure has identified that some additional resources will be required to undertake the new operational process that will need to be completed when closing tax avoidance enquiries.

HMRC will need to make changes to IT systems to accommodate this measure at an estimated cost in the region of £425,000.

Other impacts

Justice Impact Test: we are currently working with the Ministry of Justice to establish the extent of the impact on the Ministry of Justice Tribunal Service.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through reviewing disclosures of and investigations into new avoidance schemes, HMRC’s avoidance disclosure taskforce, and through communications with affected taxpayers and practitioners.

Further advice

If you have any questions about this change, please contact:

Julie Corah on Telephone: 03000 590818 or email julie.corah@hmrc.gov.uk
John Burey on Telephone: 03000 585336 or email john.burey@hmrc.gov.uk