Guidance

Penalties and other sanctions for serial tax avoidance

Published 12 January 2018

Serial tax avoidance penalties

Under paragraphs 30 to 44 part 5 schedule 18 Finance Act 2016, there are new penalties for users of new avoidance arrangements used during a warning period which are the subject of a relevant defeat during or after the end of that warning period.

Penalties can be imposed only on relevant defeats of new arrangements.

The purpose of serial tax avoidance regime (STAR) penalties is to deter serial avoiders from persisting with flawed schemes and to reassure those who do not use avoidance arrangements that they will not be disadvantaged by those who do.

Where a STAR penalty is due, the person will become liable to the penalty at the time of the relevant defeat. An assessment will be issued to charge the penalty.

The penalties are based solely on objective criteria. The STAR penalty provisions operate on an incremental basis following a defeat of new arrangements used in the warning period.

If the person has had:

• no previous warning notices for defeats of new arrangements used in the warning period, the penalty is 20% of the value of the counteracted advantage
• only one previous warning notice for a defeat of new arrangements used in the warning period, the penalty is 40% of the value of the counteracted advantage
• 2 or more previous warning notices for defeats of new arrangements used in the warning period, the penalty is 60% of the value of the counteracted advantage

There are rules to calculate the value of the counteracted advantage, which depend on the type of tax.

The previous warning notices referred to above, which are taken into account in calculating the rate of penalty include warning notices for the person’s own defeats and warning notices issued to them for defeats of persons linked to them by partnership or being in the same group of companies.

The defeat after 5 April 2017 of existing arrangements may result in the commencement of a warning period but those defeats cannot give rise to a penalty or be counted in determining the level of penalty incurred in respect of new arrangements.

This means that a defeat of such arrangements used during the warning period will not increase the rate of penalty.

There are special rules for determining the rate of penalty in the case of corporate groups, associates and partners in partnerships.

The general rule for all taxes affected by the new legislation is that the value of the counteracted tax advantage is the additional tax that becomes due or payable as a result of the defeat of the avoidance arrangements in question.

There are separate rules for the calculation of the value of counteracted advantage for direct taxes and for VAT and other indirect taxes, so that the position of losses for direct taxes can be dealt with.

Broadly, where the counteraction results in a reduction of direct tax losses and these have not been fully relieved and there’s a reasonable prospect of them being relieved in the future, the value of the counteracted advantage relating to the amount of the unrelieved losses is calculated as 10% of such amount.

If there’s no reasonable prospect of such unrelieved losses being relieved in future, the value of the counteracted tax advantage relating to such unrelieved losses is nil.

The value of the counteracted tax advantage is different for VAT and other indirect taxes.

For all taxes, to the extent that the counteracted advantage is a deferral of tax, the value of the advantage is calculated as 25% of the deferred tax for each year of deferral.

If the period of deferral is less than a year, the value would be an amount equating to 25% a year.

There are safeguards in place to ensure that the STAR penalty provisions operate fairly:

• a person will only incur penalties on new arrangements
• a person will only incur penalties on defeated arrangements that they used during a warning period, so they will be aware of the risk of a penalty
• there’s an appeal process, a defence of reasonable excuse and the potential for mitigation by the Commissioners
• an aggregation rule provides that the STAR penalty is to be reduced by certain other penalties and surcharges levied on the same tax

Unlike the tax linked penalty rules in schedule 24 Finance Act 2007, the STAR penalty rules do not include provision for special reduction, though the Commissioners have the power to mitigate the penalty.

Simultaneous defeats and warning notices

Under paragraph 31 part 5 schedule 18 Finance Act 2016, if a person simultaneously incurs 2 or more relevant defeats in relation to different arrangements, the defeats are treated as being incurred one after the other.

They’re ordered by value from highest to lowest, so the higher level of penalty is imposed on the lowest value defeat.

Where a person is given a single warning notice covering 2 or more defeats, the person is treated for the purposes of the penalty rules as having been given a separate warning notice for each defeat.

Aggregation of penalties

Under paragraph 40 part 5 schedule 18 Finance Act 2016, the amount of a penalty due under STAR can be reduced to take account of certain other penalties or surcharges on the same tax liability.

These include, for example, penalties for:

• the late payment of tax under schedule 56 Finance Act 2009
• errors in returns under schedule 24 Finance Act 2007

This is referred to as aggregation of penalties.

STAR penalties cannot be reduced by penalties incurred in respect of the General Anti-Abuse Rules (GAAR) or for failure to take corrective action in response to a follower notice.

In such circumstances, the combined penalty total will be subject to a cap.

Example

A company incurs a relevant defeat of new disclosure of tax avoidance schemes (DOTAS) arrangements used in a warning period.

It has already received a warning notice for the defeat of other new DOTAS arrangements it used in the warning period. The counteracted advantage attaching to the arrangements just defeated is £800,000.

There’s a penalty under schedule 24 Finance Act 2007 for this understatement of tax, charged at 10% of the tax, which is £80,000.

The STAR penalty is at a rate of 40%, as this is the second defeat of new arrangements used in the warning period, and amounts to £320,000.

Without the aggregation rule, the total penalty due would be £80,000 + £320,000 = £400,000.

The aggregation rule provides that the STAR penalty will be reduced by £80,000 to £240,000, so the total of the penalties will be £320,000.

Example involving follower notice penalty

An individual incurs a relevant defeat of avoidance arrangements used in a warning period, it being the first defeat of an arrangement used in the warning period.

The tax advantage attaching to the defeated avoidance arrangements is £1.5 million. HMRC opens an enquiry into the arrangements and give the individual a follower notice.

The individual fails to amend their return in response to the follower notice, so HMRC amends their return and a follower notice penalty becomes due.

The individual is then sufficiently co-operative that HMRC reduces the follower notice penalty from 50% to 45% of the tax advantage. Therefore the follower notice penalty amounts to £675,000.

There’s a penalty due for the late payment of tax of 10%, amounting to £150,000 and the 20% STAR penalty amounts to £300,000. The aggregation rule allows the STAR penalty to be reduced by the amount of the late payment penalty.

As a follower notice penalty is due the rules regarding follower notice penalties and aggregation also apply. Under these rules a cap applies to the maximum possible amount for the combined follower notice and STAR penalty.

In this case the cap is 100% of the tax amount (see paragraph (5)(E) section 212 Finance Act 2014).

Therefore the total penalties become the lower of:

• the maximum combined follower notice and STAR penalty (100% of tax amount) = £1.5 million
• the actual total follower notice and STAR penalties of £675,000 + £300,000 = £975,000

The aggregate penalty is reduced by the amount of the £150,000 late payment penalty from £300,000 + £675,000 + £150,000 = £1.25 million, to £975,000, which is made up of the late payment penalty of £150,000, with the balance representing the combined follower notice and STAR penalties.

Calculate the value of a penalty-counteracted advantage

The penalty is based on a fixed percentage of the value of the counteracted advantage, so the first step is to determine what the value of the counteracted advantage is.

Valuation of counteracted advantage for STAR penalty - taxes other than VAT

Under [paragraph 32 part 5 schedule 18 Finance Act 2016 (http://www.legislation.gov.uk/ukpga/2016/24/schedule/18/enacted#schedule-18-paragraph-32), the basic rule states that, for taxes other than VAT, the value of the counteracted advantage is the additional amount of tax due or payable as a result of the final counteraction under Condition A, Condition B, Condition C or Condition F.

The basic rule applies where the effect of the final counteraction is for additional tax to become payable based on the full amount of the adjustment in the year or period to which the counteraction relates and the adjustment made is fully chargeable to tax in the year or period that it relates to.

There are special rules which apply where there are direct tax losses involved, and the loss wrongly recorded has not been fully utilised, or where the tax advantage leads to a deferral in the payment of tax.

Both group relief and relief in the case of repayment or release of a close company loan under section 458 Corporation Tax Act (CTA) 2010, are ignored when calculating the value of the counteracted advantage.

Example

Company A is a member of a corporate group. Whilst in a warning period ending 31 December 2023, arising from the defeat of DOTAS arrangements, company A enters into further DOTAS arrangements in the year ending 31 March 2020.

It is treated as using the further arrangements when its company tax return is filed on 31 March 2021. The arrangements are defeated on 30 June 2023. It is potentially liable to a 20% penalty under STAR.

Before the defeat, its Corporation Tax return for the year ending 31 March 2020 shows profits chargeable to Corporation Tax (before group relief) of £140 million.

Group losses of £10 million are surrendered by company B to company A, giving company A net profits chargeable to Corporation Tax of £130 million and Corporation Tax (at a rate of 20%) of £26 million.

The arrangements are defeated, and company A’s profits chargeable to Corporation Tax are increased by an adjustment (relating to the removal of the tax advantage) of £15 million.

This increases its profits chargeable to Corporation Tax, before group relief, to £155 million. Company B increases its group relief surrender to £20 million (by increasing a capital allowances claim), to give company A net profits chargeable to tax of £135 million.

Although the net chargeable profits have increased now by only £5 million, the relevant tax advantage is calculated ignoring group relief, so is based on the £15 million adjustment.

Using a Corporation Tax rate of 20%, this gives a value of the counteracted advantage of £3 million for STAR penalty purposes.

Valuation of counteracted advantage for STAR penalty - losses for purposes of direct tax

Under paragraph 33 part 5 schedule 18 Finance Act 2016, where the intended effect of an avoidance arrangement on a person’s tax position is to produce or increase a loss for direct tax purposes, a rule is needed to calculate the value of the counteracted advantage when that person incurs a relevant defeat in respect of that arrangement.

This rule applies to relevant defeats under Conditions A to C. It applies both to the situation where there would not have been a loss had the arrangement not been entered into and to any intended increase in losses resulting from the arrangement.

The rule calculates the value of the counteracted advantage as follows:

• to the extent that counteracted advantage has the result that a loss is wrongly recorded for direct tax purposes and the loss has been fully utilised, the value of the counteracted advantage is the additional amount of tax due or payable as a result of the counteraction
• to the extent that the counteracted advantage has the result that a loss is wrongly recorded for direct tax purposes and the loss has not been fully utilised, the value of the counteracted advantage is the sum of:
  • the additional amount of tax due or payable as a result of the counteraction that is attributable to the utilised loss
  • 10% of the loss not utilised

No account is taken of the 10% of the loss not utilised where, because of the nature of the loss or the person’s circumstances, there’s no reasonable prospect of the loss being used to support a claim to reduce a tax liability.

Example

A company that is not in a group for the purposes of STAR but is already in a warning period arising from a defeat of disclosable VAT arrangements, enters into DOTAS arrangements which are used in that warning period and defeated.

Those DOTAS arrangements generate a non-trading deficit of £20 million in the year ending 31 December 2018, reported on its company tax return filed on 31 December 2019, the date on which it is treated as using the arrangements.

It carries forward the deficit, as there are no profits to relieve it against in the year to 31 December 2018. In the following year it sells its trade and assets, generating a capital gain of £15 million.

It distributes all of its assets by a cash dividend to its shareholders. In its tax computation it offsets £15 million of the non-trading deficit brought forward against its capital gain.

It has no income or gains against which the remaining £5 million deficit can be relieved and no prospect of using the deficit in the future as it has no assets and has disposed of its trade.

Its DOTAS arrangements are defeated in 2022, and a 20% penalty is due on the value of the counteracted advantage.

The value of the counteracted advantage relating to the utilised deficit is the Corporation Tax saving the arrangements would have achieved is £15 million × 20% = £3 million.

The value of the counteracted advantage relating to the deficit not utilised is nil, because there’s no reasonable prospect of the deficit being used to support a claim to reduce a tax liability, so the full value of the counteracted advantage is £3 million.

When applying this loss rule in the case of a group of companies where the tax avoidance arrangement is intended to create or increase an aggregate loss in the group, group relief can be taken into account.

This is even though group relief is to be ignored when calculating the value of the counteracted advantage as shown in the example.

Example

Companies A and B are the only 2 members of a corporate group. In the year ending 31 December 2023, company A has a Corporation Tax trading loss of £45 million and company B has a Corporation Tax profit of £30 million.

Both companies are anticipated to be profitable in the future. Company A has surrendered £30 million of its loss to company B, and is carrying forward the remaining £15 million loss.

£20 million of company A’s 2023 trading loss relates to DOTAS arrangements entered into in 2023, affecting its Corporation Tax liability for the year ending 31 December 2023.

The arrangements are treated as used when the return is filed, on 31 December 2024.

The companies are already in a warning period relating to the defeat of arrangements used by company A in 2018 and defeated in 2022.

This means, on the defeat of the DOTAS arrangements in 2026, there’s potentially a penalty under STAR.

As there’s purported to be an aggregate loss in the group created by the avoidance arrangements, group relief can be taken into account when applying the rule for losses in calculating the value of the counteracted advantage.

The removal of the counteracted advantage has the effect of decreasing company A’s trading loss by £20 million, from £45 million to £25 million.

This results in Corporation Tax becoming payable by company B on profits of £30 million - £25 million = £5 million.

Before the counteraction the group has unutilised losses of £15 million. After the counteraction, the group has no unutilised losses.

The value of the counteracted advantage is therefore the sum of:

• the Corporation Tax now payable by company B, which is £5 million x 20% (the current rate of Corporation Tax) = £1 million (the reduction in utilised losses)
• £15 million (the value of previously unutilised losses) x 10% = £1.5 million

The value of the counteracted advantage is £2.5 million, so the STAR penalty will be 20% × £2.5 million = £500,000.

Valuation of counteracted advantage for STAR penalty - where payment of tax is deferred

Under paragraphs 34 and 37 part 5 schedule 18 Finance Act 2016, where avoidance arrangements result in a delay in the payment of tax (whether direct tax, VAT or other indirect taxes), then the value of the counteracted advantage attributed to the delay is:

• 25% of the deferred tax for each year of deferral or delay
• 25% a year for each separate period of deferral or delay of less than a year
• 100% of the amount of the deferred tax, if this is lower than the sum of the above

Example:

A company that is not in a group for the purposes of STAR is already in a warning period following the defeat of DOTAS arrangements.

It incurs a further relevant defeat, this time in respect of disclosable VAT arrangements, which it entered into and used during the warning period.

The arrangements were not intended to affect the total amount of net VAT payable, but to defer the payment date from the return for the period 31 March 2020 to 30 June 2020.

The due date is intended to be delayed by 91 days. The amount of the intended deferred payment is £1 million.

The value of the counteracted advantage is 91 ÷ 365 × 25% × £1 million = £62,329.

The STAR penalty is £62,329 × 20% = £12,466.

To the extent that the counteracted advantage is attributable to an intended direct tax loss that was either utilised (with the value of the counteracted advantage calculated accordingly) or unutilised (with the value of the counteracted advantage calculated at 10% or 0% of the loss), the calculation for the value attributable to deferral does not apply.

Valuation of counteracted advantage for STAR penalty - VAT and other indirect taxes

Under paragraph 36 part 5 schedule 18 Finance Act 2016, the basic rule is that the value of the counteracted advantage for VAT is the sum of the amount:

• by which the VAT due or payable by the person for any prescribed accounting period exceeds the amount which would have been due or payable but for the counteraction
• of VAT credit that would have been obtained but for the counteraction, if no VAT credit is obtained for a particular prescribed accounting period
• by which such VAT credit is less than the amount which would have been obtained but for the counteraction, if a VAT credit is obtained for a particular prescribed accounting period
• by which the person’s non-deductible tax for any prescribed accounting period exceeds the amount which would be the amount of the person’s non-deductible tax but for the counteraction, but only to the extent that it is not represented by a corresponding amount above

So far as the counteracted tax advantage is a delay in relation to a person’s VAT obligations, then the value of the counteracted tax advantage is calculated as shown in the example.

Example

A group registration makes substantial exempt supplies and so is partly exempt.

They have a special method and use avoidance arrangements which purport to reduce the input tax directly related to exempt supplies and which are defeated.

Their partial exemption calculations show wholly irrecoverable input tax of £25,000 in the period 1 January to 31 March 2021. HMRC challenge the arrangements and conclude the wholly irrecoverable input tax for the period is £75,000.

They raise an assessment for £50,000 and this is the value of the counteracted advantage.

Penalty assessments

Under paragraph 38 part 5 schedule 18 Finance Act 2016, HMRC must assess any penalty due within 12 months of the date of the relevant defeat.

The assessment will:

• be made by an officer of HMRC
• be notified to the person liable for the penalty
• state the tax period to which the penalty relates
• state the amount of the penalty
• state the date on which it is issued and the time within which any appeal against the assessment may be made
• state the date by which the penalty must be paid

The assessment of the STAR penalty may be combined with an assessment to tax and will be enforced as if it were an assessment to tax of the same nature as the tax to which it relates.

The penalty is payable within 30 days of the date on which the person is notified of the assessment.

The assessment may only be altered:

• on appeal
• by a supplementary assessment if it is found that an earlier assessment underestimated the value of the counteracted advantage
• by a revision if it is found that it overestimated the value of the counteracted advantage

The Commissioners also have the power to mitigate the penalty.

Appeal against a STAR penalty

A person may appeal against the decision to make a penalty assessment, or the amount of a penalty assessment.

Guidance is available about how to appeal against a tax decision along with factsheet HMRC1: HM Revenue and Customs decisions - what to do if you disagree on GOV.UK.

An appeal must:

• be made to HMRC (except for VAT and other indirect taxes when the appeal is made to the First Tier tribunal) within 30 days beginning with the day on which the notification of penalty was given
• be in writing
• quote the person’s name or business name, and their tax reference number
• give the reasons for the appeal
• be signed

If the taxpayer’s appeal is made to HMRC and the taxpayer disagrees with HMRC’s response to their appeal, they can:

• ask HMRC to review their decision
• ask the tax tribunal (meaning the First-tier Tribunal or Upper Tribunal) to hear their appeal
• ask for alternative dispute resolution to be considered

The taxpayer is not required to pay the penalty whilst it is under appeal. On an appeal, the tribunal may:

• affirm HMRC’s decision
• substitute the decision for another one that HMRC has power to make

Reasonable excuses

Under paragraph 42 part 5 schedule 18 Finance Act 2016, there’s a safeguard of reasonable excuse to ensure that the penalty rule operates fairly where the person had a reasonable excuse for the matters to which that relevant defeat relates.

For reasonable excuse to be considered, the taxpayer must put forward an excuse, and then be able to satisfy HMRC or, on appeal, the First-tier or Upper Tribunal, that the excuse is reasonable. What is reasonable will depend on the particular facts and circumstances.

Section CH81120 of HMRC’s compliance handbook discusses what is reasonable care, and is relevant here as to what would be considered reasonable.

This is intended to cover, for example, the position where a person has taken reasonable care in obtaining professional advice on using arrangements, and it was reasonable for the taxpayer to believe that the arrangements worked.

For STAR purposes, if the advice was not directly given to the person, or fails to take account of the person’s particular circumstances, the obtaining of or reliance on the advice will not be regarded as a reasonable excuse.

A defence of reasonable excuse is only applicable to the relevant provisions in STAR regarding penalties and restriction of reliefs.

A person assessed to a penalty must satisfy HMRC (or the First-tier Tribunal or Upper Tribunal on appeal) that the person had a reasonable excuse for the relevant failure to which the relevant defeat relates.

The following cannot be a reasonable excuse for the purposes of STAR penalties or restriction of reliefs:

• a lack of funds, unless attributable to events outside the person’s control
• reliance by the taxpayer on another person to do something, where the taxpayer did not take reasonable care to avoid the relevant failure
• where the person had a reasonable excuse for the relevant failure, but the excuse has ceased, and the person did not remedy the failure without unreasonable delay
• reliance on advice where the advice was addressed to or given to a person other than the taxpayer, or takes no account of the taxpayer’s individual circumstances

A relevant failure means the failures or inaccuracies that led to the relevant defeat.

Definitions of relevant failures

Condition A

For a Condition A relevant defeat, the failures or inaccuracies that led to the just and reasonable adjustments made by way of the counteraction under the GAAR

Condition B

For a Condition B relevant defeat, the failures or inaccuracies that led to any of the following:

• the corrective action taken by the taxpayer as required in the relevant follower notice
• any other action taken to counteract the denied tax advantage referred to in the relevant follower notice

Conditions C, D or F

For a Condition C, D or F relevant defeat, the failures or inaccuracies that led to the making of adjustments (other than taxpayer emendations) or a tax assessment or any other action by HMRC, which counteracted the tax advantage that would otherwise have arisen from the relevant DOTAS arrangements or disclosable VAT or other indirect tax arrangements

Condition E

For a Condition E relevant defeat, the purchaser’s actions and failures to act, so far as they are connected with the assessment of, or adjustments (other than taxpayer emendations) to:

• the VAT position of the supplier
• any other action by HMRC which prevented the purchaser obtaining the tax advantage that would otherwise have arisen from the relevant disclosable VAT arrangements

Rate of penalty - excepted warning notices

Under paragraphs 42(2) to 42(4) part 5 schedule 18 Finance Act 2016, a warning notice is excepted for penalty purposes where a person has a reasonable excuse for the relevant failure in respect of that relevant defeat.

As a consequence, the excepted warning notice is disregarded for the purposes of determining the rate of penalty on later relevant defeats within the same warning period.

Example

An individual is in a warning period and uses 3 different sets of avoidance arrangements during that period

On the first defeat of one set of arrangements the individual incurs a 20% STAR penalty.

On the second relevant defeat the individual objects to the 40% STAR penalty he would otherwise incur (on the grounds that he had a reasonable excuse) and his objection is upheld.

The third set of arrangements is then defeated.

The rate of penalty is 40%, not 60%, because the previous warning notice was excepted.

As this is the third defeat of arrangements used in the same warning period, the individual will still be potentiality liable for naming because there’s no reasonable excuse provision for this sanction.

In a case where this third defeat could otherwise have resulted in us giving a restriction of relief notice, equivalent reasonable excuse provisions would apply under the restriction of reliefs rules.

Usually, if the individual’s objection to the penalty in relation to the second warning notice has been upheld, we would not take that warning notice into account when deciding whether to issue a restriction of relief notice.

Mitigation of a STAR penalty

The Commissioners may, at their discretion, mitigate a STAR penalty or stay or compound any proceedings for such a penalty.

They may also, after judgement, further reduce the penalty by any amount, including to nil.

In exercising their power, the Commissioners will consider both the particular facts and circumstances, and the behaviour of the taxpayer in their dealings with HMRC regarding the arrangements giving rise to the relevant penalty.

Restriction of reliefs

The restriction of relief rules under paragraphs 19 to 29 part 4 schedule 18 Finance Act 2016 are to deter taxpayers from using tax avoidance arrangements that try to deliver the tax advantage as a result of the misuse of direct tax reliefs.

The restriction of relief rules only apply to relevant defeats by virtue of:

• Condition A (the GAAR)
• Condition B (follower notices)
• Condition C (DOTAS)

They do not apply to arrangements in relation to VAT, or to arrangements relating to other indirect taxes.

The reliefs which can be restricted include:

• any relief from tax (however described) which must be claimed, or which is not available without making an election, but there are some reliefs that are exempt from restriction, such as pensions tax relief
• any relief under Income Tax loss relief (part 4 Income Tax Act (ITA) 2007) or Corporation Tax loss relief and group relief (parts 4 and 5 CTA 2010)
• any relief under a provision listed in section 24 ITA 2007
• relief for expenses of management of a company’s investment business
• reliefs that do not require a claim

A claim for relief for the restriction of relief rules means any election or other similar action which is in substance a claim for relief.

The restriction of reliefs rules only apply on the third relevant defeat of new arrangements which misused reliefs that the person has used in the same warning period and prevent the taxpayer from claiming direct tax reliefs for a period of 3 years, which may be extended.

Conditions for a restriction of relief notice

Under paragraph 19 part 4 schedule 18 Finance Act 2016, HMRC will give a person a restriction of relief notice if the following 3 conditions apply and each of the defeats meets the restriction of relief conditions set out below:

• the person incurs a relevant defeat of arrangements they used in a warning period
• the person has been given 2 or more warning notices for relevant defeats of arrangements used by them (or by a person linked to them by partnership or being a group company) during the same warning period
• warning notices and defeats relate to new arrangements

Restriction of relief conditions

For a restriction of relief to be given, all the relevant defeats in question meet each of the following conditions:

• they are relevant defeats by virtue of Condition A (GAAR), Condition B (follower notices) or Condition C (DOTAS arrangements)
• they relate to a misuse of relief
• either the relevant counteraction was made on the basis of a particular avoidance-related rule, or the misused relief was a loss relief

A loss relief means any relief under Income Tax loss relief (part 4 ITA 2007) or Corporation Tax loss relief and group relief (parts 4 and 5 CTA 2010).

A relevant defeat relates to the misuse of a relief if either:

• the tax advantage (or part of it) results from (or would, but for its counteraction, have resulted from) a relief or an increased relief from tax
• it is reasonable to conclude that claiming or using a relief is a significant part of the arrangements in question

The tax advantage here refers to the tax advantage that is finally counteracted as appropriate under Condition A, Condition B or Condition C.

For the purposes of the restriction of relief rules, where a single warning notice covering 2 or more relevant defeats is issued to a person, they are treated as having been given a separate warning notice for each relevant defeat.

Avoidance-related rule

Under paragraph 25 part 4 schedule 18 Finance Act 2016, for the purposes of the restriction of relief legislation, the avoidance-related rule is any tax rule, however worded, which refers to:

• the purpose or expected benefit of a transaction, act or other element of a scheme being tax avoidance or to obtain a tax advantage
• a transaction, act or other element of a scheme having or not having a commercial purpose

An avoidance-related rule is defined in detail as a rule in Category 1 or Category 2.

Category 1

A rule is within Category 1 if it refers (in whatever terms) to either of the following:

• the main purpose or purposes of a transaction, arrangements or any other action or matter and to whether or not the purpose in question is or involves the avoidance of tax or the obtaining of any advantage in relation to tax (however described)
• expectations as to what are, or may be, the expected benefits of a transaction, arrangements or any other action or matter and to whether or not any such benefit is the avoidance of tax or the obtaining of any advantage in relation to tax (however described)

When considering the expected benefits, it does not matter whether the reference is, for example, to:

• the sole or main benefit
• one of the main benefits
• any other reference to a benefit

An example of a rule that falls within Category 1 is the rule regarding writing down allowances for ships and aircraft.

Section 123(4) Capital Allowances Act 2001 reads:

‘Subsections (1) and (2) do not apply if the main object, or one of the main objects was to obtain a writing-down allowance determined without regard to section 109 (writing-down allowances at 10%) in respect of expenditure incurred by any person on the provision of the ship or aircraft.’

Category 2

A rule is within Category 2 if, as a result of the rule, a person may be treated differently for tax purposes depending on whether or not the purposes referred to in the rule (for example the purposes of an actual or contemplated action or enterprise) are (or are shown to be) commercial purposes.

An example of such a rule that falls within Category 2 is that which applies to the relief given to a person from a charge to tax on capital gains when they dispose of securities in exchange for securities in another company or where they dispose of their shares in a scheme of reconstruction.

The avoidance-related rule at section 137(1) of the Taxation of Chargeable Gains Act 1992 reads:

‘neither section 135 nor section 136 shall apply…unless the exchange or scheme of reconstruction in question is effected for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to Capital Gains Tax or Corporation Tax.’

Effect of relief restriction notice

Under paragraph 20 part 4 schedule 18 Finance Act 2016, a person or company that is given a restriction of relief notice may not:

• make any claim for any of the reliefs covered by STAR in the restricted period, subject to certain exceptions
• surrender group relief (part 5 CTA 2010) in the restricted period
• use certain reliefs which do not require claims to be made in the restricted period, for example relief for annual payments and reliefs claimed in previous periods and otherwise deductible in the restricted period

Exceptions to relief restriction notices

These exceptions are claims for:

• relief under double tax agreements
• certain claims associated with charities and charitable giving
• claims associated with making pension contributions to registered pension schemes

Reliefs restricted where no claim is needed

The reliefs that a person is prevented from using, but where no claim would have been needed, are:

• relief in a relevant tax year for Income Tax trading losses brought forward against subsequent profits arising from the same trade
• relief in a relevant tax year for property business losses brought forward against subsequent profits arising from the same property business
• relief for any annual payments made in the restricted period
• relief for management expenses of a company’s investment business referable to a relevant accounting period
• relief in a relevant accounting period for Corporation Tax trading losses brought forward against subsequent profits arising from the same trade
• relief against chargeable gains accruing in a relevant tax year (or part of a relevant tax year) for allowable Capital Gains Tax losses, including those relating to disposals of UK residential property interests at a time when the disposer is not tax resident in the UK
• relief against Annual Tax on Enveloped Dwellings (ATED) related chargeable gains accruing in a relevant tax year for allowable ATED related Capital Gains Tax losses
• relief for a non UK tax resident against chargeable gains in a relevant tax year relating to disposals of UK residential property interests for allowable Capital Gains Tax losses relating to disposals of UK residential property interests
• where the person is a company, relief in a relevant accounting period for UK property business losses brought forward against subsequent profits arising from the same UK property business
• relief for deemed payments by trustees of an exempt unauthorised unit trust in calculating the person’s net income for a relevant tax year

The restriction of relief rules refer to relevant tax years and to relevant accounting periods. A relevant tax year means any tax year the first day of which is in the restricted period.

A relevant accounting period means any accounting period the first day of which is in the restricted period.

Example

An individual is given a restriction of relief notice on 15 March 2021, so that their restricted period begins on 15 March 2021.

The first relevant tax year is the year beginning on 6 April 2021 and ending on 5 April 2022.

Unless the restricted period is extended, it ends on 14 March 2024 and the final relevant tax year is the year ending 5 April 2024.

Restricted periods and extension notices

Under paragraph 21 schedule 18 Finance Act 2016, the restricted period is the 3 years beginning with the day on which the restriction of relief notice is given.

The restricted period can be extended by a restricted period extension notice.

HMRC must give a person a restricted period extension notice if within the restricted period (including a restricted period extended under paragraph 21 part 4 schedule 18 Finance Act 2016) they incur a further relevant defeat meeting the restriction of relief conditions.

The restriction of relief conditions applying to the relevant defeat for these purposes are:

• the defeat is incurred by virtue of Condition A (GAAR)(Condition A), Condition B (follower notices) or Condition C (DOTAS arrangements) in respect of arrangements which the person used during the same warning period as the relevant defeats which gave rise to the issue of the restricted notice (as extended)
• the warning notice given in respect of the defeat relates to a misuse of relief
• either the relevant counteraction was made on the basis of a particular avoidance related rule, or the misused relief was a loss relief

If a person incurs a further relevant defeat which meets the above restriction on relief conditions, during a concurrent warning period (a warning period which at some time runs concurrently with the restricted period), but after the end of the restricted period, HMRC must give them a further restriction of relief notice.

Example

A person has a restricted period ending 31 October 2020, which is in a warning period ending 31 December 2022.

They incur a relevant defeat on 1 September 2020, of DOTAS arrangements involving an avoidance related rule, used during the warning period.

HMRC will extend the restricted period by issuing a restricted period extension notice.

The extended restricted period will extend the restricted period from the day that the further relevant defeat occurs, and end 3 years later.

That relevant defeat will, of course, also result in the issue of a warning notice extending the warning period to a date ending 5 years after that relevant defeat.

Restriction of reliefs - reasonable excuse

Under paragraph 22 part 4 schedule 18 Finance Act 2016, the rules regarding reasonable excuse for a restriction of relief notice are equivalent to those for reasonable excuse in respect of a penalty.

A taxpayer wishing to claim that they have a reasonable excuse where this will have an impact for both a penalty and a restriction of reliefs notice will need to appeal separately for the penalty and the restriction of reliefs, though they would be likely to be able to join their appeals.

Where a claim for reasonable excuse is made in respect of a penalty and upheld, HMRC will normally accept that the reasonable excuse also applies for the purposes of the restriction of relief rules.

Mitigation of restriction of reliefs

Under paragraph 23 part 4 schedule 18 Finance Act 2016, the Commissioners may act to mitigate the effects of the restriction of relief provisions where it appears to them that there are exceptional circumstances where the operation of the restriction relief provisions would have an unduly serious impact with respect to the tax affairs of the person who used the defeated arrangements.

This mitigation is to be achieved by the Commissioners modifying the effects of the restriction in any way they think appropriate, including allowing the taxpayer access to the whole or part of a relief which would otherwise have been denied to them.

When considering mitigation, the Commissioners will take into account the particular facts and circumstances and the conduct of the taxpayer, to ensure that this sanction is applied reasonably.

Appeal against relief restriction notices and extension notices

Under paragraph 24 part 4 schedule 18 Finance Act 2016, the rules regarding making an appeal against a restriction of relief notice and a restricted period extension notice are the same as those for making an appeal against a penalty except for the actions that a tribunal can take on hearing the appeal.

On hearing an appeal against a restriction of relief notice, a tribunal may:

• cancel HMRC’s decision
• affirm that decision with or without any modifications in accordance with their consideration of mitigation of restriction of relief

The decision can be affirmed to:

• the same extent as HMRC (which may mean applying the same mitigation as HMRC to a different starting point)
• a different extent, if they think HMRC’s decision was flawed

Naming

Under paragraph 18 part 3 schedule 18 Finance Act 2016, serial avoiders can have their names and certain other details published for a period of 12 months, after the third relevant defeat of new arrangements which they have used in the same warning period.

The legislation does not specify the means of publication, but the intention is to use the GOV.UK website.

Naming only applies to a relevant defeat where the 2 or more previous relevant defeats were also in respect of new arrangements under the commencement rules.

The arrangements must have been used in the same warning period.

The dates on which a person uses arrangements are linked to the dates of filing returns or making claims or elections, or the failure to comply with obligations, on the basis of the arrangements.

HMRC already publicly names taxpayers who are deliberate defaulters, under rules introduced in section 94 Finance Act 2009.

There’s more information about how the rules are applied in the Managing Serious Defaulters programme guidance.

Safeguards

The prospect of naming will act as a deterrent because the effect of being publicly named could affect a serial avoider’s public standing.

Safeguards are in place to ensure that names are only published when appropriate.

The person will:

• only be considered for public naming once certain objective tests are met
• be warned about the possibility
• be offered the opportunity to make representations that they should not be named, for example, that it would result in a risk to their safety

Conditions

HMRC may publish a person’s information if both of the following apply:

• the person incurs a relevant defeat in relation to new arrangements which they used in a warning period
• they are given at least 2 warning notices in respect of other defeats of new arrangements which were used in the same warning period

Provided the arrangements were all used in the same warning period, it’s irrelevant when they were defeated.

If a person has been given one warning notice that covers 2 or more relevant defeats, for the purposes of naming they are treated as if they had been given a separate warning notice for each of the relevant defeats.

When information can be published

The information must be published for the first time within 12 months of the date of the most recent warning notice that has given rise to the liability to naming.

Example

A company that is not in a group for the purposes of STAR incurs relevant defeats regarding new arrangements on 1 March 2018, 1 December 2021, 1 February 2022 and 1 August 2024.

A warning notice is given on 15 March 2018, following the 1 March 2018 defeat. The company’s first warning period therefore extends to 15 March 2023.

Warning notices are issued following the 1 December 2021 and 1 February 2022 defeats. The third warning notice in the warning period is given on 15 September 2024, following the final defeat on 1 August 2024.

The last 3 defeats are all in respect of arrangements used in the warning period commencing 16 March 2018 (which is extended by each of the later defeats).

As the defeat on 1 August 2024 follows 2 warning notices in respect of other defeats of arrangements which were used in the same warning period, the naming conditions are met by this defeat.

The information must be published by 14 September 2025, which is the anniversary of the issue of the third warning notice in the warning period (15 September 2024).

The information may remain publicly available for up to 12 months from the date when it is first published. The information may be published in any manner the Commissioners consider appropriate.

Examples of how information is published are given in Published details of deliberate tax defaulters.

Information that can be published

• the person’s name (including any trading name, previous name or pseudonym)
• the person’s address (or registered office)
• the nature of any business carried on by the person
• information about the tax effect of the defeated arrangements (had they not been defeated), for example information about total amounts of tax understated or total amounts by which claims, or statements of losses, have been adjusted
• the amount of any STAR penalty to which the person is liable in respect of the relevant defeat of any defeated arrangements
• the periods in which or times when the defeated arrangements were used
• any other information the Commissioners may consider it appropriate to publish in order to make clear the person’s identity

‘Defeated arrangements’ include all arrangements used in the warning period which have been:

• the subject of a relevant defeat
• given a warning notice before the details are published

Example

A person has a warning period running from 1 January 2018 to 31 December 2022.

During that period they use 5 different sets of arrangements, and 3 of these are defeated by 31 December 2023. A warning notice is given on that day.

HMRC has to publish information about the serial avoider by 31 December 2024.

Between 31 December 2023 and the information being published in September 2024, one of the other arrangements they used during the warning period is defeated and a warning notice issued.

Information about those arrangements can be included in the published information, because the scheme was used in the warning period and a warning notice has been issued for its defeat.

Corporate groups, associates and partnerships

There are special rules where the person whose name and other details are to be published is a member of a group of companies.

Where the person is a member of a group of companies, HMRC can publish any trading name of the group, as well as information about other group members including the:

• names of other group members (including any trading name, previous name or pseudonym)
• addresses or registered offices of other group members
• nature of the business carried on by the other group members

If the serial avoider is carrying on a trade or business in partnership, the information which may be published also includes the trading name of the partnership and details of the names and addresses of other members of the partnership.

There are also special rules for persons linked to serial avoiders which may result in the linked person being named even though they have only suffered one relevant defeat of avoidance arrangements.

This can happen where the person is linked to a taxpayer with a relevant defeat by being in the same group of companies, or in the same partnership, or an associate.

This is because relevant defeats suffered by a serial avoider result in warning notices also being issued to those linked to them in the above ways and those warning notices will be counted in determining whether the linked person has received 2 warning notices prior to the relevant defeat of the tax avoidance arrangements used by them in the same warning period as those used by the serial avoider.

Opportunity for representations

Where the Commissioners intend to publish the serial avoider’s details, they must inform the person that they are considering doing so, and ask the person whether there are any reasons why they should not publish those details.

The Commissioners will give the person reasonable opportunity to make representations to them about whether or not the information should be published.