Find out what makes a person an enabler of tax avoidance, and what to do about legally privileged communications.
An enabler is any person who, in the course of a business, enables abusive tax arrangements that are defeated.
Paragraph 7 of schedule 16 Finance Act (No.2) 2017 defines a person who has enabled abusive tax arrangements as a person who:
- is a designer of arrangements
- is a manager of arrangements
- marketed the arrangements
- is an enabling participant in the arrangements
- is a financial enabler in relation to the arrangements
When considering whether a particular activity or action amounts to enabling, each of the 5 descriptions of enabler activities should be considered in turn.
The nature of the activity could mean that the person is a designer of arrangements but is also a manager of the arrangements and has marketed the arrangements.
A person just needs to meet one of the 5 descriptions of enabler in relation to any of the actions or activities they have undertaken to be in scope for a penalty under the enablers legislation.
Each of the 5 descriptions of enabler activities is explained further in the rest of this section, which also provides examples of when a person who performs one of these activities is or is not an enabler.
A key requirement of each of the descriptions of enabler activities, other than an enabling participant, is that for a person to be an enabler, the activity must be performed in the course of a business carried on by that person.
This means that an employee of a business is excluded from being an enabler in relation to activities that have been performed, as they have been performed as part of that employment, and not in the course of a business carried on by them.
The enabler would be the employing business in this case as the employee is acting on behalf of the employer, who is the person carrying on the business and benefits from the income generated.
In the case of a partnership which is the person (or body of persons) carrying on the business, it is the partnership that will be the enabler.
Where HMRC considers a person to be a person who enabled arrangements, we will try to contact that person giving them details of the concern so that both parties can discuss this.
For example, providing details of the arrangements in question or the role the person is thought to have played. HMRC would expect that in most cases there would be a dialogue about the issue to help the person to understand and respond to HMRC’s concern before they assess a penalty.
If the person is a lawyer, they can make a declaration in respect of legally privileged communications at any time during this process.
A person who performs one of these activities in relation to arrangements, where that person is the taxpayer using the arrangements and seeking to obtain tax advantages from them, is excluded from being an enabler by virtue of paragraph 13 of schedule 16 Finance Act (No.2) 2017.
If such a person is a company within a group of companies, then any company in the same group is also excluded from being an enabler.
Designer of arrangements
The definition of a designer of arrangements is at paragraph 8 of schedule 16 Finance Act (No.2) 2017.
A person is a designer of arrangements if, in the course of a business carried on by that person, they are to any extent responsible for the design of either:
- the arrangements
- a proposal for arrangements which is implemented by the arrangements
A proposal for arrangements can be implemented by one person entering into the proposed arrangements or it can be implemented more than once by more than one person entering into arrangements.
A person is ’to any extent responsible for the design’ of the arrangements or proposal for arrangements if they provide advice that is used in that design.
Advice, which includes an opinion, is used in a design if it is taken into account in the design of the arrangements or proposal for arrangements.
When a person is not a designer
A person who provides advice that is used in the design of arrangements will be a designer of those arrangements by virtue of providing that advice if both of the following conditions are met:
- the advice they give is relevant advice
- the knowledge condition is met
The definition of relevant advice is at paragraph 8(3) of schedule 16 Finance Act (No.2) 2017. Advice is relevant advice if:
- any part of the advice suggests arrangements, including a proposal for arrangements, or alterations to arrangements or a proposal for arrangements
- it is reasonable to assume that the suggestion was made with a view to the arrangements being designed so that a tax advantage, or a greater tax advantage might be expected to arise from them
A promoter devises a proposal for arrangements (a tax avoidance scheme) involving the establishment of a limited liability partnership LLP1.
The promoter approaches leading counsel for advice on whether the arrangements, as proposed, will secure a tax advantage. counsel confirms that the arrangements will achieve the tax advantage but goes on to advise that if some further adjustments are made to the proposed arrangements, a greater tax advantage would arise. The promoter makes the adjustments suggested by counsel.
The promoter is an enabler as it is a designer of the arrangements. The leading counsel is also an enabler as the advice he has provided is relevant advice, so he too is a designer of the arrangements.
When advice is not relevant advice
Paragraph 8(5) of schedule 16 FA (No.2) 2017 provides that advice will not be taken to suggest anything which is put forward by the advice for consideration, but the advice can reasonably be read as recommending against implementing that suggestion.
Accordingly, if no relevant advice is given, the adviser will not be a designer of the arrangements as a result of giving that advice.
For example, most types of professional adviser are required to provide clients with ‘best advice’ and the ‘cab rank rule’ in the main requires barristers to advise any person who approaches them for advice.
Such advice may therefore come within the meaning of relevant advice even though the adviser is not intending to be a designer of abusive arrangements. Paragraph 8(5) of schedule 16 Finance Act (No.2) 2017 seeks to address this.
An adviser who merely gives a client a second opinion on abusive arrangements as proposed in the request for advice, where that opinion contains no suggestion for any alteration of those proposed arrangements, is not an enabler by virtue of having given that second opinion.
This is because the adviser is not, to any extent, responsible for the design of the proposal or arrangements. However, where they suggest changes for consideration, they would be an enabler unless their advice goes on to set out the risks associated with implementing those suggestions, such that the advice as a whole can reasonably be read as recommending against anything that advice or opinion puts forward for consideration.
An adviser could do this by including a paragraph which makes it clear that the adviser considers that the resulting arrangements are likely to be regarded as abusive tax arrangements, or that the probability or percentage risk of a General Anti-Abuse Rule (GAAR) counteraction is significantly above 50%, and so on.
Suggesting that there’s a 51% possibility of a GAAR challenge on its own would not ‘reasonably be read as recommending against’. It’s also not sufficient to add a passing comment of this nature if the advice, when viewed as a whole (including any oral advice), is a recommendation in favour of the arrangements.
A barrister considers a request for advice about a client’s proposed tax arrangements and how best to seek the commercial outcome desired. In the barrister’s opinion, the proposed arrangements do not work, but if various changes are made or additional steps inserted, the barrister can identify 2 alternatives that could deliver the client’s intended outcome.
However, the barrister considers that both alternatives may result in tax arrangements that are abusive and there’s a considerable risk they could be counteracted under the GAAR, to the extent that they could not be counteracted under another tax provision.
If the barrister’s advice goes no further than setting out the 2 alternatives and how they would need to be structured, then the advice is relevant advice and the barrister would be an enabler.
However, if the barrister’s advice goes on to express the view that, although either alternative could deliver the client’s intended outcome, it’s likely that any tax advantages arising under each could be successfully counteracted by HMRC under the GAAR (if not by using a Targeted Anti-Avoidance Rule), the barrister is setting out the risks of undertaking either alternative in his advice.
Provided that the advice on the whole can reasonably be read as recommending against incorporating either of the 2 alternatives so that the advice is not relevant advice, the barrister is not an enabler.
If the promoter goes on to market arrangements or a taxpayer implements arrangements that are different to those on which advice was given, the adviser would not be an enabler of those different arrangements.
The knowledge condition
The knowledge condition is at paragraph 8(4) of schedule 16 Finance Act (No.2) 2017 and is met if, at the time the advice is provided, the person providing the advice knew, or could reasonably be expected to have known, that the advice would be, or was likely to be, used in the design of abusive tax arrangements or a proposal for abusive arrangements.
This will be a question of fact and will take into consideration such things as the adviser’s existing tax and professional knowledge at the time the advice was provided.
A person who would otherwise be a designer because they provided advice which is relevant advice, is not within the meaning of an enabler if, at the time they provided the advice, they did not know, or could not reasonably be expected to have known, that the advice would be used in the design of abusive tax arrangements.
A company decides to implement a tax avoidance scheme. Its tax advisors set out the steps of the transactions, including the anticipated accounting entries required for the arrangements to work.
The company approaches its auditors, a firm independent of the tax advisors, in advance of implementing the arrangements to confirm whether those proposed entries are technically correct. Given the facts and substance of the transaction, the audit firm confirms that the entries are correct and doesn’t foresee issues in the future audit of those entries.
The audit firm is not an enabler as they have done no more than provide an opinion on arrangements designed by others.
Equally, if the audit firm disagreed with the technical analysis and went on to explain that accounting standards require the transactions to be accounted for differently, setting out the particular aspect of the arrangements, and the specific accounting requirement which caused them to reach their conclusion, the firm is not an enabler because, again, they have done no more than provide an opinion on arrangements designed by others.
The company or its advisors may change the design of the arrangements as a result of this opinion, or they may conclude that the proposed arrangements simply would not work and abandon the idea but neither decision would impact on the question of whether the audit firm is an enabler.
If however the audit firm went beyond this and provided advice to the extent that changing certain aspects of the overall arrangements would enable the company to secure a specific accounting treatment, while also not changing the overall efficacy of what they appear to be trying to achieve, the audit firm could bring itself within scope for a penalty as a designer.
They’re now acting beyond their auditor capacity, doing more than forming an independent view on the financial statements, and providing advice that is relevant advice, because it suggests arrangements or an alteration of proposed arrangements.
It’ll then be a question of fact whether the knowledge condition is also met, but we envisage certain cases where it would be.
This example shows the typical role of an auditor and how they might cross over into the design of abusive tax arrangements. In general an auditor does no more than perform an independent audit of statutory accounts, though as noted they may in practice provide an initial view on whether accounting aspects of proposed arrangements are in accordance with accounting standards.
They would therefore not normally fall within any of the descriptions of enabler primarily as they will not to any extent be responsible for the design of the arrangements or the proposal implemented by the arrangements, but nor would they fall within any of the other definitions.
However, if an auditor goes further than exercising their audit function, and provides advice which they know will be taken into account in a design or re-design of abusive tax arrangements, they will be an enabler by virtue of being a designer.
The same reasoning would apply to any other non-tax professional who acts in accordance with their professional responsibilities.
A lawyer who specialises in aspects of company law is approached by a person who, unbeknown to that lawyer, is designing abusive tax arrangements.
The person asks the lawyer some specific questions about the impact of company law on a proposed transaction and the lawyer has no reason to consider any issues beyond the question being asked. The lawyer provides their advice which is reflected in the final design of the tax arrangements.
Although the advice is relevant advice because it features in the design of arrangements, the lawyer is not an enabler as they could not reasonably be expected to have known that their advice would form part of the design of abusive tax arrangements.
This example shows there would be no expectation on the lawyer to insert additional checks or ask further questions to establish whether there is or is not a tax advantage and ensure they’re not providing advice in relation to abusive tax arrangements, provided they‘re taking the necessary care and attention that is required of them in the performance of their duties and in accordance with their professional conduct requirements, for example, taking the relevant action if fraud or money laundering is suspected.
Manager of arrangements
A manager of the arrangements is defined at paragraph 9 of schedule 16 Finance Act (No.2) 2017.
A person is a manager of arrangements if, in the course of a business carried on by them, they’re to any extent responsible for the organisation or management of those arrangements, and at that time knew or could reasonably be expected to have known that the arrangements were abusive tax arrangements.
Both of the terms ‘organisation’ and ‘management’ take their ordinary meaning.
Organisation and management could involve ensuring the required paperwork is in place to set up and implement the arrangements, or facilitating transactions forming part of the arrangements.
However, simply performing a statutory function or a service, such as preparing board minutes, completing or filing a return, making filings at Companies House or Land Registry, or auditing statutory accounts , even where these reflect a tax advantage from abusive tax arrangements, will not be managing or organising those arrangements provided that is all that has been done.
A client has entered into tax arrangements that may be abusive. The client’s tax adviser has taken no part in helping their client implement or enter into the arrangements.
The adviser’s first involvement with the arrangements is in relation to the completion of the client’s Self Assessment tax return.
Provided the tax agent adheres to their professional requirements - if they’re a member of a professional body signed up to the Professional Conduct in Relation to Taxation (PCRT) - when deciding how or whether to include the tax arrangements giving rise to the tax advantage on the tax return, the tax agent should not expect to be an enabler, because they did not have any involvement in organising or managing the arrangements.
Persons who facilitate a withdrawal from abusive tax arrangements
Paragraph 9(2) of schedule 16 Finance Act (No.2) 2017 provides a safeguard for those whose connection with abusive tax arrangements is solely to help a user to withdraw from them, in a way which does not still seek to obtain the intended, or another, tax advantage.
After entering into abusive tax arrangements, a person may decide that they no longer want to be involved with them and seek professional advice on how to unwind the arrangements.
For instance, a person may become aware of a potential GAAR counteraction, or be expecting to receive a follower notice as a result of a judicial ruling in relation to another person’s tax arrangements. The adviser in such circumstances may have to manage the taxpayer out of the abusive arrangements.
As they would be doing this in the full knowledge that the arrangements in question are (or are likely to be) abusive, there would be a risk that the adviser could come within the meaning of manager of arrangements.
Paragraph 9(2) of schedule 16 Finance Act (No.2) 2017 provides a safeguard, provided both of the following circumstances apply:
- the adviser is facilitating their client’s withdrawal from the arrangements that is they’re not simply managing the client’s continued implementation of them
- it’s reasonable to assume that the obtaining of a tax advantage is not one of their client’s purposes in withdrawing from the arrangements, such that they’re not enabling their client to enter an exit strategy which, of itself, is seeking to obtain a tax advantage
A taxpayer entered into tax arrangements but now wants to exit the arrangements because HMRC considers the arrangements to be abusive and GAAR is being considered.
The taxpayer seeks assistance from a dispute resolution specialist to help steer them out of the arrangements. The specialist negotiates an exit from the arrangements, which results in a reduction in the tax advantage that would have been obtained had the taxpayer not withdrawn from the arrangements, but some tax advantage still arises.
The specialist is not an enabler by virtue of managing arrangements, because their role is to facilitate the exit from the arrangements and although the agreed position was that part of the originally intended tax advantage remains, the taxpayer’s purpose in exiting the arrangements was not to seek a tax advantage.
However if to secure the same or a different tax advantage, the specialist instead devised ’exit arrangements’ that were abusive, the specialist would be an enabler by virtue of managing the existing arrangements. If those exit arrangements were themselves defeated, the specialist would also be an enabler by virtue of designing the abusive exit arrangements.
Marketer of arrangements
Paragraph 10 of schedule 16 Finance Act (No.2) 2017 sets out when a person is an enabler by virtue of marketing abusive tax arrangements.
A person is a marketer of arrangements (marketer) if, in the course of a business carried on by them, they undertake either of the following actions:
- They make a proposal for arrangements available for implementation by a user of those arrangements, and those arrangements are subsequently implemented in relation to that user.
- They communicate information about a proposal for those arrangements to a user of the arrangements or to another person, with a view to the user entering into those arrangements or transactions forming part of those arrangements.
This definition of a marketer does not include a knowledge condition because anyone marketing abusive tax arrangements should be well aware that that’s what they’re doing.
A financial adviser markets a proposal for arrangements (a tax avoidance scheme) for the scheme’s promoter.
The financial adviser is an enabler because they marketed the arrangements, which have been implemented.
The financial adviser will be liable to a penalty in respect of the fees they received for each of the 5 clients.
The promoter in the relevant advice example markets the scheme in an information memorandum, which refers to an opinion obtained from leading counsel that the scheme should enable the members of LLP1 to secure a tax advantage and has a good prospect of success.
Both the promoter and leading counsel also fall within the description of marketers of the proposed arrangements as they’re communicating information about the proposal with a view to other persons entering into arrangements to implement that proposal.
The promoter does this by providing the information memorandum to potential users, and counsel by including reference to, or consenting to the inclusion of his favourable opinion in the material.
If the arrangements a person actually enters into are, as a matter of fact, different to those proposed to them, the person who communicated the proposal will not be a marketing enabler.
This is because the arrangements entered into differ from those proposed, even though they may have been inspired by that proposal. This will be a question of fact.
Enabling participant of arrangements
The definition of an enabling participant is at paragraph 11 of schedule 16 Finance Act (No.2) 2017. A person is an enabling participant in a taxpayer’s arrangements, if all of the following apply:
- they enter into those arrangements or a transaction that forms part of those arrangements
- those arrangements could not have been expected to result in a tax advantage for the taxpayer without that person’s involvement, or the involvement of another person acting in the same capacity
- the knowledge condition is met
The knowledge condition is met if, when the person entered into the taxpayer’s arrangements or transactions, they knew, or could reasonably be expected to have known, that they were entering into abusive tax arrangements or transactions forming part of abusive tax arrangements.
An adviser devises a proposal for arrangements under which a company is created to become the employer of persons that are currently contractors or freelancers. The employees then receive money in the form of loans.
When the arrangements are implemented, the adviser pays the employer company a fee for each contractor or freelancer that signs up to the arrangements and who becomes an employee of the company.
The company is an enabling participant, notwithstanding that it may, or may not, obtain a tax advantage in its own right through its participation in the arrangements.
Financial enabler of arrangements
The definition of financial enabler is at paragraph 12 of schedule 16 Finance Act (No.2) 2017.
A person is a financial enabler in relation to arrangements if, at the time the financial product is provided they knew, or could reasonably be expected to have known, that at least one of the purposes of obtaining the financial product was to participate in abusive tax arrangements and both of the following conditions are met:
- during the course of a business carried on by the person, they either directly or indirectly provided a financial product to a relevant party
- it’s reasonable to assume that at least one purpose of the relevant party in obtaining the financial product was to participate in the arrangements
The inclusion of ’directly or indirectly’ means that a person can be a financial enabler if the financial product is provided through a third party.
A bank that is not signed up to the Code of Practice on Taxation for Banks is approached for an overnight loan facility.
Whilst going through the terms of the loan, the bank becomes aware that the loan will be used to participate in abusive tax arrangements, but proceeds to provide the loan facility anyway.
The bank is a financial enabler in relation to the arrangements.
The definition of relevant party is at paragraph 12(2) of schedule 16 Finance Act (No.2) 2017.
A relevant party is either the user of arrangements or a person within the meaning of ’enabling participant’ as defined in paragraph 11 of schedule 16 Finance Act (No.2) 2017.
What is a financial product
A non-exhaustive list of financial products is provided by paragraph 12(3) of schedule 16 Finance Act (No.2) 2017.
The types of financial products a person could provide to a relevant party that could make them a financial enabler include:
- a loan
- a share
- a derivative contract within the meaning of s577 of the Corporation Tax Act (CTA) 2009
- a repo in respect of securities within the meaning of s263A(A1) of TCGA 1992
- a creditor or debtor repo or quasi repo within the meaning of s543, s544, s548 and s549 of CTA 2008
- a stock lending arrangement within the meaning of s263B(1) of TCGA 1992
- alternative finance arrangements within the meaning of Chapter 6 of CTA 2009 or Part 10A of ITA 2007
- a contract or contracts which, in accordance with generally accepted accounting practice, is required to be treated as a loan, deposit or other financial asset or obligation, or would be so treated if the person was a company to which the Companies Act 2006 applies
Depending on the context and the particular financial product, ’provides’ should also be taken to mean:
- ’enters into’
Should it prove necessary, the list of financial products can be amended by regulations.
The user of the arrangements or, where the user is a company, a company in the same group as the user of the arrangements, is excluded from being an enabler.
This is to ensure that the user of the arrangements, or in a group situation, the group as a whole, is not penalised twice in relation to the abusive arrangements being defeated.
The meaning of group is at paragraph 56 of schedule 16 Finance Act (No.2) 2017.
Two companies are part of the same group if, at the time the enabling action is undertaken, one is a 75% subsidiary of the other or both are 75% subsidiaries of a third company.
The meaning of 75% subsidiary is taken from section 1154 of CTA 2010, with section 151(4) CTA 2010 applying the requirements relating to beneficial entitlement of equity holders to profits or assets in a winding up.
ABC group implements a proposal for arrangements with a view to obtaining a tax advantage. Company X provides management services to ABC group which include managing the tax avoidance arrangements.
As company X is responsible for organising and managing the tax avoidance arrangements, company X will be in scope for a penalty under the enablers legislation if the arrangements are defeated on the basis they’re abusive.
ABC group undergoes a reorganisation, and decides to bring management services in-house. It proceeds to purchase 100% of company X’s share capital so that company X is now part of ABC group.
Company X continues to provide management services in relation to further arrangements ABC group enters into. Company X will not be an excluded person under the enablers legislation in relation to the enabling activities provided to ABC group prior to joining the group, and will remain in scope for a penalty.
However, it will be an excluded person in relation to any subsequent enabling activities provided to ABC group after joining the group.
Interaction with the Code of Practice on Taxation for Banks (the Code)
The Code is a voluntary code introduced in 2009 to change the attitudes and behaviours of banks towards tax avoidance. It’s a key part of the government’s anti-avoidance strategy because banks are in a unique position as potential users, promoters and facilitators of tax avoidance.
If a bank is found to have breached its obligations under the Code, it can be named in an annual report published by HMRC. This will not prevent the bank being subject to a penalty under the enablers legislation.
Likewise there’s no specific exemption from a penalty under the enablers legislation for a bank which adopts and complies with the Code. This means a bank could be an enabler under any of the 5 descriptions.
There are similarities between the Code and the way that the enablers legislation applies to banks. Abusive tax arrangements will typically produce a tax result that is contrary to the intentions of Parliament.
Banks that adopt the Code are required to comply with the spirit, as well as the letter, of tax law by discerning and following the intentions of Parliament.
These banks should not promote arrangements to other parties unless the bank reasonably believes the tax result for the other parties is not contrary to the intentions of Parliament.
Therefore Code-compliant banks should not be marketers, designers or managers of abusive tax arrangements.
However, a Code-compliant bank could be subject to a penalty under the enablers legislation where it facilitates abusive tax avoidance arrangements even though, for example, it does not itself charge a premium fee linked to the client’s tax advantage from those arrangements.
The published Code guidance says this type of transaction will only be contrary to the Code where the lending facilities or other banking services are not provided on standard market terms.
A Code-compliant bank providing credit facilities or other services on standard market terms could never the less be a financial enabler or an enabling participant but only if it knows, or could reasonably be expected to know that the provision of those services enabled abusive tax arrangements.
A bank is an enabling participant in a customer’s abusive tax arrangements, if all of the following apply:
- it enters into those arrangements or into a transaction that forms part of those arrangements
- those arrangements could not have been expected to result in a tax advantage for the customer or another person without the bank’s involvement, or the involvement of another person acting in the same capacity
- when that bank entered into the arrangements or transaction, it knew or could reasonably be expected to have known, that what was being entered into was abusive tax arrangements or a transaction forming part of such arrangements
In some situations opening a bank account or making a payment using the banking system could be a part of abusive tax arrangements. In those cases, the bank opening the account or making the payment could be an enabling participant, but only if the knowledge condition is met at the time the bank makes its decision.
A bank is a financial enabler if at the time the financial product is provided it knew, or could reasonably be expected to have known, that at least one of the purposes of obtaining the financial product was to participate in abusive tax arrangements.
Financial products are typically these listed in paragraph 12(3) of schedule 16 Finance Act 2017.
This means it’s possible for a bank complying with the Code to be liable to a penalty under the enablers legislation if it enters into arrangements or transactions as an enabling participant or provides a financial product on standard market terms and it knows, or could reasonably be expected to have known, that at least one of the purposes for obtaining the product or other banking service was to participate in abusive tax arrangements.
If a bank knew, or could reasonably have been expected to know, that a product or service would form part of abusive tax arrangements, and those arrangements are defeated, a penalty under the enablers legislation will apply.
HMRC will not usually argue that a bank could reasonably have been expected to know if in complying with its existing commercial, regulatory, tax and Code requirements it did not need to, and did not, perform any tax analysis of the transaction.
The knowledge condition will only be met if the bank knew or could reasonably have been expected to know that it was facilitating abusive tax arrangements at the time it provided the financial product or entered into the arrangement.
A bank that has and follows adequate processes to comply with the Code and its existing tax, regulatory and other legal obligations would not be expected to seek more information from potential and existing customers, unless the existing processes necessitate this. The bank is not expected to review tax information it receives unless it’s required to do a tax analysis as part of its existing commercial, regulatory, tax and Code requirements.
Where the bank does need to review the tax information as part of these requirements, it should also consider whether it could be facilitating abusive tax arrangements.
However, there would be no expectation on the bank to insert additional checks or ask further questions to establish whether the purposes for which a relevant product or service is being obtained include its use in abusive tax arrangements, provided, as mentioned, they do have in place and follow adequate processes, taking the necessary care and attention that is required in the performance of their duties.
Banks generally require customers to provide documentation to support a credit application, for example to prove their identity and that their income is sufficient to meet payments of interest and repayment of principal. Banks do not always need to consider all the information provided to make a commercial decision or to comply with existing legal requirements.
As a result, a bank will not automatically become a financial enabler just because it has received documentation that references a tax benefit that they did not need to review before providing the credit applied for.
If the bank’s staff review the tax information before providing the credit, the bank could be a financial enabler if they identified a potential abusive tax avoidance purpose, but did not act on this.
However the bank would not usually be a financial enabler if, having taken account of that information and its knowledge of the client, it still did not know and could not reasonably be expected to have known that at least one of the purposes for obtaining the financial product was to participate in abusive tax arrangements.
Interaction with PCRT
The PCRT is produced by 7 leading professional bodies for their members working in tax, and sets out the fundamental principles and behaviour expected of their members.
Section 2 of the PCRT sets out the fundamental principles and standards of behaviour that members are expected to adhere to in their day-to-day professional dealings. Section 4 of the PCRT relates specifically to the provision of tax advice.
On 19 March 2015, HM Treasury and HMRC published the paper Tackling tax evasion and avoidance which laid down a challenge to: ‘the regulatory bodies who police professional standards to take on a greater lead and responsibility in setting and enforcing clear professional standards around the facilitation and promotion of avoidance to protect the >reputation of the tax and accountancy profession and to act for the greater public good.’
The PCRT was revised with effect from 1 March 2017. In this latest revision, the signatories have sought to address this particular challenge and clarify the behaviours and standards expected of members when working in tax.
In particular, the standards for tax planning arrangements at paragraph 2.29 of the PCRT require that members ‘must not create, encourage or promote tax planning arrangements or structures that i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.’
HMRC will disclose information in relevant cases to the professional regulator under section 20 Part 3 of the Commissioners for Revenue and Customs Act 2005 (CRCA) where it suspects misconduct, including breach of the PCRT, to enable the professional regulator to take the appropriate enforcement action against their member.
Although the enablers legislation does not exempt a person from being an enabler if they conduct their business in accordance with the PCRT and act wholly within the spirit of the standards for tax planning, it’s unlikely that such a person will come within scope of the enablers legislation.
Specifically, such persons will already be taking care and consideration to ensure their conduct complies with the PCRT and so should not be advising on, or otherwise facilitating, abusive arrangements.
For instance, the enablers legislation makes provision for circumstances where a person may be required to suggest changes to arrangements on which they’re asked to advise, or could not reasonably be expected to have known that their advice would be used to enable abusive tax arrangements.
Power to add categories of enabler and provide exception
Paragraph 14 of schedule 16 Finance Act (No.2) 2017 enables the Treasury, by regulations, to add to the categories of persons who may be enablers of abusive tax arrangements.
In addition, the Treasury may by regulations provide that a person that would otherwise be an enabler of abusive tax arrangements, is not regarded as an enabler where the conditions that may be prescribed by the regulations are met.
Regulations under paragraph 14 of schedule 16 Finance Act (No.2) 2017 may:
- amend part 4 of the schedule
- make supplementary, incidental and consequential provision, amending any other part of the schedule as appropriate
- make transitional provision
Declarations about legally privileged communications
Communications made by a lawyer may bring:
- the lawyer, where the lawyer is a sole practitioner
- their firm in the case of a partnership or company within any of the definitions of a person who is an enabler (paragraphs 8 to 12 of schedule 16 Finance Act (No.2) 2017) and therefore within scope of a penalty under paragraph 1 of schedule 16 Finance Act (No.2) 2017
Alternatively, such communications may demonstrate that the person is not within any of those definitions and therefore not within scope for a penalty.
If those communications are legally privileged the person, whether an individual, partnership or company, suspected by HMRC of being an enabler will not be able to provide those communications to HMRC, the Tribunal or the Court to demonstrate that they are not an enabler and therefore not liable to a penalty.
The declaration under paragraph 44 of schedule 16 Finance Act (No.2) 2017 is designed to deal with this situation in a way that does not breach privilege.
Paragraph 44(4) of schedule 16 Finance Act (No.2) 2017 provides that the Treasury may, by regulations, impose requirements as to the form and content of a declaration. These regulations are known as The Penalties for Enablers of Defeated Tax Avoidance (Legally Privileged Communications Declaration) Regulations 2017 and are in SI1245/2017.
A client instructs a tax lawyer at a large law firm to advise on a proposed transaction.
The lawyer concludes that the proposed arrangements will not achieve the desired outcome, but will do if certain changes are made.
However, the lawyer identifies that there’s then a material GAAR risk. The lawyer advises the client of this risk.
If the lawyer’s advice can reasonably be read as recommending against the transaction but the client nevertheless proceeds with the transaction, the lawyer will not be an enabler as they have not provided relevant advice.
However, the lawyer is a relevant lawyer and communications with the client are subject to legal professional privilege.
A declaration can be made in support of this conclusion by that lawyer or another lawyer at the firm after making due enquiry and if the lawyer is satisfied that the advice or action taken does not fall into any of the definitions of a person who is an enabler.
When a declaration can be made
The person that carries on the business in question must consider all information available to them and decide whether they’re an enabler or not in relation to the abusive tax arrangements.
The information that could demonstrate this might be a combination of legally privileged and other communications or information.
If there’s non-privileged information that would establish that the person is not an enabler, the person should rely on that information.
If non-privileged information exists and demonstrates that the person in question is an enabler, the relevant lawyer cannot make a declaration that the person is not an enabler by reference only to legally privileged communications, which, in isolation, could suggest that the person is not an enabler.
Ultimately it’s a question of fact whether a person is an enabler.
A client instructs a tax lawyer at a large law firm to advise on a proposed transaction. The lawyer assesses the proposal and writes to the client explaining that the proposed arrangements will not achieve the desired outcome unless a number of further steps are taken, and on the basis of the factual assumptions he advises there’s no GAAR risk.
Before the transaction is implemented (with the assistance of another firm of lawyers), the lawyer learns that one of the factual assumptions is wrong, which does give rise to a GAAR risk, and he writes to the client to warn of the risk.
The transaction proceeds and is defeated. In the course of those proceedings, the client waives privilege in the first letter but not the second.
The combination of the 2 letters can reasonably be read as recommending against the transaction but the first letter alone cannot.
The lawyer is a relevant lawyer whose communications are subject to legal privilege. Just because the client has waived privilege in respect of the first letter does not mean privilege in both has been waived.
A declaration can be made by the lawyer or another lawyer at the firm after making due enquiry, even if that declaration needs to rely on a combination of the (no longer privileged) first letter and the second letter.
If the person considers they are not an enabler of the abusive tax arrangements and the only information that would demonstrate that is one or more legally privileged communications made by one or more relevant lawyers, then a relevant lawyer can make a declaration.
A relevant lawyer can make a declaration at any time, either before or after the tax arrangements in question are defeated.
However, a declaration is more likely to be made in response to HMRC informing a person that HMRC suspects them to be a person who enabled abusive tax arrangements that have been defeated.
It may be the case that different businesses are approached to provide advice in relation to particular arrangements, either jointly or separately.
Where advice that is legally privileged is provided by different businesses, each business that could be an enabler with respect to the advice it provided would need to make a declaration based on what it did.
A declaration cannot be made by one business on behalf of all the businesses that jointly or separately provided advice in relation to particular arrangements.
A client of a law firm instructs the firm to advise on and assist with a transaction. The transaction is commercially driven but the firm are aware that tax structuring is part of the rationale for the transaction, and they’re told that tax advice is being provided by another adviser whom they believe to be reputable.
In order that they can advise on the corporate law aspects, and implementation, of the proposal the firm are provided with a copy of a steps paper produced by the third party tax adviser which sets out the steps and some tax commentary.
The firm are instructed by the client to comment on the corporate law aspects of the steps and to recommend any necessary changes so that they can be carried out in accordance with corporate law requirements.
The firm is not instructed to review the tax analysis of the steps, and it is not readily apparent to them, as non-tax specialists, that the arrangements were abusive.
The firm look at the proposal and advise that it cannot be completed as proposed owing to corporate law difficulties, but suggest a modification to overcome these. The modification is accepted and the firm produce documents and assist with implementing the transaction.
It later transpires that the transaction is an abusive tax arrangement which is defeated. The lawyers at the firm are relevant lawyers and their communications with the client are subject to legal professional privilege.
If the facts show that the firm did not make suggestions with a view specifically to a tax advantage being derived (as opposed to with a view to facilitating the overall implementation of the transaction) and did not know that the arrangements were abusive arrangements, a declaration can be made by one of those lawyers or another lawyer at the firm after making due enquiry and if the lawyer is satisfied that the advice or action taken does not fall into any of the descriptions of a person who is an enabler.
A lawyer is likely to provide advice based on specific instructions from their client. If those instructions did not contain information that could have led the lawyer to have known, or reasonably be expected to have known, that the purpose of obtaining the advice was to participate in abusive tax arrangements the lawyer should take that into account when making a declaration.
The way in which the advice is structured and delivered must be viewed in context when considering whether the knowledge condition is, or is not, met.
Any person named in a declaration may have to pay financial penalties as set out in paragraphs 1 and 45 of schedule 16 Finance Act (No.2) 2017. The person who makes the incorrect declaration may also be liable to a penalty under paragraph 45 of schedule 16 Finance Act (No.2) 2017.
Any relevant lawyer named in it may face prosecution for providing false information should that declaration prove to be incorrect.
Effect of a declaration
HMRC, or a court or tribunal in any proceedings before the court or tribunal in connection with a penalty under the enablers legislation, must treat a declaration made by a relevant lawyer in relation to that penalty as conclusive evidence of the things stated in it.
However, this will not be the case if HMRC or a court or tribunal are satisfied that the declaration contains incorrect information, based, for example on evidence that may have come to light during the taxpayer enquiry.
Contents of a declaration
Paragraph 44(2) of Schedule 16 Finance Act (No.2) 2017 sets out what constitutes a declaration.
- is made by a relevant lawyer as defined in paragraph 44(6) of schedule 16 Finance Act (No.2) 2017
- relates to one or more communications made by the same or a different relevant lawyer that are legally privileged and for that reason cannot be relied on to demonstrate that a person mentioned in paragraph 1 of schedule 16 Finance Act (No.2) 2017 is not a person that enabled the abusive tax arrangements.
- meets the requirements regarding the content set out in regulations
The declaration is structured to ensure that it does not require legal professional privilege to be breached. To be a valid declaration a relevant lawyer must provide information and confirmations to satisfy Conditions A, B and C of the Regulations.
Condition A requires that a declaration must identify all of the following:
- the person who would otherwise be liable to a penalty under the enablers legislation
- the relevant lawyer making the declaration
- the relevant lawyer or lawyers whose privileged communications would otherwise be relied upon
- the arrangements, or where appropriate the proposal implemented by the arrangements, to which the declaration relates
Condition B requires that the relevant lawyer making the declaration must provide the confirmations described in regulations 6 to 10.
They do not need to be more specific than providing confirmation to ensure legal professional privilege is not breached by making the declaration.
Condition B confirms that at least one of the relevant sub-paragraphs in each of regulations 6 to 10 applies so that, when viewed as a whole, the person in relation to whom the declaration is made does not fall within any of the definitions of an enabler and is therefore not liable for a penalty under paragraph 1 of schedule 16 FA (No.2) 2017.
Condition C requires the relevant lawyer making the declaration to certify that the information being provided is correct to the best of their knowledge and belief.
It also informs the relevant lawyer making the declaration that any of the persons named in Condition A may have to pay a financial penalty and that any relevant lawyer named in the declaration may face prosecution for providing false information should the declaration prove to be incorrect.
The financial penalties are those mentioned in paragraphs 1 and 45 of schedule 16 Finance Act (No.2) 2017.
Where the same proposal for arrangements (a scheme) has been implemented more than once by arrangements that are substantially similar, a declaration may contain a statement that this is the case and that the involvement of the person in relation to whom it is made was such that all the things stated in the declaration are equally true in relation to those other arrangements.
This avoids the need for a person to make multiple, identical, declarations in such circumstances.
In the ‘When advice is not relevant advice’ example, a barrister considers a request for advice about a client’s proposed tax arrangements.
In the barrister’s opinion, the proposed arrangements do not work but if various changes are made or additional steps inserted, the barrister can identify 2 alternatives that would deliver the client’s intended outcome.
However, both alternatives would result in abusive tax arrangements and would almost certainly be counteracted under GAAR, or another tax provision.
The barrister’s advice sets out that although either alternative could deliver the client’s intended outcome, it’s likely that each would be successfully counteracted by HMRC under GAAR or using another tax provision. If the barrister’s advice can reasonably be read as recommending against taking either of the alternative suggestions forward, their advice will not be relevant advice.
If the client went against the barrister’s conclusions and used the advice to enable them to implement abusive tax arrangements without further input or advice from the barrister, then the knowledge condition would not be met.
The barrister is a relevant lawyer whose communications are subject to legal professional privilege. In the circumstances described above they could make a declaration that they do not come within the meaning of an enabler in any of paragraphs 8 to 12 of schedule 16 Finance Act (No.2) 2017.
The declaration can be made at any time, before or after a penalty is assessed and any appeal lodged. The outcome would be the same if, instead of a barrister, a lawyer in a large law firm provided the advice to the client.
The person potentially liable to a penalty under the enablers legislation would be the law firm and the declaration could be made by the lawyer whose advice is privileged, or by another relevant lawyer on behalf of the firm.
If the above proposal was implemented 10 times, the relevant lawyer making the declaration could include the statement mentioned under Condition C.
Meaning of relevant lawyer
A relevant lawyer is a barrister, advocate, solicitor or other legal representative, with whom communications may be subject to a claim to legal professional privilege.
In Scotland, this will be communications protected from disclosure in legal proceedings on the grounds of confidentiality of communication.
When a communication is legally privileged
A communication is ‘legally privileged’ if, during legal proceedings, a claim of legal professional privilege or, in Scotland, to confidentiality of communication between a client and a professional legal adviser, could be maintained in respect of that communication.
Making an incorrect declaration
A relevant lawyer who carelessly or deliberately gives any incorrect information in a declaration is liable to a penalty of up to £5,000 (incorrect declaration penalty).
This includes the relevant lawyer making the declaration and any relevant lawyer mentioned in it. The person in relation to whom the declaration is made, such as a large law firm, will be liable for a penalty under paragraph 1 of schedule 16 Finance Act (No.2) 2017.
If the relevant lawyer who gave the incorrect information in a declaration has taken reasonable care, the incorrect information is not treated as given carelessly.
The consequences of making an incorrect declaration may include HMRC undertaking any or all of the following actions:
- considering charging a penalty under paragraph 45 of schedule 16 Finance Act (No.2) 2017 charging a penalty on a person now shown to have enabled the abusive tax arrangements under paragraph 1 of schedule 16 Finance Act (No.2) 2017
- considering informing the relevant regulatory body in accordance with our normal CRCA procedures, for them to consider appropriate sanctions
- considering criminal proceedings and prosecution in accordance with the HMRC Criminal Investigation policy
HMRC may consider criminal proceedings and prosecution is appropriate where:
- an individual holds a position of trust or responsibility
- materially false statements are made or materially false documents are provided in the course of a civil investigation
- pursuing an avoidance scheme, reliance is placed on a false or altered document or such reliance or material facts are misrepresented to enhance the credibility of a scheme
Before deciding how to proceed in relation to a declaration that is found to be incorrect, HMRC will engage with the person who made the incorrect declaration (or the person who provided misleading or false information resulting in the incorrect declaration if appropriate) to establish the facts and circumstances leading to the incorrect declaration being made.
To enable HMRC to assess a penalty for an incorrect declaration and to deal with any appeal against that penalty the relevant assessment, time limit and appeal procedural paragraphs are modified to refer to paragraph 45, rather than paragraph 1.
The time limits for assessing that enabler penalty are extended by virtue of paragraph 22(5) and (6) of schedule 16 Finance Act (No.2) 2017 by up to 12 months from the date the inaccuracy in the declaration was identified.
The following paragraphs of schedule 16 Finance Act (No.2) 2017 apply for the purposes of an incorrect declaration penalty as they do for a penalty under the enablers legislation:
- Paragraph 19(1) – HMRC must assess the penalty and notify the person that the penalty has been assessed.
- Paragraph 20 – the penalty must be paid within 30 days from the day on which it was notified.
- Paragraph 22(1) is modified so that the penalty must be assessed within the relevant time, where the ‘relevant time’ cannot be earlier than the ‘end of 12 months beginning with the date on which the facts sufficient to indicate that the person is liable to the penalty came to the Commissioners’ knowledge.
- Paragraph 37 – a person can appeal against HMRC’s decision that a penalty is payable or the amount of the penalty that is payable.
- Paragraph 38 – an appeal is treated in the same way as the assessment to the underlying tax to which the arrangements relate and the penalty is not payable until the penalty is determined - however sub-paragraph (3) is modified so that it has effect as if the reference to the ‘arrangements to which the penalty relates’ is to the ‘arrangements to which the declaration under paragraph 44 schedule 16 Finance Act (No.2) 2017 relates’.
- Paragraph 39(1) – the tribunal can affirm or cancel HMRC’s decision that a penalty is payable.
- Paragraph 39(2) – the tribunal can affirm HMRC’s decision on the amount of the penalty that is payable, or substitute for it another amount that HMRC had power to decide.
- Paragraph 39(5) tribunal means the First-tier Tribunal or the Upper Tribunal.
In addition, a declaration under paragraph 44 schedule 16 Finance Act (No.2) 2017 can be made for the purposes of demonstrating that an incorrect declaration penalty is not due under paragraph 45 schedule 16 Finance Act (No.2) 2017, in the same way it can be used for the purposes of a penalty under paragraph 1 schedule 16 Finance Act (No.2) 2017.