The regime forms part of the government’s high-profile campaign to tackle deliberate and aggressive tax avoidance. That campaign is no longer focused on changing the behaviour of taxpayers alone. Under the new rules, those who assist and enable taxpayers to participate in abusive tax arrangements will also now face sanctions. Lawyers, accountants, banks, and independent financial advisers who design, implement, market or otherwise enable such arrangements are all within scope.
The government first consulted on the introduction of a penalty regime for enablers of tax avoidance in August 2016. The original proposals were very broad and were intended to catch anyone involved in the so-called “tax avoidance supply chain”, irrespective of knowledge and with no-carve out for professionals providing advice on mainstream commercial tax issues. The response to the consultation from stakeholders was robust and HMRC appears to have taken some of the responses on board.
Whilst it is clear that the government will now proceed to introduce the new rules, the legislation included in the new Finance Bill 2017 comprises a more measured regime under which, according to HMRC, “the vast majority of professionals providing advice to their clients on genuine commercial arrangements have nothing to fear.”
What are the key elements of the penalty regime?
The regime will:
- apply to “abusive” schemes which are defeated by HMRC;
- in respect of advice arrangements entered into on or after the date of Royal Assent to the Finance Act 2017; and
impose a fixed 100% fee-based penalty on all enablers of the defeated arrangements.
Who is an enabler?
The legislation defines “enabler” to include a designer, manager, marketer, enabling participant or financial enabler of abusive arrangements. Professional advisers will most commonly fall into the category of “designers” of arrangements, although they could also be “managers” in some circumstances where their role is limited to implementation.
The government has listened to stakeholders’ representations that there should be appropriate safeguards for persons who unwittingly participate in or facilitate abusive tax arrangements. The legislation now provides a knowledge-based carve out for all categories of enablers except for “marketers” (i.e. promoters). This means that advisers who provide relevant advice on the arrangements, but who did not know (or could not reasonably have been expected to know) that the advice would be used in relation to the design of abusive tax arrangements will be excluded from liability to a penalty. There is a further carve-out for advisers who provided advice which included a recommendation against the arrangements. These exclusions go some way to addressing the concerns raised in the consultation period, although some difficult questions remain, particularly in relation to legal professional privilege.
The penalty trigger
The trigger for the penalty will be the defeat of an abusive tax arrangement by HMRC. Arrangements will be abusive where they could not reasonably be regarded as a reasonable course of action in relation to tax provisions. They will be defeated where the tax advantage sought in a document given to HMRC (such as a return) has been counteracted, and that counteraction is final, either on appeal or by way of settlement. Where HMRC has issued an assessment, then the arrangements will be defeated where the HMRC assessment is upheld, and can no longer be varied by further appeal.
The enabler penalty
Where the trigger is satisfied, a penalty will be imposed on each person who enabled the arrangements. The penalty will be 100% of the fee received by the enabler. HMRC has discretion to mitigate the penalty although the circumstances in which it might do so are not yet clear. Where a penalty is imposed, the enabler has the right to appeal.
The role of the General Anti Abuse Rule Advisory Panel
Before HMRC can impose a penalty, HMRC must consider any opinion of the GAAR Advisory Panel in respect of the arrangements. This is a welcome development and should provide some comfort to advisers who were concerned that they could be caught by the new rules where they were providing advice on mainstream commercial tax issues. The provision for the GAAR Advisory Panel to opine on the arrangements should go some way to ensuring that only those persons who enable arrangements which are abusive, and therefore rightly fall within the scope of the regime, are caught.
Naming and shaming of enablers
One of the most notable aspect of the proposed rules is the provision empowering HMRC to name enablers in certain circumstances, subject to an individual’s rights to make representations before publication. The potential reputational risk associated with the publication of an enabler’s name is designed to cause considerable concern to any advisors involved in the structuring or implementation of abusive arrangements and is expected to have a significant deterrent effect.
The new regime will come into force when the new Finance Bill receives Royal Assent.