Strengthening Tax Avoidance Sanctions and Deterrents - CIOT comments

By Technical Team on 14 Oct 2016

The CIOT comments sent to HMRC on 12 October on HMRC’s Discussion document “Strengthening Tax Avoidance Sanctions and Deterrents” in which HMRC were seeking views on the following specific proposals:

  1. Financial sanctions for those who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC, with the aim of deterring ‘enablers of tax avoidance’. The focus of the proposals is on those who benefit financially from enabling others to implement tax avoidance arrangements;
  2. Changing the way the penalty regime works for those whose tax returns are found to be inaccurate as a result of using such arrangements by defining what does not constitute the taking of ‘reasonable care’ and placing the requirement to prove ‘reasonable care’ onto the taxpayer;
  3. Defining what is meant by ‘defeated tax avoidance arrangements’.  HMRC are proposing that a wide definition of ‘arrangements’ is adopted for these proposals, as is already used in other parts of tax legislation;
  4. Seeking further ways to discourage avoidance and shrink the avoidance market.

In its response to the proposals, the CIOT says that it supports the Government’s ambition to tackle and alter the behaviour of the ‘shrinking but persistent minority’ of promoters and advisers identified by the Government who continue to market tax avoidance schemes. However, it is our view that the proposals are far too widely drawn in that they potentially apply to those working on commercial transactions which are not in any sense tax avoidance schemes. It is of paramount importance that the proposals, if introduced, are aimed at the right targets. Key to this is that the relevant definitions are extremely clear and impact only those targets. The challenge for the Government is therefore to frame legislation which will achieve their objective of preventing those who devise and market avoidance schemes from profiting from that activity, while maintaining the right of taxpayers to obtain full and expert advice on complicated and often unclear areas of law, enabling them to sensibly plan their tax affairs within the law and not lay themselves open to large, unintended tax bills. Since the proposals impose a significant financial penalty, they will deter some from providing advice at all and (by extending to those who have not devised or actively marketed tax avoidance) risk making the UK a much less attractive place for commercial transactions and other activities. Given that the UK is the European base for many investments, this would be very damaging to the UK economy. At a time when the Brexit decision is already causing some overseas investors to re-evaluate the UK as a place to invest and do business, it is important that over-reaching counter tax avoidance measures do not add further uncertainty.

In summary, we acknowledge that there are limited financial penalties at present for those who devise and actively market tax avoidance schemes. However, to ensure that any new measure is properly targeted, in our view, the following changes need to be made to the proposals:

  1. The breadth of ‘tax avoidance’ for the purpose of the rules needs to be cut down to apply only to arrangements caught by the General Anti-Abuse Rule (GAAR) and the Disclosure of Tax Avoidance Scheme (DOTAS) rules.  Targeted Anti-Avoidance Rules (TAARs) and unallowable purpose rules should not be included.
  2. The definition of ‘enabler’ needs to be limited to those who devise and play an active role in the promotion of tax avoidance schemes.
  3. There should also be a reasonable care defence available to the professional adviser and compliance with PCRT should form a key part of the defence.
  4. There should be a warning before a penalty is imposed.
  5. The penalty should be related to net fees, as anything else would be disproportionate.

Technical Team

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