What is the background to the draft Finance Bill 2022 clauses on tax avoidance published on 20 July 2021?
In the wake of Sir Amyas Morse’s Independent Review of the Loan Charge back in December 2019 the government committed to implementing further measures to tackle promoters of tax avoidance schemes (POTAS) and reduce the scope for marketing of such schemes.
In March 2020 HMRC published its Promoter Strategy which looked at ways of disrupting the business model of those still marketing such schemes.
The July 2020 consultation Tackling Promoters of Tax Avoidance introduced some new measures which were included in Finance Bill 2021 that strengthened the existing anti-avoidance regimes and these were complemented by the November 2020 paper which called for evidence on raising standards in the tax advice market.
Despite all of this, HMRC is still concerned that promoters (and others in the tax avoidance supply chain) continue to fail to comply with their voluntary obligations and are still managing to sidestep HMRC compliance activity and sell their schemes.
What further provisions does FB 2022 contain to target POTAS?
The draft FB 2022 clauses include four new provisions to further address promoters of tax avoidance:
• giving HMRC the protective mechanism to freeze a promoter’s assets to prevent dissipation before payment of potential penalties. There were talks of giving HMRC powers to apply to the court for security payments in addition to these new asset freezing orders, but this is on the backburner for now
• tackling offshore promoters by charging additional penalties (of up to the total amount earned by the scheme) against UK entities that facilitate tax avoidance via these offshore promoters
• allowing HMRC to present winding-up petitions to close down companies that promote avoidance schemes and thus operate against the public interest, and
• enabling HMRC to publish details of promoters and their schemes to raise public awareness and give taxpayers the opportunity to identify and exit any arrangements—the policy objective is to protect the taxpayer while also getting the tax in
When will the FB 2022 changes take effect?
The FB 2022 (which implements proposed measures announced in the March 2021 Budget) draft legislation was published on 20 July 2021. The consultation on the Finance Bill measures will run until 14 September 2021 and Royal Assent is expected to be forthcoming in time for the new tax year in Spring 2022.
The new clauses will generally have effect in relation to all penalties assessed or determined or arrangements enabled on or after the date of Royal Assent but note that any information or non-compliant behaviour ongoing prior to this time could form part of HMRC’s case.
What guidance has been published?
The new clauses each include a helpful explanatory note published on the government website. The results of the consultation (that ended on 20 July 2021) regarding the implementation of the proposed legislation are also available to read on the government website.
Why does HMRC continue to try to strengthen these regimes?
HMRC is committed to disrupting the business of any promoters still operating and are determined to impose harsh sanctions. The concern is that as new measures are introduced, companies and promoters find new loopholes to bypass these measures, making it necessary to incorporate further regulations. These individuals are only able to operate because of the naivety of the taxpayer so the plan is to also do more to support the taxpayer and ensure that they can steer clear of and exit any tax avoidance arrangements.
What evidence is there of the disclosure of tax avoidance schemes (DOTAS), POTAS or enablers regimes having been effective so far?
When the General Anti-Abuse Rule (GAAR) Report was published in 2011, it found that the existing tools, including DOTAS (which requires promoters of avoidance schemes to give HMRC information about the schemes they are promoting and who their clients are) had been incapable of dealing with some abusive tax avoidance schemes.
Subsequently, the POTAS regime, accelerated payments and follower notices were introduced by the Finance Act 2014. The POTAS rules are aimed at changing the behaviour of promoters and deterring the development and use of avoidance schemes by monitoring the activities of those who repeatedly sell schemes which fail.
Since 2014, the number of Scheme Reference Numbers allocated by HMRC under the DOTAS rules appears to have decreased significantly. HMRC has also said that thanks to anti-avoidance measures, about 25 significant promoters have ceased all activity. The very fact that new sanctions continue to be introduced suggest that there is still a problem to tackle, although this is now considered to be very localised and indeed by 2018/19 the tax avoidance gap had shrunk to 0.3% of the total theoretical liabilities for that year—this is a small problem in the scheme of things but may still be a big problem from a policy perspective.
What further measures or changes to the draft legislation do you expect to be announced at the next Budget or fiscal statement?
There may be yet further measures mooted if the existing ones prove to be insufficient, but it is unclear at this stage what these might look like.
There is a real concern about whether the constant ebb of new rules is really addressing the problem. It seems clear that there is a stubborn disconnect between the language spoken by HMRC and the policy advisers and some so-called tax advisers. If schemes still exist it is because there is still a market for them and a desire for taxpayers to pay as little tax as possible, albeit sticking within the confines of a particular interpretation of the tax rules.
HMRC considers that the policy objectives should override any contrary interpretation of the legislation and the intention is that many of these new rules are principles-based in a bid to overcome this ‘policy vs interpretation’ disconnect.
We may see yet more targeted attempts to stamp out those that attempt to sail too close to the wind. Another option might be for the GAAR to become a point of first, and not last, resort going forward.
There must also be consideration of whether resource is better directed at enforcement, such as more large scale investigations of aggressive tax avoiders, rather than new anti-avoidance measures.