In a significant escalation of its crackdown on tax avoidance, the UK government has consulted on reforms aimed at dismantling the business models of those who promote and enable avoidance schemes.
The consultation ‘Closing in on promoters of marketed tax avoidance’, which closed on 18 June, proposed giving HMRC new powers to target promoters more effectively and earlier in a scheme’s lifecycle.
HMRC described the measures, unveiled on 26 March, as ‘a step change’ in efforts to close in on the small number of remaining tax avoidance promoters.
‘The impact on genuine advisers could be disproportionate compared to the deterrent effect’
‘They have to tackle it from the top down and that is what they are doing with this,’ says Paul Newsham, CEO of the Payroll Compliance Authority. ‘They’re cutting it off to stop it from filtering down. If the risks and penalties are big enough, it will stop you in your tracks, no matter how attractive an introductory commission may be.’
Mission creep
Tax advisers support HMRC’s tougher stance, but warn that the measures could have a serious impact on the overwhelming majority of compliant advisers who provide bespoke tax advice.
‘The current proposals are broad and risk the inevitable mission creep,’ says John Cassidy, partner and head of tax resolutions at Crowe. He warns that powers introduced for specific problems have often expanded into wider use.
‘It warrants targeted, focused and rigorous attention, and perhaps criminal action’
‘The concern is that the potential impact on tens of thousands of genuine advisers could be disproportionate compared to the deterrent effect on the 20-30 hardcore promoters who are the real target that HMRC should specifically and rigorously focus on,’ Cassidy says.
He adds that such a low number of promoters warrants ‘targeted, focused and rigorous attention, and perhaps criminal action’, using HMRC’s existing powers, sources of information and cross-border agreements.
Last bastion
The measures include expanding the Disclosure of Tax Avoidance Schemes (DOTAS) regime, introducing Universal Stop Notices (USNs) and Promoter Action Notices and targeting the ‘controlling minds’ behind schemes.
Miles Dean, a partner and head of international tax at Andersen, says the proposals are aimed at one of ‘the last bastions of tax avoidance’: disguised remuneration schemes marketed to umbrella companies – essentially payroll providers for temporary workers or contractors.
‘It is what goes on in the background with umbrella companies, the bells and whistles, where you have got these funky share schemes and loan arrangements that are used to optimise the “employees” overall tax position,’ Dean says.
‘Tax advisers will now document much more clearly what they are doing’
HMRC rejects claims that disguised remuneration schemes remove liability for income tax and national insurance contributions on a worker’s earnings. A new hallmark is planned to target ‘crude schemes’ that involve paying an employee a small amount of earnings via PAYE, with the balance paid to the employee untaxed.
The government is also considering a new criminal offence for failing to disclose notifiable arrangements to HMRC without a reasonable excuse – regardless of intent – with penalties including unlimited fines and up to two years’ imprisonment.
Vipul Sheth, managing director of accountancy practice Advancetrack, says tax advisers ‘will now document much more clearly what they are doing, why they are doing it. Should they ever be hit by something, they are able to demonstrate these are the laws, this is how they are applying them, nothing more than that,’ he says.
Stop now
The government suggests implementing a USN to halt the promotion or enabling of schemes that are identical or similar to those described in the notice. Failure to comply by the promoter would amount to a failure by the person who has control or significant influence over them. HMRC could also issue a USN even before a scheme is launched, based on intelligence.
Andrew Parkes, national technical director at Andersen, says the proposals will provide ‘some real ammunition to finally get rid of the die-hard promoters’.
‘It will become a much more vanilla offering that advisers will be providing’
Key is the speed at which HMRC will be able to close down schemes using USNs, which will prevent promoters hiding behind business structures by starting one company on Monday and moving to a new company on Tuesday.
‘You are the person behind both of them, whether that is actual or shadow, and you can be hit with it,’ Parkes says. ‘If the promoter knows that if they have come up with a scheme on Monday, HMRC can come after them on Tuesday, then what is the point of doing this? It is taking the reward away,’ he says.
Risk averse
The measures could have a chilling effect on legitimate advisory services, says Sheth. Instead of trying to push the envelope, advisers will pull back because of the fear of getting hit with a USN, he says.
‘Suddenly all of that type of work gets wiped out, which might be a significant investment of time and money,’ Sheth says. ‘Firms of all shapes and sizes are going to become more risk averse. It will become a much more vanilla offering that advisers will be providing,’ he says.
Scale
According to HMRC, the tax gap related to marketed avoidance schemes sold to individuals has fallen from an estimated £1.5bn in the FY 2005/06 to around £500m today.
HMRC says around 20-30 active promoter organisations remain selling mass-marketed tax avoidance schemes, some based offshore and using complex corporate structures.
