The Finance Bill will include sanctions for enablers of tax avoidance.
If the August 2016 consultation is a guide then this refers not merely to those who design, promote and market avoidance – but everyone in the supply chain who benefits from an end user implementing avoidance arrangements and without whom such arrangements could not be implemented. Professionals such as lawyers and accountants, as well as IFAs, are most obviously targeted. But in a typical M&A, reorganisation, joint venture or financing transaction the breadth of the term may include banks, insurers, insurance brokers, trustees, company formation agents and providers of company secretarial or fiduciary services.
Where the rules apply each and every enabler is at risk of penalties. In this respect a relevant defeat of tax avoidance arrangements may include arrangements:
- counteracted by the General Anti-Abuse Rule;
- the subject of a Follower Notice;
- notifiable under DOTAS (or VAT equivalent) and
- where a targeted avoidance-related rule or unallowable purpose test applies.
Penalties may be tax geared, the consultation referred to amounts up to 100% of the tax sought to be avoided. The size of the penalty is expected to depend upon the role and behaviour of the enabler.
These are potentially extreme measures. Subject to a change of heart following consultation, the rules are not expected to be limited to evasion. Nor in the context of avoidance are they expected to apply only to ineffective marketed schemes; the Chancellor simply announced the measure as “a new penalty for those who enable the use of a tax avoidance scheme that HMRC later challenges and defeats”. In which case the measures are likely to be potentially relevant in many commercial transactions; it is inevitable that different views may arise as between taxpayers and HMRC regarding the law and its application to specific circumstances.
The new rules raise the prospect of penalties for advisers and parties to arrangements where reasonable positions have been taken following advice delivered in accordance with professional obligations. Whilst preventing the selling of schemes with no realistic prospect of success might be welcomed, the expected regime is not likely to be so limited.
I accept that there is a real problem with marketed schemes. However, the introduction of the GAAR, follower notices and advance payment notices, as well as changes to DOTAS, have all contributed to a climate where tax avoidance is discouraged. These measures could be given more of an opportunity to work. There might also be those who say that HMRC should adopt a more rigorous approach using existing powers.
If the measures follow consultation proposals then they are likely to be disproportionate to the mischief identified. For lawyers the proposals may give rise to specific problems regarding legal professional privilege – this is the client’s privilege, but if it is not waived lawyers may find that they cannot defend themselves against a penalty. It remains unclear whether penalties visited upon enablers may be subject to reimbursement by clients and if so the tax effect of this (the receipt will be taxable, but query whether the expense can be said to be wholly and exclusively incurred for the purposes of the payee’s trade or profession). Also, for professionals will penalties be in the nature of personal liabilities, or fall upon the firm? In any event I wonder whether the imposition of a penalty may be a professional conduct matter.
We will know more when draft legislation is published on 5 December. Hopefully the Government will take on board comments made as part of the consultation exercise, with a more limited measure as a result. In which case some of my concerns may fall away.