Draft legislation published on Monday goes some way to address concerns raised during the consultation process. Importantly, the provisions have been limited to circumstances where there are abusive tax arrangements which are defeated. Whether there are abusive tax arrangements is determined in accordance with the familiar GAAR criteria, under FA 2013. For some reason the criteria is set out in full rather than simply cross-referenced.
“Tax” for these purposes does not include VAT, stamp duty or SDRT (but does include SDLT).
So a taxpayer who chooses a reasonable course of action, albeit one which is tax motivated, should be outside of the target area. For penalties to apply the “double reasonableness” test must be satisfied, a high threshold. As is the case with the GAAR, the proposed rule states that the fact that tax arrangements accord with established practice, and HMRC had, at the time the arrangements were entered into, indicated its acceptance of that practice, is an example of something that might indicate that the arrangements are not abusive.
Provision is made for regulations to be made by the Treasury so that the GAAR Advisory Panel may provide opinions as to whether arrangements are abusive tax arrangements.
These are important limitations, which are welcomed.
The concept of “defeat” in respect of tax arrangements is wide. It includes a Tribunal or Court decision, as well as acceptance of an assessment or the making of a self-assessment. A defeat is final when no adjustments can be made. HMRC then normally have two years from defeat to assess any enabler.
Where arrangements which are substantially the same are implemented more than once, a single defeat will not trigger the penalty regime. Instead, assessment is not possible until the required percentage of relevant defeats is reached – a 50% threshold, calculated by reference to HMRC’s reasonable belief. The two year period is not triggered until the required percentage of defeats is reached.
Persons who “enabled” the arrangements are widely defined by reference to the following categories – designers, managers, marketeers, enabling participants (without whom the arrangements could not be expected to result in a tax advantage) and financial enablers (who provide loans, shares, derivative contracts and other financial products). The rules are likely to raise difficult questions as to who is or is not an enabler in a variety of circumstances. There is an exclusion for the taxpayer and any company in the same group as the taxpayer. However, this exclusion will not assist in a wide variety of circumstances – for example, where there is a relationship which falls short of grouping (such as a joint venture), where partnerships are involved or there is a family connection.
Whilst the consultation raised the prospect of tax-geared penalties, the draft provisions target the total amount or value of all fees received or receivable by the enabler. Express provision is made for apportionment where an enabler receives consideration attributable to two or more transactions, but this may offer limited comfort given that any consideration given for what is in substance one bargain is to be treated as attributable to all elements of the bargain. For example, legal fees on structuring, acquisition and financing may in appropriate circumstances be aggregated for penalty purposes even if the abusive tax arrangements related only to the financing element.
HMRC may at their discretion mitigate any penalty, but there is no statutory rule as to the factors to take into account or their weighting.
Given the significant periods of time that may elapse from “enabling” to “defeat”, it may be difficult for some enablers to make a good case for mitigation where there have been personal changes or there are insufficient records.
Specific provision is made for lawyers to provide declarations as evidence of the things stated, where information is privilege and so not available for the purpose of establishing that the lawyer is not liable to a penalty. It is unclear how this will work, regulations (yet to be published) will govern the position. Also, it seems that whilst this mechanism is relevant to the question of whether a penalty applies, no mention is made of its use in the context of penalty mitigation.
Subject to a de-minimis limit (to be specified), the Commissioners may publish information about persons who have incurred penalties. In addition to the financial consequences, there is potential for “naming and shaming”.
The new rules apply to arrangements entered into on or after Royal Asset to the Finance Bill. Also, actions of a would be enabler pre-Royal Assent are to be disregarded.
Overall the published position strikes a far better balance than was indicated by the consultation. But difficult issues remain.