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BRIEFING PAPER

Number 7948, 30 January 2019

Tax avoidance and tax evasion

By Antony Seely

Contents: 1. Introduction - what is tax

avoidance and what is tax evasion?

2. The tax gap 3. The Coalition Government’s

approach 4. Follower notices &

accelerated payments 5. The Conservative

Government’s approach 6. The 2019 Loan Charge

2 Tax avoidance and tax evasion

Contents Summary 3

1. Introduction - what is tax avoidance and what is tax evasion? 5

2. The tax gap 9

3. The Coalition Government’s approach 23 3.1 A new anti-avoidance strategy 23 3.2 Assessing the impact of HMRC’s strategy 31

4. Follower notices & accelerated payments 39 4.1 ‘Raising the stakes on tax avoidance’ - summer 2013 39 4.2 Budget 2014: introduction of accelerated payments 45 4.3 Finance Bill 2014 50 4.4 Impact of the new regime 60 4.5 Subsequent proposals regarding ‘serial avoiders’ and offshore evasion 66

5. The Conservative Government’s approach 73 5.1 Budget 2015 73 5.2 Offshore evasion & the Panama Papers 76 5.3 Spring Budget 2017 84 5.4 The Paradise Papers & Autumn Budget 2017 103 5.5 Budget 2018 111

6. The 2019 Loan Charge 117 6.1 Disguised remuneration & Finance Act 2011 119 6.2 DR schemes & the 2019 Loan Charge - Budget 2016 121 6.3 DR schemes and the ’Rangers case’ - July 2017 127 6.4 The Contractor Loan Settlement Opportunity - November 2017 132 6.5 The 2019 Loan Charge & Finance Act 2018 137

HMRC’s warnings to scheme users & its action against promoters 141 Early Day Motion 1239 of 2017-19 143 Guidance for taxpayers liable to pay the Charge 145

6.6 Recent developments 150

Cover page image copyright Chamber-066 by UK Parliament image. Licensed under CC BY 2.0 / image

cropped.

3 Commons Library Briefing, 30 January 2019

Summary In recent years tax avoidance has been the subject of considerable public concern, although there is no statutory definition of what tax avoidance consists of. Tax avoidance is to be distinguished from tax evasion, where someone acts against the law. By contrast tax avoidance is compliant with the law, though aggressive or abusive avoidance, as opposed to simple tax planning, will seek to comply with the letter of the law, but to subvert its purpose. As Treasury Minister David Gauke has observed, there is a distinction between tax planning and tax avoidance, “although there will be occasions when the line is a little blurred.”1

In recent years HM Revenue & Customs has produced estimates of the tax gap, the difference between tax that is collected and that which is ‘theoretically due’:

The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law) ... An equivalent way of defining the tax gap is the tax that is lost through non-payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attack.2

In June 2018 HMRC published revised estimates, which put the total tax gap at £33 billion for 2016/17, representing 5.7% of total tax liabilities.3 There has been a long-term reduction in the tax gap, which was estimated to be 7.3% in 2005/06. HMRC’s analysis provides a breakdown of the gap by reference to the different types of taxpayer behaviour that lead to a shortfall in receipts, though as HMRC note, the “estimates give a broad indication of behaviours and are calculated using assumptions and judgment.” This work suggests that in 2016/17 the annual cost of tax avoidance was £1.7 billion, while the cost of tax evasion was £5.3 billion.4

Historically UK tax law has been specifically targeted rather than purposive; in tackling the exploitation of loopholes in the law, governments have legislated against individual avoidance schemes as and when these have come to light. Often the response to this legislation has been the creation of new schemes to circumvent the law, which in turn has seen further legislation – an ‘arms race’ between the revenue authorities and Parliamentary counsel on one side, and on the other, taxpayers aided and abetted by the legal profession. In recent years concerns as to the scale of mass marketed tax avoidance schemes have led to three major initiatives to undermine this market, and encourage a sea change in attitudes: the Disclosure of Tax Avoidance Schemes regime (DOTAS); the General Anti-Abuse Rule (GAAR); and the system of follower notices & accelerated payments.

Over the past twenty years many commentators have suggested having legislation to counter tax avoidance in general: by providing certainty for both sides as to the tax consequences of any transaction, a ‘general anti-avoidance rule’ might dissuade the most egregious efforts to avoid tax, encourage taxpayers and legal counsel to redirect their energies to more productive activities and allow the authorities to simplify the law without fear of it being systematically undermined. In the late 1990s the Labour Government

1 HC Deb 12 July 2010 c706 2 Measuring Tax Gaps 2013, October 2013 p6. HMRC’s work on the tax gap is collated on Gov.uk 3 HMRC press notice, Low tax gap results in £71 billion for UK public services, 15 June 2018; see also,

HMRC, Calculating the 2016-17 Tax Gap: Issue Briefing, 14 June 2018 4 Measuring Tax Gaps 2018, June 2018 p5

4 Tax avoidance and tax evasion

consulted on an anti-avoidance rule before deciding against it. Concerns over the scale of tax avoidance rekindled interest in the idea, though in its 2004 Budget the Labour Government announced a new ‘disclosure regime’ as an alternative, whereby tax avoidance schemes would be required to be disclosed to the revenue departments.5 Under ‘DOTAS’ accountants, financial advisers and other 'promoters' selling tax avoidance schemes are required to notify the tax authorities of any new scheme they are to offer to taxpayers. Each scheme is given a reference number which, in turn, taxpayers have to use in their tax return, if they have used it. HMRC have used this information to track the take-up of avoidance schemes, challenge individual schemes in the courts if HMRC have assessed that they do not work in the way the promoter claims, or to address unintended loopholes in the law that some schemes seek to exploit.

In its first Budget in June 2010 the Coalition Government announced it would consult on a general anti-avoidance rule, and commissioned a study group, led by Graham Aaronson QC, to consider the case. In his report, published in 2011, Mr Aaronson recommended a narrowly focused rule targeted at ‘abusive arrangements’ only, and following a consultation exercise, in December 2012 the Government announced the introduction of a General Anti-Abuse Rule (GAAR) in 2013.6

In 2014 the Coalition Government announced the introduction of a system of follower notices & accelerated payments.7 Broadly speaking, in cases where someone is in dispute over their assessment, HMRC may issue a ‘follower notice’ if this arises from the use of an avoidance scheme that is either the same or has similar arrangements to one that HMRC has successfully challenged in court. Taxpayers must settle their affairs, or pay a penalty. HMRC may also issue a notice for an accelerated payment, where the taxpayer is required to pay the disputed sum ‘up front’, before their assessment had been definitively decided – either by the taxpayer agreeing HMRC’s assessment, or the courts making a final judgement in their case. Taxpayers do not have the right to appeal HMRC’s decision to the Tribunal.

Controversially, the Government announced these arrangements would apply to outstanding disputes for past tax years, and that HMRC would also issue demands for accelerated payments in relation to avoidance schemes notified under ‘DOTAS’. Despite concerns as the ‘retrospective’ nature of the new regime, the new rules were agreed, with only minor amendments, in July 2014. In July 2017 HMRC reported that it had issued over 75,000 notices worth in excess of £7 billion and collected nearly £4 billion.8

The Government has continued to introduce provisions to tackle tax avoidance and tax evasion, including measures in the last three Budgets.9 This paper provides an introduction to the issue of tax avoidance and evasion and the measurement of the tax gap, looking in detail at the development of follower notices and accelerated payments, before discussing the current Government’s approach, and the introduction of the 2019 Loan Charge. Two other Library papers look at the Labour Government’s consideration of a general anti-avoidance rule and the establishment of the disclosure regime, and at the Coalition Government’s decision to introduce a GAAR.10

5 Budget 2004, HC 301, March 2004, p202. Guidance on DOTAS is on Gov.uk 6 Autumn Statement, Cm 8480 December 2012 para 1.178. Guidance on the GAAR is on Gov.uk 7 Budget 2014, HC 1104, March 2014 para 1.198-201 8 HMRC Annual Report 2016/17, HC 18, July 2017 p24. Guidance on follower notices & accelerated

payments is on Gov.uk. 9 Spring Budget 2017, HC 1025, March 2017 para 3.42-49; Autumn Budget 2017, HC 57, November 2017

para 3.65-77; Budget 2018, HC 1629, October 2018 para 3.76-91. 10 Tax avoidance: a General Anti-Avoidance Rule - background history (1990-2010), CBP2956, 13 April 2016;

and, Tax avoidance: a General Anti-Abuse Rule, CBP6265, 7 September 2018.

5 Commons Library Briefing, 30 January 2019

1. Introduction - what is tax avoidance and what is tax evasion?

During a debate on tax avoidance and tax evasion in July 2010 Treasury Minister David Gauke drew the following distinction between these two terms:

Tax evasion occurs when someone acts against the law. Tax avoidance involves compliance with the letter but not the spirit of the law, and it is right that the Government seek to minimise that. Tax planning is a case of acting in both the spirit and the letter of the law. There is a distinction, although there will be occasions when the line is a little blurred.11

A longer definition was provided in answer to a PQ in the Lords a few years before:

Lord Patten asked Her Majesty's Government: Whether they will clarify their use of the terms "tax avoidance" and "tax evasion".

Lord McKenzie of Luton: These terms lack any single or universally applied legal definition and their meaning will depend upon the context in which they are used. The term "tax evasion" refers to reduction of tax liability by illegal means. The term "tax avoidance" is usually used to refer to an inappropriate reduction in tax liability and was described by Lord Nolan in the following terms: "The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability."12

The reference is to an expression used by Lord Noland in a case heard by the House of Lords in 1997, when he distinguished between avoidance and actions where the taxpayer mitigates his tax liability:

The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option.13

(The appeal of this definition is not unchallenged – as one standard guide to the law notes, “the trouble with this explanation is that while it provides a coherent reason for saying in a particular case that the facts do not amount to avoidance and so do not trigger the application of some rule, it does not provide a way of telling whether those particular

11 HC Deb 12 July 2010 c706 12 HC Deb 24 May 2006 ccWA111-2 13 IRC v Willoughby & Another [1997]

6 Tax avoidance and tax evasion

facts fall one side of the line or the other – it is a conclusion, not a test - and so it restates the problem rather than solving it.”14)

While it is often noted that tax avoidance is not illegal, in the past governments have drawn a distinction between the exploitation of the tax system and simple compliance with the law – for example, in answer to a PQ in July 2010:

Andrew George: To ask the Chancellor of the Exchequer what definition of the terms (a) tax avoidance and (b) tax efficiency his Department uses.

Mr Gauke: The Government have not published a definition of avoidance. However it is widely understood to entail taking a view of the tax treatment of a transaction that is tenable but has tax consequences that were not intended by the legislature. This does not prevent taxpayers organising their affairs in an efficient manner, consistent with the intentions of the legislation. Tackling tax avoidance is essential and we make every effort to do so. The Government consider the economic efficiency of tax measures as part of the tax policy-making process.15

The House of Lords Economic Affairs Committee considered this question in their 2013 report on the Government’s proposals for a ‘General Anti-Abuse Rule’ – or GAAR. The Committee cited Mr Gauke’s distinction between avoidance and evasion, reproduced above, but went on to quote the evidence of Ms Judith Knott (then HMRC Director, Corporation Tax International Anti-Avoidance) when she appeared before the Committee:

“What we mean by legitimate tax planning is tax planning that is very much in line with Parliament’s intentions when it passed the rules. A good example would be putting cash into an ISA account. That is legitimate and what Parliament intended to happen. Avoidance, on the other hand, is behaviour that seeks to bend the tax rules in a way that Parliament did not intend. It is often accompanied by artificial transactions—trying to seek a result that was not intended.”16

The Committee observed that the definitions “depend on the existence of a common interpretation of what the original lawmakers had in mind in enacting a particular tax statute”:

The courts interpret Parliamentary intention as that revealed by the wording and context of the legislation itself and extraneous comment or other guidance can be taken into account only in very limited circumstances. This is a much narrower definition of Parliamentary intention than the wider colloquial definition which might either infer intention or take into account external information.

Consequently, in practice, a good deal of uncertainty can often attach to the question of whether a particular arrangement constitutes ‘tax avoidance’ and, if so, whether it is to be regarded

14 Tiley & Collison’s UK Tax Guide 2016/17 para 3.2 15 HC Deb 12 July 2010 c544W 16 The draft Finance Bill 2013, 13 March 2013, HL Paper 139 2012-13 para 12

7 Commons Library Briefing, 30 January 2019

as ‘acceptable’ (tax planning or tax mitigation) or ‘unacceptable’ (aggressive or abusive avoidance).17

The concept of “parliamentary intention” is not a simple or obvious one – as noted in a paper on tax avoidance published by the Oxford Centre for Business Taxation:

The aim of the courts is to construe legislation in a way that gives effect to “parliamentary intention”. Parliamentary intention in this context is a term of art, extensively debated in legal literature and should be distinguished from a colloquial usage. Lord Nicholls has explained: "...the 'intention of Parliament' is an objective concept, not subjective. The phrase is a shorthand reference to the intention which the court reasonably imputes to Parliament in respect of the language used.

It is not the subjective intention of the minister or other persons who promoted the legislation. Nor is it the subjective intention of the draftsman, or of individual members or even of a majority of individual members of either House.”18 In other words the political and authoritative process of Parliament passing legislation produces the text of legislation, the intention of which is found by the courts looking at the wording of that legislation.19,20

Further to the questions of legal interpretation, the choice of words in this area has important political consequences. Graham Aaronson QC made this point when he gave evidence to the Lords Economic Affairs Committee in January 2013:

“Avoidance” is a rather unfortunate word in this context because avoidance can be regarded as a particularly nasty thing to do or, if it is an accident, it is a very sensible thing to do—you avoid an accident. So I would rather use words that are less emotive when describing the intellectual process in determining whether you should be paying a smaller amount of tax than you would otherwise pay.

You can call that tax planning because it is planning. Whether it is good planning or bad planning, whether it is abusive planning or innocent planning, it is planning. Tax avoidance is a very dangerous expression to use if you want to have a serious debate because one person’s avoidance is another person’s perfectly reasonable planning.21

However, the term ‘tax avoidance’ has continued to be widely used, and in a paper on its tax policy over the 2010-15 Parliament, the Coalition Government provided a terminology that, arguably, illustrates how the debate about this issue changed over this period:

17 op.cit. para 14. For more details on the distinction between evasion and avoidance

see, Hamilton v Hamilton & Anor [2016] EWHC 1132 (Ch) (13 May 2016) para 37. 18 R v Secretary of State for Environment, Transport and the Regions [2001] 2 AC 349. 19 See also Lord Reid in Black-Clawson International Ltd v Papierwerke Waldhof-

Aschaffenburg AG [1975] A.C. 591, at 613: “In seeking for the intention of Parliament we are seeking not what Parliament meant but the true meaning of what they said”. On Parliamentary intention see also Judith Freedman, “Interpreting tax statutes: tax avoidance and the intention of Parliament”, Law Quarterly Review 2007, 53 at 72 et seq. especially the literature referred to there.

20 Michael Devereux, Judith Freedman & John Vella, Tax Avoidance, OCBT December 2012 p4. See also, “Seeking after meaning”, Taxation, 21 April 2016, and for another view barrister Jolyon Maugham’s blog post, “Is tax avoidance like hardcore pornography?”, Waiting for Godot blog, 30 August 2016.

21 Draft Finance Bill 2013: Oral & Written Evidence, March 2013 pp12-13 (Q10)

8 Tax avoidance and tax evasion

Clarifying tax terminology

Tax evasion is always illegal. It is when people or businesses deliberately do not declare and account for the taxes that they owe. It includes the hidden economy, where people conceal their presence or taxable sources of income.

Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter – but not the spirit – of the law. Most tax avoidance schemes simply do not work, and those who engage in it can find they pay more than the tax they attempted to save once HMRC has successfully challenged them.

Tax planning involves using tax reliefs for the purpose for which they were intended, for example, claiming tax relief on capital investment, or saving via ISAs or for retirement by making contributions to a pension scheme.

However, tax reliefs can be used excessively or aggressively, by others than those intended to benefit from them or in ways that clearly go beyond the intention of Parliament. Where this is the case it is right to take action, because it is important that the tax system is fair and perceived to be so.22

22 HM Treasury, Tackling tax evasion & avoidance, Cm 9047, March 2015 p5 (Box 1.A:

Clarifying tax terminology). See also, PQ HL4794, 25 February 2015

9 Commons Library Briefing, 30 January 2019

2. The tax gap In recent years HM Revenue & Customs has produced estimates of the tax gap - the difference between tax that is actually collected and that which is ‘theoretically due’:

The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law) ... An equivalent way of defining the tax gap is the tax that is lost through non-payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attack.23

In June 2018 HMRC published revised estimates, which put the total tax gap at £33 billion for 2016/17, representing 5.7% of total tax liabilities.

• The UK tax gap in 2016-17 is estimated to be £33 billion. This is 5.7% of total theoretical tax liabilities and the same level as 2015-16.

• There has been a long-term reduction in the overall tax gap, from 7.3% in 2005-06 to 5.7% in 2016-17.

• The tax gap for income tax, National Insurance Contributions and Capital Gains Tax (IT, NICs and CGT) was 4.2% in 2016-17 — its joint lowest level since 2009-10.

• There has been a long-term reduction between 2005-06 and 2016-17 for the VAT (Value Added Tax) gap (12.5% to 8.9%) and for the duty-only excise tax gap (8.1% to 5.8%).

23 Measuring Tax Gaps 2013, October 2013 p6. The department’s work on the tax gap

is collated on Gov.uk

10 Tax avoidance and tax evasion

• The Corporation Tax gap has been on a long-term downward trend, from 12.4% in 2005-06 to 7.4% in 2016-17.

• There has been a steady downward trend in the avoidance tax gap, from £4.9 billion in 2005-06 to £1.7 billion in 2016-17.24

HMRC suggest the percentage figure is a better measure of compliance over time, “because it takes account of some of the effects of inflation, economic growth and changes to tax rates, whereas the cash figure does not. For example, in a growing economy where the tax base25 is increasing, even if the percentage tax gap remained level, the cash figure would grow.”26 Notably HMRC describe the tax gap as “a useful tool for understanding the relative size and nature of non-compliance”:

This understanding can be applied in many different ways:

• it provides a foundation for HMRC’s strategy. Thinking about the tax gap helps the department to understand how non-compliance occurs and how HMRC can address the causes.

• drawing on information on how other countries manage their tax gaps, our tax gap analysis provides insight into which strategies are most effective at reducing the tax gap.

• although the tax gap isn’t sufficiently timely or precise enough to set performance targets, it provides important information that helps us to understand our long-term performance.27

The report provides a breakdown of the gap by reference to the different types of taxpayer behaviour that lead to a shortfall in receipts, though as they observe, the “estimates give a broad indication of behaviours and are calculated using assumptions and judgment.” This puts the annual cost of tax avoidance in 2016/17 at £1.7 billion:28

24 HMRC press notice, Low tax gap results in £71 billion for UK public services, 15 June

2018; HMRC, Measuring Tax Gaps 2018, June 2018 p4, p6 25 The aggregate value of the financial streams or assets on which tax can be imposed. 26 Measuring Tax Gaps 2018, June 2018 p7 27 op.cit. p3 28 op.cit. p11. 1Figures may not appear to sum due to rounding.

11 Commons Library Briefing, 30 January 2019

The report gives a more detailed description of exactly what type of behaviour falls under each of these categories:29

1 More information and frequently asked question on the OECD’s Inclusive Framework

on BEPS can be found at: www.oecd.org/ctp/beps-frequentlyaskedquestions.htm

29 op.cit. p20

12 Tax avoidance and tax evasion

As noted in its summary, the report also provides estimates of the tax gap by type of tax, and by customer group. In the latter case, it is estimated that over 40% of the tax gap is attributed to small businesses, while 10% is attributed to individuals:

Figure 1.5 shows the 2015-16 and 2016-17 tax gaps by customer group. In both 2015-16 and 2016-17 more than 40% of the tax gap was attributed to small businesses. Individuals account for the smallest share of the tax gap in both 2015-16 and 2016-17.

This section of the report underlines that, “an additional element of judgment and uncertainty is present in the customer group estimates”:

Table 1.4 (at the end of the chapter) shows a time series of tax gap by customer group, as a percentage of total theoretical liabilities. This shows that the breakdown of the tax gap by customer group over the past five years has been broadly stable.30

In September 2011 the Treasury Committee took evidence from HMRC on its action to close the tax gap; during this session Dave Hartnett, then Permanent Secretary for Tax and his colleague, Melanie Dawes, Director General, Business Tax, explained how analysis of the size of the tax gap shaped the department’s priorities:

Dave Hartnett: I think … for us, the tax gap is quite an important tool, if I can put it that way, in promoting understanding of all the causes of non-compliance and helping us to focus on ways of reducing them. If I can put it this way, it is a bit like a long-term health check for us. A definition of it is the difference between what the Government can expect to receive and actually do receive, but I think, as you may have seen, unlike some other countries, we include avoidance in it, and also the slightly contentious issue of measuring that in line with the spirit of the law-what the intention of Parliament might have been …

Q180 Stewart Hosie: … Some of the professional bodies take the [the department’s estimate of the tax gap] and say it is inflated because it includes legitimate disagreements over legal interpretation, which is a perfectly valid position for them to take. Others say it is understated due to inadequate information. You

30 Measuring Tax Gaps 2018, June 2018 p10

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say it is your best guess but you invest a lot in calculating it … What more do we all need to do to get this right, given how important it is?

Dave Hartnett: …On legal interpretation and other things in particular, the focus we put on legal interpretation is where we lose-but not while the argument is going on-and where the Government are therefore going to receive less than expected. We recognise that "legitimate debate" contention around issues will always happen.

Melanie Dawes: Yes, and it is important to say on avoidance that where we resolve an issue with a taxpayer and we agree with their legal interpretation, we do not record that as a tax cut. We record that as the tax gap having been closed because the treatment has been agreed. In terms of what we should be doing with this …we think it is a very useful strategic tool. We used it to get a feel for the overall big areas of risk when we were putting together our plans for the spending review, for example, so it is very helpful. The important thing is not to use it in the wrong way, so we are not using it for performance targets to measure up actual operation performance in the business.31

In 2010 HMRC’s approach to measuring the tax gap was questioned, in the context of alternative estimates published by Tax Research UK, which put the tax gap in the region of £70-£120 billion.32 In a debate on tax avoidance in June 2010, Treasury Minister David Gauke acknowledged these figures implied the gap was much, much greater than HMRC had estimated, but went on to argue that the analysis was ‘deeply and systematically flawed’; the Ministers comments are worth reproducing at some length:

It must be accepted that in preparing estimates, organisations external to Government have access to much less data than HMRC ... However, having considered the methodology used to produce the figure of £120 billion, I must tell the House that even a brief analysis reveals that it is deeply and systematically flawed.

For example, Tax Research LLP estimates total revenue lost due to tax evasion at £70 billion. That figure is obtained by applying the percentage tax gap from VAT to direct taxes. There are two main problems with that. First, different tax regimes have different tax gaps. According to independent research by the OECD, for example, the operational experience shows that tax regimes such as pay-as-you-earn that withhold tax at source have far smaller tax gaps than other types. To apply the VAT gap percentage to taxes collected by PAYE or otherwise at source greatly overstates the tax gap, because the VAT tax gap is considerably higher.

Secondly, an element of double counting is involved, although, to be fair, that might not be apparent from the numbers used by Tax Research. The VAT gap already includes amounts due to tax avoidance and tax debt. Applying that percentage to direct taxes and then adding additional amounts for both avoidance and tax

31 Administration and effectiveness of HMRC: closing the tax gap – Oral Evidence, HC

1371-iii, 12 September 2011 Q178, Q180 32 Tax Research UK is run by the writer Richard Murphy. See, Tax Justice and Jobs: the

business case for investing in staff at HMRC, March 2010. These estimates have been widely quoted in the press: eg, “On charity George Osborne must stand up to the self-interested super-rich”, Guardian, 16 April 2012 & “Editorial - Tax: share the burden fairly or anger will grow”, Observer, 15 April 2012.

14 Tax avoidance and tax evasion

debt, as does Tax Research, results in the double counting of losses from the avoidance of direct taxes and non-payment.

The Tax Research estimate of tax debt is £28 billion. That is a snapshot figure of all tax owed to HMRC on 31 March 2009, which does not represent the actual losses to the Exchequer from non-payment. Almost all tax owed to HMRC is eventually paid, sometimes within days of becoming due. A proportion of debts outstanding are in staged repayment plans, such as those covered by the business payment support service. Only the tax debt written off as uncollectable by HMRC is an actual loss to the Exchequer from debt. That is therefore the amount that HMRC uses in its estimate of the tax gap, which in the 2007-08 tax gap figures was not £28 billion but £3 billion …

The final and most significant point concerns tax loss due to tax avoidance, which Tax Research estimates at £25 billion. That estimate includes the use of legitimate reliefs promoted by the Government to encourage certain activities, such as capital allowances to encourage investment and research and development tax credits to encourage innovation. Tax avoidance is generally regarded as the use of legal structures and allowances to reduce tax bills in manners not intended by Parliament when enacting the legislation. It is simply nonsense to categorise as tax avoidance the use of allowances for purposes intended by Parliament ... Furthermore, the Tax Research estimate does not provide HMRC with any credit for the significant amount of tax that it recovers by challenging avoidance schemes. The figure of £25 billion therefore seems somewhat wide of the mark.33

In a follow-up report published in March 2012 the Treasury Committee expressed some doubts as to the value of completing such a detailed annual assessment of the tax gap: “HMRC should not be aiming to collect more tax at any cost, but should be ensuring that all taxpayers pay the correct amount of tax … [in addition] the tax gap calculation is … misleading as a comparison from year to year, because its size depends on a number of factors which have nothing to do with whether the correct amount of tax is being paid, for instance the applicable rates of tax.”34 A longer extract is given below:

The tax gap can be a useful concept for assessing trends in the amount of possible unpaid tax. We are not, however, convinced that the process of calculating, publishing and publicising an aggregate figure for the tax gap is a sensible use of HMRC's limited resources. The aggregate tax gap figure is misleading and risks focusing HMRC on the wrong task as it only provides an order of magnitude.

We recognise that it is useful for HMRC's employees to have some idea of the difference between what HMRC should be collecting and what is collected, particularly in the case of criminal activity. However, in other areas it would be more useful for it to identify ambiguities in tax law rather than employ resources in calculating how much tax would be collected if everyone shared its interpretation of the law. Separate reports on how much tax was lost through criminal activity and areas where HMRC had encountered different interpretations of tax law would be a better use of resources. We would welcome further submissions from

33 HC Deb 16 June 2010 cc190-1WH 34 Twenty-ninth report: Closing the tax gap – HMRC’s record at ensuring tax

compliance, 9 March 2012, HC 1371 of 2010-12, para 14-15

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HMRC and tax experts both on how the tax gap calculation can be improved, and on whether it serves any useful purpose in HMRC's work.35

In turn the Government gave a robust defence of HMRC’s approach:

HMRC believes the aggregate tax gap analysis is a valuable tool in prioritising resources, as the Committee recommends, and agrees that the focus of work on tax gaps needs to be proportionate and help the best use of the resources available. HMRC does identify areas where there are different interpretations of tax law. Quantifying the scale of these issues helps set priorities for policy development and resource deployment. This allows the department to compare these priorities against tax losses resulting from other types of behaviour.

There have been recommendations from both the Public Accounts Committee and the National Audit Office36 to develop and use tax gap estimates in this way, and to publish the figures. In the interest of clarity HMRC thinks it makes sense to describe all of our tax gap estimates in one document so that a reader can understand more easily how the figures are calculated and the methodological issues which underpin them.37

HMRC also provided a detailed submission on measuring the gap, specifically in relation to the estimates published by Tax Research UK.38 The department argued that the £120bn figure “could be dangerous if not countered by HMRC’s published estimates … partly because they give a misleading view of HMRC’s effectiveness and the amount of uncollected revenues. But also because they encourage the perception that deliberate non-compliance in the UK is the norm—a perception which could encourage further non-compliance.”39

The submission raises similar concerns to those set out by the Exchequer Secretary to the House in June 2010 – quoted above – though further detail is given on the question of measuring tax evasion. Richard Murphy had claimed the annual cost of evasion was £70 billion – while HMRC had put it at £26 billion. The primary explanation for this disparity is that Mr Murphy had assumed that the size of any tax gap would be the same across all taxes:

Tax Research UK particularly criticises HMRC’s use of bottom-up methodologies to measure the direct tax gap and applies the VAT gap rate to arrive at an evasion figure for all direct taxes. This is highly inappropriate for three reasons:

• the VAT gap includes all forms of non-compliance such as non-payment, avoidance and criminal attack as well as

35 HC 1371 of 2010-12 para 16-18. For a critique that these estimates should ignore

the sums that would be paid if taxpayers complied with ‘the spirit of the law’ see, “The tax chink”, Tax Journal, 19 December 2014.

36 Following the NAO 2003 report Tackling Fraud against the Inland Revenue PAC recommended ‘The Revenue should focus their work on making a reasonable estimate of the tax gap so they can judge the effort needed for a given reduction in losses’. Following the NAO 2007 report Management of Large Business Corporation Tax PAC recommended ‘The department does not have a robust measurement of the corporation tax gap… it should develop such a measure and publish the result, with separate estimates for large businesses and small and medium sized businesses.’

37 First special report, 18 May 2012, HC 124 of 2012-13 p2 38 Appendix 2, First special report, 18 May 2012, HC 124 of 2012-13 pp11-18 39 op.cit. p15

16 Tax avoidance and tax evasion

evasion. So the VAT gap arises from much more than just suppression of turnover that might feed through to evasion of direct taxes;

• the use of the VAT gap in this way counts debt and avoidance twice for direct taxes—an arithmetical error, and

• very importantly, tax gaps vary considerably by type of tax.

Tax gaps for taxes using deduction of tax at source, or with significant third party reporting requirements are much lower than for taxes without these features. This is established by very detailed research in the US and Denmark40 and borne out by UK experience.

Using the percentage VAT gap—9.7% for 2010–11 is the latest estimate—to estimate a tax gap for business profits of companies and sole traders may give an answer of the right order of magnitude. But it gives completely the wrong answer for the income tax due from employees where PAYE is operated. International research suggests a tax gap for this of around 1%. This incorrect assumption accounts for £30bn of the £120bn estimate.

Tax Research UK have supported their evasion estimate through comparison with an academic paper produced for the World Bank41 which contains estimates of the size of the hidden economy for a number of countries including the UK. The estimate for the hidden economy in the UK is 13% of GDP which Tax Research UK then convert to a tax gap estimate of £73bn.

Rather than support the Tax Research UK figure we believe that this comparison, if anything, further undermines it. The methodology uses a variant of a ‘currency demand’ model to estimate the size of the hidden economy. The use of ‘currency demand’ models for this purpose has been comprehensively and extensively criticised in unusually strong terms by other academics42,43 and national statistical bodies.44,45

The main theme of the criticism is that the methodology relies upon the application of assumptions which result in estimates that are much too large to be plausible. For example the Australian Bureau of Statistics explore what it would mean for Australia to have a hidden economy of 15% (as predicted in an application of this methodology by the same author).

Critically they point out that a hidden economy of this overall size implies much higher levels of non-compliance in the areas of the economy where there is scope for underreporting. For example it implies underreporting of around 50% for every single self-employed taxpayer—which they reject as being implausible. Certainly non-compliance of the scale suggested for the UK is

40 Denmark, Henrik J Kleven, et. Al, Unwilling or Unable to Cheat? Evidence from a

Randomized Tax Audit Experiment, Tax Gap for Tax Year 2006, IRS 41 Friedrich Schneider, Andreas Buehn, Claudio E. Montenegro, Shadow Economies All

over the World New Estimates for 162 Countries from 1999 to 2007, July 2010 42 Trevor Breusch, Estimating the Underground Economy MIMIC models, November

2005 43 Konstantin Kholodilin, Ulrich Thiessen, The Shadow Economy in OECD Countries:

Panel Data Evidence, May 2011 44 Australian Bureau of Statistics, The Underground Economy and Australia’s GDP,

March 2004 45 Statistics Canada, Estimating the Underground Economy in Canada 1992–2008,

June 2011

17 Commons Library Briefing, 30 January 2019

completely incompatible with all of our customer research and operational data.

As a result of the general concern about the use such models a body consisting of a number of international organisations including OECD, IMF, the World Bank, UN and the European Commission have issued a strongly worded statement advising against use.46 Part of their statement says: Unofficial estimates are often based on macroeconomic models. For instance, they may assume a fixed relation between the size of the economy and money in circulation. Such methods may yield grossly exaggerated results, attracting the attention of politicians and newspapers and thereby gaining wide publicity.

In a more recent report ‘Reducing opportunities for tax non-compliance in the underground economy’,47 OECD comment: the OECD (and other international organisations) reject these methods as being useful in obtaining exhaustive estimates of GDP or in estimating underground production and have observed that when applied they produce for most countries spectacularly high estimates of NOE [Non Observed Economy] activities which have no sound scientific base but which, nevertheless, attract much attention from the media and other parties.48

Following these exchanges, these arguments were reiterated in a pair of articles published in the journal Taxation in summer 2012 – first by Ed Hagger, a deputy director at HMRC, and second by Mr Murphy.49

Reviewing the exchange, the then editor, Mike Truman, suggested one reason for the disagreement was that the Tax Justice approach was trying to measure something fundamentally different; in Mr Murphy’s view the gap was the difference between the contribution society ‘expected’ in tax and the amount actually paid, so that the legitimate use of corporate tax reliefs, say, could be termed ‘avoidance’: “this is a logical and consistent approach, but it does not measure the gap between the tax HMRC could collect and what they do collect.”50

In December 2013 the Public Accounts Committee published a report on HMRC’s annual accounts, in which it was strongly critical of the tax gap, arguing that it did not “include an assessment of the amount of tax lost through tax avoidance” and so “represents only a fraction of the amount that the public might expect to be payable.”51

In evidence Edward Troup (Tax Assurance Commissioner, HMRC) and Jim Harra (then Director-General, Business Tax, HMRC) were both asked if these figures included estimates of the amounts of money that many

46 Estimates of the unrecorded economy and national accounts, Declaration of the

Intersecretariat Working Group on National Accounts, October 2006 47 Forum on Tax Administration : SME Compliance sub-group, Reducing opportunities

for tax non-compliance in the underground economy, OECD, January 2012 48 Treasury Committee, First special report, 18 May 2012, HC 124 2012-13 pp17-18 49 “Mind the gap” & “What’s the tax gap?”, Taxation, 8 & 23 August 2012 50 Mr Truman concluded that “as a definition, and an estimate, of the tax gap”, Mr

Hagger had made “a better, if less philosophically satisfying case” (“The third round”, Taxation, 13 September 2012).

51 Public Accounts Committee, Thirty-fourth report: HMRC Tax Collection – annual report & accounts 2012/13, 19 December 2013, HC 666 of 2013-14 p8

18 Tax avoidance and tax evasion

felt companies, like Starbucks, Amazon and Google, should be paying.52 Both witnesses suggested that this would be misleading:

Q231 Chair: Am I right in saying that the sort of issues that we were discussing in relation to Starbucks, Amazon and Google … and the tax that could have been payable from those companies is not included, because it is not seen to be within the rules?

Edward Troup: The tax gap that we measure is a compliance tax gap.

Q232 Chair: It does not include that. I am asking whether it includes the Starbucks scenario, the Amazon scenario or the Google scenario.

Edward Troup: It does not include the amounts of tax that some of the commentators have said these companies should pay. That is correct …

Q258 Chair: At the moment … your tax gap is purely the tip of an iceberg.

Jim Harra: Our tax gap is a complete measure of non-compliance with current tax law. It does not include a measure of how much additional tax might be collected if you changed the policy.53

Many commentators have continued to criticise this approach to estimating the tax gap, and have made the case that this type of analysis should provide figures for the amounts of tax that should be paid. In January 2015 an alliance of charities, including Christian Aid and Oxfam, published proposals for a ‘Tax Dodging Bill’, to ensure that companies, particularly multinationals, paid their “fair share” of taxes.54 The authors argued that “tax dodging” encompassed three different types of behaviour (emphasis added):

There is no single, agreed, definition of “tax dodging”, but it is a phrase that has become widely accepted and understood by the public in the UK and is thus used here in place of a more specific definition of the behaviours that we are asking parties to tackle in this campaign.

In this case we include in our definition three broad types of behaviour: 1) Using opportunities provided by the tax system to attempt to reduce tax payments in a way that, on examination, would be deemed to be outside the law and thus illegal; 2) Using opportunities provided by the tax system to attempt to reduce tax payments in a way that is deemed legal, but is contrary to the intention of the law; 3) Using tax incentives, that are provided for in law, but which are not proven to provide the economic or social benefits that would justify the loss of tax revenue.55

Writing on this question some years ago, Judith Freedman, Professor of Taxation Law at Oxford, argued, “how much tax should be paid is not a

52 In late 2012 there was considerable media coverage contrasting the scale of these

multinationals’ operations and the amounts of tax they paid – an issue on which the Committee published a critical report (HC 716 of 2012-13). For more details see, Corporate tax reform (2010-2015), Commons Briefing paper CBP5945, 25 July 2016.

53 Thirty-fourth report, HC 666 of 2013-14 para 3 (fn 7), Ev25, Ev27 54 TaxDodgingBill.org press notice, Parties given 200-day challenge to fight back at

global tax dodgers, 26 January 2015 55 Oxfam, The Tax Dodging Bill: what it is and why we need it, January 2015 p19

19 Commons Library Briefing, 30 January 2019

question of moral intuition but a question of what is imposed by law.”56 Taking up this point more recently, the tax barrister Jolyon Maugham, suggested that “as a tool for delivering tax outcomes, morality is highly imperfect: subjective, imprecise, and enforceable indirectly at best.” However, there was a risk for the tax community from ignoring the truism: that which is legal isn’t always moral:

Discrimination on the grounds of ‘colour’ (to use the language of the Act) did not become immoral only on 8 December 1965 when the first Race Relations Act received royal assent … At the second reading of the Race Relations Bill, Peter, later Baron, Thorneycroft, argued that one should not legislate against discrimination on the grounds of ‘colour’; it was too soon. As he put it: ‘The British people can be led, but they cannot be driven.’

Thorneycroft was right, albeit in only the narrowest sense. That there can be a relationship between law and morality is a basic requirement of the law. The law becomes difficult to enforce if it is too advanced of morality: this was the Baron’s contention. However, the law falls into disrepair where it fails to keep pace with changing mores. And that, Dear Reader, is what we have here.57

Turning back to the tax gap, in their report in December 2013 the Public Accounts Committee argued that HMRC “should be explicit about the limitations of its current measure of the tax gap”:

The tax gap is a theoretical concept to assess tax revenues lost to the Exchequer. It does not cover the full amount lost through tax avoidance. It sets out to measure the difference between the amount collected and the amount that should be collected. The stated tax gap underestimates the amount of money lost to the Exchequer … HMRC should be explicit about the limitations of its current measure of the tax gap and gather intelligence about the value of tax lost through aggressive tax avoidance schemes.58

At the time HMRC published a press notice in which they took issue with this point:

HMRC’s methodology for measuring the tax gap is robust and has been endorsed by the International Monetary Fund (IMF). Contrary to what the PAC report says, the published tax gap does include a measure of the tax lost from avoidance, as well as evasion, but it can only measure non-compliance with existing tax law – it cannot estimate how much tax might be due if tax laws were different.

HMRC can only bring in the tax that is due under the law and we cannot collect what is not legally due, however much the Committee might want us to.

The Public Accounts Committee already knows that we cannot prosecute multinational companies for activities that are lawful within the international tax framework and has itself acknowledged that the kinds of international tax planning by large businesses that it has reviewed are lawful.59

56 “Chapter 8: Is tax avoidance ‘fair’?”, in, Chris Wales (ed)., Fair tax: towards a modern

tax system, Smith Institute 2008 p94. 57 “The uses of morality in tax”, Tax Journal, 19 December 2014. See also Mike

Truman’s valedictory editorial in Taxation: “So long …”, 4 March 2015. 58 Thirty-fourth report, HC 666 of 2013-14 p5 59 HMRC press notice, HMRC responds to PAC report, 19 December 2013

20 Tax avoidance and tax evasion

Subsequently the Government published a response to the Committee’s report, endorsing HMRC’s approach:

The Government disagrees with the Committee’s recommendation. The tax gap definition, calculation and the limitations are described in detail in the departments’ annual tax gap publication. The tax gap measures compliance with existing tax law and is informed by the intelligence the department gathers on the use of avoidance schemes. It does not cover how much tax might be paid if tax laws were different.60

HMRC has continued to produce these estimates each year, and following the publication of its 2015 report, Edward Troup, then HMRC Permanent Secretary, restated why, in his view, it was “one of the most important documents we publish”:

An Ipsos MORI poll of the British public in September 2015 showed that they believe 36% of their compatriots have avoided paying the full amount of tax on income or purchases in the past year. However, the proportion of people who admitted they had done so in the same anonymous survey was just 6%. Due in part to our work in tax gap estimation, we know that more than 90% of the tax that is due is paid with little or no involvement from HMRC.

This “perception gap” between what people think about non-compliance and the objective truth is important; if people think everybody is at it, they are more likely to dodge tax themselves. If HMRC can show objectively, transparently and clearly that non-compliance is not nearly as big a problem as people’s assumptions suggest, we can increase tax morale, reinforce social norms and – cyclically – reduce the tax gap further.61

In June 2016 Mr Troup gave evidence to the Treasury Select Committee, and on this occasion the then Chair of the Committee, Andrew Tyrie, asked “just how much of the tax gap is ever going to be eradicable in practice, given human nature.” In response, Mr Troup made a couple of points:

[The tax gap is] in a very real sense, the best measure of the long‑term performance of a tax administration, because it is effectively the tax that is not collected, for whatever reason, and our goal should always be to reduce [it] …

We are always going to have a tax gap, because there are always going to be criminal attacks; there is always going to be evasion … We think what we are doing, particularly with our digital transformation, will give taxpayers, particularly business taxpayers, the tools that effectively allow them to reduce their errors … [Moreover] no country in the world has an observed tax gap significantly lower than ours, which means we are already pushing at the boundaries of what is doable with current technology, with the current tax system.62

Following publication of the 2018 edition of the tax gap, Chris Sanger (global head of tax policy at EY), writing in the Tax Journal, noted that “at first glance, the results for this year look uninspiring” as the

60 HM Treasury, Treasury Minutes, Cm 8819, February 2014 p13 61 “Measuring the gap”, Taxation, 15 October 2015 62 Oral evidence: HMRC Executive Chair and Chief Executive, HC 232, 8 June 2016

Qs9-11

21 Commons Library Briefing, 30 January 2019

percentage figure “had been relatively constant since 2011/12.” He went on to argue that “dismissing the report because of the lack of movement in the year is to be misunderstand the purpose of the tax gap figures”:

HMRC uses the information to inform its operational strategy, to compare itself to other countries and to track its long-term performance. And it’s clear that the tax gap has impacted HMRC’s strategy. Consider the fact that the largest risk to the Exchequer, at over 40%, comes from small business. Also, the largest source of tax risk is failure to take reasonable care, which together with error, makes up more than a quarter of the tax gap. This fits with HMRC’s policy of mandating the ‘making tax digital’ requirements.63

Mr Sanger went on to note that the figures provide “an opportunity for HMRC to demonstrate its success, something that can be difficult given the necessary and wholly justified constraints to taxpayer confidentiality”, citing the evidence that HMRC’s director of customer strategy, David Richardson, gave in April that year to the Treasury Sub-Committee, as part of an inquiry into tax avoidance and evasion.

In his evidence Mr Richardson was asked whether HMRC’s compliance policy was unfairly focused on smaller traders:

Q2 Chair: One thing that is sometimes said about you is that you love to go after the sole trader, the white van man, the person running a childcare business from home, as opposed to the wealthiest, those with the most money and those doing the biggest amounts of avoidance. The figures that you have made public would suggest that, to some extent—that you are aiming at people primarily with less money and not looking at getting large amounts of money from richer individuals.

David Richardson: That is said sometimes; it is not true. Our compliance policy is the same right across the different sectors of the population, which is to try to prevent non‑compliance happening before it would otherwise happen, and then to pursue people where there is non‑compliance to get the correct amount of tax in. If you make the contrast between large business and small business, which is the one that is often suggested in the papers—that we go after small businesses and let large businesses off—that is completely untrue.

If you look at our investigation rate, you will find that over one in two of every large business is under investigation by us at any one time and, last year, we collected £8 billion in compliance yield from large business. If you look at small businesses, the number of businesses under investigation at any time is about one in 10. It is important that we investigate small businesses, because they make up 46% of the tax gap, so we need to have a presence with small business. But large business represents a particular risk to us, and we investigate large businesses much more frequently and with much greater technical expertise than at the small end.

Q3 Chair: If we take people you define as wealthy individuals, how certain can we be that your estimate of the tax that is being

63 “The tax gap: a right riveting read?”, Tax Journal, 6 July 2018. For more details of

HMRC’s programme to introduce a new system of digital tax accounts see, Making Tax Digital, Commons Briefing paper CBP7949, 24 December 2018.

22 Tax avoidance and tax evasion

avoided by them is an accurate one, and that you are not understating the amount of money?

David Richardson: We publish a tax gap. We are one of the few countries that publish a tax gap. That has been looked at by the IMF, by Government statisticians, so we have reasonable confidence in the tax gap and stand by that. We publish it so that people can see what is going on. What is important with the tax gap is the trend. By applying it in the same way every year, you can see a downward trend over the last 10 years.

We are now at 6%, which is the lowest it has ever been and certainly one of the lowest of the countries that produce a tax gap. It is a good indicator of the extent of evasion and avoidance. Like all statistics, it is unlikely to be 100% accurate, but it is a consistent measure that shows a clear trend and a reliable, broad view of the make-up of the gap.64

64 Treasury Sub‑Committee, Oral evidence: Tax avoidance and evasion, HC 934, 17

April 2018 Qs2-3

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3. The Coalition Government’s approach

3.1 A new anti-avoidance strategy The Coalition Government set out its priorities for tax policy in its agreement published in May 2010, announcing that as a whole the tax system should be made “more competitive, simpler, greener and fairer.” On avoidance, the agreement stated that the Government would make “every effort” to tackle it “including detailed development of Liberal Democrat proposals.”65

In Opposition the Liberal Democrats had pin-pointed a number of anti-avoidance measures, including a new General Anti-Avoidance Principle - or ‘GAAP’ - that they estimated could raise up to £2.2bn a year. In their General Election briefing on the major parties’ tax proposals the Institute for Fiscal Studies (IFS) commented on the viability of a GAAP, citing earlier work by the Tax Law Review Committee:

A general anti-avoidance principle (GAAP) is intended to help prevent behaviour that reduces tax liabilities through transactions that satisfy the letter of the law but are said to violate the spirit of the law in some way. In the past, concerns have been raised that a GAAP would be inherently vague and would potentially create uncertainty for taxpayers, and therefore that a resource-intensive ‘pre-clearance’ mechanism would be required whereby taxpayers could check in advance with HMRC whether particular arrangements would fall foul of the GAAP. The Liberal Democrats’ response to these concerns is to propose that ‘pre-clearance’ be provided by a new branch of HMRC which would charge commercial rates for such advice. This is a reasonable solution, but note that in effect it simply shifts the cost of pre-clearance from HMRC to the taxpayer.

The effects and effectiveness of a GAAP would depend a great deal on exactly how it was worded and on how the courts interpreted it. International experience has been varied in these respects. It is not a panacea and is unlikely to remove the need for more specific anti-avoidance legislation, but it could potentially raise some revenue.66

To estimate how much a GAAP would yield, the Liberal Democrats have taken the Government’s estimates of how much it loses from both ‘avoidance’ and differences in ‘legal interpretation’, and simply guessed what fraction of this total a GAAP would deliver: 20% for income tax, NICs and capital gains tax, and 25% for corporation tax. Yet a GAAP of the kind they describe would do little to address differences in ‘legal interpretation’.

The HMRC document from which the Liberal Democrats take their estimate of the tax gap describes the difference between ‘avoidance’ and ‘differences in legal interpretation’. Avoidance,

65 HMG, The Coalition: our programme for government, May 2010 p30 66 See Bowler, T. (2009), Countering tax avoidance in the UK: which way forward?, IFS

Tax Law Review Committee Discussion Paper No. 7 … for an analysis of the impact a GAAP might have had on tax avoidance had the current Government introduced one following consultation in 1998.

24 Tax avoidance and tax evasion

according to HMRC, is “the use of schemes or arrangements that seem to HMRC to have been implemented primarily in order to deliver a tax advantage”; by contrast, “Legal interpretation relates to the potential tax loss from cases where HMRC and customers have different views of how, or whether, the law applies to specific and often complex transactions. Examples include the correct categorisation of an asset for allowances, the allocation of profits within a group of companies, or VAT liability of a particular item. In these situations the customer will have an alternative view of the law and of how it applies to the facts in their case to that held by HMRC.”

A GAAP as normally envisaged would address avoidance but not differences in legal interpretation, on these definitions; and indeed it is notable that the stated aim of the Lib Dems’ GAAP is to target transactions “constructed in such a way that the sole or main purpose, or one of the main purposes, is to reduce or eliminate tax liability” – a phrase that is almost indistinguishable from the above definition of ‘avoidance’ rather than ‘legal interpretation’

To raise £2.2 billion, therefore, the fractions of ‘avoidance’ alone that a GAAP would need to eliminate are much larger than the 20% and 25% that Liberal Democrats assume. Since these percentages are arbitrary guesses in any case (and we have no better way of estimating the yield), it is possible that larger percentages would turn out to be accurate. But relying on bringing in £2.2 billion is clearly less cautious than the 20% and 25% numbers might suggest.67

In its first Budget in June 2010 the Government stated that as part of “wider work on improvements to the tax policy making process” it would “engage informally with interested parties to explore whether there is a case for developing a General Anti-Avoidance rule.”68 In September, just prior to the Spending Review, the Chief Secretary to the Treasury announced that HMRC would receive an extra £900m of funding for a number of additional activities over 2011-2015 to improve its collection record, by reducing the current incidence of both avoidance and evasion.69 In turn the Spending Review the next month stated that this extra £900m would bring in “an additional £7bn a year in tax revenues by 2014/15”:70

This will include:

• a five-fold increase in criminal prosecutions to act as a deterrent to others;

• a new dedicated team of investigators to crack down on offshore evasion;

• more resources for the prevention of tobacco and alcohol fraud, an increase in registration checks, and a cyber team to address repayment fraud;

67 Taxes and Benefits: The Parties’ Plans, IFS April 2010 p39 68 Budget 2010, HC 61 June 2010 para 2.114. The Government published more details

of its approach at the time in, Tax policy making: a new approach, 22 June 2010 69 Liberal Democrats press notice, Alexander announces major clampdown on tax

avoidance and evasion, 19 September 2010 70 Cm 7942 October 2010 pp 71-2

25 Commons Library Briefing, 30 January 2019

• dedicated tax experts to extend HMRC’s coverage of large businesses, focused on providing resources to tackle high risk areas; and

• improving the scope of in house debt collection and placing up to £1 billion per year of tax debt to private sector debt collection agencies.

It should be noted that this investment was in the context of a cut in HMRC’s total spending:

Owen Smith: To ask the Chancellor of the Exchequer what effects he expects the outcomes of the comprehensive spending review to have on his Department's funding for HM Revenue and Customs in each year of the spending review period.

Mr Gauke: The outcome of the spending review is that HMRC will be required to make savings of 25% in real terms on a straight line basis over the next four years and that they will re-invest £900 million to tackle non-compliance in the tax system. The overall net effect is a real terms reduction of about 15%.71

At the time there were some concerns that the reductions to the HMRC’s budget and consequent cuts in staff would see an increase in tax evasion and avoidance,72 though the Government argued that there was not a binary relationship between the two:

Mr Jim Cunningham: To ask the Chancellor of the Exchequer what his most recent assessment is of the relationship between the number of staff employed by HM Revenue and Customs (HMRC) and the amount of tax revenue obtained by HMRC.

Mr Gauke: The amount of tax revenue received by the Government in any given year depends on a number of factors, including:

• the state of the economy eg the level of personal and corporate income, consumption, saving and investment;

• the structure of the tax system eg the rates, thresholds and reliefs in operation;

• the level of compliance by taxpayers; and

• HM Revenue and Customs' (HMRC) administration of the tax system, and the productivity of its compliance activities.

Through the use of new technology and increases in staff productivity HMRC has increased the amount of revenue bought in as a result of its compliance activities from £7.5 billion in 2005-06 to £12 billion in 2008-09. Over the period April 2005 to April 2010, HMRC has reduced the number of full-time equivalent staff it employs by 23% (excluding the transfer of 4,641 FTE staff to the UKBA).73

The Treasury Committee were critical of this funding decision, as part of their report on tax compliance published in March 2012:

71 HC Deb 23 November 2010 c278W 72 For example, The Association of Revenue & Customs, Being bold : a Radical Approach

to Raising Revenue and Reducing the Deficit, September 2010 & FDA press notice, Tax gap figure reinforces case for increased HMRC resourcing, 17 September 2010; see also, “A challenge to the Chancellor”, and “Closing the gap”, Taxation, 5 May & 6 October 2010

73 HC Deb 11 October 2010 c242W

26 Tax avoidance and tax evasion

In the 2010 Spending Review, HM Treasury allocated £917 million to HMRC with the intention of generating an additional £7 billion in compliance yield annually and £18 billion over the four-year life of the Spending Review.74

Given HMRC's estimate of the 2009-10 tax gap of £35 billion, this is a reduction of 20%, which is a very ambitious target … We accept that, based upon figures in HMRC's latest tax gap report, these seem to be sensible areas in which to invest. However the process by which the areas to be invested in, the amount to be invested, and the estimated additional yield were calculated and decided lacks transparency.

Mr David Gauke MP, Exchequer Secretary, explained the process as follows: “[HMRC] came forward with a proposal saying, "This is what we think we can do to reduce costs and this is what we can do to reinvest in a way that would increase the yield". I think it would be fair to say that pretty well the HMRC bid was accepted by the Government. The Treasury kicked the tyres very hard and examined all the detailed proposals that were contained within it, which broke down to, "Well, this particular programme we think would cost X and produce Y". We examined the various proposals and, by and large, the HMRC bid was accepted, and that is why we reached the settlement that we did [HC 731 Q372].

In a further memorandum intended to elaborate on this point, the Exchequer Secretary told us that: “HMRC came forward with a number of investment cases to further increase compliance and reduce the tax gap that the Treasury were satisfied with on that basis... The final £917m reinvestment proposals therefore met the test of standing up to intense Treasury scrutiny [HC 731 Ev 130].”

Neither the Minister's oral evidence nor his supplementary evidence makes clear what criteria were applied to assess HMRC's proposals for investment, or whether this assessment was systematic. This makes it difficult for us to scrutinise in detail whether the areas to be invested in are the right ones, whether the estimated yield from each area is accurate, and whether proposals which were rejected should have been accepted.75

The Committee went on to raise concerns that investments in this area might encourage an overly aggressive attitude by tax officers:

We welcome the Exchequer Secretary's view that "the Treasury could, in theory, seek to invest in HMRC until the marginal pound invested brought not less than a pound in return... [but] in practice the Treasury considers each additional investment in HMRC on a case-by-case basis". However we encourage the Treasury to include in its consideration the question of whether the activity invested in will yield the right amount of tax and not just the greatest possible amount.76

At the time of the 2011 Budget the Government published a strategy document on its anti-avoidance strategy. In the foreword to this, the then Exchequer Secretary, David Gauke, made the case for a new approach as follows:

74 Spending Review Settlement 2010, Cm 7942, October 2010; Treasury Committee,

Administration and effectiveness of HM Revenue and Customs, 30 July 2011, HC 731 of 2010-12 Q258

75 HC 1371 2010-12 pp7-8 76 HC 1371 2010-12 p8

27 Commons Library Briefing, 30 January 2019

We inherited a tax system with a ‘tax gap’ of around £40 billion. More than a sixth of that is due to tax evasion – that is, illegally understating tax liabilities. But a further one sixth is estimated to be due to tax avoidance – that is, reducing tax liabilities by using the tax law to get a tax advantage that Parliament never intended. And the problem is a persistent one …

Clearly, there is a problem we need to tackle and we are committed to tackling it differently from our predecessors. That means a more strategic approach that gets to the root of the problem, rather than treating the symptoms.77

The document went on to summarise the key elements of this approach…

• making the most of opportunities to make the tax system more watertight against avoidance, for example, as part of wider policy reform;

• reviewing areas of the tax system that have been under repeated avoidance attack, to get to the heart of the problem and develop sustainable solutions; and

• creating new generic defences against avoidance, going beyond closing identified avoidance loopholes, including considering the case for a General Anti-Avoidance Rule (GAAR).78

… and to set out four strands of work on legislative defences against tax avoidance:

• a new proposal to reduce the cash flow benefits that taxpayers can gain from using high risk avoidance schemes;

• a new rolling programme of reviews on high risk areas of the tax code;

• work in hand on a GAAR; and

• the targeted tax measures that sit alongside this strategic work to address specific avoidance risks that have emerged.79

With regard to the specific proposal to consider a ‘GAAR’, in November 2011 the Treasury published a report by a study group, led by Graham Aaronson QC, which recommended a narrowly focused rule targeted at ‘abusive arrangements’ only,80 and following consultation,81 the Government introduced provision for this tax avoidance legislation in 2013.82 Several countries have introduced legislation along these lines, and an IMF survey of international practice gives a short description of how this rule is meant to work:

A GAAR is a provision of last resort that is capable of being invoked by a tax authority to strike down unacceptable tax avoidance practices that would otherwise comply with the terms and statutory interpretation of the ordinary tax law. A GAAR is

77 HM Treasury/HM Revenue & Customs, Tackling Tax Avoidance, March 2011 p3 78 op.cit. p5 79 op.cit. p9 80 HM Treasury press notice 130/11, 21 November 2011 81 HMRC, A General Anti-Abuse Rule (GAAR) - consultation document, June 2012 82 As noted above, these developments are set out at greater length in, Tax avoidance:

a General Anti-Abuse Rule, Commons Briefing paper CBP6265, 7 September 2018.

28 Tax avoidance and tax evasion

typically designed to strike down those otherwise lawful practices that are found to be carried out in a manner which undermines the intention of the tax law such as where a taxpayer has misused or abused that law. This is typically achieved by giving the tax authority the power to cancel a particular tax benefit or assess a different (increased) tax liability against the taxpayer in circumstances where the course of action taken by a taxpayer is so blatant, artificial or contrived that it is only explicable by the desire to obtain a relevant tax benefit.83

As HMRC’s detailed guidance on the GAAR explains, “to ensure that the taxpayer is given the benefit of any reasonable doubt when determining whether arrangements are abusive, a number of safeguards are built into the GAAR rules”:

These include:

• requiring HMRC to establish that the arrangements are abusive (it is not up to the taxpayer to show that the arrangements are non-abusive) n the case of the UK’s GAAR,

• applying a ‘double reasonableness’ test - this requires HMRC to show that the arrangements ’cannot reasonably be regarded as a reasonable course of action’ - this recognises that there are some arrangements which some people would regard as a reasonable course of action while others would not - the ‘double reasonableness’ test sets a high threshold by asking whether it would be reasonable to hold the view that the arrangement was a reasonable course of action - the arrangement is treated as abusive only if it would not be reasonable to hold such a view

• allowing the court or tribunal to take into account any relevant material as to the purpose of the legislation that it is suggested the taxpayer has abused, or as to the sort of transactions which had become established practice at the time when the arrangements were entered into

• requiring HMRC to obtain the opinion of an independent advisory panel as to whether an arrangement constituted a reasonable course of action, before HMRC can finally apply the GAAR.84

In answer to a PQ in May 2018 Treasury Minister Mel Stride noted, “HMRC is actively using the GAAR and all cases referred to the GAAR Advisory Panel to date have resulted in a Panel opinion in HMRC’s favour. Since 2013, twelve Panel opinions have been published and HMRC has taken action against each referred case using the GAAR.”85

In their report on Finance Bill 2011, the House of Lords Economic Affairs Committee looked at this issue, asking a number of witnesses about the Government’s new approach:

[The Government's strategy and the three elements to this strategy identified in Tackling Tax Avoidance] … met with wide-spread approval from our private sector witnesses. The Chartered Institute of Taxation (CIOT) thought that "the idea of a strategic

83 Waerzeggers & Hillier, Introducing a General Anti-Avoidance Rule (GAAR) : Ensuring

That a GAAR Achieves Its Purpose, International Monetary Fund, January 2016 p1 84 HMRC, GAAR Guidance with effect from 28/3/2018, March 2018 para B12.1 85 PQ138560, 1 May 2018

29 Commons Library Briefing, 30 January 2019

approach to tackling avoidance is sensible and in many ways much needed ... We are pleased to note that the new Protocol on unscheduled announcement of changes to tax law explicitly recognises that retrospective changes to tax legislation will be wholly exceptional …" [Written evidence (WE)86].

The Institute of Directors (IoD) thought that although the "detailed articulation of the strategy may be new, we would be surprised and concerned if more than a small proportion of the practices that it mentions were new."[WE] They agreed with taking "away the cash-flow advantage of using high-risk avoidance schemes that fail."[WE] The CBI echoed this ... The Institute of Chartered Accountants (ICAEW) thought that "Tackling Tax Avoidance makes a number of sensible recommendations. We have welcomed previously the new Protocol on unscheduled announcement of changes to tax law which reiterates the fundamental principle that any tax changes should be made prospectively and not retrospectively."[WE]

Mr Alex Jackman of the Forum of Private Business (FPB) was positive … but he had a concern "We do not want to see small business unfairly targeted … while there are a few big wins out there, I think the view might be taken by HMRC that there are a few more easy wins at the lower end of the business spectrum. That is something we would be seeking to avoid."[Q231]

On the rolling programme of reviews of high-risk areas of the tax code, most of our private sector witnesses were content with HMRC having chosen income tax losses and unauthorised unit trusts ... Only Mr Murphy87 thought that these areas "seem to be relatively minor compared to major issues such as profit shifting, the use of tax havens, the abuse of the domicile rule, the residence rules and what they are giving rise to."[Q90]88

Witnesses raised two specific concerns: first, that the department should be stopping avoidance schemes more quickly, and second, that it should improve the drafting of legislation.89

On the first of these issues, officials pointed to the impact of the ‘disclosure regime’, DOTAS for short, under which promoters of avoidance schemes are required to give HMRC information on the nature of the scheme, and those taxpayers that they have provided it to.90 For its part the Committee concluded that tackling evasion was just as important as tackling avoidance, if not more so:

Some of our witnesses enjoined us not to forget about evasion. In their evidence, the CIOT wrote "As a final point in this section, we would urge the Government not to lose sight of evasion and other criminal activity, which can have a far greater impact on Exchequer revenues than avoidance."[WE] … [Richard Murphy] agreed "Let's be blunt about it; the biggest issue with regard to loss of revenue is not with regard to avoidance, it is with regard to evasion, and most people who are evading would in fact be basic

86 Written evidence to the Committee, collated on the Committee’s site. 87 Richard Murphy, Tax Research LLP 88 Select Committee on Economic Affairs, The Finance Bill 2011, 17 June 2011 HL

Paper 158 2010-12 pp32-33 89 HL Paper 158 2010-12 p33, pp35-36 90 For more details see, National Audit Office, Tax avoidance: tackling marketed

avoidance schemes, HC 730, 21 November 2012, and, Commons Briefing Paper CBP2956, 13 April 2017 (see section 2.1).

30 Tax avoidance and tax evasion

rate taxpayers, probably not high rate taxpayers at all. This is cash put in pockets …."[Q85]

Dave Hartnett (Permanent Secretary for Tax at HMRC) outlined for us what was happening to tackle evasion and stated that he was "expecting our numbers from compliance interventions to be very good for 2010-11—probably our best ever … We are in the throes of recruiting 200 more criminal investigators. We particularly want to focus on people who have hidden money offshore over a number of years, as a product of tax fraud. We have set up new groups around the country, with task forces looking at particular industries … We have teams of specialist investigators who are pursuing people working in the hidden economy."[Q270]

On the basis of HMRC's figures the tax lost from all forms of evasion and default is very much greater than that lost from avoidance: £22 billion compared with £7.5 billion. We welcome action to tackle evasion. We recommend that the Government should publish an anti-evasion strategy in the same way as for anti-avoidance.91

As noted above, HMRC seek to assess the effectiveness of their strategy to increasing tax revenues by estimating “compliance yield”: that is, the additional revenue it generates through its activities to identify and prevent tax losses arising from avoidance, evasion and criminal attack. As the National Audit Office explain:

HMRC estimates compliance yield to provide accountability and to support decision-making. The long-term aim of compliance work is to reduce the tax gap: the difference between the tax that is theoretically due and the tax HMRC actually collects.

But a more direct measure of compliance yield is also necessary as the tax gap is subject to long reporting delays and is affected by factors outside HMRC’s control, such as the strength of the economy and changes to tax rates. HMRC therefore estimates the additional tax revenue attributable to its compliance activities, both to provide accountability for its overall performance and to manage its business and the performance of its compliance teams on a day-to-day basis.92

In 2014 it came to light that HMRC had made a £1.9bn error when it had established the baseline for these estimates in 2010, something for which it was strongly criticised by the Public Accounts Committee.93

Nevertheless, in an overview of the department’s work published in February 2015, the NAO found that HMRC had made “significant progress since the 2010 spending review in delivering its strategic objectives, successfully reducing the cost of tax collection while increasing the tax it raises from its compliance work.” The report went on to provide details of HMRC’s (corrected) estimates of its compliance yield over this period:

HMRC estimates that it secured compliance revenue of £23.9 billion in 2013-14, over £7 billion more than the baseline set at

91 HL Paper 158 2010-12 p42 92 NAO, HMRC 2013-14 accounts, 3 July 2014 pR19. Part Two of the report discusses

the measurement of the compliance yield in detail. 93 HMRC’s progress in improving tax compliance and improving tax avoidance, 18

November 2014, HC 458 of 2014-15 pp7-10

31 Commons Library Briefing, 30 January 2019

the beginning of the spending review period. Despite an error in the baseline that HMRC originally set, it met the additional compliance yield targets agreed in the 2010 spending review. In 2013-14, it generated an increase of £7.3 billion against the target of £5.3 billion. HMRC believes it is on track to meet its 2014-15 target.94

3.2 Assessing the impact of HMRC’s strategy When HMRC’s 2015 estimates of the tax gap were published, the Chartered Institute of Taxation noted that despite the amount of press coverage given to the scale of tax avoidance, the costs from tax evasion and other illegal activities were much higher: “This total includes an estimated £2.7n lost to tax avoidance … However, £5.1bn was lost to criminal attacks, £4.4bn to evasion and £6.2bn to the ‘hidden economy’, a total of £15.7bn from illegal activity.” John Cullinane, CIOT Tax Policy Director, commented: “These figures suggest that tax evasion and other illegal activity are costing the Exchequer nearly six times as much as tax avoidance.”95

Writing at this time barrister Jolyon Maugham suggested that without a significant reduction in the scale of the hidden economy “our scope for improvement is limited”:

Legislative steps are an imperfect solution. They are imperfect because they cannot address the resource heavy areas of smuggling, the shadow economy and so on. Technological advances … can assist but we also need investigators.

Perhaps more profoundly, they are imperfect because they create imbalances in the system. Over time they will erode – indeed, they are already eroding – the reputation HMRC has previously enjoyed for fair dealing …

The tax avoidance figures next year will show the effects of the adoption in the Finance Act 2014 of a slew of radical legislative measures – and there is more to come from further legislation in subsequent Acts. And at some stage soon – although the current data records no such trend – we will see some modest benefits from a growing focus on evasion. Modest, because unless someone is brave enough really to tackle the shadow economy, our scope for improvement is limited.96

Similar concerns were raised the following year when HMRC published estimates of the tax gap for 2014/15: of a total tax gap of £36 billion, £2.2 billion was attributed to tax avoidance, and £16.2 billion to various types of illegal activity (the hidden economy, evasion and criminal attacks). In a press notice from the CIOT Mr Cullinane observed:

“These figures suggest that tax evasion and other illegal activity are costing the Exchequer more than seven times as much as tax avoidance. The CIOT has long argued that HMRC needs to put more effort into investigating and prosecuting those who seek to evade tax. The Government are right to have put extra resources

94 Increasing the effectiveness of tax collection: a stocktake of progress since 2010, 6

February 2015, HC 1029-I of 2014-15 p7, pp10-11 95 CIOT press notice, 22 October 2015 96 “The tax gap, updated”, Waiting for Godot blog, 22 October 2015

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in this direction, as well as tackling artificial and abusive attempts to avoid tax.

“Taxpayers will be reassured that HMRC is making good progress on tackling and managing the tax gap. We welcome HMRC’s continued commitment to providing impartial statistics that should inform the unprecedented debate about taxation and we will continue to push for the more simplified and workable tax system that personal and corporate taxpayers tell us they want.”97

In December 2015 the NAO published a report on HMRC’s approach to dealing with tax fraud; the authors underlined the inherent difficulties to effectively prioritising risks in this area, despite HMRC’s work in estimating its compliance yield and the size of the tax gap:

It is inherently challenging for HMRC to understand whether it is using the best mix of measures to tackle tax fraud in the long term.

HMRC uses compliance yield as a direct measure of the effectiveness of its compliance work, while its annual tax gap calculation provides an indicator of the long-term impact of HMRC’s work overall. However, it is difficult for HMRC to know how its interventions interact with one another or whether it is achieving the best outcome from the resources it deploys to tackle tax fraud in the round. It is also hard to detect or quantify potential unintended consequences of its compliance work, such as whether disrupted criminal activity is displaced to other gangs, or the long-term effect on taxpayers’ behaviour of encouraging tax evaders to volunteer information about their income and assets so they can benefit from lighter penalties than might otherwise have been imposed.

The problem of measuring outcomes is one faced by all tax administrations worldwide. HMRC recognises this complexity and is developing its thinking on how to design a new range of performance measures that will give it a better understanding of the impact from its work.98

The report discussed a number of initiatives to tackle evasion, including provision to give HMRC powers to obtain data from payment providers and business intermediaries to identify hidden economic activity. Further details of this were published in December 2015,99 and provision to this effect was included in the Finance Act 2016 (specifically ss176-7).

In April 2016 the Public Accounts Committee published a report following the NAO’s work on tax fraud, which was critical of HMRC’s record to reducing its scale – and in particular, the relatively small numbers of investigations and prosecutions in this area.100 Among its recommendations the Committee argued that HMRC should improve

97 CIOT press notice, ‘Tax gap’ figures – help the compliant comply, and bear down on

those who do not, 20 October 2016. See also, CIOT, ‘Tax gap’ continues its slow fall, 26 October 2017.

98 Tackling tax fraud: how HMRC responds to tax evasion, the hidden economy and criminal attacks, HC601, 17 December 2015 p9

99 HMRC, Tackling the hidden economy: extension of new data-gathering powers – tax information & impact note, December 2015

100 Public Accounts Committee press notice, New measures and greater clarity needed to fight tax fraud, 15 April 2016

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the way it reported its performance, clarify its strategy, and tackle public perceptions that wealthy individuals were able to evade tax successfully:

We cannot judge how effective HMRC is at reducing the tax gap because the way it reports its performance is too confusing. HMRC told us that its performance in addressing tax fraud was good. But HMRC’s assessment of the tax gap shows that the level of tax fraud has remained virtually static over the last five years, at around 3% of all tax liabilities. The impact that HMRC claims for its work far exceeds any reduction in the tax gap …

Recommendation: HMRC should clearly set out in its annual reports the relationship between its compliance yields and changes in the tax gap. It should also publish this information in a way that is accessible for everyone to understand.

HMRC has not set out a clear strategy for tackling tax fraud. HMRC referred to a number of areas where it plans to focus its activities to tackle different types of tax fraud including the risks posed by illicit alcohol and evasion by wealthy individuals. HMRC is missing key information that would be necessary to inform a properly strategic approach. For example, HMRC could not tell us how much resource it puts into tackling tax fraud compared to other types of compliance work, such as dealing with tax avoidance or error ...

Recommendation: HMRC should set out its strategy to tackle fraud by November 2016. It should identify how much resource is devoted to tackling different tax risks and the corresponding yield in each area of the tax gap.

The perception that HMRC does not tackle tax fraud by the wealthy needs to be addressed … HMRC told us it investigates around 35 wealthy individuals for tax evasion each year, but did not know how many wealthy individuals it had successfully prosecuted. We welcome the fact that HMRC has sought and received funding to increase the number of investigations it undertakes into corporates and wealthy individuals to 100 a year by 2020, indicating that the current level is insufficient.

Recommendation: HMRC must do more to tackle tax fraud and counter the belief that people are getting away with tax evasion. It needs to increase the number of investigations and prosecutions, including wealthy tax evaders, and publicise this work to deter others from evading tax and to send out a message that those who try will not get away with it.101

In its response the Government accepted that HMRC should improve its performance reporting, and engage with public perceptions about tax evasion, though it rejected the suggestion that the department did not have an effective strategy to reduce fraud.102

HMRC’s 2015/16 Annual Report had a section discussing both the tax gap and the compliance yield, with some comments on the difficulties to trying to explicitly link the two.103 However, as the NAO observed, in its commentary on the annual accounts, “this is a useful step in explaining the relationship, but it will take longer-term work to address the issues raised by the Committee of Public Accounts about how

101 Tackling tax fraud, 15 April 2016, HC 674 of 2015-16, pp5-6 102 Treasury Minutes, Cm 9323, July 2016 pp1-3 103 HMRC 2015/16 Annual Report, HC 338, July 2016 pp16-19

34 Tax avoidance and tax evasion

HMRC’s reported headline performance measures relate to each other.”104 HMRC confirmed changes in its estimates of the ‘future revenue benefit’ of its compliance interventions – that is, the impact this work is estimated to have on tax receipts over future years.105 As the NAO noted, “from 2016-17, following our recommendation, HMRC will report future revenue benefit in the year of impact rather than the year in which it is assessed. The new method is more consistent with the way the rest of compliance yield is reported, although there will still be a degree of uncertainty around the estimation … The new approach will help to improve the transparency and internal consistency of HMRC’s performance measurement.”106

The Committee reiterated its concerns about public perceptions of the scale of tax evasion by the wealthy in a report in January 2017,107 and in response HMRC stated that it would publish more details of this aspect of its work in its next Annual Report.108

In July 2017 HMRC published its 2016/17 Report, which presented its latest estimates of its compliance yield, as well as separate short papers on the element of this accounted for by future revenue benefit,109 and on the relationship between compliance yield and the tax gap. In the latter case, this paper observed, “the amount of compliance yield HMRC generates and the size of the tax gap are related but the links are not straightforward”:

Compliance yield records many aspects of compliance work, including tax recovered directly from our work, future revenue benefit and losses prevented. It can also cover more than one tax year. Different factors, such as the number of new businesses, new customers, changes in levels of voluntary compliance, economic factors, tax policy and rate changes all affect the tax gap. Because the tax gap reflects a single year, and some compliance cases can cover multiple years, it is possible that the amount of compliance yield HMRC secures might increase while the percentage tax gap remains the same or reduces.110

The National Audit Office’s report on the accounts has a short section on this issue, describing HMRC’s paper on the compliance yield and the tax gap as “a useful step in explaining the relationship”, but going on to say, “it will take longer-term work to address the issues raised by the Committee of Public Accounts on how HMRC’s reported headline performance measures relate to each other.”111

HMRC estimated that its compliance yield for 2016/17 was £28.9 billion, of which £6.3 billion was accounted for by future revenue

104 HM Revenue & Customs 2015-16 Accounts, July 2016 para 1.33 105 For details see, HMRC, HMRC compliance revenues – how HMRC will change how it

reports ‘Future Revenue Benefit’, July 2016 106 HM Revenue & Customs 2015-16 Accounts, July 2016 para 1.32 107 Public Accounts Committee press notice, Government must take tougher stance on

taxing the very wealthy, 27 January 2017. See also, Collecting tax from high net worth individuals, 27 January 2017, HC 774 of 2016-17

108 Treasury Minutes, Cm 9433, March 2017 pp5-7 109 HMRC's Compliance Yield: How HMRC reports future revenue benefit – an update

for 2016-17, July 2017 110 The tax gap and compliance yield – what they are and how they relate, July 2017 111 HMRC Annual Report and Accounts 2016-17, July 2017 para 1.20

35 Commons Library Briefing, 30 January 2019

benefit, and £1.3 billion from the use of ‘accelerated payment notices’, which are discussed in the next section of this paper:

The main components of our £28.9 billion compliance yield are:

• £10.3 billion of cash expected — the amount of additional revenue due when we identify previous non-compliance, reduced by a discount rate to reflect the fact that some of the amounts that we identify will not be collected, for example where a business becomes insolvent …

• £7.9 billion of revenue loss prevented — the value of our activities where we have prevented revenue from being lost to the Exchequer that impacts on our tax receipts …

• £6.3 billion of future revenue benefit — the estimated effect of our compliance interventions on customers’ future behaviour

• £3 billion of product and process yield — the estimated annual impact on net tax receipts of legislative changes to close tax loop holes and changes to our processes which reduce opportunities to avoid or evade tax …

• £1.3 billion of revenue from Accelerated Payments notices — the disputed amounts of tax that people using tax avoidance schemes are now required to pay up-front within 90 days, as well as an estimate of the behavioural change that the policy has generated ...

If we calculate future revenue benefit using the old methodology (reporting future revenue benefit in the year we completed our compliance activities) our total compliance yield for 2016-17 would be £28 billion, of which future revenue benefit would be £5.4 billion. The new methodology records future revenue benefit against the year in which the exchequer benefit is expected and amounts to £6.3 billion.112

On the specific issue of prosecutions, the report added:

A total of 886 criminals and fraudsters were prosecuted in 2016-17, mostly for tax-related offences, serving a collective total of 806 years in prison. We are committed to increasing the number of criminal investigations that we can undertake into serious and complex tax crime, focusing particularly on wealthy

112 HMRC Annual Report 2016/17, HC 18, July 2017 pp23-4

36 Tax avoidance and tax evasion

individuals and corporates, with the aim of increasing prosecutions in this area to 100 a year by the end of the Parliament.113

In November 2017 the Public Accounts Committee held an evidence session on HMRC’s report, and on this occasion, Jon Thompson (Chief Executive and Permanent Secretary), and Jim Harra (Director General, Customer Strategy and Tax Design), said a little as to HMRC’s ambitions to reduce the tax gap …

Q76 Chair: …We have talked a lot on this Committee about the tax gap, and the good news is that there is a downward trend over the last nine years, from 8.3% in 2005-06 to 6.5% in 2014-15. How much further can we realistically expect the tax gap to fall, Mr Thompson? It is a prediction we’re asking for.

Jon Thompson: A prediction? Yeah, well—

Q77 Chair: To measure you against.

Jon Thompson: The next question will be, “Am I prepared to sign up to a target?” Look, we will strive to get it as low as possible. It is actually really rather difficult to work out what is the lowest possible level that you can go to. Jim and I have been having some interesting conversations about this. With more powers, more people, more intervention and more data, you can continue to reduce the tax gap, and indeed there is a whole range of measures in the pipeline now and I guess there will be further measures in the upcoming autumn Budget. It is quite difficult. It cannot be zero, otherwise every other person would need to be a tax inspector, but quite how low it can go is difficult to estimate. We believe that we have the most comprehensive measurement of the tax gap and that it is the lowest published one in the world, but we still need to strive to get it lower and there is a whole range of measures in the pipeline that we think will reduce the tax gap further.

… and the most significant obstacles to achieving this:

Q78 Chair: … We have picked at this issue before, but which parts of the tax gap are you most worried about? Which are the hardest bits to crack?

Jim Harra: It is all hard to crack in different ways. The largest part of it is really the small businesses. That poses a number of big challenges for us. First, there is a very large number of small businesses, so, case by case, it can be a relatively small amount and therefore it can be very difficult to tackle that in a cost-effective way. Also, the way that we have traditionally tackled that issue could be quite intrusive and stressful for a small business, because it involves in-depth investigation.

And we are seeing in the economy a movement away from employment towards small businesses, so the underlying pressure is people moving out of an area of taxation that is highly compliant into an area that is highly non-compliant. That is a key challenge for us. We want to find different ways of tackling that, other than the traditional method of having a lot of boots on the

113 op.cit. p24. A piece by the charity Full Fact noted that “a large part” of compliance

yields “covers money that the Government thinks it will get in future … rather than what it has saved so far” (“How much has the government recouped from tax evasion and avoidance?”, 2 November 2017.

37 Commons Library Briefing, 30 January 2019

ground investigating a lot of small businesses, although that will always be part of it.

A key measure that Parliament has passed in the last couple of weeks is Making Tax Digital for business, which is starting to modernise the small business tax system and drive out some of the error and failure to take reasonable care. We can build on that in future.

There are a couple of other areas where we can make a big difference. First, there is a new set of intermediaries in the self-employment arena. You have had eBay and Amazon here before you, and there are also taxi and takeaway apps, and we need to look to exploit these intermediaries more in the future to help small businesses to comply and prevent opportunities for them not to. Secondly, there is the tax agent industry, which has a very high level of penetration into small business taxation, yet its clients are often presenting as non-compliant. We need to drive up the value the tax system gets from agents in the system.114

The Committee published its final report in January 2018, in which it raised concerns that the department was “unclear how far it can close the tax gap with existing resources.” Noting the fact that a large share of the gap was attributed to SMEs, the Committee argued that HMRC should set ‘target levels’ for its reduction:

HMRC’s intention is to close the tax gap as far as possible. However, while HMRC says that with more powers, people, interventions and data it would be able to reduce the tax gap, it is not able to estimate how far the gap can realistically fall. Almost half of the tax gap can be attributed to small and medium-sized enterprises (SMEs), of which there are a large number, with each one often involving relatively small amounts of tax revenue. HMRC recognises it needs to change its approach and believes several measures will address the tax gap risks of the SME sector: the introduction of the Making Tax Digital for Business programme; working closely with intermediaries, such as Amazon and eBay; and using tax agents working with small businesses to encourage increased compliance.

Recommendation: HMRC should set target levels for reduction of the tax gap, including for the SME sector, and set out how HMRC will be more responsive to emerging risks.115

However, in its response, published in March, the Government disagreed with this recommendation:

2.2 The Department’s published estimates of the tax gap provide the Department and the public with important information on long term trends in tax compliance. The Government is clear that it aims to drive down the tax gap, and the indication from recent years is that this approach is working, with the 2015-16 tax gap estimated to be a joint record low since 2005-06.

The Government will continue to relentlessly take action to drive down the tax gap. However, the tax gap is a lagged measure (the Department’s most recent estimates cover the tax year 2015-16),

114 Oral evidence: 2016-17 HMRC Standard Report, HC 456, 6 November 2017

pp17-18. As noted, for more details on HMRC’s Making Tax Digital initiative see, Commons Briefing Paper CBP7949, 28 February 2018.

115 Public Accounts Committee, Twelfth report: HMRC’s performance in 2016-17, HC 456, 12 January 2018 p5

38 Tax avoidance and tax evasion

and cannot reflect the impact of the Department’s compliance activity in a sufficiently timely way to be useful as a target.

2.3 Whilst the Department uses tax gap analysis to inform its compliance activity, and accepts it is right to be assessed on movement in the tax gap over time, tax gap reduction is not suitable as a performance target. The Department uses a range of real-time operational targets - which are set out in HMRCs Annual Reports and Accounts - to focus on performance.

In practice, tax gap estimates are reviewed and revised each year to reflect updated data, such as changes to National Accounts statistics, in line with best statistical practice. For example, the 2014-15 tax gap estimate was revised downwards by £2.6bn in the “Measuring Tax Gaps 2017 edition” publication in October 2017, one year after the estimate’s original publication in October 2016. This would make measuring performance against an annual target uncertain.116

Finally, in July this year HMRC published updated estimates for its compliance yield which put it at £30.3 billion in 2017/18: 117

116 Treasury Minutes, Government response to the Committee of Public Accounts, Cm

9596, March 2018 p9 117 HMRC Annual Report 2017/18, HC 1222, July 2018 p21. HMRC also published

further details on calculating future revenue benefit at this time: HMRC's compliance yield: How HMRC reports FRB – an update for 2017-18, July 2018

39 Commons Library Briefing, 30 January 2019

4. Follower notices & accelerated payments

4.1 ‘Raising the stakes on tax avoidance’ - summer 2013

In summer 2013 the Coalition Government published a consultation paper, Raising the stakes on tax avoidance. In this, HMRC focused on the difficulties in dealing effectively with “high risk promoters”, a relatively small number of individuals and firms who “would commonly encourage tax advisers’ clients to enter into avoidance schemes, attempt to impose conditions of confidentiality on clients and disrupt the relationship between the tax adviser and their client.” The paper noted that in general the types of scheme being sold “overwhelmingly do not work and have very little chance of succeeding at the outset.” Given this, “a key question to consider is why they continue to be used by taxpayers, usually at the cost of a significant fee”:

Since summer 2012 HMRC has gained a better understanding of the market for avoidance schemes and the key players involved. Key factors emerging from the research to date are:

• provision of minimal amounts of information by promoters to potential clients and their ‘mainstream advisers’;

• disclosure to HMRC of the avoidance scheme only when absolutely necessary, and a willingness to challenge the application of DOTAS;

• reassurance to potential clients that the product is backed up by legal advice, but with only minimal information about how and why; and

• a willingness by taxpayers to accept a level of risk on the basis that a product might succeed or that they will not be challenged by HMRC.118

In a consultation paper the following year HMRC noted “over 80% of avoidance cases heard in the courts and tribunals were won by HMRC in the last financial year. In addition, piloting of behavioural change work has resulted in hundreds of users approaching HMRC to withdraw from avoidance arrangements, some as early as the start of HMRC’s investigation”119 Figures on HMRC’s success rates in court proceedings and tax tribunals have also been given in answer to PQs.120

Turning back to the 2013 paper, it noted that when schemes had been marketed to a significant number of taxpayers, HMRC incurred considerable costs in challenging each taxpayer who had used it:

Buyers of a tax avoidance scheme will submit their returns to HMRC on the assumption that the scheme reduces their tax liability. Where a tax avoidance scheme is mass-marketed, as they

118 Raising the stakes on tax avoidance: consultation document, 12 August 2013. See

also HMRC’s guidance for taxpayers informed by this research: Tempted by tax avoidance? A warning for people thinking about avoidance schemes, March 2014.

119 Tackling marketed tax avoidance, January 2014 para 2.3 120 PQ135813, 18 April 2018

40 Tax avoidance and tax evasion

often are, HMRC is presented with a large number of returns all based on the same assumption that the scheme will have reduced the person’s tax liability in a particular way. Where HMRC holds that the scheme does not work, it follows that it will argue that any returns based on that scheme are incorrect.

When faced with a large number of very similar cases, it is sometimes most efficient for HMRC to investigate ‘representative cases’, taking them to litigation if necessary. However, when HMRC wins a representative case in the courts, other taxpayers who have used the same or very similar schemes sometimes see little incentive to settle their cases with HMRC.

When HMRC pursues litigation in a number of very similar cases the Tribunal rules allow for the cases to be heard together in certain circumstances, but this only applies to cases which have been notified to the Tribunal. To get to this stage HMRC has to investigate these cases to litigation standard and close them. Not only does this use up the Tribunal’s resources, but it also places a strain on HMRC’s compliance resources, wastes HMRC’s time and delays the collection of the right tax.121

As noted above, during this period the Public Accounts Committee published a series of reports on corporate tax avoidance, in which it was strongly critical of HMRC’s efforts.122 The approach taken by the then Committee chair, Margaret Hodge, and the other members of the Committee, particularly in evidence sessions with witnesses, was not uncontroversial,123 but in an essay on tax avoidance over the last century, Graham Aaronson QC, argued that the Committee’s work had had a significant impact on the Government’s legislative approach:

Depending on our viewpoint, Margaret Hodge’s and the PAC’s harsh criticism of HMRC was either excessive or wholly justified. In my opinion it was in fact both: it was excessive because it failed to do justice to the radical steps which HMRC was already taking to deter and counteract tax avoidance; but it also responded to and harnessed public intolerance of tax avoidance and so created a climate where HMRC could equip itself with the means needed to combat avoidance more effectively.

So, like a surf-boarder rising a giant wave off Hawaii, the Treasury moved to introduce a succession of anti-avoidance measures having the aim of counteracting and deterring tax avoidance strategies across a range of taxes.124

In the Autumn Statement in December the Government confirmed that it would pursue two options set out in this consultation to deal more effectively with users of ‘failed schemes’ and the promoters who sold them:

1.308 Autumn Statement 2013 confirms that the government will:

• introduce new requirements for users of failed avoidance schemes to oblige them to settle the dispute where the avoidance scheme they are using has been defeated in

121 Raising the stakes on tax avoidance …, 12 August 2013 para 5.1-2 122 See, for example, Tax Avoidance–Google, 13 June 2013, HC 112 of 2013-14. 123 See, for example, “Tax prat of the year” & “So farewell then …”, Taxation, 6

February 2013 & 10 June 2015 124 “Insight and analysis: The swing of the pendulum: tax avoidance in modern times”,

Tax Journal, 30 September 2016

41 Commons Library Briefing, 30 January 2019

another party’s litigation through the Courts, with penalties attached for non-compliance

• increase obligations and sanctions for high-risk promoters of tax avoidance schemes, by introducing objective criteria for identifying and publishing the names of high-risk promoters, seeking more information from them and applying penalties where there is failure to comply. Their clients will also be required to identify themselves to HMRC.125

The Government also announced that it would introduce new powers to require taxpayers in this situation to pay tax ‘upfront’, possibly extending this system of accelerated payments to other taxpayers using avoidance schemes:

1.309 Autumn Statement also announces that the government will:

• introduce a new power that requires taxpayers who are using avoidance schemes that have been defeated through the Courts to pay the tax in dispute with HMRC upfront. This will provide HMRC will an additional tool to address a legacy stock of an estimated 65,000 avoidance cases, around 85% of which date back to before 2010. It will remove the cash advantage of sitting and waiting during an avoidance dispute, and bring in £700 million over the forecast period

• consult on the scope for extending this power by widening the criteria for which taxpayers are required to pay any disputed tax upfront.126

Writing in the Tax Journal, James Bullock (Pinset Masons) observed, “one of the enticements to taking part in a tax-avoidance scheme is the cashflow benefit that such schemes bring. Even if the scheme is found ultimately to fail, a taxpayer undertaking a scheme can (and could until recently even for PAYE and NIC) generally secure the benefit of holding the tax whilst the dispute is determined. With ‘marketed’ schemes the deal was even better, as generally only one taxpayer is litigated – and it is open to so-called ‘follower’ taxpayers to argue that their fact patterns are different – and therefore they have to sit and wait until HMRC gets around to them. HMRC is now acting to end this particular party.”127

The scale of the Exchequer risk posed by disputed tax was set out in HMRC’s consultation document published in January:

The existence of around 65,000 open cases involving marketed tax avoidance schemes illustrates how the current position can lead to a build-up of avoidance schemes that HMRC needs to tackle through investigation and litigation, which can take several years to complete. Over 85 per cent of these cases date back to

125 It was estimated that these two measures would raise £35m a year from 2015/16

(‘high-risk’ promoters), and £75m in 2015/16, falling to £30m a year in later years (penalties for ‘follower’ cases): Budget 2014, HC 1033, March 2014 p59 (Table 2.2 – items be & bf). Details of these changes are set out in: HMRC, Raising the stakes on tax avoidance - summary of responses & draft legislation, January 2014.

126 Autumn Statement, Cm 8747, December 2013 p74 127 “Views on the Autumn Statement: enforcement and compliance issues”, Tax Journal,

6 December 2013

42 Tax avoidance and tax evasion

2009-10 or earlier … reflecting a market for avoidance products which was very active in earlier years.

These 65,000 taxpayers have used a wide range of avoidance schemes to reduce their liability to SDLT, Capital Gains Tax, Corporation Tax, Income Tax and National Insurance Contributions (NICs). However the largest areas of legacy avoidance include:

Some of these users have used the same scheme more than once whilst others have used more than one scheme.128

The document set out the range of circumstances where disputed tax would be held by either the Exchequer or the taxpayer, before a final tax liability is determined:

There is no inherent presumption that tax under dispute should sit with the taxpayer rather than the Exchequer. Under current law, there are a number of circumstances where the tax sits with the Exchequer while the liability is finalised.

Currently:

• HMRC is able to deny claims for tax repayments pending final resolution;

• HMRC can enforce tax payment when there are claims for other years that might reduce or eliminate that tax;

• Tax is payable following a court or tribunal decision, despite a continuing appeal; and

• There are general circumstances where tax is withheld and repaid (eg: PAYE, tax on interest),

but

HMRC cannot normally intervene in a taxpayer’s self-assessment, even when the taxpayer deducts amounts claimed as a result of attempted tax avoidance.129

It went on to give an overview of how, once HMRC had identified ‘follower cases’ to a given scheme that had been struck down in the

128 Tackling marketed tax avoidance – consultation document, 24 January 2014 para

1.1, paras 2.6-8. Interested parties were given a month to response to this follow-up document – ie, by 24 February.

129 op.cit. para 3.5-6

43 Commons Library Briefing, 30 January 2019

courts, it would require those taxpayers to amend their tax return, and pay over the disputed amount of tax:

[Under the Government’s proposals for ‘follower notices’, HMRC would] issue … a notice to taxpayers involved in avoidance schemes where there has been a final judicial decision in another taxpayer’s case on the same or similar arrangements. The notice requires the taxpayer to amend their tax return (if the return is still under enquiry) or agree to settle the dispute (where a closure notice or tax assessment or determination has been made and is under appeal).

At the heart of this notice is the proposition that the likelihood of the taxpayer’s scheme succeeding is remote, given that a tribunal or court has made a decision on the same or similar arrangements. In HMRC’s experience, it is extremely rare for a taxpayer to even proceed to their own litigation in the face of such a decision, but while the vast majority do eventually concede they prolong the dispute for as long as they are able, often agreeing to settle only as the date of litigation approaches. In the Government’s view, the delivery of a related judicial decision fundamentally changes the presumption of where the tax should sit during this period.

The sum would be estimated by HMRC, though subject to revision if the actual amount due was larger, or, if the taxpayer successfully pursued an appeal that, in their own case, their use of the scheme was legal:

Taxpayers receiving a ‘follower notice’ are required to tell HMRC the amount of the tax advantage being sought. However, this figure may not be available until the taxpayer agrees to resolve the dispute in response to the notice – and will not be provided by the taxpayer at all in cases where the taxpayer chooses not to resolve the dispute.

It is proposed, therefore, that HMRC will issue a Payment Notice to the best of their judgement. In the majority of cases HMRC would expect to have a reasonable indication of the amount in dispute as the matter will have been under enquiry, or HMRC will have issued an assessment or determination.

The amount of tax to be paid under the Payment Notice is the amount of additional tax that would otherwise have been paid if the arrangements had not been entered into. This is meant to be a simple recalculation of the additional tax due on the return (or similar document) having removed the effects of the avoidance scheme, less any relevant amounts already paid. It is not a calculation whereby the taxpayer can say that in the absence of these arrangements another structure would have been employed instead.

The amount to be paid will be the amount remaining after any part of the tax in dispute that is already subject to a withheld repayment.

It is important to note that this will simply be a form of payment on account and not a payment that determines the amount of the final liability. If the amount paid is less than the final amount due, the taxpayer will still be liable to pay any remaining balance when the dispute is finally resolved. Equally, if the taxpayer continues to

44 Tax avoidance and tax evasion

pursue their claim and is successful then they will get their money back with interest.130

The most contentious aspect of this consultation was the proposal that the system for accelerated payments would apply not only to ‘follower cases’ but to two other categories of taxpayer: those in dispute with HMRC because they have used a scheme notified under DOTAS, or those using a scheme which HMRC are seeking to frustrate, using the new GAAR.131 Indeed the consultation document notes that although this would have an impact on a “significant proportion of avoidance schemes”, it would plan to keep the criteria “under review to determine whether any further broadening may be appropriate.”132

In a press notice issued after the end of the consultation, the Chartered Institute of Taxation argued that the proposals to tackle follower cases should be used only for a limited time:

The Government’s proposals would link together cases which are deemed to be similar, so that if a court ruled against one taxpayer, not only that taxpayer but all others deemed to have ‘follower cases’ would have to pay straight away the tax HMRC believe is due. They would get the tax back if they pursued the case and ultimately won …

CIOT President Stephen Coleclough commented: “We have sympathy with the Government's need to accelerate dealing with some tens of thousands of outstanding mass marketed avoidance cases which are jamming up the courts … However, handing HMRC almost unprecedented executive powers to decide who falls within the mischief they intend to deal with, without the usual safeguards and appeal rights, is not something which should be done lightly …

If this is to proceed, HMRC should issue comprehensive guidance at the same time as the Bill is published to show what situations are to be tackled in this way. It should only apply to members of the same scheme or very close variants of it. Additionally the legislation should include a sunset clause repealing the legislation after, say, three years as the exceptional circumstances that are currently in existence should be dealt with in that time. These emergency measures should not become a permanent state of affairs.”

The Institute went on to strongly oppose extending accelerated payments to existing schemes, which had been notified under DOTAS, as this was “in effect introducing retrospective legislation”:

[CIOT President, Stephen Coleclough said] “the fact that there has been disclosure indicates an intention to be open and transparent with HMRC. In a number of cases the disclosure has been made even if the promoter or taxpayer did not believe it to be strictly necessary ‘to be on the safe side’. To now introduce a retrospective change of law leading to an accelerated payment of tax is unreasonable. To extend HMRC’s powers without safeguards to taxpayers who by definition have been transparent

130 op.cit. paras 3.7-8, paras 3.15-9 131 For example, “Wealthy investors protest against new UK tax rules”, Financial Times,

9 March 2014 132 Tackling marketed tax avoidance, January 2014 para 4.3. The case for these changes

was also set out by David Richardson, director of HMRC’s counter avoidance directorate, in a piece in Taxation: “Accelerated payment”, 20 February 2014.

45 Commons Library Briefing, 30 January 2019

with the tax authority is unjustifiable. If these provisions are to come in at all then they should only apply to arrangements entered into after Finance Bill 2014 is passed.”133

In their response, the Institute for Chartered Accountants also set out their concerns about the retrospective aspect to these proposals, as well as the relatively short amount of time for interested parties to respond:

[The consultation] proposes … all DOTAS registered tax planning arrangements under enquiry by HMRC would come within the accelerated payment scheme, even if they were entered into many years previously and in some cases a DOTAS registration was submitted as a precautionary measure. In principle we believe that retrospective legislation of this nature is wrong.

We have seen a proposal that the accelerated payment regime should not apply to existing DOTAS registered schemes ‘where it can be shown that the promoters/taxpayers have taken all reasonable measures, and have acted with reasonable expedition, to enable the dispute to be brought before the statutory appeals tribunal.’ That sounds a reasonable suggestion.

The proposal is also likely to lead to a perverse outcome in that it will offer no incentive for HMRC to reach closure on the case. Given that the tax may not legally be due that sounds completely contrary to natural justice and must inevitably result in further litigation …

Finance Bill 2014 will be published, probably before the end of March ... we strongly urge the government to withhold those of the current draft clauses which they accept will need further improvement. We would welcome the opportunity to work with HMRC to deliver the necessary amendments and the improved clauses can then be introduced, as a Government amendment, during the course of the Public Bill debates on the Finance Bill.134

4.2 Budget 2014: introduction of accelerated payments

Despite these concerns, in his Budget on 19 March the Chancellor confirmed the introduction of a system of accelerated payments, which would provide a substantial cash flow boost to the Exchequer:

While the vast majority of wealthy people pay their taxes, there is still a small minority who do not. We will now require that those who have signed up to disclosed tax avoidance schemes pay their taxes, like everyone else, up front. This will apply in future to schemes covered by our general anti-abuse rule too. If people feel they have been wronged, they can of course go to court. If they win, they get their money back with interest. We have already consulted on this idea; now we will implement it. The OBR confirms that this will bring forward £4 billion of tax receipts and it will fundamentally reduce the incentive to engage in tax avoidance in the future.135

133 CIOT press notice, Tax avoidance schemes: 'Emergency measures' tolerable for dealing

with courts backlog, but wider application goes too far, 4 March 2014. The CIOT also published formal responses to both consultation papers.

134 ICAEW (Tax Faculty), Tackling marketed tax avoidance (TAXREP 16/14), 26 February 2014 para 19, paras 45-7, paras 20-23

135 HC Deb 19 March 2014 c785

46 Tax avoidance and tax evasion

The Budget report gave more details, noting that accelerated payments would apply to follower cases and to those within DOTAS or counteracted by the GAAR:

Following a consultation that closed in February 2014, the government will legislate to provide that HMRC may issue a notice to the user of a tax avoidance scheme that they should settle their dispute with HMRC when the claimed tax effect has been defeated in other litigation. If the taxpayer does not settle they risk a penalty and must make upfront payment of the tax in dispute. Budget 2014 announces that the requirement to pay upfront will also apply to the disputed tax associated with any scheme that falls within the disclosure of tax avoidance scheme rules (DOTAS) and with schemes that HMRC counteracts under the general anti-abuse rule (GAAR).136

The report also underlined that the new power “will only apply to tax avoidance schemes that are disputed by HMRC”:

The legislation will make it clear that HMRC will only be able to issue an accelerated payment notice where they have first sent the taxpayer an enquiry notice or issued them with a notice of assessment. It is not a new tax demand and does not make any changes to tax liabilities. If the taxpayer subsequently wins their case in the courts, they will be reimbursed with interest.137

It was estimated that applying accelerated payments to follower cases will raise around £300m in both 2015/16 and 2016/17, with the annual yield falling to £100m by 2018/19. Extending the scheme to DOTAS and GAAR schemes was projected to raise considerably more:138

The department’s Policy Costings document underlines the significant size of the amounts of tax that are under dispute, as a consequence of marketed avoidance schemes:

The total value of tax under dispute by HMRC related to marketed, artificial avoidance cases is around £14 billion, associated with a population of around 65,000 taxpayers. Of this, £2.5 billion concerns avoidance arrangements that fall outside the scope of the Budget and Autumn Statement measures as the schemes are outside the DOTAS rules and relate to taxpayers will not be issued with follower penalty notices.

To arrive at the £7.1bn that is estimated to be the value of accelerated payments notices that will be issued in relation to existing cases the following adjustments are then made:

• for cases where the issuance of a notice is dependent on future court decisions, the costing assumes a HMRC win rate of 80 per cent. This is based on HMRC‘s win rate in associated avoidance cases between 2010 and 2013

136 Budget 2014, HC 1104, March 2014 para 2.188 137 op.cit. para 1.201 138 op.cit. pp57-8 (Table 2.2 – item r; Table 2.1 – item 52). see also, HM Treasury,

Budget 2014: policy costings, March 2014 p37.

47 Commons Library Briefing, 30 January 2019

• an adjustment is also made for individuals that already concede their position and settle once their scheme is shown to fail in the courts in another party’s litigation

• an adjustment is made to take account of the fact that in a relatively small number of cases some taxpayers will have already paid the amounts in dispute, while continuing to dispute the amounts in question

• HMRC will also issue notices in relation to the future flow of cases which would arise from new avoidance, for which the estimated value of tax that would be disputed in the absence of this measure is estimated to be around £700 million per annum.

To arrive at its costings, HM Treasury had made a number of assumptions:

The costing is produced by making adjustments for:

• The responses by taxpayers issued with payment notices. It is estimated that the majority of those issued with notices will pay, either (a) within the allowed 90 day payment period, (b) through managed payment plans (this will be evaluated on a case-by-case basis and will result in some payments being spread over time), or (c) following payment enforcement action by HMRC.

• Repayments. HMRC will make repayments with interest in cases where upfront payments of tax have been made but where a taxpayer wins a subsequent tribunal or court decision.

• Behavioural responses. A further adjustment is made for those taxpayers who stop using avoidance schemes as a result of this measure, which increases tax yield from this group. In line with the standard methodology for anti-avoidance costings, a behavioural adjustment is made to reflect evidence of attrition in the yield from previous anti-avoidance measures.

• Tax under dispute which would have been collected in later years but which is now collected upfront. This reduces the costing by around £500 million in each year from 2015-16.

• Amounts scored under the follower notices measure announced in Budget 2013 and the accelerated payment measure announced at Autumn Statement 2013 are subtracted from the final costing to avoid double counting.139

The Office for Budget Responsibility is required to certify that all Budget costings represent a ‘reasonable and central view given the information currently available’. In some cases the OBR highlights that the cost is subject to a greater level of uncertainty – so, with regard to the estimates for this scheme, the OBR noted these were “dependent on a large number of assumptions, some of which … concern the behavioural response of those affected.”140

In September 2017 the OBR published a working paper which looked at the costings of a variety of HMRC anti-avoidance and operational 139 Budget 2014: policy costings, March 2014 pp36-7 140 op.cit. p67; OBR, Economic & fiscal outlook, Cm 8820, March 2014 para 4.43

48 Tax avoidance and tax evasion

measures over the 2012-2016 period, including the introduction of accelerated payments.141 This found that current estimates of the amounts that accelerated payments would raise from 2014/15 to 2018/19 were about 15% less than the original estimates. There were a variety of explanations in this case, including the fact that the regime appears to have had a stronger deterrent effect than initially assumed:

Tax base: The initial estimate of the existing stock of disputed tax that would be subject to AP notices was too high, partly due to some cases falling out of scope and partly due to more taxpayers choosing to settle with HMRC than expected.

AP notices: The original costings underestimated the number of notices issued, but also the length of time required to do so. This is partly due to HMRC needing to issue separate notices for tax and NICs, but also because the original costings underestimated both the number of relevant avoidance cases and the proportion of cases where AP notices would be used. Outturn data also suggest the average value of cases was lower than assumed in the original costings.

Timing: More payments were made upfront than assumed in the original costings and, for those that made payment arrangements with HMRC rather than paying upfront, the time period was shorter than originally expected.

Behavioural response: It appears that the threat of receiving an AP notice has acted as a stronger deterrent than originally assumed. The number of avoidance schemes disclosed under DOTAS and declared usages of DOTAS schemes on tax returns, though already on a downward trend prior to the introduction of APs, has fallen significantly faster since … HMRC estimates that the number of DOTAS scheme usages has fallen by over a half due to the deterrent effect of AP notices.142

In two impact notes on this measure, HMRC confirmed that the new rules would take effect from the date of the Finance Bill’s Royal Assent: specifically, they would cover “all cases where there is an open enquiry or open appeal on or after [this date]”.143 These notes also give some details of the cohort of taxpayers which would be affected:

It is estimated that accelerated payment notices relating to existing avoidance cases currently under dispute will be issued to approximately 33,000 individual taxpayers concerning £5.1 billion of tax under dispute under this measure and the Autumn Statement 2013 measure applying accelerated payments to follower cases.

Estimates of the distributional impacts of these measures are affected by the use of avoidance schemes that deflate the income reported on self-assessment returns.

Having noted this caveat, analysis shows that the population of individuals affected:

141 OBR, Working paper No.11: Evaluation of HMRC anti-avoidance and operational

measures, September 2017 142 op.cit. pp22-23 143 HMRC, Accelerated payments of tax for avoidance schemes & Avoidance schemes:

relevant judicial ruling - notice to settle dispute, 19 March 2014. In the case of ‘follower cases’ there will also have to be a relevant qualifying judgement.

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• have a mean gross income of £262,000, compared to £29,000 for the wider income tax paying population;

• around 85 per cent of individuals have multiple sources of income, with employment income (including self-employment) the predominant income source for 54 per cent and non-employment, non-pension income the predominant income source for 42 per cent of the individuals affected respectively, compared to 78 per cent and 5 per cent for the wider income tax paying population respectively.144

Budget 2014 also confirmed that the Government would proceed with one other measure first proposed in Raising the stakes on tax avoidance: the Promoters of Tax Avoidance Schemes (‘POTAS’) regime. Under these rules HMRC have powers to issue conduct notices to promoters, and in turn any breach of this notice triggers enhanced information powers with large financial penalties for non-compliance.145 At the time it was anticipated that about 20 businesses might be designated in this way,146 with a relatively small Exchequer impact,147 and in general the regime has attracted very little attention compared to accelerated payments.148

Generally press coverage of the Budget focused on other measures, though the Chartered Institute of Taxation issued a press notice, arguing that extending accelerated payments “beyond follower cases to DOTAS schemes raises serious questions about the breadth and proportionality of these proposals.” It went on to argue that it was incumbent on HMRC “to publish a list of DOTAS schemes to which this legislation will apply as quickly as possible.”149 The Financial Times quoted Jason Collins, head of tax at Pinset Masons, saying, “this is an audacious move. The backlash against tax planning is allowing them to push this change through without consultation.”150 By contrast the Times quoted Bill Dodwell, head of tax at Deloitte, who suggested it was “a realistic reaction to the current situation … The Revenue win almost all the cases in this area. There is no reason why they should have to wait 10 years to get their money. I hope this will discourage the sort of mass-market tax scheme from being sold in the future.”151

144 HM Treasury/HMRC, Overview of tax legislation and rates, 19 March 2014 ppA94-5 145 Budget 2014, HC 1104, March 2014 para 2.187 146 HMRC, Promoters of tax avoidance schemes (TIIN), 17 July 2014 147 £5m in 2014/15, rising to £35m a year in later years (Budget 2014, HC 1104, March

2014 p59, Table 2.2 – item be). 148 For details of how POTAS operates see, HMRC, Promoters of tax avoidance schemes:

guidance, September 2015 149 CIOT press notice, Tax avoidance schemes: Retrospective measures without proper

taxpayer safeguards go too far, 19 March 2014. 150 “Anti-avoidance measures attacked”, Financial Times, 20 March 2014 151 “Revenue wins power to raid bank accounts in battle over avoidance”, Times, 20

March 2014; see also, Law Society hits at tax crackdown plan”, Financial Times, 7 April 2014

50 Tax avoidance and tax evasion

4.3 Finance Bill 2014 Provisions with regard to these proposals for follower notices and accelerated payments were included in the Finance Bill 2014, published on 25 March.152

When the Bill was published, HMRC also published a summary of the responses it had had to its consultation on tackling marketed avoidance schemes. Many responses had “acknowledged the underlying policy issue”, but had gone on to argue “that there was no problem to address” – a position based “on three contentions”:

• All taxpayers are entitled to have their dispute considered and resolved without being forced to pay over the tax in the meantime, irrespective of the nature of the dispute, and that in effect the taxpayer would be treated as being in the wrong until they were able to prove their case;

• Any delays are caused by HMRC’s “slow and tardy response” and not by taxpayers, advisers and scheme promoters; and

• HMRC already has adequate powers to force progress in these types of dispute and this gave more power and discretion than was necessary.153

The document presented the Government’s reasons for not accepting these contentions – first, on the cause of these delays and the suggestion that the proposals invoke a new principle:

There is ample evidence that those who enter into these schemes do so in the expectation that they will, as a minimum, keep hold of the tax for many years, exploiting the current structure of the enquiry, appeals and postponement legislation. The Government is not prepared to let this continue.

HMRC can under current law deny repayments claimed while a dispute is in progress. It is also the case that many taxpayers pay their tax upfront under PAYE, or through deduction of tax at source from interest. These proposals therefore introduce no new principle – instead they extend the current circumstances where the Exchequer holds the disputed tax.154

The document also set out HMRC’s existing powers in this respect and why, in the Government’s view, they were not sufficient to deal with this problem:

HMRC currently has powers in section 28C of Taxes Management Act (TMA) 1970 to issue a determination of tax where there has been no return submitted – but that cannot be applied to these avoidance cases, where returns will have been submitted, claiming the tax advantage from the avoidance scheme.

Section 9C of TMA permits HMRC to amend a taxpayer’s self-assessment where tax is at risk. This power is applicable in circumstances where HMRC believes that the subsequent settlement of the liability may be in jeopardy (for example, the

152 specifically, part 4 of the Bill (clauses 192-226). The text of the Bill, explanatory notes

and details of its scrutiny are collated on its Parliament Bill page. 153 Tackling marketed tax avoidance: summary of responses, 27 March 2014 para 2.14 154 op.cit. para 2.15-6

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taxpayer may leave the UK). This is not applicable to the generality of avoidance cases.

Where there is an appeal, the taxpayer may make a postponement application under section 55 of TMA. If HMRC disagrees with the postponement, the matter must be resolved by the tribunal. Therefore, opposing postponement applications in many thousands of cases under the current rule would impose a substantial burden on the resources of the Tribunal Service. Furthermore this route can only be used where there is an appeal and not where an enquiry is still open.

In the vast majority of cases there is an open enquiry rather than an appeal. HMRC has been criticised for delaying the issue of closure notices. However, as a number of recent published tribunal and court decisions show, these cases involve complex and contrived arrangements that take a significant length of time to resolve. HMRC cannot issue a closure notice prematurely as that would risk the wrong amount of tax arising from the return.

Some responses pointed to HMRC’s ability under section 28ZA of TMA to refer matters to the tribunal during an open enquiry. However, this would make little impact on the overall problem in that it would to a large extent require consideration of the substantive tax point at issue.155

The paper went on to address the charge that the proposals would be retrospective:

[The proposals] do not change the underlying tax liability. Where an accelerated payment is made and the taxpayer subsequently wins their dispute the tax will be repaid with interest – no different to the situation where, currently, a repayment is denied whilst the dispute is resolved. Application of the proposals to existing disputes will ensure that all taxpayers in an avoidance dispute after Royal Assent will be in the same position, irrespective of when their dispute began.156

Annex C to the document gave more detail on how the new system would work in practice, including a diagram of the ‘typical taxpayer journey’, reproduced below, where someone has purchased an avoidance scheme, submitted their assessment, and then had that assessment investigated by HMRC:

155 op.cit. para 2.18-22 156 op.cit. para 2.25

52 Tax avoidance and tax evasion

The teal line shows the journey before accelerated payments was introduced … The red line shows how accelerated payments will fit in with the existing customer journey and require payment sooner in the process. The journey can halt at any point when the taxpayer decides to drop their claim and settle, or where HMRC decides that the scheme works and repays the tax.

In its description of accelerated payments, HMRC emphasized that “this measure in no way alters the underlying tax liability”:

When a person is advised to reduce their tax liability, they are often introduced to a promoter who explains the scheme to them, then the person signs documents to enter into the scheme and pays a fee. The promoter tells the taxpayer that the scheme is a Disclosed Tax Avoidance Scheme and gives them a reference number which needs to be included in their tax return in the tax avoidance section.

The taxpayer then submits their tax return with the scheme reference number or their adviser submits it for them. In either case, the taxpayer is responsible for the form being correct and a declaration is made to that effect. This is the stage at which a person would normally pay the tax due. The avoidance scheme has reduced that amount but not the income that the person has.

HMRC considers the self-assessment tax return and considers more tax may be due than has been paid as a result of the avoidance scheme. An enquiry notice is issued … Even where taxpayers and promoters co-operate in full, the investigation and litigation process inevitably takes a considerable time and some take full advantage of that to hold onto the tax. From now on, tax in dispute in suspected avoidance cases will sit with the Exchequer …

HMRC will only be able to issue an Accelerated Payment notice where they have sent the taxpayer an enquiry notice or where they have issued a notice of assessment for the disputed tax. So, as a minimum, everyone who receives an AP notice will have been notified by HMRC that their tax affairs are under consideration.

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Once an accelerated payment notice is issued the tax payer will have 90 days to pay. If they cannot pay, they can contact HMRC in that time to agree arrangements for payment. If they think the tax due is incorrect they can also raise that with HMRC who will review the facts. HMRC will then issue a decision notice confirming the amount of tax due to be paid up front at which point the taxpayer has a further 30 days to pay.

This measure in no way alters the underlying tax liability. A person will still have full access to the courts to determine their tax liability. HMRC wins around 80% of avoidance cases in the courts. If HMRC loses, they will repay the tax with interest.157

The response document noted that some revisions would be made to the legislation as initially drafted 158 The Government also confirmed that it would issue detailed guidance on the scheme in the next weeks, and, picking up a point made by the CIOT after the Budget, publish a list of existing DOTAS schemes to be subject to accelerated payment by the time the Finance Bill received Royal Assent.159 However, the Government rejected the case, made by many respondents, that taxpayers should be able to formally appeal HMRC’s decision to issue a demand for an accelerated payment:

Many respondents objected to the discretion that HMRC would have to determine the amount and the absence of a formal appeal right at this stage. One response referred to this as appearing to make HMRC “the sole arbiters of the tax law.” Most responses, where comments were made, restated the view that there should be an appeal right to the tribunal, or recommending “some more independent review”, and that the proposed objection criteria were not sufficient in themselves. Other responses suggested a modified appeal right to restrict the possibility of the appeal being simply a delaying tactic …

The Government does not intend to extend an appeal right against the issue of the accelerated payment ... Provision of a formal appeal right would in practice involve arguing the substantive issue of the dispute itself, which would do nothing to change the current position.

HMRC is committed to applying clear and strong governance to the use of this measure and only “designated” officers will be authorised to calculate the tax due for the payment notice. It is also the case that taxpayers will have 90 days in which to dispute the amount calculated with a view to getting the correct figure agreed.

The accelerated payment does not determine the final liability. Whilst the amount will be calculated as accurately as possible, taxpayers will still have full appeal rights against the eventual closure notice or any assessment or determination that may be issued … The Government does not believe that a specific

157 Tackling marketed tax avoidance: summary of Responses, 27 March 2014 pp34-5.

See also, HC Deb 3 July 2014 c688W 158 First, when a late payment penalty is charged on an accelerated payment and,

subsequently, that accelerated payment is found to have been too high, the excess penalty plus interest is to be paid back, when the overpayment is repaid (op.cit. para 3.41-2). Second, where HMRC seeks to apply accelerated penalties to a scheme it seeks to challenge using the GAAR, the GAAR Advisory Panel will have to agree this is appropriate (op.cit. para 4.25-6)

159 op.cit. para 5.1-3. See also, “Accelerating away”, Taxation, 8 May 2014 & “Analysis: FB2014 - Follower notices and accelerated payments”, Tax Journal, 9 May 2014.

54 Tax avoidance and tax evasion

provision for ‘financial extremity’ is necessary. HMRC will use its full range of existing tools in pursuing the collection of tax, including appropriately structured payment arrangements, to assist taxpayers in paying the required amounts.160

In their report on the Budget published on 9 May, the Treasury Committee argued that the Government had failed to make the case for making the new system of accelerated payments retrospective.161 In a press notice on their report the Committee said:

Retrospective tax legislation conflicts with the principles of tax policy recommended by this Committee. In our Budget 2012 Report we recommended that the Government restrict the use of retrospection to wholly exceptional circumstances. Witnesses told us that the Government was not abiding by this recommendation. Furthermore, the Red Book announced an additional retrospective taxation policy: an extension of the requirement for taxpayers to pay upfront any disputed tax associated with anti-avoidance schemes. This policy will retrospectively apply to some of the 65,000 outstanding tax avoidance cases. There may be a case for this policy but the Government has yet to explain what is wholly exceptional about these cases that justifies this retrospective measure. It should do so in response to this Report.

The then Chair of the Committee, Andrew Tyrie, added: “we have deep reservations about any extension of retrospection in the tax system. Retrospection runs counter to the Committee’s principles of tax policy. In particular, it undermines certainty. Retrospection should be considered only in wholly exceptional circumstances. The latest measure would have to be justified on those grounds. Retrospection puts policy on a slippery path to arbitrary taxation, discouraging investment and innovation and creating the scope for great unfairness.”162

The Government’s response to the Committee’s report was published two months later, and in this, the Government refuted the charge that these provisions were retrospective:

The Government does not agree that this legislation is retrospective. This legislation does not take effect on a date before its announcement or enactment, and it does not change any tax liability arising from any transaction or arrangement, whether undertaken before or after the introduction of these new rules. It puts in place a new requirement that takes effect in the future, to pay over a sum of money in dispute. Those disputes will be resolved in the same manner as before, with full appeal rights to the tribunal and courts.163

Turning back to the Finance Bill, on 17 June 2014 the Public Bill Committee scrutinising the Finance Bill debated, and approved, these provisions, with just a small number of minor, technical amendments tabled by the Government.164

160 op.cit. para 3.28-34 161 Thirteenth report of Session 2013-14, HC 1189, 9 May 2014, pp76-8 162 Treasury Committee press notice, 9 May 2014 163 Treasury Committee, Second special report of 2013-14, HC 609, 1 August 2014 p13 164 PBC (Finance Bill), Thirteenth Sitting & Fourteenth Sitting, 17 June 2014 cc 467-510.

For details see, HMT, Amendments 32 to 38 to Clauses 212 & 222 and Schedule 28 (Accelerated payments), 6 June 2014

55 Commons Library Briefing, 30 January 2019

Speaking for the Opposition Shabana Mahmood raised concerns over the relatively short time frame set for the consultation on these measures, but went on to say that, in the light of the sheer number of outstanding cases, “Opposition Members … support the principle of follower notices as a practical measure that should—hopefully—decrease the amount of time it takes to settle those matters and ensure that the currently uncollected tax is collected quickly.”165 Ms Mahmood noted two concerns about follower notices that had been raised: the fact that HMRC could rely on decisions made by a tribunal, as well as the court, in issuing a follower notice and that taxpayers could not appeal HMRC’s decision to take this action.166 She also asked if HMRC would have sufficient resources to administer the system.

In response the then Exchequer Secretary, David Gauke, acknowledged that the time allotted for consultation had been shorter than normal, “because we were keen to ensure that we could progress this matter on a Budget timetable and make it part of the Finance Bill. HMRC made every effort to ensure that anyone who wanted to make a comment was able to, and it continued to accept responses and meet with concerned parties after the consultation formally closed.”167 On the use of tribunal decisions, and the absence of a formal right of appeal, Mr Gauke said:

HMRC wins an overwhelming majority of avoidance cases at tribunal, and most taxpayers who lose accept the tribunal’s decision and do not take their case further. Therefore, in most cases the first-tier tribunal settles the matter. However, if a case is appealed further, follower notices cannot be issued until the litigation is finally settled in HMRC’s favour. Excluding first-tier cases would remove an important source of judicial decisions and might lead to taxpayers deliberately avoiding an appeal against and adverse judgment, so it could not be used to generate follower notices …

Creating a right of appeal against a notice would simply clog up the process and not deliver a saving. Taxpayers will be able to require HMRC to reconsider any notice that they receive. There will be a full right of appeal against any penalty issued and against any amendment made to the taxpayer’s return if the taxpayer does not amend it himself. HMRC will be ensuring strict governance over the issue of notices, which will have to be authorised by senior leaders.168

As Mr Gauke noted, HMRC would be empowered to charge penalties for failure to response to a follower notice:

Clause 200 allows a taxpayer to make representations about a notice within 90 days and requires HMRC to consider them. Having done so, if HMRC confirms the follower notice, the taxpayer is given a further 30 days to take corrective action … Clause 201 applies a penalty if a taxpayer is served with a follower notice, but does not take corrective action within the specified period. The penalty is charged on the amount of tax advantage

165 PBC (Finance Bill), Thirteenth Sitting, 17 June 2014 c469 166 Both of these concerns were raised by the Law Society (Finance (No.2) Bill 2013-14

committee stage - follower notices and accelerated payments, 3 April 2014). 167 PBC (Finance Bill), Thirteenth Sitting, 17 June 2014 c483 168 op.cit. c484

56 Tax avoidance and tax evasion

denied: the extra tax that becomes due, or the reduction in tax repayable, when the scheme is counteracted … [Under] clause 202 … the penalty … is set at 50% of the denied tax advantage. That is in line with the scale of penalties for inaccurate returns, which range from 30% to 100%, depending on behaviour. To encourage taxpayers to co-operate with HMRC to resolve their case, clause 203 allows the penalty due to be reduced to as little as 10% to reflect any co-operation.169

That said, taxpayers will be entitled to appeal against a penalty charged in these circumstances. Under clause 207, if a tribunal thinks that the basis of a follower notice is wrong, any penalty will be cancelled or reduced. Although this clause was agreed, unamended, by Committee, the Government tabled amendments for the Finance Bill’s Report Stage, to make clear the grounds on which a taxpayer could appeal against a penalty: a taxpayer may appeal on the grounds that the follower notice should not have been issued to him in the first place or that it was reasonable for him to continue his dispute rather than settle with HMRC on receipt of a follower notice. The amendments also provided that only a designated officer of HMRC will be allowed to issue a follower notice.170

In his comments in Committee, the Minister also addressed the question of whether HMRC had sufficient resources:

In November 2013, HMRC created a new counter-avoidance directorate to bring together all marketed avoidance work in one place. The directorate is mainly made up of departmental resources that were already working in the marketed avoidance area rather than additional resource, but about 100 of its 850 people will be funded from new money announced by the Chancellor at the Budget to deliver accelerated payments. We do not believe there will be a detrimental impact on HMRC’s other operations.171

The Committee went on to consider accelerated payment notices, and the Minister was asked about the possibility that taxpayers might be made bankrupt. Mr Gauke said, “I record the fact that HMRC has time to pay arrangements for those who are constructively engaged with it and who are looking to pay off their tax debts in a constructive way but are constrained by cash flow matters. That is a perfectly reasonable approach.” While the Minister did not propose any substantive changes to the proposals, he noted that he had “asked HMRC to ensure that there is active consultation on the published guidance, to ensure that the important issues raised are dealt with in that process.”172

Mr Gauke was asked about the extension of accelerated payments to DOTAS cases, and whether this was not penalising those taxpayers who had been cautious to make sure they were fully compliant with the law,

169 op.cit. cc477-8 170 HM Treasury, Government amendment 1-3: Right to appeal follower penalty (Clause

207), 24 June 2014. This is discussed in a little more detail below. 171 PBC, Thirteenth Sitting, 17 June 2014 c485. The Chancellor mentioned this rise in

funding in his Budget speech: HC Deb 19 March 2014 c785. 172 op.cit. c487, c488

57 Commons Library Briefing, 30 January 2019

and used DOTAS in good faith; in reply, the Minister made two observations:

Disclosure under DOTAS does not necessarily mean that someone will be affected by the accelerated payments regime. HMRC will look at the particular scheme and assess whether it is effective. There may well be circumstances in which HMRC will look at a particular scheme and say, “A DOTAS disclosure has been made, but as far as we can see this scheme is entirely consistent with the law. It is effective and there is no tax under dispute, so no accelerated payment will need to be made.” If there is no tax under dispute, there is no accelerated payment.

The other point that is worth bearing in mind is that the trend for DOTAS disclosures is a significant fall, and all the evidence suggests that that trend has been driven not by concerns about accelerated payments, because it was in place before that policy was announced, but due to the fact that not as much aggressive tax avoidance is being undertaken as a few years ago.173

On the question of retrospection, the Minister noted the nature of payments made this way:

We are clear that the legislation is not retrospective. It does not change anybody’s tax liability, but it changes who holds the tax during an avoidance dispute ... [The accelerated payment] will be treated as a payment on account of the final liability, which means that interest will stop running on the amount paid from the date that the taxpayer pays it over. This is emphatically not any form of determination of the final tax liability, which will still be subject to all existing appeal rights. If the taxpayer is ultimately successful, they will get a repayment, with interest, just like the vast majority who have to reclaim any tax they think they are owed.174

Several Members contributed to the debate. Teresa Pearce took issue with the Minister’s view on retrospection:

The definition of retrospection is to change the legal consequences of actions that were committed, or relationships that existed, before the enactment of a law, and that is exactly what this legislation does. I agree that it might not change an underlying tax liability, but it changes the consequences of actions ...

It is not only my interpretation that the legislation is retrospective, but that of the Treasury Committee. The Chartered Institute of Taxation, the Law Society and several well-respected chambers have said that they find the legislation’s retrospective element unacceptable … If the Minister and the Government are trying to change behaviour, surely they cannot change behaviour in the past. They need to change it going forward, but the retrospective element will not do anything about that. People cannot change what they have already done, but they can change what they will do in the future.175

By contrast, Charlie Elphicke argued that retrospection was about the creation of uncertainty for the taxpayer:

173 op.cit. c490 174 op.cit. cc491-2. The Minister also gave a summary of the Government amendments

to these provisions: c493. 175 op.cit. c494

58 Tax avoidance and tax evasion

That is not the case with these provisions, as they apply only in a DOTAS case when a filing has been made to the Revenue. If an adviser has been making a filing, they will say, “I have had to file this with the Revenue.” If they were a competent advisor, they would say, “Keep the money to one side; don’t go out and spend it.”

The argument that we hear being made is that if a person puts £100 on red or black in a roulette tournament, it is okay for them, while the ball is still spinning, to take 50 quid of that stake and buy a round of drinks on the grounds that they might win, but that is a poorly founded argument. If someone is going to put a bet down … the stake should stay on the table. The principle that the Government are setting out is that the stake should remain on the table and in the hands of the house. In this particular case, the money should be held with the Revenue if it is making a challenge and has issued a follower notice.176

For the Opposition Shabana Mahmood argued that the Minister’s case was persuasive:

This feels much more like a situation where, to borrow a concept from another aspect of our legal system, the legitimate expectations of a taxpayer have been changed. When that happens, as it does in other aspects of our law, particularly when we discuss concepts of reasonableness in judicial reviews and other matters, if legitimate expectations of taxpayers or others are changed, that mischief—the changing of legitimate expectations—is remedied by the time-to-pay arrangements, which should assist in righting any wrongs. There is also the remedy of an interest payment on top of the tax that was in dispute if it is found that it needs to be paid back to the taxpayer. If there is any unfairness as a result of the measures, it can be remedied by those other measures.177

In his response to the debate Mr Gauke addressed the point made by Ms Pearce:

The point was made that, if this is about changing behaviour, it should only apply to arrangements people enter into after the measures come into effect. The point I would make in response is that new rules are intended to achieve two things: they change behaviour away from avoidance but have the additional objective of accelerating the resolution of the large number of existing cases and the receipt of the revenue tied up in them. We want all taxpayers in this type of dispute to be in the same predicament so that there is no reason to apply the rules differently depending on when the particular arrangements began.178

Members also raised concerns over the impact that the new regime would have on the legal service. In response to this Mr Gauke said:

On some of the practical issues involving the impact on HMRC and the tribunal … the measures are expected to prompt a range of legal challenges, including judicial review proceedings, an increase in closure applications to the tribunal and disputed enforcement activity. Flexible legal resource options are being considered to meet the expected demands of the work. That legal resource will be increased and adapted depending on the scale

176 op.cit. c496 177 op.cit. cc502-3 178 op.cit. c507

59 Commons Library Briefing, 30 January 2019

and scope of any challenges … HMRC is in discussion with the Ministry of Justice to plan for the introduction of these measures and to deal with the likely consequences.179

The Minister went on to discuss concerns over the financial burden of payments and the position of taxpayers who had made disclosures simply to be sure they were being fully compliant, before confirming a formal review of DOTAS over the summer:

In cases of genuine hardship, HMRC will consider alternative payment arrangements, as it does with any debt. The priority in cases of genuine hardship will be to get people on to a payment track so that the debt is paid as quickly as possible … Where individuals do not immediately have the cash, it may be appropriate in some instances to back up a payment arrangement with a security against assets. In cases where, for instance, individuals have taken deliberate action to put their assets out of reach of HMRC … so that they cannot pay the tax, bankruptcy action may well be appropriate, but the particular action will always depend on the precise facts and circumstances of the taxpayer …

I took one or two interventions on the issue of whether DOTAS disclosures are on the safe side. If disclosures are made but there is no additional tax, there will not be an accelerated payment. HMRC will publish a list of scheme reference numbers before Royal Assent to tell taxpayers which schemes will get a payment notice and which will not ...

DOTAS has been in place for 10 years and has been revised at various times. We believe that now is the right time to look at its hallmarks to see whether they still work properly or whether they need updating. We also want to look at how compliance can be updated. We will publish a consultation in the summer, and HMRC will … shortly publish draft guidance in consultation with professional bodies and other interested parties.180

Subsequently HMRC published its proposals to strengthen the DOTAS regime on 31 July.181

As mentioned, the Government tabled amendments to these provisions, specifically in regard to the grounds for making an appeal against follower notice penalties. These were debated and agreed without further changes at the Report stage of the Bill on 2 July.182

On this occasion the Exchequer Secretary clarified two points that he had made in Committee; first on the number of responses made to the draft provisions for follower notices, published in January:

[In Committee] I mentioned then that 22 responses had been received to the January consultation on the draft legislation. Some commentators have subsequently questioned whether the number was not in fact higher. The draft legislation on follower notices was issued in two separate documents in January, one of which was on tackling marketed tax avoidance. Although we received a total of more than 800 responses, the vast majority

179 op.cit. c508. See, “Tide of tax bill challenges to spur hiring spree for judges”,

Financial Times, 23 June 2014 180 op.cit. cc507-8, c509. The Committee proceeded to agree to this section of the Bill

without a division. 181 Strengthening the Tax Avoidance Disclosure Regimes – consultation, 31 July 2014 182 HC Deb 2 July 2014 cc961-1017

60 Tax avoidance and tax evasion

related to accelerated payments, and only 22 specifically related to the draft legislation on follower notices that was published at the same time. I hope that that provides clarification.

Mr Gauke went on to discuss the potential scope of accelerated payments to previous tax years:

In Committee, I was asked whether the accelerated payments regime would “reach back to disputed tax liabilities relating to periods prior to the introduction of the DOTAS reporting?”––[Official Report, Finance Public Bill Committee, 17 June 2014; c. 507.]

I said that it would not. I want to clarify that an accelerated payment notice may not be issued to a taxpayer with a pre-DOTAS tax dispute where DOTAS—disclosure of tax avoidance schemes—is the only criterion available. Even though a scheme may have come into DOTAS after its introduction, anyone using it before DOTAS will not be subject to accelerated payment on DOTAS alone. However, accelerated payment based on a follower notice can apply to pre-DOTAS cases because the notice does not depend on the DOTAS disclosure.183

Subsequently the Minister confirmed that HMRC was ‘on course’ to issuing guidance, and details of those DOTAS schemes to be subject to accelerated payments notices,184 and HMRC’s guidance on acclerated payments, and a list of DOTAS schemes, are now available online.

4.4 Impact of the new regime When the legislation to introduce accelerated payments was agreed, there was some press coverage of the fact that several celebrities would be amongst those taxpayers who were anticipating that they would be served with a demand for this type of payment.185 In October 2014 HMRC confirmed that over 600 Accelerated Payment notices had been sent since late August, relating to over £25 million of disputed tax. In a press notice the department stated that it would be issuing 2,500 notices per month by January 2015, and that it was “on track to deliver notices to 43,000 tax avoidance scheme users, covering £7.1 billion of disputed tax, by the end of March 2016.”186

As noted above, it is a Parliamentary convention that Finance Bills do not include legislation relating to National Insurance, so that provision to extend both the system of accelerated payments, and the ‘POTAS’ regime, to NICs was included in a separate National Insurance Bill, published in July.187 When the Public Bill Committee took evidence of

183 HC Deb 2 July cc965-6 184 op.cit. c986. These provisions now form part 4 (ss 199-233) of the Finance Act 2014.

See also, “Thousands of taxpayers in avoidance schemes to repay billions”, Financial Times, 15 July 2014.

185 “Thousands of taxpayers in avoidance schemes to repay billions” & , “Ingenious Media tells celebrity investors they face tax crackdown”, Financial Times, 15 July & 7 July 2014. For a technical discussion see, “Press the accelerator”, Taxation, 9 October 2014.

186 HMRC press notice, Tax avoidance demands top £250m, 23 October 2014. By 9 January 2015 3,000 notices had been issued and £99m received (Strengthening Sanctions for Tax Avoidance, January 2015 p5).

187 For more details on the legislation see, Library Research paper 14/45, 21 August 2014, and Commons Briefing paper CBP6975, 11 February 2015.

61 Commons Library Briefing, 30 January 2019

the Bill on 21 October, Members asked witnesses about the state of play regarding accelerated payments.

Both Andrew Hubbard (from accountants Baker Tilly) and Frank Haskew (from the ICAEW) suggested it was too early to make a definitive assessment, though Mr Haskew suggested that the market for avoidance schemes “is starting to move already in relation to things such as … professional indemnity insurance.”188 Mr Haskew noted that both the ICAEW and the CIOT were worried that HMRC might not have the legal powers to return any overpayment of NICs associated with an accelerated payment. When asked, the Minister David Gauke assured the Committee this was not the case:

If the courts determine that the amount that has been paid under an accelerated payments notice, whether in respect of tax or national insurance contributions, ultimately does not need to be paid, and if the scheme in question, for example, was legal and effective, HMRC would be obliged to make that repayment. Although it is not in the Bill, I am grateful for that question and I am happy to make that statement and to make it clear that that is the view of HMRC and the Government, having looked at it very closely.189

Both the Minister, David Gauke and David Edney, policy adviser at HMRC, gave details of how the new regime was working, and the department’s resources to administer it:

Mr Gauke: The plan from HMRC has always been to start off relatively cautiously in terms of numbers and ramp it up. The first notices went out at the end of August. Something like 600 notices have been sent out, covering tax liability of up to £250 million. The notices give the parties concerned 90 days in which to settle and make the payment, so one would not expect us necessarily to see the money coming in until the end of November. I can inform the Committee that, up until now, over £25 million has been paid as a consequence of the accelerated payments project. There is clearly much more to come …

Mr Edney: We set up a dedicated helpline for people to contact us. It was noticeable that, as soon as accelerated payments were talked about and the first notices went out, the calls started coming in. They first asked, “What is this all about and am I affected?” and then minds started to concentrate and people said, “I really want to get out of this. I see now that I cannot hold on to the money any longer. What do I have to do to settle?” As well as the advisers we have in place to issue the notice, we have advisers to settle their liabilities without even receiving a notice …

We have added a little bit of resource to issue the first tranche of notices. We will build up the staffing into the new year as we build up to full capacity. As the reaction builds in, we will then look at resources on our debt management teams, for example, and our legal teams. Rather than recruiting very large numbers up front, we are taking it in stages as the programme unfolds.190

188 Public Bill Committee (National Insurance Contributions Bill), First sitting, 21 October

2014 c10 189 op.cit. c26 190 Public Bill Committee, Second sitting, 21 October 2014 c25

62 Tax avoidance and tax evasion

When the Committee debated that part of the Bill relating to accelerated payments, Shabana Mahmood reiterated the Opposition’s support for these changes and their view that these arrangements did not constitute retrospective legislation. Ms Mahmood went on to ask if HMRC had sufficient resources to administer the new regime; in response, Mr Gauke said:

The Government have provided significant reinvestment of £1 billion specifically to combat revenue lost and at risk through non-compliance … [so] while most of HMRC’s lines of business are reducing in size, the number of roles in compliance is increasing … Around 100 staff have been recruited into counter-avoidance to deal with the issue of accelerated payment notices, and another 100 will be added in 2015. In addition, HMRC is deploying additional staff to handle collection work. HMRC is taking a flexible approach on additional legal staff, which will depend on the number and nature of legal challenges.

Her Majesty’s Courts and Tribunals Service is recruiting additional tribunal judges to handle the cases involving accelerated payments and follower notices and to accelerate the number of cases going through the tribunal generally. The Government have invested extra funds into HMRC’s work to tackle avoidance and evasion. That is bearing fruit, with compliance in 2013-14 bringing in £23.9 billion up substantially from where it was when we came to office.191

In January 2015 the National Audit Office published an overview of the department’s work to improve tax collection since 2010. On the question of compliance, the NAO found that HMRC had made “significant progress since the 2010 spending review in delivering its strategic objectives, successfully reducing the cost of tax collection while increasing the tax it raises from its compliance work.”192

The report also looked at HMRC’s response to concerns raised by the NAO and the Public Accounts Committee in 2012-13 over the scale of marketed avoidance schemes. Reviewing the introduction of accelerated payments & follower notices, as well as associated changes to the avoidance landscape – the GAAR, the strengthened disclosure regime, new sanctions on scheme promoters – the NAO concluded, “HMRC’s response … has been exemplary”:

HMRC’s response to our and the Committee’s recommendations on marketed tax avoidance has been exemplary. In the next parliament, the Committee may want to examine whether HMRC’s new powers to tackle marketed avoidance are working as intended. HMRC will need to demonstrate that it is reducing its backlog of 65,000 open avoidance cases. It also faces the challenge of finding ways to measure the impact of new approaches it is introducing to promote compliance and prevent tax avoidance from happening. The impact of these will be harder for HMRC to measure than the additional tax yield HMRC secures from its investigations.193

191 op.cit. cc47-8 192 Increasing the effectiveness of tax collection: a stocktake of progress since 2010, 6

February 2015, HC 1029-I of 2014-15 p7 193 HC 1029-I of 2014-15 p22

63 Commons Library Briefing, 30 January 2019

Figures on the numbers of notices issued and payments received were given in HMRC’s 2016/17 Annual Report, published in July 2017:

Last year, as planned, we reached the end of our three-year programme of issuing Accelerated Payment Notices (APN) to users of eligible avoidance schemes. APNs are one of the most significant tools that we have to tackle avoidance by individuals and companies, removing their ability to defer payment of tax in ongoing disputes involving marketed tax avoidance schemes. Since 2014 we have issued more than 75,000 notices worth in excess of £7 billion and collecting nearly £4 billion.

During the last year we issued more than 30,000 notices, worth £2.3 billion, with total revenue generated of £1.3 billion. This included £180 million of estimated compliance yield protected by APNs, through making the use of avoidance schemes less attractive to existing and potential avoidance scheme users. …

Where a customer disagrees with an Accelerated Payment Notice, they have the right to make representations to us. Of the 75,000 notices issued we received a total of 40,000 representations. So far we have considered more than 32,000 of these representations and around 90%of the notices were upheld as valid, with more than 80% confirmed in the original amount.194

Since the introduction of this legislation there has been relatively little debate or comment on the accelerated payments regime in the House. In March 2016 Greg Mulholland MP tabled an EDM critical of APNs – though only 3 Members signed it.195 Subsequently the operation of the regime has been raised in a few PQs: two examples are reproduced below:

Asked by Mr Charles Walker : To ask Mr Chancellor of the Exchequer, what mechanisms there are for companies to appeal the terms of accelerated payment notices issued by HM Revenue and Customs; and if he will make a statement.

Answered by: Jane Ellison : The accelerated payment regime was introduced in Finance Act 2014 to change the underlying economics of tax avoidance by requiring disputed tax to be paid upfront while an avoidance scheme is being challenged. Disputed tax remains due and payable under the accelerated payment regime until such time as the dispute is settled by agreement with HM Revenue and Customs (HMRC) or the dispute is litigated and there is a judicial decision. Where an accelerated payment has been made, it is repayable if HMRC agrees, or the courts decide, that the scheme in question does produce a tax advantage under the legislation. Taxpayers can make representations to HMRC about an accelerated payment notice if they believe the conditions for issue have not been met or the amount shown is incorrect. They can also ask the courts to judicially review the issue of an accelerated payment notice.196

*

Asked by Grant Shapps :To ask Mr Chancellor of the Exchequer, what comparative assessment HM Revenue and Customs has made of the amount it will recover if a company goes into

194 HMRC Annual Report 2016/17, HC 18, July 2017 p24 195 EDM 1321 of 2015-16, 23 March 2016 196 PQs 59586, 59587 & 59588, 16 January 2017

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liquidation because of accelerated payment notice debt or if that company continues to trade.

Answered by: Mel Stride : HM Revenue and Customs (HMRC) has stringent governance arrangements in place where insolvency is considered. Each case is considered individually and, where a company is trading insolvent, HMRC must take the most appropriate action to mitigate the tax losses. Many factors are considered when deciding whether to petition against a company.

HMRC treats unpaid Accelerated Payments as any other established debt using their range of debt collection powers as necessary to recover what is owed, including insolvency powers where appropriate.

HMRC does not hold information on the amount recovered from company liquidations caused by unpaid accelerated payment notice debts. Any insolvency action in relation to unpaid accelerated payment notices is currently at an early stage.197

In July 2015 the Court of Appeal rejected a legal challenge to the APN regime.198 One part of the judgement is striking in relation to the claimants’ argument that it was unfair to apply APNs to the scheme, given they had bought into this scheme essentially in good faith, several years ago (para 126)

The claimants assert that “if they had known that participating in a business notified under DOTAS meant that monies contributed would be claimed by executive act some 10 years later at short notice and prior even to any enquiry or assessment to tax, it is highly unlikely that they would have made the investment”. This is untenable. The primary risk to the claimants was not precisely when they might have to pay the relevant tax, but whether they would have to pay it. That was a risk that must have been well understood and for which financial provision can be expected to have been made.

At the time they participated in the schemes, the claimants could not have known when HMRC’s enquiries and any FTT appeal process would end. It was possible that the appeal process could have concluded much earlier, with a consequential requirement to pay the disputed sums.

Writing on this judgement in Taxation, editor Andrew Hubbard, argued that “clients who have received APNs or PPNs [given to partnerships] must face the fact that they will almost certainly have to pay.”199

Subsequent legal challenges have also failed.200 In November 2016 the Tribunal considered an appeal against penalties that HMRC had imposed on a taxpayer for late payment of an accelerated notice – in this case a ‘PPN’ as it was issued against a partnership. As part of the judgement the Tribunal noted that, “Parliament had deliberately enacted provisions that a challenge against a PPN should be made by way of judicial review. The taxpayer, having chosen not to make such an

197 PQ4787, 18 July 2017 198 Rowe, Worrall and others v CIR [2015] EWHC 2293. The judgement is online. See

also, HMRC press notice, HMRC win Accelerated Payments challenge, 31 July 2015. 199 “Not so ingenious”, Taxation, 6 August 2015 200 “The failed JR challenges to APNs: lessons learned?”, Tax Journal, 9 September

2016; “Still in the fast lane?”, Taxation, 14 July 2017; “Judicial review applications against HMRC”, Taxation, 31 October 2018.

65 Commons Library Briefing, 30 January 2019

application, could therefore not argue that the invalidity of the underlying assessment was a reasonable excuse not to pay the PPNs.”201 In December 2017 the Court of Appeal handed down judgement in two joined cases involving dozens of taxpayers, and, once again, upheld HMRC’s position.202

HMRC regularly publish details of avoidance schemes which they believe are being used to unfairly avoid tax – their ‘Spotlights’ publication. In February 2016 HMRC published a notice, Misleading claims from tax avoidance scheme promoters, which observed, “promoters marketing these avoidance schemes and arrangements use a variety of terms or statements to reassure the potential user that the products they are marketing are acceptable. Such statements are often short and snappy and made without context so could be misleading”:

There are a wide variety of claims and statements made but some examples include:

• these arrangements fall outside the scope of tax avoidance

• the scheme is not disclosable to HMRC and leading Tax Counsel (QC) have agreed this

• the scheme has been disclosed and therefore you cannot be penalised

• we have been offering these schemes for years and have not been challenged

• you can receive tax-free payments that are compliant with tax law

• we have won all previous court cases in relation to these arrangements

• HMRC will write you a few letters and then give up and go away

• the arrangements are recognised by HMRC as not an avoidance scheme

• we have a successful track record of implementation

• leading Tax Counsel have advised that the arrangements are legal and work

• penalties can’t be applied as you have relied on advice of Tax Counsel

• you can earn more and mitigate tax and do so using tax efficient structures fully compliant with the law

• the product is low risk

• you’re fully insured against any defeat

• HMRC has approved the scheme - they’ve given it a reference number

Such claims are made without context and are usually misleading.

201 “Got to pay: Case summary”, Taxation, 23 November 2016 202 Rowe v HMRC [2017] EWCA Civ 2105. See also, Stephen Daly, “A case note on

‘notices’”, taxatlincolnox blog, 13 December 2017; and, Carlton & Ors v HMRC [2018] EWHC 130 (Admin)

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HMRC never approves avoidance schemes. Assertions that HMRC has never challenged schemes of a particular type, or claims that a scheme produces tax free payments that are compliant with tax law, are often simply incorrect. Saying ‘the scheme has been disclosed and therefore you can’t be penalised’ doesn’t mean that you won’t have to pay the disputed tax, interest and possibly penalties. Similarly, saying ‘leading Tax Counsel have advised that the arrangements are legal and work’ does not necessarily mean the scheme works.

Counsel may be advising the promoter on the basis of assumptions which may not turn out to be correct when the scheme is implemented. And whilst Counsel may have advised that the scheme works, their advice is only one opinion. HMRC has a strong track record on avoidance and wins around 80% of all avoidance cases taken to court.203

4.5 Subsequent proposals regarding ‘serial avoiders’ and offshore evasion

In the Autumn Statement in December 2014, the Coalition Government announced that it would consult on action to “impose additional financial costs, compliance and reporting requirements or repeat users of known avoidance schemes.”204 In January 2015 HMRC launched a consultation – Strengthening the sanctions for tax avoidance – which, as noted above, asked for views on having penalties for GAAR cases, and on measures to tackle ‘serial avoiders’: “a small group of risk takers, each of whom is repeatedly involved in tax avoidance schemes to avoid significant amounts of tax.”205

The consultation paper gave more details of what additional sanctions might be applied, while underlining that any new regime would have to be underpinned by certain safeguards:

Introducing surcharges for repeated use of schemes that fail

When a tax avoidance scheme fails, the tax return is inaccurate and penalties may be chargeable. This depends in each case on establishing that the taxpayer failed to take reasonable care. However, the law must look at each case in isolation, and cannot consider the evidence of a pattern of previous or parallel behaviour. Introducing a surcharge on the repeated or concurrent use of tax avoidance schemes that fail could help deter serial avoiders from persisting with flawed schemes year after year …

Special Measures for Serial Avoiders

Serial avoiders may be largely insulated against the personal impact of an intensive enquiry into their tax affairs by their agent or the scheme promoter. Currently, neither the threat of enquiry nor the burden of compliance are likely to carry weight with the serial avoider; or move them to cooperate and progress matters at pace; indeed, delay is a tactic frequently used to hold up settlement and payment.

203 HMRC, Misleading claims from tax avoidance scheme promoters, Spotlight 29,

February 2016 204 Autumn Statement, Cm 8961 December 2014 para 2.158. At this time the

Government also proposed changes to make DOTAS more effective (paras 2.160-2). 205 Strengthening Sanctions for Tax Avoidance, 30 January 2015 p7

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Increasing the level of scrutiny and obligation on taxpayers during an enquiry could raise the stakes for the avoider and help shift their behaviour ... On entering special measures, serial avoiders could be required:

To provide certificates about their use of tax avoidance schemes to show whether or not they have used a tax avoidance scheme in a particular period, with a view to influencing their behaviour by making them formally acknowledge their involvement in tax avoidance;

To provide as a matter of course more documents and information about their tax affairs or with their tax return rather than waiting for an enquiry or information request from HMRC, with a view to making clear that serial avoidance will result in the imposition of additional obligations on an avoider;

To comply with a conduct notice or a stop notice requiring them to do, or refrain from doing, certain things, with a view to improving their tax compliance …

Publishing the names of serial avoiders

Some serial avoiders may be particularly sensitive to reputational risk. Introducing the additional prospect of publicity could alter the balance of risk for serial avoiders, and act as a deterrent to future involvement in high risk tax avoidance schemes. This sanction could be directly triggered by the imposition of a surcharge for repeated use of schemes that fail; or it could be a further consequence of failure to comply with special measures, which could themselves be triggered by imposition of a surcharge…

Safeguards

Whether in raising a surcharge, imposing special measures or naming a serial avoider there would need to be appropriate safeguards. Any new regime would need to include procedural safeguards and rights of appeal to ensure that it catches and sanctions only its intended, narrow target. The power to name would require especially careful handling, as it would be harder to demonstrate that any perceived reputational damage could be effectively undone.206

The Chancellor George Osborne presented his last Budget of the Parliament on 18 March 2015, and in the Budget report the Government confirmed that it would go ahead with the proposed changes regarding serial avoiders in a future Finance Bill:

2.203 Serial avoiders – The government will introduce legislation for tougher measures for those who persistently enter into tax avoidance schemes which fail (serial avoiders), including a special reporting requirement and a surcharge on those whose latest tax return is inaccurate as a result of a further failed avoidance scheme.

The government will also look to restrict access to reliefs for the minority who have a record of trying to abuse them through avoidance schemes that don’t work and intends to develop further measures to name those who continue to use schemes that fail. Legislation will be introduced in due course that will widen the current scope of the Promoters of Tax Avoidance

206 op.cit. pp 8-10. Responses to this consultation were invited by 12 March 2015.

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Schemes regime by bringing in promoters whose schemes regularly fail. (Future Finance Bill).207

The Budget report went on to note that the forthcoming Finance Bill, to be passed before the Dissolution, would enable HMRC to issue Conduct Notices to a broader range of connected persons under the POTAS regime, and, ensure that the 3 year time limit for issuing Conduct Notices to promoters who have failed to disclose avoidance schemes to HMRC applied from the date when a failure is established.208

Alongside the Budget the Coalition Government published Tackling tax evasion & avoidance – a paper setting out the action it had taken over the Parliament to deal with avoidance and evasion, both domestically, and in response to international concerns about corporate tax avoidance, as well as bank secrecy laws and their exploitation for the purposes of evasion and money laundering.209 With regard to the domestic scene it confirmed the Government’s intention to introduce a system of penalty payments for GAAR cases, while noting that only “a fairly small number of cases” were expected to fall foul of the rule.210 Following the introduction of accelerated payments, consideration would be given as to “whether the principle might be appropriate for different types of cases and whether the government should extend the acceleration of tax payments to more avoidance cases.”211

This paper also mentioned four initiatives to tackle offshore evasion. HMRC published a strategy paper on this issue in March 2013, which gave a summary description of what this constitutes …

Offshore evasion is using a non-UK jurisdiction with the objective of evading UK tax. This includes moving UK gains, income or assets offshore to conceal them from HMRC; not declaring taxable income or gains that arise overseas, or taxable assets kept overseas; and using complex offshore structures to hide the beneficial ownership of assets, income or gains.

… and estimates as to the scale of this activity:

The hidden nature of the problem and the way that information is currently recorded mean that there is no clear view of the cost of offshore evasion. However, HMRC’s recent progress in tackling offshore evasion through exchange of information agreements and disclosure facilities indicates that it has a significant cost to the UK. That is why we are undertaking innovative new work to use a wide range of data sources and engage experts and academics to develop a comprehensive evidence base on the scale and nature of offshore evasion.212

The difficulties faced by many countries in tackling offshore evasion was a theme to the 2013 G8, and in July 2014 the OECD published a new

207 Budget 2015, HC 1093, March 2015 p91 208 op.cit. para 2.204. This was made by s119 of FA2015 209 HM Treasury, Tackling tax evasion & avoidance, Cm9047, March 2015. The paper

lists a series of measures taken from 2011 to 2015 to ‘close loopholes’ (Table 2.A). 210 Tackling tax evasion & avoidance, Cm9047, March 2015 para 3.22 211 op.cit. para 3.34 212 HMRC, No safe havens: Our offshore evasion strategy 2013 and beyond, March

2013 p2. HMRC published an update to this strategy the following year: No safe havens 2014, April 2014.

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global standard on automatic information exchange – the ‘Common Reporting Standard’ (CRS) – to tackle offshore tax evasion:

The Standard provides for annual automatic exchange between governments of financial account information, including balances, interest, dividends, and sales proceeds from financial assets, reported to governments by financial institutions and covering accounts held by individuals and entities, including trusts and foundations. The new consolidated version includes commentary and guidance for implementation by governments and financial institutions, detailed model agreements, as well as standards for harmonised technical and information technology solutions, notably a standard format and requirements for secure transmission of data.213

The UK was one of an initial group of 51 countries that agreed later that year to implement the standard,214 including all EU Member States under an EU-wide Administrative Co-operation Agreement. Following consultation, legislation to give effect to these provisions was introduced in March 2015.215 Notably the Crown Dependencies and Overseas Territories agreed bilateral arrangements with the UK on automatic information exchange in 2013 and, in turn, signed up to implement this new global standard.216

Following consultation over 2014, the March 2015 Budget confirmed the introduction of enhanced civil penalties for offshore tax evasion.217 In addition the Government proposed that these civil penalties could be strengthened, possibly supplemented by other measures, including a new criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion by their agents:

3.11 The government has reached ground-breaking agreements to exchange information on financial accounts automatically every year with over 90 other countries. Building on this, it is introducing stronger sanctions for those who continue to evade tax and for those who assist them.

3.12 The Government today announces the introduction of a new strict liability offence for those who have not paid the tax due on offshore income. This will act as a significant deterrent to the minority of people who evade their tax and will help to stamp out offshore tax evasion. There was previous consultation on a strict liability offence in 2014 at a time when fewer countries had agreed to begin exchanging information automatically in 2017 or 2018. In light of the significant increase in the number of participating countries, there will be a further consultation before legislation is introduced which takes account of this and considers appropriate defences and thresholds.

3.13 The Government is also taking tough action against those who enable offshore tax evasion. The Government today

213 OECD press notice, OECD releases full version of global standard for automatic

exchange of information, 21 October 2014 Details are on the OECD’s site here. 214 HM Treasury press notice, Next step taken in stamping out international tax evasion,

30 October 2014 215 HMRC, Tax administration: regulations to implement the UK's automatic exchange

of information agreements, March 2015 216 PQ HL4852, 18 February 2015. See also, PQ67167, 17 March 2017 217 Budget 2015, HC1093, March 2015 para 2.202. see also, HMRC, Strengthening

penalties for offshore non-compliance, December 2014

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announces new civil penalties for enablers of tax evasion and will consult on the detail of this. This will include a new collateral penalty under which enablers will pay a fine equivalent to that paid by the individual that they helped to evade tax; and public naming of those that enable tax evasion. Criminal sanctions are already available against individuals who facilitate or encourage tax evasion. The Government today announces it will create a new offence of corporate failure to prevent tax evasion or the facilitation of tax evasion, following consultation.

3.14 HMRC is already able to apply penalties of up to 200% of the tax due. Changes introduced in Finance Bill 2015 will extend the scope of these. The government today announces that there will be a further toughening of the range of penalties available to HMRC, following consultation. This will include a new penalty that would take a portion of the asset that has been hidden and increasing the scope of the power to name those who have evaded tax.218

At this time the Government also announced that it would introduce a new ‘disclosure’ programme, for taxpayers to declare unreported tax liabilities connected with assets held offshore. As noted in Tackling tax evasion & avoidance, “without access to information on offshore financial assets, HMRC’s approach has long been to encourage people to come forward and disclose information voluntarily. It has done this by offering time-limited ‘disclosure facilities’, including through bilateral agreements, which encourage tax evaders to come forward and to disclose their offshore affairs, pay the tax due together with penalties and interest.”219

The Budget report noted that the new Worldwide Disclosure Facility (WDF) would not offer taxpayers similar incentives as previous schemes, that had sought to encourage voluntary disclosures by imposing lower penalties on unpaid tax recovered this way. The Government also stated that it would “invest £4 million in data analytics resource to maximise the yield from the Common Reporting Standard data.”220 The Budget report estimated that this would yield about £570m over 2015-20.221

The WDF was launched in September 2016. Writing in Taxation magazine on its launch, Dawn Register & Helen Adams (BDO LLP) noted that, “the reason for no further incentives to encourage voluntary disclosure is HMRC’s improved capability of detecting and investigating offshore tax evasion and non-compliance”:

The common reporting standard (CRS) is described by HMRC as a ‘game changer’, bringing the automatic exchange of bank information from more than 100 countries around the world over the next two years. This is in addition to data from more than 40 territories on the beneficial ownership of offshore companies and

218 Tackling tax evasion & avoidance, Cm 9047, March 2015 p16. Consultation on each

of these measures was launched in July 2015, and subsequently the Conservative Government confirmed it would introduce them (Autumn Statement Cm 9162, November 2015 para 3.77-80). This is discussed below.

219 Tackling tax evasion & avoidance, Cm 9047, March 2015 para 2.16 220 Budget 2015, HC 1093, March 2015 para 2.197-9, para 2.201 221 op.cit. p64 (Table 2.1- item 25)

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trusts. The result is to revolutionise tax transparency and make it easier for HMRC to tackle offshore tax evasion and avoidance.

The author went on to note that this was one of a series of initiatives that HMRC was introducing to reduce offshore tax evasion:

The WDF must be viewed with two other measures on which HMRC is working. First, the requirement to correct (RTC) [initiative] … will create a statutory obligation to correct any undeclared UK tax liabilities in respect of an offshore matter by 30 September 2018. These proposals will introduce tough new penalties for ‘failure to correct’ if the non-compliance is not resolved by then.

Second, HMRC is putting into place the client notification regulations. The new SI 2016/899 states that advisers will need to contact specified clients to warn them of the consequences of failing to disclose fully their UK tax liabilities and advertise the WDF. Further guidance is expected before advisers contact these clients between 30 September 2016 and 31 August 2017. HMRC will use both the RTC and notification letters to encourage individuals to use the WDF to bring their tax affairs up to date, with a particular focus on anything offshore.222

In a second piece on the WDF that appeared in the Tax Journal at this time, Ms Adams and James Kennedy (also BDO LLP) noted:

The launch of WDF is interlinked with the common reporting standard (CRS), the automatic information exchange of bank data from around the world and registers of beneficial ownership. HMRC has improved its efficient, effective data analysis capabilities to handle bulk data. Consequently, it simply does not believe that it needs to offer incentives for disclosure, as it will soon receive data from over 100 countries from which it will identify cases for investigation.223

Prior to the 2015 General Election the Institute for Fiscal Studies published an assessment of the Coalition Government’s tax policy, including its efforts to tackle tax avoidance and evasion.224 On the impact of the new GAAR the authors noted that it was still “very early days”: “to date there have been no test cases of the GAAR – not necessarily because it has no practical application, or because it is a completely effective deterrent, but because it takes time for relevant transactions to arise, come to the attention of HMRC, be investigated and come to court.” DOTAS had facilitated the practice of clamping down on avoidance schemes as they came to light, but it was hard to say what the revenue impact of these initiatives had been:

The principal weapon [to tackle avoidance] has still been to clamp down on specific avoidance schemes when they are uncovered (often through the Disclosure of Tax Avoidance Schemes, or DOTAS, provisions introduced by the previous Labour government). Every Budget and Autumn Statement has included a

222 “Sticks instead of carrots”, Taxation, 29 September 2016. For details of the first of

these measures – the ‘requirement to correct’ – see, HMRC, Tackling offshore tax evasion: requirement to correct, December 2016. It is also discussed below.

223 “Q&A : the Worldwide Disclosure Facility”, Tax Journal, 23 September 2016 224 Stuart Adam & Barra Roantree, The Coalition Government’s Record on Tax: IFS

Briefing note BN167, March 2015

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raft of anti-avoidance measures, most of them small individually but collectively forecast to raise billions of pounds.

There is no clear dividing line between reducing avoidance opportunities and broadening the tax base, so it is hard to separate out ‘anti-avoidance’ measures and quantify their intended revenue yield. It is even harder to know whether the measures in fact bring in the sums forecast.225

More generally the authors argued that even though the GAAR represented “a move beyond the traditional approach of simply dealing with each avoidance scheme as it is uncovered”, it was “still tackling the symptoms rather than the underlying cause – often a lack of clarity or consistency in the tax base”:

As the Mirrlees Review noted, ‘If activities were taxed similarly, there would be no (or, at least, much less) incentive for taxpayers to dress up one form of activity as another – and there would correspondingly be little or no revenue loss to the Exchequer if they did so.’226

If tax evasion is a function of enforcement, avoidance is a function of the tax base. Preventing tax avoidance is not an administrative exercise to be layered on top, but inextricably intertwined with the design of tax policy. Design a coherent tax policy and the problem of avoidance will be much reduced.227

225 The Coalition Government’s Record on Tax, March 2015 p27 226 Tax by Design: The Mirrlees Review, IFS 2011 p501 227 The Coalition Government’s Record on Tax, March 2015 p27

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5. The Conservative Government’s approach

5.1 Budget 2015 In the Conservative Government’s first Budget after the 2015 General Election, the then Chancellor George Osborne did not announce any major change in the Government’s approach to this issue. The Budget report included a number of separate measures relating to tax planning, tax avoidance, evasion and compliance,228 and confirmed consultation on a penalty regime for GAAR, as well as measures, previously announced, regarding serial tax avoiders:

The government will publish a consultation, ahead of introducing legislation in Finance Bill 2016, for serial avoiders who persistently enter into tax avoidance schemes which are defeated. These include a special reporting requirement and a surcharge on those whose latest tax return is inaccurate as a result of a further defeated avoidance scheme, restricting access to reliefs for the minority who have a record of trying to abuse them, and developing further measures to name serial avoiders. The scope of the Promoters of Tax Avoidance Schemes regime would be widened by bringing in promoters whose schemes are regularly defeated. (Finance Bill 2016).229

Following a consultation exercise, the Government confirmed it would introduce these arrangements with effect from 6 April 2017:

Legislation will be introduced in Finance Bill 2016 to allow HMRC to send a notice when they defeat a tax avoidance scheme which puts that person on warning for 5 years. During this time, taxpayers will be required to notify HMRC each year that they have not used any further avoidance schemes, or if they have, to give full details of the schemes and the amount of the tax advantage the schemes are asserted to deliver.

For taxpayers who use further avoidance schemes while under warning which HMRC defeat, they will become liable to a penalty of 20% of the understated tax. Subsequent defeats of such schemes will result in increasing penalties to a maximum of 60%.

Taxpayers who use three schemes during a warning period which HMRC defeats will have their names and other details published by HMRC.

Taxpayers who use at least three tax avoidance schemes during the warning period which exploit reliefs in a way not intended by Parliament and which HMRC defeats will have their access to certain reliefs deferred for a period of three years. If they use no further avoidance schemes which exploit reliefs in this time which HMRC defeat, they will be able to claim reliefs in relation to the deferred period, provided they are still in time to do so.230

228 Summer Budget 2015, HC 264, July 2015 pp94-6, Table 2.1 – items 27-36. 229 Summer Budget 2015, HC 264, July 2015 para 2.174 230 Tax administration: serial avoiders special regime - tax information & impact note

(TIIN), December 2015. The Exchequer impact was estimated to be negligible.

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Draft legislation was published at the time, and these provisions now form s159 & schedule 18 of FA2016.231

The Government also confirmed that it would introduce a new threshold condition for the ‘promoters regime’:

Legislation will be introduced in Finance Bill 2016 to provide a new threshold condition for the POTAS regime. The July 2015 consultation proposed the detail for a new threshold condition for promoters who have marketed multiple tax avoidance schemes that are regularly defeated.

Three such defeats over an eight-year period will trigger the threshold condition and bring the scheme promoter into consideration for a Conduct Notice. For this threshold condition, a defeat is defined as: litigation finally being in HMRC’s favour; the user of the scheme reaches agreement with HMRC about their case or makes no appeal against an assessment; a GAAR counteraction has been issued; or the user of the scheme corrects their return on receipt of a Follower Notice. Where there are multiple users of a defeated scheme, a scheme will be defeated if litigation is finally found in HMRC’s favour or 75% of the scheme users agree with HMRC that the scheme does not provide the asserted tax advantage.232

Finally, in the Summer 2015 Budget the Government also stated it would consult “on new measures to increase compliance and tax transparency in relation to large business tax strategies”:

These will include the introduction of a ‘special measures’ regime to tackle businesses that persistently adopt highly aggressive behaviours including around tax planning, and a voluntary Code of Practice defining the standards HMRC expects large businesses to meet in their relationship with HMRC.233

Following consultation over the summer, in December 2015 the Government published details of how these initiatives would work; first, the ‘special measures’ regime -

The government is legislating to provide that large businesses with an ongoing history of aggressive tax planning and/or refusing to engage with HMRC may be subject to special measures.

A business in this position will be advised that they may be of risk of being put into special measures. A twelve month improvement period will then allow HMRC and the business to work together to resolve issues. At the end of the period, the business will either have improved and so not enter special measures or be notified of entry into special measures. At this stage no sanctions are triggered.

Businesses who enter special measures risk sanctions if they demonstrate further instances of the behaviours that led to their inclusions in special measures. Sanctions could include, removing access to non-statutory clearances, removing the defence of ‘reasonable care’ or potentially naming as being in special measures. Businesses enter special measures for a minimum of 2

231 No changes were made to the draft legislation: HM Treasury, Overview of tax

legislation & rates, March 2016 p24 232 HMRC, Tax administration: new threshold condition for promoters of tax avoidance

schemes – TIIN, December 2015. Again, the Exchequer impact of this change is thought to be negligible. This provisions forms s160 of FA2016.

233 Summer Budget 2015, HC 264, July 2015 para 2.176

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years. Two years from entry into special measures HMRC will conduct an ‘exit review’ to decide whether the behaviours have improved and the business should exit special measures or whether an extension of special measures is required.234

- and second, the transparency strategy, which would cover 2,000 largest businesses in the UK:

The measure will introduce a legislative requirement for all large businesses to publish an annual tax strategy, in so far as it relates to UK activities, approved by the Business’s Executive Board.

The strategy will cover 4 areas:

1. the approach of the UK group to risk management and governance arrangements in relation to UK taxation

2. the attitude of the group towards tax planning (so far as affecting UK taxation)

3. the level of risk in relation to UK taxation that the group is prepared to accept

4. the approach of the group towards its dealings with HM Revenue and Customs (HMRC)

Non-publication of an identifiable tax strategy or incomplete content based on the 4 areas outlined above could lead to a financial penalty. This penalty will be subject to the usual HMRC appeals process.235

Draft legislation was published at the time, and in the 2016 Budget the Government confirmed this would be included in the Finance Bill, subject to certain revisions “to clarify the population of those entities in scope of the legislation. The legislation will be effective for accounting periods commencing on or after Royal Assent to Finance Bill 2016.”236 The Exchequer yield from these changes was estimated to be £175m in 201/18, rising consistently to £635m by 2020/21.237

These three measures were debated, and agreed, at the Committee stage of the Bill on 28 June – though the debate focused on the separate, if related issue of corporate tax avoidance, and the proposal for multinational companies (MNEs) to provide public country-by-country (CbC) reporting. Under provisions introduced in 2016 UK MNEs have to provide HMRC with information on their global activities, profits and taxes,238 and Caroline Flint tabled an amendment to require MNEs to make this information public, as part of their transparency strategy. However, Ms Flint’s amendment was unsuccessful, as the Government maintained its position that public CbC reporting should only be implemented on a multilateral basis.239

It is worth adding that, as with previous Budgets, the 2016 Budget also included several new measures to reduce avoidance, evasion and certain 234 Tax administration: large business special measures regime, 9 December 2015 235 Tax administration: large businesses transparency strategy, 9 December 2015 236 Overview of Tax Legislation & Rates, March 2016 para 1.76. The provision forms

s161 & schedule 19 of FA2016. 237 Budget 2016, HC 901, March 2016 (Table 2.2 – item an). See also, HMT, Summer

Budget 2015 Policy Costings, July 2015 p35 238 HMRC, Country-by-country reporting – updated, March 2017 239 HC Deb 28 June 2016 cc157-9. For more details see, Public country-by-country

reporting, Commons Debate Pack 2017-233, 20 November 2017.

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‘imbalances’ in the tax system (where support disproportionately benefits certain groups or types of business structure.)240

5.2 Offshore evasion & the Panama Papers As noted above, in March 2015 the Coalition Government had proposed four initiatives to tackle offshore evasion:

• A new criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion by their agents;

• Tougher financial penalties for offshore evaders, including the possibility of a penalty based on the value of the asset on which tax was evaded as well as wider public naming of offshore evaders;

• A new penalty regime for those who enable tax evasion, based on the tax they have helped taxpayers to evade and naming of enablers;

• A new simpler criminal offence to make prosecution of offshore evaders easier.241

Consultation documents on each of these measures were published in July 2015, and in December the Government confirmed it would bring forward legislation for three of these measures in the Finance Bill 2016:

• a new criminal offence for tax evasion,

• new civil penalties for offshore tax evaders, and

• new civil penalties for those enabling offshore evasion.242

Tax information notes on each measure were published at the time.

• Tax administration: criminal offence for offshore tax evaders

• Increased civil sanctions for offshore tax evaders

• Tax administration: civil sanctions for enablers of offshore tax evasion

In turn provision for these measures was included in the Finance Bill published after the 2016 Budget, well as provision for an additional penalty for serious cases of deliberate offshore evasion, equivalent to up to 10% of the underlying asset value.243 In the 2016 Budget the Government also announced that Finance Bill 2017 would include provision for a new legal requirement to correct past offshore non-compliance within a defined period of time with new sanctions for those who failed to do so.244 In the latter case, a consultation exercise on a ‘requirement to correct’ was launched in the summer.245

240 Budget 2016, HC 901, March 2016 (Item 2.1 – items 39-53). The term ‘imbalances’

seems to have been used first in the July Budget (HC264, July 2015 para 1.184). 241 Tackling tax evasion & avoidance, Cm9047, March 2015 p16 242 Autumn Statement Cm 9162, November 2015 para 3.77-80. See also, Budget 2016,

HC901, March 2016 para 2.200-2 243 HMT, Overview of Tax Legislation & Rates, March 2016 para 1.77. These now form

ss162-67 of FA2017. See also, “The door is closing”, Taxation, 16 June 2016. 244 Budget 2016, HC 901, March 2016 para 2.200-3 245 HMRC press notice, Tough new sanctions announced for offshore tax evaders, 24

August 2016; see also, “UK plans tougher penalties for offshore tax evaders”, Financial Times, 24 August 2016.

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In the case of a criminal offence for corporates, stakeholders and respondents had been “broadly understanding of the need for greater corporate responsibility in relation to the acts carried out by those who represent the corporation”, though there were concerns that there might be practical difficulties in prosecution. Given this response, the Government proposed that it would publish draft legislation and draft guidance in early 2016 for further consultation before proceeding.246

The then Prime Minister David Cameron reiterated the Government’s plans to introduce this criminal offence, in a statement on 11 April 2016.247 This followed the publication a few days before of the ‘Panama papers’ – a leak of financial records from Mossack Fonseca, a law firm that had provided advice on establishing offshore companies in tax havens to a wide variety of politicians, celebrities, and other wealthy individuals.248 Mr Cameron announced a joint taskforce would be established to investigate potential cases of evasion, led by HMRC and the National Crime Agency249 – and gave details of ongoing efforts to improve the financial information provided by the Crown Dependencies and Overseas Territories to the revenue authorities. Part of Mr Cameron’s statement to the House is reproduced below:

As the revelations in the Panama papers have made clear, we need to go even further. So we are taking three additional measures, to make it harder for people to hide the proceeds of corruption offshore, to make sure that those who smooth the way can no longer get away with it and to investigate wrongdoing.

First, let me deal with our Crown dependencies and overseas territories that function as financial centres. They have already agreed to exchange taxpayer financial account information automatically, and will begin doing so from this September …

Today I can tell the House that we have now agreed that they will provide UK law enforcement and tax agencies with full access to information on the beneficial ownership of companies. We have finalised arrangements with all of them except for Anguilla and Guernsey, both of which we believe will follow in the coming days and months. For the first time, UK police and law enforcement agencies will be able to see exactly who really owns and controls every company incorporated in those territories … Next month we will seek to go further still, using our anti-corruption summit to encourage consensus not just on exchanging information, but on publishing such information and putting it into the public domain …

Next, we will take another major step forward in dealing with those who facilitate corruption. Under current legislation it is difficult to prosecute a company that assists with tax evasion, but we are going to change that. We will legislate this year for a new criminal offence to apply to corporations that fail to

246 Tackling offshore tax evasion: a new corporate criminal offence of failure to prevent

the facilitation of tax evasion - Summary of Responses, December 2015 pp7-8, p36 247 No.10 Downing Street press notice, PM: Companies to be liable for employees who

facilitate tax cheating, 11 April 2016 248 “What are the Panama Papers? A guide to history's biggest data leak”, Guardian, 5

April 2016 249 HMT press notice, UK launches cross-government taskforce on the ‘Panama Papers’,

10 April 2016

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prevent their representatives from criminally facilitating tax evasion.

Finally, we are providing initial new funding of up to £10 million for a new cross-agency taskforce to swiftly analyse all the information that has been made available from Panama, and to take rapid action. That taskforce will include analysts, compliance specialists, and investigators from across HMRC, the National Crime Agency, the Serious Fraud Office, and the Financial Conduct Authority.250

With regard to the new corporate offence, in April HMRC published draft legislation and draft guidance for consultation.251 The paper set out the policy objectives of the new offence as follows:

1.3 The new corporate offence aims to overcome the difficulties in attributing criminal liability to corporations for the criminal acts of those who act on their behalf. Whilst this consultation refers to the application of the new offence to “corporations”, the draft legislation refers to a “relevant body” to encompass the broad range of legal persons to which the new offence will apply.252

1.4 Attributing criminal liability to a corporation normally requires prosecutors to show that the most senior members of the corporation were involved in and aware of the illegal activity, typically those at the Board of Directors level. This has a number of impacts:

1. In large multinational organisations decision making is often decentralised and may be taken at a level lower than that of the Board of Directors, with the effect that the corporation can be shielded from criminal liability. This also makes it harder to hold such organisations to account compared to a smaller organisation where decision making is centralised.

2. The existing law can act as an incentive for the most senior members of a corporation to turn a blind eye to the criminal acts of its representatives in order to shield the corporation from criminal liability.

3. The existing law can act as a disincentive for internal reporting of suspected illegal activity to the most senior members of the corporation.

1.5 The cumulative effect is an environment that does not foster corporate monitoring and self-reporting of criminal activity. The criminal law currently renders corporations that refrain from implementing good corporate governance and strong reporting procedures hard to prosecute, and offers no incentive to invest in such procedures. It is those corporations that deliberately turn a blind eye to wrongdoing and preserve their ignorance of criminality within their organisation that the current criminal law most advantages.253

250 HC Deb 11 April 2016 cc23-26 251 Tackling tax evasion: a new corporate offence of failure to prevent the criminal

facilitation of tax evasion, April 2016 252 “Relevant body” is defined within section 1(2) of the new draft clauses. 253 Tackling tax evasion: a new corporate offence of failure to prevent the criminal

facilitation of tax evasion, April 2016 pp6-7. The consultation document gives a case study of how the offence would work “to help inform stakeholder feedback” (see para 3.6, pp24-26).

79 Commons Library Briefing, 30 January 2019

Subsequently the Government introduced legislation, as part of the Criminal Finances Act 2017, to establish a new statutory offence to hold corporations and partnerships criminally liable when they fail to prevent their employees, agents, or others who provide services on their behalf from criminally facilitating tax evasion. These new offences took effect from 30 September this year;254 further details are in two Library papers, the first prepared for the Second Reading of the Criminal Finances Bill in October 2016 (CBP7739), the second summarising the Committee stage of the Bill (CBP7825).

With regard to beneficial ownership, the Government had introduced provisions for this country as part of the Small Business, Enterprise & Employment Act 2015.255 In April 2014 the Prime Minister wrote to the Crown Dependencies and Overseas Territories to encourage them to follow the UK’s example. The speed with which individual territories responded to this appeal has often been raised in the House – though, as noted by the Foreign Office Minister, James Duddridge, in February, “this is a matter of direction, rather than an ultimate destination.” The Minister said that he wished to see “significant progress” ahead of the anti-corruption summit in May.256

On 14 April 2016 the Chancellor announced that the UK had agreed with Germany, France, Italy and Spain for the automatic exchange of information of data on company beneficial ownership between tax and law enforcement agencies.257 The five participants also made a commitment to establish new registers of trusts.258

Subsequently, just before the anti-corruption summit, the Government announced that the UK had completed a series of bilateral agreements with the Crown dependencies and overseas territories on sharing beneficial ownership information. Details are collated on Gov.uk, but, as underlined in a written answer, generally this information would be shared with the relevant legal and tax authorities only:

Jonathan Ashworth : To ask the Secretary of State for Foreign and Commonwealth Affairs, what plans the Government has to force Overseas Territories and Crown Dependencies to establish public central registers of beneficial ownership.

Answered by: Sir Alan Duncan : While the Overseas Territories (OTs) and Crown Dependencies (CDs) are separate jurisdictions, and are responsible for their own fiscal matters, we are working closely with them on their role on company transparency. Our priority has been for them to establish a central register of beneficial ownership information (or a similarly effective system) where they do not already have one, and for UK law enforcement

254 HMRC press notice, 30 September 2017. For discussion of its impact see, “FTSE 100

split down the middle on the CFA”, Tax Journal, 28 September 2018. 255 For more details see, Small Business, Enterprise and Employment Bill, Commons

Briefing paper RP14-39, 14 July 2014. 256 HC Deb 23 February 2016 cc145-6. The Prime Minister had first announced this

summit in a speech in Singapore last year (No.10 Downing Street, 28 July 2015). 257 HM Treasury press notice, UK leads European calls for G20 action on beneficial

ownership, 14 April 2016 258 HM Treasury, G5 letter to G20 counterparts regarding action on beneficial

ownership, 14 April 2016. Several countries joined this initiative some days later: HMT press notice, Tax transparency progress hailed by Chancellor, 22 April 2016

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and tax authorities to have full and automatic access to that information.

Bilateral arrangements to this effect have now been concluded with all the relevant OTs and with the CDs, and these will enter into effect by June 2017. The registers will, with one exception, not be public, but these measures will place our Crown Dependencies and Overseas Territories well ahead of other similar jurisdictions and represent a significant step forward in our ability to counter criminal activity.259

Two Library papers give more details on the anti-corruption summit, which was held on 12 May, and on the developments since then regarding beneficial ownership.260

The question of requiring the Crown Dependencies and Overseas Territories to establish public registers of beneficial ownership has continued to be debated – particularly during the proceedings of the Criminal Finances Bill .261 As a compromise at the Report stage of the Bill in the Lords in April 2017, the Government introduced a new provision to require Ministers to report to the House on the effectiveness of the arrangements for the exchange of beneficial ownership information with these territories.262 Over this period the Government has reiterated that should public registers become the global standard, “we would expect the Crown Dependencies to follow suit.”263 In a short Lords debate on the Paradise Papers on 14 December DIFD Minister Lord Bates said, “we already have central registers in four of those authorities, including the Cayman Islands, Bermuda and Gibraltar. Montserrat and Anguilla will have registers by April of next year. The Turks and Caicos Islands have been particularly affected by the hurricane, so they have been given a little extra time, but we are very clear that action needs to be taken.”264

Of related interest, on 5 April 2017 the Government launched a call for evidence, setting out proposals for a new beneficial ownership register of overseas companies that own UK property or participate in UK government procurement.265

Finally, with regard to the new task-force, in a press notice following the announcement the CIOT’s Tax Policy Director, John Cullianane, said, “This is a sensible, joined-up approach from the Government. There is a huge amount of data to work through, and this is an extremely complex area, with a number of different criminal offences in scope, with different expiry periods and burdens of proof. So it makes sense to bring together specialists from HMRC, the National Crime Agency and elsewhere in a dedicated, focused taskforce.”266

259 PQ43422, 2 August 2016 260 The international anti-corruption summit in May 2016, CBP7580, 20 May 2016;

Registers of beneficial ownership, CBP8259, 24 August 2018. 261 See, Criminal Finances Bill: Committee Stage Report, CBP7825, 16 February 2017. 262 HL Deb 25 April 2017 cc1309-35. This now forms s9 of the Criminal Finances Act

2017. 263 PQ68007, 21 March 2017. See also, PQ112793, 20 November 2017. 264 HL Deb 14 December 2017 c1664 265 HLWS592, 5 April 2017. Details are published on Gov.uk. 266 CIOT press notice, 11 April 2016

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In a debate on tax avoidance just after Mr Cameron’s statement to the House, Treasury Minister David Gauke said the following:

The taskforce will report to my right hon. Friends the Chancellor of the Exchequer and the Home Secretary on the strategy for taking action, and we will update Parliament later this year. I stress that the taskforce will have total operational independence. If it finds people to prosecute, it will prosecute them. If it finds information about illegality, it can act on it. In addition, the independent FCA has written to financial firms asking them to declare their links to Mossack Fonseca. If the FCA were to find any evidence that firms have been breaking the rules, it, too, has strong powers to take punitive action.267

In June 2016 Edward Troup, HMRC Permanent Secretary, gave evidence to the Treasury Select Committee, and on this occasion Wes Streeting asked Mr Troup about the setup of the task force, and its progress to date. In response, Mr Troup made a couple of points:

Although I would not understate the importance of this, I would not suggest that somehow [the leak] has given us information that we had not had before; we were already following up on 700 leads that, in some way, were linked to Panama before this dataset was published. The task force … currently has about 100 staff and, of those, around 70 are HMRC staff working on this project …

We are not suddenly going to produce thousands of prosecutions that we would not otherwise have done ... the ICIJ, which actually holds the dataset—because the BBC and The Guardian have just had bits of information from the ICIJ—have a stated policy of not releasing information to government agencies. Although we have asked them for it, we do not have the dataset from the ICIJ, so I have to be a bit careful... There is progress. There are people on the ground from the task force in Panama. The Financial Conduct Authority is analysing the returns from 64 companies … with contacts with Mossack Fonseca. I am not going to either give an update on progress or say exactly what we expect and when, because it depends on the outcome of that work.268

The Chancellor Philip Hammond provided an update to the House on the work of the taskforce on 8 November 2016, in a detailed written statement;269 this is reproduced in full over the following two pages.

267 HC Deb 13 April 2016 c374. See also, PQ33514, 18 April 2016. On the impact for

individuals with offshore accounts see, “Stormy skies”, Taxation, 18 August 2016. 268 Treasury Committee, Oral evidence: HMRC Executive Chair and Chief Executive, HC

232, 8 June 2016 Qs17-18 269 These details were also set out in a press notice published at the time. See also,

PQ60460, 21 January 2017.

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Panama Papers Taskforce

Written statement HCWS247, 8 November 2016

In his statement to the House on 11 April 2016, the former Prime Minister David Cameron announced the creation of a cross-agency taskforce to analyse all the information that had been made available from the International Consortium of Investigative Journalists (ICIJ)’s Panama papers data leak. My right hon. Friend the Home Secretary and I now wish to update the House on the work of the taskforce.

In its short existence, the taskforce has added greatly to the UK’s understanding of the evermore complex and contrived structures that are being developed to mask offshore tax evasion and economic crime. This intelligence will ensure that the UK remains uniquely placed to contribute to the international effort to uncover, and take action, on wrongdoing, regardless of how deeply hidden the arrangements are, as well as identify those jurisdictions where regulatory oversight requires improvement.

We can today report that the taskforce has:

- opened civil and criminal investigations into 22 individuals for suspected tax evasion

- led the international acquisition of high-quality, significant and credible data on offshore activity in Panama—ensuring the important work of the taskforce was not delayed by the ICIJ’s refusal to release all of the information that it holds to any tax authority or law enforcement agency

- identified a number of leads relevant to a major insider-trading operation led by the Financial Conduct Authority and supported by the National Crime Agency

- identified nine potential professional enablers of economic crime—all of whom have links with known criminals

- placed 43 high net worth individuals under special review while their links to Panama are further investigated

- identified two new UK properties and a number of companies relevant to a National Crime Agency financial sanctions enquiry

- established links to eight active Serious Fraud Office investigations

- identified 26 offshore companies whose beneficial ownership of UK property was previously concealed, and whose financial activity has been identified to the National Crime Agency as potentially suspicious

- contacted 64 firms to determine their links with Mossack Fonseca to establish potential further avenues for investigation by the taskforce

- seen individuals coming forward to settle their affairs in advance of taskforce partners taking action.

The taskforce’s respective partners will engage the relevant prosecuting authorities to bring any identified wrongdoing before the courts.

The Government have also invested to develop their expertise in data and intelligence exploitation. This has ensured that Departments and agencies are well placed to forensically analyse massive-scale data of this kind, which are becoming ever-more frequently available.

The taskforce has established a Joint Financial Analysis Centre (JFAC). Using the data and intelligence gathered from across the taskforce, the JFAC has developed cutting-edge software tools and techniques, ensuring the taskforce has access to the very best information from which to work.

The proactive acquisition of data, alongside the establishment of the JFAC, has enabled the taskforce to identify a number of areas for further investigation across the full range of tax and economic crime, as well as links to organised crime, which will be the focus of its work over the coming months.

83 Commons Library Briefing, 30 January 2019

At this time the National Audit Office published a report on HMRC’s strategy to collect tax from the wealthiest individuals. Part of this looked at HMRC’s approach to tackling offshore evasion, noting “HMRC expects that criminal investigations and sanctions will play a more prominent role in its response to offshore evasion in the future”:

HMRC offered disclosure facilities with incentives for people to tell it about the tax they had evaded because it found it very difficult to identify assets held overseas. HMRC is now seeking to take a tougher approach to tackling offshore evasion by taking advantage of new sources of data and new powers that will be available to it.

A common reporting standard is being introduced from 2017. This is an agreement by more than 100 countries to automatically exchange information on taxpayers. This should enable HMRC to better identify and investigate people with undisclosed assets and income offshore. In advance of this, the government has opened a new Worldwide Disclosure Facility, which will be a final opportunity for people to bring their tax affairs into line.270

270 HMRC’s approach to collecting tax from high net worth individuals, HC790, 1

November 2016 p44

Taskforce members are present in Panama, using established relationships with the Panamanian authorities, and working with diplomatic colleagues, to offer support to analyse all the available data. Taskforce members have also worked with international partners as part of the Joint International Tax Shelter Information Centre to exchange information and intelligence as part of the wider international effort.

More generally, the Government have introduced tough new powers, increased penalties and game-changing measures to tackle offshore and onshore tax evasion. In the summer 2015 Budget, the Government gave HMRC an additional £800 million to invest in compliance and tax evasion work. This is expected to recover £7.2 billion in tax by the end of 2020-21. This includes tripling the number of criminal investigations that it undertakes into serious and complex tax crime, focusing particularly on wealthy individuals and companies. The aim is to increase prosecutions in this area to 100 a year, by the end of this Parliament.

The Government have also been pivotal in increasing global financial transparency in more than 100 countries, including British overseas territories and crown dependencies, by automatically sharing offshore account data. This additional data will help identify and pursue the tiny minority of tax evaders still hiding their money offshore.

The Government aim to make the UK a more hostile place for those seeking to move, hide or use the proceeds of crime or corruption. In October 2015, the Government published the national risk assessment for money laundering and terrorist financing to better understand the risks and vulnerabilities for the UK. The action plan, published in April 2016, and the Criminal Finances Bill, introduced to Parliament in September, will significantly improve our capabilities to tackle money laundering and recover the proceeds of crime, including proceeds of corruption.

The London anti-corruption summit earlier this year brought more than 40 countries together and resulted in a commitment to more than 600 actions. Since then, the UK has made real progress on its own commitments —our public register of beneficial ownership information is now live, the first G20 country to do so; and the National Crime Agency is working to get the new international anti-corruption co-ordination centre operational by next April.

84 Tax avoidance and tax evasion

An update on the work of the taskforce was given in answer to a PQ in October 2017:

Asked by Kelvin Hopkins : To ask Mr Chancellor of the Exchequer, what progress his Department has made in its inquiry into the Panama Papers.

Answered by: Mel Stride : Since the last update to Parliament in November 2016, HMRC has tripled the number of criminal and civil investigations linked to the Panama papers.

To date, the work of the Panama Papers Taskforce has led to civil and criminal investigations into 66 individuals for suspected tax evasion, including high net worth individuals. As part of this HMRC has made four arrests; and carried out six interviews under caution. Taskforce partners have made three arrests in relation to an organised crime group suspected of a £125m conspiracy to defraud pension investors, tax evasion and associated money laundering. They have also identified leads relevant to a major insider trading operation, in relation to which a number of individuals have been arrested and are on bail pending further activity.

UK law enforcement continues to interrogate and exploit Panama Papers related data, identifying previously unknown individuals, companies and properties, making links between them and providing intelligence and investigative opportunities.

The systems used to launder money and evade tax through offshore structures are complex and highly sophisticated. The Joint Financial Analysis Centre and HMRC’s expert analysts are using leading-edge technology to unpick these structures and trace them back to individuals. This work is painstaking and forensic and there are no easy shortcuts.

HMRC is not a prosecuting authority. Its focus is on building the strongest possible cases in order to secure convictions, and it expects to refer cases to the prosecuting authorities from autumn 2017 onwards.271

5.3 Spring Budget 2017 In the 2016 Budget the Government announced that it would consult on a number of initiatives to mitigate the scale of avoidance and evasion, and launched four consultation exercises over the summer covering tax avoidance sanctions and deterrents; the DOTAS regime as it applies to indirect taxes; the penalty regime dealing with offshore evasion; and, the penalty regime dealing with VAT fraud.272

Spring Budget 2017 confirmed that provisions would be included in the Finance Bill 2017 in relation to each of these initiatives, as well as amendments to the ‘POTAS’ rules (the 2014 legislation affecting scheme promoters identified by HMRC as being especially aggressive and uncooperative).273

271 PQ105360, 12 October 2017; see also, PQ118090, 12 December 2017 272 Budget 2016, HC 901, March 2016, para 2.145 (VAT fraud), para 2.203

(requirement to correct), and para 2.204 (marketed tax avoidance) 273 Overview of Tax Legislation & Rates, March 2017 para 1.38-1.42 For an overview of

the issue at this time see, Chartered Institute of Taxation, The state of play on tax evasion and avoidance, 2 March 2017.

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The estimated Exchequer impact of these measures was not especially large,274 and there was much less debate over their introduction compared with earlier initiatives, although the Government’s proposals to impose penalties on those ‘enabling’ avoidance, as initially drafted, were strongly criticised by the tax profession, leading to some important modifications.

Strengthening tax avoidance sanctions and deterrents In the 2016 Budget the Government announced several further initiatives to tackle marketed tax avoidance, stating it would “consider the case for clarifying what constitutes reasonable care in avoidance penalty cases”, and “consider options to address the issue of those who “enable” tax avoidance schemes.”275 On 17 August HMRC launched its consultation; responses were invited by 12 October.

On the first issue, the consultation document explained HMRC has faced considerable difficulties to establish a failure to take reasonable care involving complex avoidance arrangements: first, because of the nature of the advice that taxpayers will have relied upon, when deciding to invest in an avoidance scheme that has proved faulty …

Many tax avoiders argue that they have taken reasonable care and that their tax return was made on a reasonably arguable view of the law as it applied to the transactions they entered into. They contend this is based on what they were told by the person who promoted the avoidance, by an Independent Financial Adviser, personal tax accountant, or by any other person in the supply or facilitation chain, i.e. by an enabler of the avoidance arrangements they used …

To support this they often rely on marketing or other material provided by those marketing it, or generic, plausible-sounding, statements from an “eminent QC”, which they have also been given by those in the supply chain, endorsing the arrangements and their effectiveness.

In the worst examples, advice offered to users is very limited in quality, scope and relevance. Generic marketing material is sometimes presented as financial or tax advice, when in fact it has not been written or considered by anyone with the requisite knowledge or experience.276

… and second, because the burden of proof rests with HMRC:

This means there can be little incentive for a tax avoider to co-operate and they may frequently try to frustrate HMRC investigations by withholding basic information about the arrangements. They may need to seek this information from the promoter who may also be disinclined to cooperate.

When contesting that they have taken reasonable care, they might be slow to produce supporting evidence, or submit incomplete information. This can make it difficult to identify whether a penalty is appropriate. These tactics can lead to drawn

274 Spring Budget 2017, HC 1025, March 2017 (Table 2.1-item 22; Table 2.2 – item p). 275 Budget 2016, HC 901, March 2016, para 2.204 276 Strengthening tax avoidance sanctions and deterrents: discussion document, August

2016 para 3.9-11

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out and more costly investigations, prolonging the resolution of avoidance disputes for all parties.277

In turn the consultation proposed several tests to determine whether a taxpayer had, or had not, taken reasonable care, putting the burden of proof on the taxpayer – while the imposition of a penalty would be subject to certain existing safeguards regarding penalties.

Turning to ‘enablers’, the consultation document explained that the term “encompasses more than those who design, promote and market avoidance. It includes anyone in the supply chain who benefits from an end user implementing tax avoidance arrangements and without whom the arrangements as designed could not be implemented.”278 The main driver to enablers actively encouraging taxpayers to invest in dubious schemes has been that they “do not feel affected by the suite of sanctions and deterrents designed to influence avoider behaviour”:

Indeed, some judge that the business and reputational risks associated with HMRC defeating avoidance arrangements they have helped enable are outweighed by the financial rewards to them. There can be few downsides to their continued involvement with such arrangements, notwithstanding the hardship which may be faced by their clients.279

As a solution to this problem, the consultation proposed a new penalty to be paid by anyone who had enabled tax avoidance that HMRC was successful in defeating. “It should penalise everyone in the supply chair who has enabled avoidance arrangements which are defeated.” As noted briefly above, Budget 2016 included the introduction of new civil penalties for those enabling offshore evasion, and the consultation proposed drawing on the criteria employed in this case:

The 2015 consultation “Tackling offshore tax evasion: Civil sanctions for enablers of offshore evasion” outlined a number of ways in which an individual or business might enable someone to evade tax through the use of offshore structures. They include:

• Acting as a “middleman”– arranging access and providing introductions to others who may provide services relevant to evasion

• Providing planning and bespoke advice on the jurisdictions, investments and structures that will enable the taxpayer to hide their money and any income, profit or gains

• Delivery of infrastructure – including setting up companies, trusts and other vehicles that are used to hide beneficial ownership; opening bank accounts; providing legal services and documentation which underpin the structures used in the evasion such as notary services and powers of attorney

• Maintenance of infrastructure – providing professional trustee or company director services including nominee services; providing virtual offices, IT structures, legal services

277 op.cit. para 3.14-5 278 op.cit. para 2.7 279 op.cit. para 2.10. The consultation document provides two case studies to illustrate

the problem (see p9).

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and documentation which obscures the true nature of the arrangements such as audit certificates

• Financial assistance – helping the evader to move their money or assets out of the UK, and/or keep it hidden by providing ongoing banking services and platforms; providing client accounts and escrow services; moving money through financial instruments, currency conversions etc.

• Non-reporting – not fulfilling their reporting, regulatory or legal obligations, which in itself helps to hide the activities of the evader from HMRC

Many of these descriptions apply equally to tax avoidance.

With this in mind, we propose developing a definition of enabler based on the broad criteria used for the offshore evasion measure but specifically tailored to the avoidance supply chain and ensuring that appropriate safeguards are included to exclude those who are unwittingly party to enabling the avoidance in question.280

Initial responses from the tax profession expressed considerable concern about the potential scope of the new penalties for tax enablers, though tax justice campaigners welcomed the proposals.281 John Cullinane, tax policy director at the Chartered Institute of Taxation argued, “it is far from clear that a definition drafted for ‘enabling’ a criminal offence will be appropriate for defining an activity which, while undesirable in the eyes of most people, is legal, provided all appropriate disclosures are made to the tax authorities”:

“We are concerned about a scenario where a taxpayer goes to their tax adviser for advice on risks attached to participating in a scheme, receives appropriate advice setting out these risks and the likelihood of the scheme being defeated, but decides to join the scheme despite this. It would be extremely harsh to penalise a tax adviser in this scenario where all the tax adviser has done is advise the taxpayer on the law as it stands.

“It is important to be aware that court cases on tax matters are not only about avoidance. Often there are simply disagreements between HMRC and taxpayers about how the rules operate and the courts are asked to adjudicate. Losing a case of this kind in the courts should not be seen as tax avoidance by the taxpayer or as enabling avoidance by their advisers.”282

An editorial in the Financial Times argued, “taking the battle to the supply side of the tax avoidance industry is sensible” though “the Government should take care to ensure that it does not unreasonably hit defensible tax planning”:

Tax rules are not ultimately set in aspic. Avoidance is generally defined as creating a tax break that Parliament never intended.

280 op.cit. para 2.15, para 2.12-4 281 “HMRC gets ‘nasty’ in tax clampdown”, Financial Times, 18 August 2016. See also,

“The proposals targeting tax avoidance enablers”, Tax Journal, 2 September 2016. 282 CIOT press release, ‘Enabling’ tax avoidance – legislation must draw distinction

between promoting avoidance and advising on the law, 17 August 2016

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Yet what legislators mean at a particular time can change as circumstances evolve.283

Writing in the Tax Journal, Peter Vaines, a member of Field Court Tax Chambers, argued that “it is simply unacceptable, in a civilized society, for a government department to penalise professional advisers for advising on the law”:

[HMRC] has a genuine problem which deserves to be addressed, but it is important not to get carried away. Indeed, HMRC might usefully reflect on whether it should be subject to the same penalties if it was unsuccessful in a challenge to a claim by a taxpayer to a tax relief or deduction – and if not, why not.284

Writing in Taxation, Fiona Fernie, partner at Pinsent Masons, argued that the proposed definition of defeated tax avoidance “is incredibly wide-ranging and could end up capturing conventionally accepted tax planning.”285 In their response to the consultation, the Tax Law Review Committee argued, “the proposals, if adopted in anything approximating their current form, carry a real risk of a wholesale reduction in the numbers of onshore tax professionals who presently provide responsible and accurate professional advice to taxpayers”:

The Committee does not doubt that popular sentiment has expressed considerable objection to many of the tax avoidance arrangements indulged in by the “persistent minority”. It recalls, however, that a swathe of measures have been enacted in recent years designed to identify, discourage, shame and penalise tax avoiders and those who promote and market tax avoidance arrangements. These measures are not all fully operational yet, and there has been no sensible opportunity to assess their longer term impact on the tax avoidance industry, in particular the type of avoidance indulged in by “the persistent minority” supposedly targeted by these proposals.

The need for further measures is therefore untested and unproven. The current measures in particular are unjustified by any evidence of an on-going widespread problem necessitating far reaching, untargeted and potentially damaging measures such as those currently proposed.

In particular, the Consultative Document fails to consider and identify adequately (or indeed at all) the type of behaviour and the nature of the avoidance in which “the persistent minority” engage, which is the supposed target of the proposal. It therefore fails to distinguish “the persistent minority” from the vast majority of responsible tax professionals without whom the tax system, commercial business activity and the organisation of individual financial affairs could not function satisfactorily. In effect, all are inappropriately tarred with the same brush.

We do not imagine that the issues to which we draw attention in this submission are intended by government or HMRC. In the Committee’s view, however, they would be an inevitable outcome of the proposal if enacted in its current form. In short, the scope

283 “Editorial: May flexes her muscles over tax avoidance”, Financial Times, 18 August

2016 284 “Comment: Deterring tax avoidance”, Tax Journal, 9 September 2016 285 “Stronger sanctions”, Taxation, 1 September 2016. See also, CIOT press notice, Tax

experts call for new penalties to target deliberate promotion of avoidance rather than commercial advice, 12 October 2016.

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of the proposal and the targeting of the issues created by “the persistent minority” require a more considered, careful and targeted approach than is evidenced by the Consultative Document. 286

Writing in his blog barrister Jolyon Maugham argued that the action of enablers represented a “very real” problem, and the consultation set out “very real solutions” though “they may well go too far.” His description of the incentives for the unscrupulous enabler is worth reproducing:

The real issue is this. A tax advisor gets his fee for telling you that you can declare 10 rather than 100. He’s in the money from the start. And if you should happen to sue him later, he might have wound himself up, or he might shelter behind the advice given by a barrister, or he might point to the small print in the scheme documentation telling you that (despite the fact he’s charging you a fee) you must take your own tax advice.

So he gets handsome reward and very often without any personal accountability for the consequences. This state of affairs can encourage abysmal behaviour by highly paid professionals.287

In December the Government confirmed it would proceed with this reform, but with substantive modifications, publishing draft legislation and an impact assessment – which gave a short summary of both measures:

Legislation will be introduced in Finance Bill 2017 to provide for a penalty on those who enable tax avoidance which is later defeated. Key elements of the regime will:

• define who is an ‘enabler’ to draw the distinction between those who design, market or otherwise facilitate avoidance arrangements implemented from those who solely advise, report or otherwise provide opinion on such arrangements and whose advice does not result in any amendment to the arrangements or any resulting arrangements

• ensure that those who are brought within the meaning of enabler through unwittingly becoming involved in the arrangements are excluded from that definition

• describe the types of arrangements which, if defeated, bring those who enabled those arrangements within scope for penalties

• describe how the amount of any penalty is calculated and assessed and provide a right of appeal against that assessment

Legislation will also be introduced in Finance Bill 2017 to clarify what constitutes the taking of reasonable care in relation to the application of the existing penalty regime in Schedule 24 to FA2007, in relation to inaccuracies arising in a person’s tax return from the defeat of tax avoidance arrangements they have entered into.

286 Strengthening Tax Avoidance Sanctions and Deterrents: a discussion document -

Response to Consultation, October 2016 pp1-2. The Committee was established by the IFS in 1994, and, in its words, “represent a broad cross-section of informed opinion from industry and commerce, the judiciary, academia, the professions and political and public life.”

287 “Tax avoidance penalties”, Waiting for Godot blog, 17 August 2016

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The new legislation will change the regime to presume that a person has been careless unless they can prove they have taken reasonable care and describe circumstances and events which are explicitly stated not to represent taking reasonable care in cases of defeated avoidance.

Examples of such circumstances and events include (but are not limited to):

• advice addressed to a third party or without reference to the taxpayer’s specific circumstances and use of the scheme

• advice commissioned or funded by a party with a direct financial interest in selling the scheme or not provided by a disinterested party

• material produced by parties without the relevant tax or legal expertise/experience to advise on complicated tax avoidance arrangements, typically this would be the sort of material used to market the arrangements and would not amount to advice setting out the legal options necessary for a potential user to assess the efficacy of the scheme or the risks involved.288

In its summary of the responses, HMRC noted, there had been “strong support for the [proposal for penalties on enablers] from some … but there were also strongly expressed concerns from others that, if inappropriately targeted, the measure could inhibit genuine commercial arrangements and impartial advice.”289

In the light of this the Government announced that it would amend its approach to achieve “the original aim of tackling the enablers of tax avoidance schemes while the vast majority of professionals providing advice to their clients on genuine commercial arrangements have nothing to fear”:

While there was general agreement that the proposed description of enablers and all relevant classes or groups of persons were captured, there was some concern that there should be a clear distinction in applying any new sanction between tax planning, tax avoidance and tax evasion.

There was also concern that the proposed safeguards would not go far enough. This was particularly pertinent to those who are acting within their professional capacity (and already subject to other professional conduct regulations) and merely giving ‘second opinion’ advice, or those whose advice/service may unwittingly be caught up with wider avoidance arrangements. A number of respondents commented that the rules would not capture those who could easily re-establish their business/services offshore and so would not capture the “persistent minority” the measure is targeted at ...

Government response The government noted the views of everyone who responded. The measure will cover all those in the avoidance supply chain. The regime will describe those who enable avoidance and distinguish them from those who simply provide second opinion advice to clients on arrangements designed or enabled by others. The government also recognises

288 Strengthening sanctions and deterrents for tax avoidance; TIIN, 5 December 2016 289 Strengthening Tax Avoidance Sanctions and Deterrents - Summary of responses, 5

December 2016 para 1.7-8

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that the definition of an enabler needs to be well-targeted to ensure those who are unwittingly within the meaning of enabler, or whose advice about arrangements included a clear recommendation that they should not be proceeded with, are excluded and will provide for this in the draft legislation.

The consultation suggested bringing an enabler within scope for a penalty when the tax avoidance they had enabled had been defeated, and not to link an enabler’s penalty with the final penalty position of the user. Most respondents considered the scope was appropriate in relation to aggressive avoidance, but felt there was not enough emphasis to distinguish evasion from avoidance.

Responses also suggested more clarity was needed in relation to key terms, particularly “defeated arrangements”, and the type of activities that would place a person firmly within scope as an enabler of tax avoidance. Some respondents held strong views that the enabler ought only to face a penalty in circumstances when the scheme user would also do so. Many of those responding also sought clarity regarding when the policy would apply from.

Government response The government noted these views. The rules will be prospective. They will apply to actions taken by the enabler on or after Royal Assent to Finance Bill 2017, so that a person enabling avoidance will be fully aware that they are in scope of a penalty. The draft legislation will set out the arrangements which, if defeated, bring an enabler within scope for a penalty.

The government does not consider that an enabler should face a penalty in relation to defeated avoidance only where the user does so. The conditions for a penalty to apply to the user are, necessarily, different from those for enablers. It may well be that a user, having been able to show that they had taken reasonable care in making their tax return, or being subject to one of the other safeguards in that regime, would not face a penalty, but where it may be appropriate for an enabler to face a penalty by reference to their actions as an enabler of those defeated arrangements.290

The proposed changes to the ‘enablers’ regime were welcomed by stakeholders. In a press notice CIOT tax policy director John Cullinane gave his reaction:

“It is pleasing to see that after a wide ranging consultation with the CIOT and other stakeholders, the government has taken on board our concerns and recognises that the vast majority of tax professionals providing advice on commercial arrangements are in no sense ‘enabling tax avoidance’ but are simply helping their clients to understand as well as comply with their tax obligations.

“It is crucial that they can continue to do so without being exposed to this new penalty.

“The moves outlined in today’s draft legislation present a measured and balanced approach towards tackling those who enable tax avoidance while ensuring that the interests of the overwhelming majority of agents who provide genuine professional advice to their clients are protected.

290 op.cit. para 1.11, paras 2.3-7

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“By defining ‘abusive tax arrangements’ around the principles of the General Anti-Abuse Rule (GAAR) – which asks whether entering into or carrying out the tax arrangements could have been a reasonable course of action – the proposals are better focussed on the small minority of advisers who profit from devising, marketing and facilitating aggressive tax avoidance schemes.291

Writing in the Tax Journal on the draft provisions, Richard Woolich and Geoffrey Tack, both at DLA Piper, concluded, “it is clear that the Government has listened and advisers are now much less likely to fall foul of these rules, giving bona fide advice”:

The government was clearly impressed by the extent of responses and has published a lengthy list of respondents. There are some impressive names in the list, from well-known law firms and accountancy practices to the Law Society and the Bar Council.

One suspects that, with respondents of such calibre, the government was really made to think about the pending penalty regime against enablers and has listened to the comments about its original proposals in the consultation exercise. This process may be a lesson for future opposition to unwelcome proposed legislation. Yet, essentially, the government will persevere with its crackdown on the production and selling of abusive tax avoidance schemes and target in the Finance Bill 2017 those who make profit from giving aggressive tax advice which is shown to be wrong.292

In the 2017 Budget the Government confirmed it would introduce both measures, with certain amendments to the legislation as drafted:

Following consultation, the enablers legislation has been revised to provide further detail of when and how the General Anti Abuse Rule (GAAR) Advisory Panel will consider enabler cases.

Further changes have been made to apply the enablers regime to arrangements that seek to avoid NICs, to make consequential changes to the Promoters of Tax Avoidance Scheme legislation and to provide further detail regarding when enablers will be named. Minor amendments have also been made to further improve the clarity and targeting of both the legislation for enablers and reasonable care.

The changes relating to reasonable care come into effect at Royal Assent and apply to inaccuracies in documents relating to tax periods which begin on or after 6 April 2017. The penalty for enablers will apply prospectively to enabling activity after Royal Assent.293

It was estimated that these changes would raise £50m in 2018/19, falling to £15-£20m a year in later years.294

291 CIOT press release, Professional Body welcomes increased focus of government

action on ‘enablers’ of tax avoidance, 5 December 2016. See also, “Tax avoiders remain in HMRC’s line of fire”, Financial Times, 10 December 2016.

292 “Finance Bill 2017: Enablers of defeated avoidance schemes and penalties”, Tax Journal, 19 January 2017. See also, “Turning up the heat”, Accountancy, April 2017

293 HMT, Overview of Tax Legislation & Rates, March 2017 para 1.41. Provision to this effect was made by ss64-5 of the Finance (No 2) Act 2017. The provision was the subject of a brief debate at the Committee stage of the Bill: PBC, Fifth Sitting, 24 October 2017 cc140-2.

294 Spring Budget 2017, HC 1025, March 2017 (Table 2.1-item 22).

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‘DOTAS’: indirect taxes – reform and extension of scope Budget 2016 announced it would “consult during the summer on updating the VAT Disclosure of Schemes Regime (VADR), including by extending coverage to other indirect taxes and by alignment with the Disclosure of Tax Avoidance Schemes regime.”295 HMRC launched a consultation the following month; as this explained, it was HMRC’s view that the disclosure regime as it applied to VAT was “no longer fulfilling its policy intentions”:

VADR has been an important component of HMRC’s fight against VAT avoidance, allowing HMRC to identify avoidance patterns and risks at an early stage and plan their responses accordingly. A large number of disclosures were made in the early years of the regime, but, unlike DOTAS, VADR has not been significantly updated since it was introduced. The number of disclosures has declined, the regime has not kept pace with changes in the VAT avoidance landscape and it is no longer fulfilling its policy intentions. It is important that it is reviewed to make sure it operates effectively to protect the Exchequer and to discourage the avoidance of VAT.

VADR currently requires disclosure to be made by those who use an avoidance scheme. This is in contrast to DOTAS where, for the most part, it is promoters of tax avoidance schemes who are required to disclose them to HMRC. Those promoters then have ongoing obligations to provide information to both users of their schemes and to HMRC. And users have to include details of disclosed schemes in their tax returns.296

In December HMRC published a summary of responses it had received. In general there was support for the principle for reforming VADR:

While there was general agreement from respondents with the proposed changes to VADR, a small number of respondents considered that the government had not made a sufficiently strong case for change. One was concerned that the proposed revisions would increase administrative burdens rather than decrease them. Only one respondent suggested an alternative approach, to simply require earlier disclosure under the existing structure.

Government response The government is grateful for the views expressed but does not accept that the proposed revised structure for VADR would result in any significant increase in burdens for customers. In principle, the change should reduce burdens as the focus for compliance shifts from all taxpayers to a much smaller number of promoters. However, the government will continue to ensure any administrative load is proportionate when drafting the regulations. …

Respondents … agreed that the DOTAS rules on who is a promoter and when a scheme user has to disclose an avoidance scheme provided a suitable model to apply in VADR. One respondent suggested that, due to the nature of VAT avoidance, most schemes do not involve a promoter and so the relevance of the question is moot. Some respondents stated that due to the

295 Budget 2016, HC 901, March 2016, para 2.145 296 Strengthening the Tax Avoidance Disclosure Regimes for Indirect Taxes and

Inheritance Tax, April 2016 para 1.8-9

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often very short timescales in VAT between an intermediary being consulted about arrangements and the relevant transactions taking place, the time allowed for promoters to notify HMRC about notifiable proposals or arrangements should be longer than provided for under DOTAS.

Government response The government is grateful for these views and considers the DOTAS rules on who is a promoter and when a scheme user has to disclose an avoidance scheme can be appropriately applied to VADR.297

Respondents were less convinced of the need to extend VADR to other indirect taxes, though the Government took the view that this was an important measure to improve HMRC’s assessment of the scale of avoidance across the tax system:

Views were mixed about whether the scope of VADR should be extended to include other indirect taxes. A narrow majority were in favour or could see no reason to object to the proposal, but others considered such a move would impose unnecessary burdens on taxpayers for little discernible benefit to HMRC.

Government response It is currently difficult for HMRC to form a clear view of the risks of avoidance in these taxes and the government therefore believes it is important that they be brought within the scope of VADR. There will be no extra burden on those who do not use reportable tax arrangements and so the government does not believe this extension would be disproportionate.298

At this time HMRC published draft legislation and an impact assessment of reforming VADR; the latter explained how the disclosure regime would be reformed:

This measure replaces the VAT regime for disclosure of avoidance, which currently only covers VAT. It moves the responsibility for disclosing VAT avoidance schemes to HM Revenue and Customs (HMRC) from scheme users to scheme promoters.

It also widens the scope of the disclosure regime to include all indirect taxes.

The measure will require promoters of indirect tax avoidance schemes to provide details of schemes at the earliest of: the date the promoter first makes a firm approach to another person about the proposed scheme; the date the proposals are first made available for implementation by another; or the date the promoter first becomes aware of any transaction which forms part of the scheme. In some circumstances where arrangements or proposed arrangements are substantially the same as arrangements already notified to HMRC, the promoter will not be required to make a further disclosure.

If a person uses a tax avoidance scheme the promoter of which does not belong in the UK, or there is no promoter of the scheme, the user of the scheme will be required to disclose it to HMRC.

When a promoter notifies HMRC of details of a scheme, HMRC will issue a reference number and the promoter must notify their clients of this number. The promoter must provide HMRC with certain details about these clients; those details will be contained

297 Strengthening the Tax Avoidance Disclosure Regimes for Indirect Taxes and

Inheritance Tax: Summary of responses, 5 December 2016 para 2.2-6 298 op.cit. para 3.2-3

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in Regulations. The client will be required to notify HMRC of their use of a scheme, and the scheme number.299

It was not anticipated that this measure would have an Exchequer impact. In the 2017 Budget the Government confirmed it would proceed with these changes, to take effect from 1 September 2017.300

Offshore evasion: requirement to correct In the 2016 Budget the Government announced that as part of the Finance Bill 2017 it would “introduce a new legal requirement to correct past offshore non-compliance within a defined period of time with new sanctions for those who fail to do so.”301 HMRC published a consultation document in August which set out the rationale for this measure:

The introduction of a new requirement to correct (RTC) and tougher penalties for a failure to correct (FTC) aims to send a strong message that there is a step change in HMRC’s approach to offshore tax compliance. The measure will introduce an obligation for taxpayers to put past affairs in order and strongly penalise those who do not meet this obligation. In doing so, the measure will drive taxpayers with offshore interests to review their affairs to either:

• assure themselves that their offshore interests have been treated correctly for tax purposes, or

• to identify the incorrect tax treatment and put it right by notifying HMRC to ensure the appropriate tax, interest and penalties can be charged.

We believe the RTC proposal and increased sanctions for failing to correct set out in this document will provide a strong incentive for taxpayers to review their offshore affairs and come forward to put them in order before HMRC receives the full Common Reporting Standard (CRS) data.302

Those who do not put their affairs in order will face the tougher failure to correct sanctions for any existing non-compliance and could also face … significantly tougher sanctions … for any offences in subsequent years. The RTC period will end on 30 September 2018 by which point HMRC will be receiving CRS data from all those committed, which will allow it to identify and pursue those who have not come forward to regularise their affairs.

HMRC has provided a number of opportunities for taxpayers to disclose offshore issues in the past. These were appropriate for periods when HMRC had relatively little data on UK taxpayers’ offshore interests and they were successful with over 59,000 people putting their affairs in order. These activities and other offshore work have raised over £2.9bn. In the future HMRC will receive significantly more data and any taxpayers who have not taken advantage of previous opportunities to disclose and do not

299 Strengthening the Indirect Tax Avoidance Disclosure Regime: TIIN, 5 December 2016 300 Overview of Tax Legislation & Rates, March 2017 para 1.38. Provision to this effect

was made by s66 of the Finance (No 2) Act 2017. See also, HMRC, Notice 799: disclosure of tax avoidance schemes for VAT and other indirect taxes, January 2018.

301 Budget 2016, HC 901, March 2016, para 2.203 302 [As noted, the CRS is a multinational agreement for the automatic exchange of

taxpayer information. The consultation paper noted exchanges would start in 2017 for 54 early adopters, with all other participants exchanging by 2018.]

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comply with the new RTC should face much stiffer penalties. The RTC will introduce much tougher penalties and will also provide a strong legal underpinning to drive taxpayers to regularise their offshore affairs.303

In December the Government published details of the responses it had received; there had been broad support for this initiative, though many stakeholders had “commented on the need for a significant communications campaign to ensure all taxpayers are aware of the requirement”:

Stakeholders and respondents broadly supported the initiative, its scope and definition and many said they would like to see a single and simplified set of sanctions for tackling offshore tax evasion. Many stakeholders commented on the need for a significant communications campaign to ensure all taxpayers are aware of the requirement, particularly those where any non-compliance has not been deliberate. This is seen as an important part of encouraging taxpayers to come forward where they may not associate their activities with evasion ...

Many respondents welcomed a failure to correct penalty model that simplifies the currently complex application of offshore penalties. However many respondents wanted to ensure sanctions retain some flexibility with recognition of taxpayer behaviour and co-operation. Some respondents commented on the need for any toughened sanctions to retain sufficient incentive for taxpayers to come forward and disclose …

Government response … The government is determined to ensure the toughest sanctions are there for those that evade taxes, whilst providing a period for taxpayers to review their offshore interests and come forward to clear up any past issues and therefore avoid the possibility of the heavier penalties.

The requirement will also include reasonable excuse provisions that ensure that, where the taxpayer has good reason for not having corrected, they will not face the new higher penalty. We are aiming to provide a clear and unambiguous message that acting early is vital and believe the proposed structure of the RTC and associated sanctions do that. The incentives to come forward and correct are clear.

A number of respondents also raised the issue of the incentive for taxpayers to come forward following the requirement to correct period, stating that the failure to correct penalty would not provide any incentive to disclosure if a taxpayer had not corrected during the window. However the penalty range proposed provides this incentive.

If taxpayers come forward after the correction period, the starting point for the penalty would be 200%, but disclosure and cooperation mean it could be halved to a minimum penalty of 100% of the tax that has not been corrected. The government will also ensure that the criteria for reducing the penalty from 200% will take account of whether the person comes forward voluntarily and the seriousness of the offence. A potential

303 Tackling offshore tax evasion: a requirement to correct, August 2016 para 3.1-3. See

also, HMRC press notice, Tough new sanctions announced for offshore tax evaders, 24 August 2016

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reduction in penalties from a maximum of 200% to 100% is a significant incentive.304

The Government published draft legislation and an impact assessment of this new legal requirement, which explained how this provision would work in practice:

Taxpayers within scope of the RTC will be those who have not declared the right amount of UK tax in respect of offshore interests on or before 5 April 2017. These will be taxpayers who have done one of the following in respect of offshore tax:

• failed to notify chargeability

• failed to make and deliver a return

• delivered an inaccurate document (for example, a return) to HMRC

In addition the failure must relate to Income Tax, Inheritance Tax or Capital Gains Tax and not have been corrected on or before 5 April 2017.

Taxpayers within scope of the RTC are required to correct that position on or before 30 September 2018 by providing the appropriate information to HMRC. For example, a taxpayer who delivered an inaccurate return to HMRC by omitting a source of offshore income will be required to provide sufficient information to HMRC to allow that inaccuracy to be corrected by HMRC assessing the under-declared tax.

Where a taxpayer fails to correct the offshore tax non-compliance on or before 30 September 2018 the legislation will introduce a new sanctions for that failure. The new sanctions:

• are a tax geared penalty of between 100% and 200% of the tax not corrected - penalties will be reduced within this range to reflect the taxpayer’s cooperation with HMRC, including whether they came forward unprompted to tell HMRC of their failure

• are an asset based penalty of up to 10% of the value of the relevant asset would apply in the most serious cases, and involved over £25,000 in any tax year

• will have the ability for HMRC to name those who have failed to correct in the most serious cases, and where over £25,000 tax per investigation is involved

• will adopt the enhanced penalty for asset moves of 50% of the amount of the standard penalty, which would apply if HMRC could show that assets or funds had been moved to attempt to avoid the requirement to correct

• will have no penalty where the taxpayer has a reasonable excuse for failing to correct the position. HMRC will also have the option of, exceptionally, charging the existing penalties instead if that is appropriate.305

304 Tackling offshore tax evasion: Requirement to Correct - Summary of Responses, 5

December 2016 para 2.3-11 305 Tackling offshore tax evasion: requirement to correct, 5 December 2016. See also,

HMRC press notice, New Year brings in new penalties for enablers of offshore tax evasion, 1 January 2017.

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HMRC’s impact assessment also noted that taxpayers affected by the RTC were likely to be of above average wealth, though “there is no data to identify the size of this group.”

In the 2017 Budget the Government confirmed that it would introduce this measure, subject to certain amendments to the legislation as originally drafted:

This new “requirement to correct” is expected to come into force when the Finance Bill 2017 receives Royal Assent and will apply to all taxpayers with offshore interests who have not complied with their UK tax obligations as at 5 April 2017 … The draft legislation will be revised to ensure the reasonable excuse provision does not apply where advice is received from an adviser who is not independent. This reflects the government's response on this point in [its response to the consultation] published on 5 December 2016.306

At this time it was estimated this measure would raise £10m in 2017/18, rising to £70m by 2021/22.307

VAT: penalty charges in fraud cases In the Budget 2016 the Government announced it would consult on a new penalty for participating in VAT fraud, and subject to this consultation “the intention is to legislate in Finance Bill 2017.”308 HMRC’s consultation document was published in September; as this explained, at present, when issuing a penalty for a business’ failure to properly account for VAT, HMRC has to decide if the business’ failure is ‘deliberate’ or ‘careless’, a factor that does not apply when charging penalties for serious VAT fraud:

The knowledge principle and Schedule 24 penalties It is settled case law309 that businesses are denied the right to reclaim VAT as input tax when they know or should have known that their transactions are connected with VAT fraud. Such businesses are regarded in law as participants in the fraud. This approach is often referred to as the knowledge principle … HMRC applies this principle successfully to tackle MTIC (Missing Trader Intra-Community) fraud and to a lesser extent other VAT frauds.

When applying the knowledge principle to individual cases, it is difficult for HMRC to separate evidence of ‘knowledge’ from evidence that the business ‘should have known’ of a connection with VAT fraud. So in most instances we issue a decision covering both eventualities.

However the relevant civil penalties legislation (Schedule 24 of FA2007) operates on a different basis. This requires HMRC to decide, when issuing the penalty, whether the business’s non-compliance is “deliberate” or “careless”. This determines the level

306 Overview of Tax Legislation & Rates, March 2017 para 1.42 307 Autumn Statement, Cm 9362, November 2016 para 4.53, Table 2.1 – item 28.

Provision to this effect was made by s67 of the Finance (No 2) Act 2017. See also, HMRC, Requirement to Correct tax due on offshore assets, August 2018.

308 Budget 2016, HC 901, March 2016, para 2.145 309 see Axel Kittel v Belgian State v Recolta Recycling SPRL (cases C-439/04 and

C-440/04)

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of the penalty. HMRC cannot choose a combined careless and deliberate penalty: we must choose one or the other.

This misalignment between these regimes causes practical difficulties. A ’deliberate’ penalty implies we think the customer has actual knowledge, whilst a ‘careless’ penalty implies we think the customer ‘should have known’ of the connection with fraud.

Having to make this distinction in behaviour in order to issue a penalty affects HMRC’s ability to defend the underlying decision on the primary fraud issue against any appeal.310

This misalignment has created practical difficulties for HMRC in tackling VAT fraud:

HMRC’s current approach – delay issuing the penalty

To address this, our current practice is to wait until after the VAT case has been finalised, including any litigation, before issuing the Schedule 24 penalty. This approach causes two problems:

• Firstly, it opens up the opportunity of a second round of litigation, this time against the penalty. Any challenge to the behavioural aspect of the penalty is effectively a relitigation of the findings in the underlying VAT appeal. This adds to the costs for HMRC, appellants and the courts. ‘Knowledge principle’ cases are already costly in time and money due to the volume of evidence required.

• Secondly, the delay in issuing the penalty increases the risk that, by the time the penalty is issued, it will be ineffective. This is because the monies to pay the penalty may have been dispersed by those involved in the fraud.

Penalty for participating in VAT fraud

To address the issue we are proposing a new penalty that aligns with the knowledge principle. The key design features are a penalty that:

• can be issued at the same time as the knowledge principle decision in the underlying VAT fraud case; and

• does not rely on the distinction between whether a business or individual knew or should have known of the connection with VAT fraud.311

In its summary of responses to the consultation, published in December, HMRC stated that, “a majority of respondents were in favour of introducing a penalty for participating in VAT fraud at a ratio of around three to one” though “there were different views about the design options with no clear preference.” Further to this,

Most respondents favoured applying the new penalty to company officers whose companies participated in VAT fraud, although some wished to restrict this application to circumstances where the company officer could reasonably be held culpable. Others wished to restrict the application of the penalty to company officers to cases where they had actual knowledge of fraud. Most respondents favoured naming businesses that knew or should

310 Penalty for participating in VAT fraud, September 2016 para 2.5-10 311 op.cit. para 2.11-12

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have known that their transactions were connected with VAT fraud.312

In the light of these responses, the Government announced it would introduce this new penalty:

Having carefully considered the responses to this consultation, the government has decided to proceed with the introduction of a penalty for participating in VAT fraud. It considers that there is a strong case for having a new penalty aligned with the knowledge principle. This will help streamline cases and strengthen HMRC’s ability to tackle serious VAT fraud. The government also recognises the deterrent benefits of a strengthened penalty regime in this area.

The government recognises the concerns about the application of the penalty to cases where participants “should have known” that the transactions were connected with fraud. This concept is quite narrowly defined in case law. Some of the respondents, perhaps understandably, were unaware of the scope of the current knowledge principle and how this term has been defined by the courts. HMRC will be applying the penalty in the context of the existing case law and want to reassure respondents that the new penalty cannot apply to cases where businesses could not have known that their transactions were connected with fraud.

A few respondents suggested, as an alternative, that the existing error penalty regime could be run in the alternative (i.e. deliberate or careless) as a way of solving the misalignment with the knowledge principle. HMRC looked into this but came to the conclusion that it is not a practical policy solution or legally possible. It would not solve the current problem of misalignment between the two regimes. HMRC would still be required to state its preferred case for the error penalty, either at the point of issuing the penalty (in order to notify the business of the rate of the penalty), or alternatively once the case reached court (as the appellant would need to know the case they had to answer).313

As with the other tax avoidance and evasion initiatives announced in Budget 2016, draft legislation and an impact assessment of this measure was published at the time; the latter stated that this change is expected to have a negligible impact on the Exchequer.314

In Spring Budget 2017 the Government confirmed it would proceed with this measure: “following consultation on the draft legislation some minor changes have been made to improve the clarity of the measure and also to limit the naming of a company officer to instances where the amount of tax due exceeds £25,000. The new penalty will take effect once the Finance Bill receives Royal Assent.”315

Promoters of Tax Avoidance Schemes (POTAS) Finally, in Spring Budget 2017 the Government announced it would introduce legislation to “ensure that promoters of tax avoidance schemes cannot circumvent the POTAS regime by re-organising their

312 Penalty for participating in VAT fraud: summary of responses, 5 December 2016

para 2.1-3 313 op.cit. para 3.2-4 314 VAT: penalty for participating in VAT fraud, 5 December 2016 315 HMT, Overview of Tax Legislation & Rates, March 2017 para 1.39. Provision to this

effect was made by s68 of the Finance (No 2) Act 2017.

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business by either sharing control of a promoting business, or putting a person or persons between themselves and the promoting business. This will ensure that HMRC can apply the POTAS regime as intended.”316 Further details are given in a tax information & impact note, which stated this measure was not expected to have additional Exchequer impact.317

Finance Bill 2017 Following the Prime Minister's announcement, on 18 April, of the Government's intention to call a General Election on 8 June, the House completed all of the remaining stages of the Bill in the Commons on Tuesday 25 April. With cross-party support the Government removed a series of clauses from the Bill, with the intention of legislating for these at the start of the new Parliament. On this occasion Treasury Minister Jane Ellison said the following:

The Bill is progressing on the basis of consensus and therefore, at the request of the Opposition, we are not proceeding with a number of clauses. However, there has been no policy change. These provisions will make a significant contribution to the public finances, and the Government will legislate for the remaining provisions at the earliest opportunity, at the start of the new Parliament.318

As part of this measure, all of the clauses in the Bill relating to the five avoidance and evasion initiatives discussed above were removed from the Bill, except the provision making amendments to the existing POTAS legislation for associated and successor entities rules.319 On 13 July the Government confirmed, in a written statement, that a Finance Bill would be introduced to this effect “as soon as possible after the summer recess.”320 In turn this second Finance Bill was introduced on 6 September, including these clauses, which were agreed without amendment.321

In an overview of HMRC’s information powers by Nigel Barker, Annis Lampard and Jenny Tevlin (Deloitte) in the Tax Journal in May 2017, the authors commented on the “significant recent shift what is available to HMRC, reflecting increasing globalisation in business and personal finances”:

Following data leaks from territories including Liechtenstein and Panama, emphasis on international data cooperation across tax agencies has increased. In the corporate sphere, country by country reporting to tax authorities under the OECD Action 13 BEPS initiative will soon be relevant to all groups with a turnover

316 Spring Budget 2017, HC 1025, March 2017 para 3.43 317 Promoters of Tax Avoidance Schemes: associated and successor entities rules: TIIN, 8

March 2017. Budget 2013 estimated the POTAS regime would raise about £35m a year (HC 1033, March 2013 p65, Table 2.1 – item 54).

318 HC Deb 25 April 2017 c1013 319 Committee of the Whole House proceedings, 25 April 2017. See, Chartered Institute

of Taxation press notice, Tax advisers welcome sensible, pragmatic approach to Finance Bill, 25 April 2017. This provision forms s24 of the Finance Act 2017.

320 Finance Bill: Written Statement, HCWS47, 13 July 2017 321 Public Bill Committee, Fifth Sitting, 24 October 2017 cc140-4. As noted these

provisions form ss64-68 of Finance (No.2) Act 2017. See also, CIOT press notice, Major new tax penalties in force, 17 November 2017.

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of more than €750m. In addition, more than 100 jurisdictions have joined the common reporting standard (CRS), an important global initiative where financial intermediaries will have to file details of individual accounts with national tax authorities. For early adopters, there will be an automatic exchange of financial data from September 2017 and a year later for others.

They went on to argue that this in turn had led to a change in HMRC’s approach:

Reflecting the new data sources available, we are seeing a change in how HMRC is using its information powers. Previously, requests for information may have been made on a speculative basis; however, HMRC is now much more confident about its right to ask for what it is requesting, and may even have an expectation itself as to what response it will receive. In the rest of this article, we will therefore review HMRC's informal and formal information gathering powers, as well as some of the more unusual and newer powers available to HMRC.322

As noted, the ‘requirement to collect’ (RTC) provisions introduce a statutory obligation on taxpayers to correct any undeclared UK tax liabilities in respect of an offshore matter by 30 September 2018. In a recent piece on the RTC in Taxation magazine, Garry Ashford (Harbottle and Lewis) noted the significance of the 30 September deadline:

The most important feature of the RTC is its potential breadth in terms of issues that it might affect. Any personal tax matter that has an overseas nature will amount to offshore non-compliance if it is found to be incorrect after 30 September …

Many advisers will think this is focused on people deliberately evading UK tax – for example, routeing UK income through an offshore bank account – but the RTC has the potential to capture all sorts of tax positions, including individuals who are unaware that a tax liability exists or might have existed.

The RTC deadline coincides with HMRC receiving huge quantities of personal financial data under the provisions for automatic exchange of financial account information in tax matters – the common reporting standard (CRS). Over the past ten years or so, HMRC has signed various agreements, the result of which is that overseas jurisdictions will be exchanging vast quantities of information relating to residents holding assets or receiving income in each others’ jurisdictions. The CRS is the latest such agreement and will involve more than 100 countries exchanging information. The first tranche of data was exchanged last year, with the final group of signatory countries exchanging from 30 September 2018.323

322 “HMRC’s information powers”, Tax Journal, 19 May 2017 323 “Don’t get snarled”, Taxation, 6 September 2018

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5.4 The Paradise Papers & Autumn Budget 2017

On 5 November the International Consortium of Investigative Journalists started to publish details and commentary on material it had obtained from two offshore service providers and 19 tax havens' company registries, which it called the ‘Paradise Papers’. In turn details of the financial holdings of both wealthy individuals and multinational enterprises from this leak were reported by the BBC, the Guardian, and other media organisations, reiterating public concerns as to the scale of tax avoidance and evasion, particularly by high net-worth individuals, and the actions of offshore jurisdictions to facilitate these activities.

In evidence to the Public Accounts Committee on 6 November, Jon Thompson (HMRC’s chief executive) noted that the ‘Paradise Papers’ cache was “different from the Panama papers in 2016, which were published on a website in an unstructured way and you could inquire through those papers. In this particular situation, the papers have not been made publicly available; they are only available to those within the International Consortium of Investigative Journalists.”324 He explained that HMRC had requested information on the material held by the ICIJ but without receiving a response – a point also made by the Financial Secretary Mel Stride a few days later.325 In answer to a written question at this time the Minister said the following:

HMRC does not have power to acquire journalistic material held overseas and, therefore, is unable to obtain the information held by the ICIJ known as the Paradise Papers. However, HMRC has requested access to the material that has been provided by the International Consortium of Investigative Journalists to the BBC and The Guardian. HMRC has also encouraged these organisations to pass on any information that points to wrongdoing and are prepared to look at every allegation in full.326

Turning back to his evidence session with the PAC, Mr Thompson said a little on HMRC’s response to the Paradise Papers publication:

Q17 Chair: In terms of your legal powers, how quickly could you secure any of that data? Give us a range if you cannot give an exact timetable.

Jon Thompson: The tax treaties and exchange of information agreements that we have with all Crown dependencies—the overseas treaties—allow us to inquire about specific taxpayers. At this point, we are trying to work off what is in the public domain and then work from that in terms of making specific inquiries. That is not the same as saying that there is a bulk set of data that is apparently available. Obviously we would like that, but we have to do it by individual allegation, taxpayer by taxpayer, in order to get that information.

Q18 Chair: And you are prepared to look at every allegation in full.

324 Oral evidence: 2016-17 HMRC Standard Report, HC 456, 6 November 2017 Q6 325 HC Deb 14 November 2017 cc168-9 326 PQ113170, 20 November 2017

104 Tax avoidance and tax evasion

Jon Thompson: We certainly are. In the same way we did with Panama, we will look at every case of tax evasion very seriously. We have secured significant revenues from those trying to hide overseas—more than £2.8 billion over the last few years ...

Q19 Chair: With the Panama papers, we were frustrated—I suspect you were, too—about how long it took to dig through that information. How quickly could we see results if you had all that information on the Paradise papers?

Jon Thompson: I think it depends on whether we conclude early on that the acts are civil or criminal. With criminal acts, it takes quite a bit longer to prepare a case. The Panama papers were published on 4 April 2016. There are currently 66 criminal or civil investigations; four people have been arrested and a further six have been interviewed under caution. Those cases continue to be live. We would expect an additional tax yield of £100 million from the Panama papers. That gives you some sense of how long quite complicated tax cases take to bring to some sort of fruition.

Q20 Chair: That is quite encouraging news, because when we have asked about the Panama papers before, we have got very little information. Are you better prepared now for dealing with these papers than HMRC was when the Panama papers were leaked?

Jon Thompson: I would say that we are, in one significant respect: over the last 18 months or so we have significantly improved the way in which we can ingest data from other sources. There is now a director-led speciality function within our customer compliance group: the director of risk and intelligence services. We have created a dedicated function that can ingest data from as many sources as we can get them and put that data together around individual taxpayers, so that our interventions are risk-based.327

Mr Thompson and his colleague Jim Harra (Director General, Customer Strategy and Tax Design), also acknowledged that HMRC had only been able to obtain access to the Panama Papers by making a payment for this information:

Q47 Chair: May I just ask, with the Panama papers, did you have to make any payment to receive any information, or was it passed over to you freely?

Jon Thompson: It was not passed to us freely.

Q48 Chair: You had to pay a fee?

Jon Thompson: We obtained it. I need to be careful about what the law limits me to say. We obtained it, but not from the ICIJ.

Jim Harra: It was part of an international effort to obtain that data.328

The publication of this material was debated, briefly, the same day, in response to an Urgent Question tabled by the Shadow Chancellor, John McDonnell,329 and then a few days later, following a successful application by Dame Margaret Hodge for an emergency debate on the

327 op.cit., Qs 17-20 328 Op.cit. Qs 47-48 329 HC Deb 6 November 2017 c1195-1208

105 Commons Library Briefing, 30 January 2019

issue.330 On this occasion Dame Margaret highlighted three specific areas where, in her view, the Government had failed to take effective action: in penalising tax advisers, in requiring overseas territories to publicise beneficial ownership, and in resourcing HMRC:

The Treasury, and other Ministers and Departments, listen only to a very small and exclusive group of tax professionals when making decisions on tax policy … Curtailing the influence of tax professionals on tax policy is essential, and making the advisers accountable for the schemes that they invent and market is central to the campaign to destroy tax avoidance. The measures in the Finance Act 2017 represent one small step in the right direction of holding advisers to account, but the small print suggests that very few, if any, will be caught by the legislation. The definitions are too narrow, and the penalties too weak …

We should lead by example. We should demonstrate that transparency can and does change behaviour. We should compel our overseas territories and Crown dependencies to publish public registers. In the past, a Conservative Government used their powers to outlaw capital punishment in our Crown dependencies and overseas territories, and a Labour Government used the same powers to outlaw discrimination against gay people. Today we should work together to outlaw the secrecy of those jurisdictions, which leads to such massive tax injustices …

We can and should properly resource HMRC now so that it has the capability to pursue all who seek to avoid paying tax, not just the small businesses who form an easy target that can be hounded with little effort. Every £1 invested in HMRC enforcement yields £97 in additional tax revenues. It is a complete no-brainer that we should be strengthening HMRC and reversing some of the cuts.331

In his response the Financial Secretary made some comments on each of these matters:

We have brought in 75 measures since 2010 to clamp down on these practices. A further 35 will come in from 2015, raising £18.5 billion by 2020-21. One of the problems is that we have been so active in bringing in so many measures that, unfortunately, not all of them have been noticed. In last week’s debate, the right hon. Member for Barking raised the issue of taking action against those who promote tax avoidance schemes … She only to look at the Finance Bill … in which she will find measures to deal with precisely what she was urging us to take action on last week …

We all agree that we need to look closely at what is happening in the international sphere. On that, this Government have a record of which we can be proud. Through the OECD, we have been in the vanguard of the base erosion and profit shifting project. We have worked closely with the Crown dependencies and overseas territories.

We have brought in a diverted profits tax, which will raise £1.3 billion by 2019, and common reporting standards to ensure that information is exchanged in relation to around 100 countries. We have introduced a directory of beneficial ownership that is

330 HC Deb 13 November 2017 cc55-6. This procedure is established under the rules of

Standing Order No.24; details are on the Parliament site. 331 HC Deb 14 November 2017 cc163-4

106 Tax avoidance and tax evasion

accessible by HMRC, the authority that needs to have that information. All this has happened in the last couple of years, and it is a game changer. Many of the issues arising from the Paradise papers go back very many years, but these measures are in place right now …

Some £1.8 billion of additional money has been invested in HMRC since 2010, of which £800 million will relate to the period after 2015, bringing in £7.2 billion by 2020-21. We will also be trebling the number of investigations of the wealthy to ensure they are paying their appropriate level of tax, as a direct consequence of all that additional investment.332

In January 2018 the Public Accounts Committee published its report on HMRC’s performance in the previous year in which raised concerns over the ‘Paradise Papers’ leak and whether HMRC had sufficient resources “to deal with the full scale of the recent allegations:”

The ‘Paradise Papers’ leak suggests potentially serious and extensive allegations of tax evasion and avoidance. The ‘Paradise Papers’ leak of a large volume of financial documents has highlighted the potentially dubious practices of many high-profile individuals and corporations in their use of offshore tax havens. HM Revenue and Customs (HMRC) has requested the leaked documents but it has not yet received a response. HMRC tells us that if the information is not forthcoming it can then use its network of exchange of information agreements with other countries to obtain the data. The ‘Panama Papers’ were published in April 2016, and have to date resulted in 66 criminal or civil investigations, and expected additional tax revenues of £100 million. HMRC now claims to be better equipped to deal promptly with any large-scale leak of data. However, the speed with which cases can be investigated depends on whether they are civil or criminal, as criminal cases will take longer to prepare. We are far from confident that HMRC has sufficient resources to deal with the full scale of the recent allegations.

Recommendation: HMRC should obtain the information from the ‘Paradise Papers’ as soon as possible, and report back to the Committee by March 2018 to set out its response, including any additional revenue likely to be at stake.333

In its response, published in March, the Government agreed, although it appears HMRC has been unable to obtain this material:

1.2 The Department welcomes all information that could assist in its work on tackling tax evasion and avoidance. The Department has therefore sought access to the International Consortium of Investigative Journalists (ICIJ) material. However, the ICIJ (which is based outside the UK’s jurisdiction) has refused to provide the Department with material beyond that already publicly available.

1.3 The Department has requested access to the ICIJ material that was used by the BBC and The Guardian. The Department has also encouraged these media organisations to pass on any information that points to wrongdoing and is prepared to look at every allegation in full. Only the Guardian have responded, explaining that they are not in possession of the data, and only have access to it through the ICIJ and therefore cannot help our enquiries. 1:

332 HC Deb 14 November 2017 c167, c168, cc165-6 333 Public Accounts Committee, Twelfth report: HMRC’s performance in 2016-17, HC

456, 12 January 2018 p5

107 Commons Library Briefing, 30 January 2019

PAC conclusion: The ‘Paradise Papers’ leak suggests potentially serious and extensive allegations of tax evasion and avoidance. 1: PAC recommendation: HMRC should obtain the information from the ‘Paradise Papers’ as soon as possible, and report back to the Committee by March 2018 to set out its response, including any additional revenue likely to be at stake.

1.4 The Department is looking very closely at all the information the ICIJ and its members have disclosed in both the media and on the ICIJ published database. The Department is also reviewing this information in relation to existing enquiry work2016. This would make measuring performance against an annual target uncertain.334

In answer to a PQ in June, Treasury Minister Mel Stride said that “HMRC is looking very closely at the information the ICIJ has released in the Paradise Papers to see if it reveals anything new that could add to their existing leads and investigations” although “in a significant number of cases that HMRC have reviewed, the practices and schemes which the data points to were either already known to HMRC or have no UK tax consequences.”335

Writing on the Paradise Papers in Taxation, Fiona Fernie (Blick Rothenberg) argued that the most recent statutory provisions represented a change in approach by HMRC, from using ‘carrots’, to encourage individuals to voluntarily disclose irregularities, to “new tools and ‘sticks’ in the form of increasingly punitive measures … against those evading (or serially avoiding) UK tax.”336

On this theme the IFS’ Tax Law Review Committee published a review of the recent changes made to HMRC powers, in which it raised concerns as to the effectiveness of the safeguards provided for taxpayers.337 The report paid particular attention to two issues: HMRC’s practice in issuing accelerated payment notices (APNs) …

In the case of the APNs, the position is ameliorated by the fact that the taxpayer can recover all the money paid (plus interest) if successful in appealing the substantive tax issue. Although no safeguards were introduced in the APN legislation to limit the application of the powers where bankruptcy of the taxpayer would result, the courts have imposed such a restriction. With this restriction in place, the APNs generally lead to a process and cash-flow change so that taxpayers must expect to pay disputed tax at an early stage of a tax dispute, rather than after the matter has been litigated, but the APNs do not by themselves deter taxpayers from disputing HMRC’s assessment of a tax liability. If the taxpayer served with an APN is successful in disputing the underlying tax, they get the tax paid back with interest. However, taxpayers can be, and indeed have been, served with APNs where HMRC has incorrectly applied the APN rules. The taxpayer must then seek to persuade HMRC that an error has occurred or incur

334 Treasury Minutes, Government response to the Committee of Public Accounts, Cm

9596, March 2018 pp8-9 335 PQ155663, 29 June 2018 336 “Paradise lost”, Taxation, 16 November 2017 337 IFS press notice, The implications of recent additions to HMRC powers and the

shifting balance in the relationship with taxpayers, 20 November 2017. See also, “Fears raised over expansion of powers for the taxman”, Financial Times, 13 December 2017

108 Tax avoidance and tax evasion

the cost and procedural demands of seeking judicial review because there is no right of appeal to the tribunal against HMRC’s procedural error.

… and the penalties that HMRC may charge in relation to both follower notices (FN) and the application of the General Anti-Abuse Rule:

A potentially more serious problem arises with the FN penalty and GAAR penalty provisions (the ‘Penalty Powers’). They make the financial risks of appeal so great that even taxpayers with strong cases may not be prepared to risk going to court. Those powers, which have been introduced expressly to encourage taxpayers to settle disputes with HMRC on the meaning and application of tax law – in other words, to deter taxpayers from seeking an independent review by the tribunals and courts as to the meaning and application of tax law – have significantly increased the financial risks to taxpayers of continuing to dispute with HMRC the tax due in their cases.

The taxpayer does not just pay over the disputed tax but faces the imposition of a 50 per cent or 60 per cent penalty if they continue to dispute the matter and lose in the courts. Concern has been expressed by others, and is shared by this paper, that the Penalty Powers have effectively given HMRC quasi-judicial powers to determine what tax law means and how it applies in particular cases. The financial risks to taxpayers of seeking independent adjudication of their cases through the tribunals and courts are so high when some of the Penalty Powers are exercised that few taxpayers will wish to dispute the tax claimed by HMRC, even when they have a strong case deserving judicial consideration. In that situation, taxpayers are effectively denied access to justice.338

The Chancellor presented the Government’s first Autumn Budget on 22 November 2017. Tax avoidance was not a major theme to the speech, nor in press coverage, though the Budget report set out a list of individual measures to mitigate both avoidance and evasion, noting “since 2010 the government has secured almost £160 billion in additional tax revenue and alongside the Budget publishes details of over 100 measures it has introduced. These actions have also helped the UK achieve one of the lowest tax gaps in the world … Further steps taken in the Budget are forecast to raise £4.8 billion between now and 2022-23.”339 The Government published a policy paper alongside the Budget report - Tackling tax avoidance, evasion and non-compliance - which includes an annex listing measures introduced since 2010, and those announced in the Budget.340

The ‘Red Book’ also gave details of an increase in HMRC’s budget:

3.88 The government is investing a further £155 million in additional resources and new technology for HMRC.

338 Tracey Bowler, The implications of recent additions to HMRC powers and the

shifting balance in the relationship with taxpayers, TLRC Discussion Paper No.13, November 2017 pp7-8. See also, Stephen Daly, “TLRC discussion paper”, taxatlinconox blog, 14 December 2017

339 Autumn Budget 2017, HC 57, November 2017 para 3.65-77. See also, HM Treasury, Overview of Tax Legislation & Rates, November 2017 para 1.43

340 HMT, Tackling tax avoidance, evasion and non-compliance, November 2017, Table A1 & Table 1B. see also, PQ117106, 7 December 2017 & PQ135367, 18 April 2018.

109 Commons Library Briefing, 30 January 2019

This investment is forecast to help bring in £2.3 billion of additional tax revenues by allowing HMRC to:

• transform their approach to tackling the hidden economy through new technology

• further tackle those who are engaging in marketed tax avoidance schemes

• enhance efforts to tackle the enablers of tax fraud and hold intermediaries accountable for the services they provide using the Corporate Criminal Offence

• increase their ability to tackle non-compliance among mid-size businesses and wealthy individuals

• recover greater amounts of tax debt including through a new taskforce to specifically tackle tax debts more than 9 months old.341

In its discussion of the policy costings for the Budget, the Office for Budget Responsibility highlighted the difficulty of estimating the Exchequer impact of this package of measures:

HMRC operational measures

A.8 The Government has announced a package of measures designed to generate additional revenue from HMRC compliance activity. The various components were combined into the single line of the scorecard: ‘Avoidance and Evasion: additional compliance resource’ (Table 2.1 – item 39).

As we have previously set out, the costing of these type of measures is often subject to a high degree of uncertainty. While we only certify measures that we judge to be reasonable and central, efforts to tackle avoidance and evasion have not always brought in the expected yield.342

The measures often target a subset of individuals or companies that are already actively changing their behaviour to avoid or evade tax. As a result there is typically a high degree of behavioural uncertainty. Similarly, since the measures are directed at uncollected tax, there is usually less reliable data available to inform the costing. And there are often uncertainties relating to the timely delivery of operational changes, especially when they rely on new IT systems …

A.9 Scrutinising this package of measures brought about some further challenges. The approach HMRC takes to measuring compliance yield does not map directly onto the National Accounts receipts definitions used in the Government’s fiscal targets and that we therefore forecast. This makes it difficult to distinguish what is relevant to our forecast with any precision. Another challenge was determining whether the yield from this package would be additional to that already captured in previously announced measures. In particular the large July 2015 package of HMRC measures has yet to become fully effective, so we needed to assure ourselves that the yield in our baseline forecast in respect of previous measures was not being factored into these new measures too.

341 Autumn Budget 2017, HC 57, November 2017 para 3.88, p29 (Table 2.1 – item 39) 342 See for example Chapter 5 in our 2017 Fiscal risks report and Johal, Evaluation of

HMRC anti-avoidance and operational measures, OBR Working Paper No.11.

110 Tax avoidance and tax evasion

A.10 To overcome some of these challenges we looked at HMRC’s past compliance performance. For example, we considered the progression of HMRC’s estimates of the tax gaps for the different taxes, groups of taxpayers and activities targeted by this package. This allowed us to consider top-down whether the expected yield from different elements of the package was reasonable relative to the types of activity the Government each seeks to tackle. We also looked at the returns to investment for the July 2015 package of measures and how they compared to the current package. For most, we expected to see diminishing returns from additional investment and challenged those costings where that had not been assumed. We required each costing to show that appropriate contingencies were in place for delays in recruitment and for training lags. Where staff were being redeployed from elsewhere within HMRC we asked for an appropriate opportunity cost to be incorporated.

A.11 We assign this package of measures a ‘very high’ uncertainty rating, with each of data, behaviour and modelling also classed as ‘high’ or ‘very high’. For some elements, such as those targeting the hidden economy or criminals, the level of uncertainty is very high. We will continue to evaluate the performance of these and previous anti-avoidance and evasion measures on a regular basis. This Budget has continued the recent pattern whereby the yield from revenue-raising measures is concentrated in these more uncertain areas while the cost of the tax giveaways is far more certain.343

As part of its inquiry on the Autumn Budget the Treasury Committee took evidence from the main professional bodies on 5 December, and on this occasion Alister Jack asked about the impact that the debate on avoidance and evasion had had on the profession:

Q249 Mr Jack: … I want to go on to the Panama Papers and Paradise Papers and all that … Do you think the public perception is that those structures are tax avoidance or even tax evasion? … Has that made practitioners more cautious about the way they offer advice?

Ray McCann: [Deputy President, Chartered Institute of Taxation] It is undoubtedly the case that practitioners today are warier of falling foul of both new tax rules and HMRC … Allied to that, the professional bodies have, in the past two years, taken quite considerable steps in ramping up our professional standards…

Specifically on the Paradise Papers, we have to recognise that many of those structures have been around for decades, certainly years, and they will quite often predate a lot of the upsurge in public disapproval of offshore tax planning structures. Whether they can be changed, altered or some of them are even impacted by some of the changes that Government are bringing forward remains to be seen, because many of them will no doubt say that they have put in place a compliant structure that complies with every rule in every jurisdiction that is going …

Frank Haskew [Head of Tax Faculty, Institute of Chartered Accountants in England and Wales] Amplifying what Ray said, our professional conduct in relation to taxation [PCRT] that Ray mentioned is signed up to by seven professional bodies …

343 Economic & Fiscal Outlook, Cm 9530, November 2017 pp230-1

111 Commons Library Briefing, 30 January 2019

The Government, in the Finance Act that was passed last month—the Finance (No.2) Act—included some provisions to have penalties on what is described as enablers of tax avoidance. We now have measures there on the statute book whereby, if advice to a client is outside the parameters of the general anti-abuse rule, the advisers can also be subject to a penalty. This pincer movement is coming in on advisers from a number of directions…

We also need to remember the tax advice market in the UK. HMRC estimates that about 30% of tax advisers are not affiliated to a professional body. There are overseas advisers as well. The UK tax market is quite fragmented. With our PCRT and the enablers, we have stepped up to the plate, and HMRC has introduced rules that should have an impact on the way advisers go about giving their business to clients.

Subsequently Rushanara Ali asked about HMRC’s estimates for compliance yields and the extent to which these figures were driven by government action or a change in public attitudes.

Q264 Rushanara Ali: … The Chancellor said that the Government had collected £160 billion in additional tax revenue through the crackdown on evasion. To what extent would you assign that to government policy ... To what extent is it public pressure, media pressure or the moral imperative? Could it be a bit of both?

Frank Haskew: That is a difficult question. It probably is a bit of all of that … I would mention here that HMRC published only last month its most recent tax gap figures. However much some commentators question the basis of some of the calculations, we have to accept that up to an extent this is evolving. The UK’s methodology is, at the moment, as good as it gets. Clearly, more can be done … but it shows that the UK’s trajectory in terms of the tax gap has been coming down. …

We have had a huge amount of anti-avoidance and anti-evasion legislation over the past five years ... We have had more resources invested into HMRC. We saw that in the latest Red Book … We have seen public pressure and public concerns. We have seen reputation concerns. We have had our own PCRT, which we have revised. Coming to it from a lot of different directions, the climate has changed remarkably.344

5.5 Budget 2018 The Chancellor presented the Budget on 29 October and although tax avoidance was not a major theme to either the Budget or the responses to it, Mr Hammond mentioned the issue briefly in his speech:

Today we continue the work of the past eight years, where we have secured £185 billion since 2010 that would otherwise have gone unpaid, with a package of measures today to further clamp down on tax avoidance, evasion and unfair outcomes, raising another £2 billion over the next five years.

We will make HMRC a preferred creditor in business insolvencies, to ensure that tax that has been collected on behalf of HMRC is actually paid to HMRC. We will end the practice of purchasing services through overseas branches to avoid UK VAT, and we will crack down on insurance companies routing services through

344 Budget Autumn 2017: Oral Evidence, HC 600, 5 December 2017 Qs249, 264

112 Tax avoidance and tax evasion

offshore territories. And we will stop our generous R&D tax credits system being abused by reintroducing a PAYE restriction for the small and medium-sized companies scheme.345

Further details were published in the Budget report: 346

Protecting your taxes in insolvency – From 6 April 2020, when a business enters insolvency, more of the taxes paid in good faith by its employees and customers, and temporarily held in trust by the business, will go to fund public services rather than being distributed to other creditors. This reform will only apply to taxes collected and held by businesses on behalf of other taxpayers (VAT, PAYE Income Tax, employee NICs, and Construction Industry Scheme deductions). The rules will remain unchanged for taxes owed by businesses themselves, such as Corporation Tax and employer NICs. (69) …

*

Preventing abuse of R&D tax relief for small and medium-sized enterprises (SMEs) – To help prevent abuse of the payable credit, from 1 April 2020, the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year. This will ensure the relief is robust against identified abuse, including fraud, following the prevention by HMRC of fraudulent claims worth £300 million.347 The government will consult on this change. (70) …

*

Unfulfilled supplies – The government will amend rules from 1 March 2019 to bring consistency to the VAT treatment of prepayments. This change will bring all prepayments for goods and services into the scope of VAT where customers have been charged VAT but have failed to collect what they have paid for and have not received a refund. (71)

Regulation 38 – The government will introduce stricter rules for how and when adjustments to VAT should be made following a reduction in price. Secondary legislation will tighten definitions for Regulation 38 and ensure a credit note is issued to customers. This will guarantee businesses are transparent and do not benefit from VAT that is due to the consumer or the Exchequer. (71)

*

Profit fragmentation – As announced at Autumn Budget 2017, the government will legislate in Finance Bill 2018-19 to introduce targeted legislation that aims to prevent UK businesses from avoiding UK tax by arranging for their UK-taxable business profits to accrue to entities resident in territories where significantly lower tax is paid than in the UK. The taxable UK profits will be increased to the actual, commercial level. (72) …

VAT grouping – The government will legislate in Finance Bill 2018-19 to extend the eligibility to join a VAT group to certain non-corporate entities. In addition, revised VAT grouping guidance will be issued to:

345 HC Deb 29 October 2018 c662 346 Budget 2018, HC 1629, October 2018 pp51-2 347 HMRC press release, HMRC arrest three during investigation into suspected £300m

corporation tax scam, 29 June 2016

113 Commons Library Briefing, 30 January 2019

• amend the definition of ‘bought in services’ to ensure that such services are subject to UK VAT

• provide clarity to businesses on HMRC’s protection of revenue powers and treatment of UK fixed establishments

These guidance changes will be published in draft and come into effect from 1 April 2019. (72)

VAT Specified Supplies Order – As announced in July 2018, the government will legislate to prevent a version of VAT avoidance (known as ‘looping’) that involves UK insurers setting up associates in non-VAT territories and using these associates to supply their UK customers. This allows them to reclaim VAT on costs that UK based competitors are unable to reclaim. (72) …

*

Capital gains tax: tackling misuse of Entrepreneurs’ Relief – In addition to the current requirements on share capital and voting rights, from 29 October 2018 shareholders must also be entitled to at least 5% of the distributable profits and net assets of a company to claim the relief. This is to address an identified abuse of the current rules. (73)

The anticipated Exchequer impact of each of these changes is set out in the Budget report; the number given at the end of paragraph for each measure correlates to its place in the Budget report’s table, listing the cost/yield of all the measures announced in the Budget:348

Notes:

* Negligible. 1 Costings reflect the OBR’s latest economic and fiscal determinants. 2 At Spending Review 2015, the government set departmental spending plans for resource DEL (RDEL) for

the years up to and including 2019-20, and capital DEL (CDEL) for the years up to and including 2020-21.

Where specific commitments have been made beyond those periods, these have been set out on the

scorecard. Where a specific commitment has not been made, adjustments have been made to the overall

spending assumption beyond the period.

348 Budget 2018, HC 1629, October 2018 p38 (Table 2.1)

114 Tax avoidance and tax evasion

These figures also appear in the OBT’s Economic and Fiscal Outlook; the report underlines that, as is often the case, there are considerable uncertainties with the projected yield from most of these initiatives to tackle avoidance and evasion:

‘VAT: ensuring proper adjustments’: this measure has two components. The first – relating to VAT on unfulfilled supplies – applies VAT to cases where a customer makes a full or part pre-payment for a service or good but then does not use or collect it. An example would be the booking and subsequent cancellation of a hotel room. The second part closes a loophole that allows businesses to adjust their VAT return to reclaim VAT from HMRC in respect of past periods with no time limit.

Data for both elements are highly uncertain, particularly the second which assumes the number of businesses currently exploiting the loophole by extrapolating from the limited number of known cases. The low quality of data means the modelling relies on several assumptions to derive the tax base and, as with many anti-avoidance measures, there is also considerable uncertainty over the potential size of the behavioural response. We assign this costing a ‘very high’ uncertainty rating, with data, behaviour and modelling all deemed to be sources of ‘very high’ uncertainty.

‘Offshore: prevent profit fragmentation, extend VAT grouping rules and prevent looping avoidance schemes’: this package of anti-avoidance measures has three components. Profit fragmentation targets UK residents who avoid UK tax by diverting their business profits via an external entity. The second component relates to VAT exempt businesses that use overseas branches and UK VAT grouping rules to circumvent non-recoverability of acquisitions subject to VAT. The third element tackles a VAT avoidance scheme known as ‘offshore looping’ that is used within the insurance sector. As is often the case with offshore measures the behavioural response is highly uncertain and we have given this package a ‘very high’ uncertainty rating overall

‘Capital gains tax: tackling misuse in entrepreneurs' relief’: this measure adds two new tests designed to limit the eligibility for entrepreneur’s relief and prevent misuse. The key uncertainty in this costing relates to the low quality of relevant data, and we assign this costing a ‘high’ uncertainty rating overall. 349

349 Cm 9713, October 2018 p235, p239-40

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Statutory provision for most of these measures is to be made either in the Finance Bill 2019 or in secondary legislation,350 although legislation regarding profit fragmentation, VAT grouping and the misuse of entrepreneurs’ relief was included in the Finance Bill published after the Budget.351

The Committee of the Whole House considered a selection of provisions from the Bill on 19-20 November; as part of this, on the second day, the House considered one grouping of anti-avoidance clauses.352 Although no changes were made to these provisions, the House agreed two new clauses tabled by the Opposition:

• NC5, to require a review of the impact of the tax avoidance provisions in the Bill, with regards to child poverty, households on different levels of income, people with protected characteristics and on a regional basis - tabled by the Labour Party.

• NC14, to require a review of the effectiveness of the tax avoidance provisions in the Bill – tabled by the SNP.

During the debate, Anneliese Dodds put the case for NC5 as follows:

Our new clause 5 is directed at another Government blank spot: the distributional impact of their tax measures. It would require an equality impact assessment of the Government’s tax avoidance measures in relation to child poverty, household income levels, people with protected characteristics, and our nations and regions. That assessment is necessary because of the continuing leakage from our tax system owing to avoidance as well as evasion. Failure to deal with avoidance has put pressure on the rest of the tax system, which … has been exacerbated by unnecessary tax cuts to the very best-off people and to profitable corporations.353

In turn, Alison Thewliss put the case for the SNP’s new clause as follows:

On the provisions on tax avoidance, we must gauge our progress by continually measuring the value and effectiveness of those policies. … Our proposal is in the spirit of achieving better, more robust policies in the future … There are many reasons why HMRC does not always collect the tax that it ought to be paid, whether through criminal activity, through evasion or avoidance or just through human error, and there is much more that can be done to address that … The SNP has long argued that the tax system is unnecessarily cumbersome and complicated. There are layers and layers of regulations and exemptions, which lead to loopholes appearing. The system seems to get more complex every year when we look at the Finance Bill, and there also appear to be armies of tax avoidance specialists seeking to exploit whatever gaps they can find.354

350 HMT, Overview of tax legislation & Rates, October 2018 para 2.17, 2.27-8, 2.49 351 Specifically, clause 16 (profit fragmentation), clause 53 (VAT grouping) and clause

38 (entrepreneurs’ relief) of Finance (No.3) Bill 2017-19. In the latter case, the clause made a number of other changes to the rules for the relief, and, following concerns about its impact, was amended at the Report stage of the Bill (HC Deb 8 January 2019 cc310-11).

352 HC Deb 20 November 2018 cc779-833 353 op.cit. c794 354 op.cit. cc808-9

116 Tax avoidance and tax evasion

When he opened the debate, Treasury Minister Mel Stride had opposed both new clauses, as well as a third new clause (NC6), tabled by the Labour Party, similar to the SNP’s new clause:

New clause 5 would require the Government to carry out a review of the equality impact of some of the Bill’s anti-avoidance provisions. The tax information and impact notes published alongside the measures already set out the impact of anti-avoidance measures in the Bill on those sharing protected characteristics. In general, they show that HMRC does not expect the measures to have notably different impacts on people according to their protected characteristics.

New clauses 6 and 14 would require the Government to publish a review of the effectiveness of the Bill’s provisions to tackle tax avoidance and tax evasion, and to reduce the tax gap. Such a review is unnecessary. The Government keep all taxes under review and will continue to measure and publish annual statistics on the tax gap. I have little doubt that those statistics will continue to show that the tax gap is lower than at any time under the previous Labour Government.355

However, at the conclusion of the debate Mr Stride announced that the Government would accept both NC5 and NC14:

New clause 5 calls for a review of the impact of the clauses in this group on child poverty, on households at different levels of income, on those with protected characteristics and on the different parts of the United Kingdom. As I have stated, the Government already provide impact and distribution assessments and analysis in the Budget, as well as tax impact information and notes on individual tax measures …

New clause 14, proposed by the Scottish National party, calls for a review of the effect of the clauses in this group on reducing tax avoidance and evasion and on “inducing new tax avoidance measures unanticipated by the Act”, and for estimates of the impact of the clauses on the tax gap.

In the light of the Government’s desire to reinforce what we are doing already or what we will naturally provide in a timely manner as events unfold, the Government will not oppose new clause 5 … or new clause 14. That is subject to the information that is being sought being available, in which case we will of course provide it.356

355 op.cit. c789 356 op.cit. c831. They now form clauses 92 & 93 of the Bill, which has completed its

scrutiny in the Commons (HL Bill 154 of 2017-19)

117 Commons Library Briefing, 30 January 2019

6. The 2019 Loan Charge Over the last few years the Government has introduced several measures to tackle ‘disguised remuneration’ (DR) schemes. Initially legislation to counter this form of tax avoidance was introduced in 2011.357 Subsequently in the 2016 Budget the Government confirmed that since then “new schemes have emerged which attempt to sidestep this legislation” often involving “individuals being paid in loans through structures such as offshore Employee Benefit Trusts”, and that it would introduce legislation to counter their use, including “a new charge on loans paid through disguised remuneration schemes which have not been taxed and are still outstanding on 5 April 2019.”358 Statutory provision was included in the Finance (No.2) Act 2017,359 with supplementary provisions in the Finance Act 2018.360

Many Members have received representation about this from constituents, and to date 118 Members have signed an EDM, tabled by Stephen Lloyd MP in May 2018, criticising this measure as unfairly retrospective.361 However, this legislation attracted cross-party support when it was scrutinised in the House, and there is no indication that Ministers are minded to either scrap the change or substantively amend the way it applies. Treasury Minister Mel Stride set out the Government’s position in long written answer to a series of linked PQs in June 2018:

Asked by Stephen Lloyd : To ask Mr Chancellor of the Exchequer, what recent steps HMRC has taken in respect of (a) disguised remuneration schemes and (b) the promoters of such schemes.

Answered by: Mel Stride : The charge on disguised remuneration (DR) loans is targeted at artificial tax avoidance schemes where earnings were paid via a third party in the form of ‘loans’ which in reality were never repaid. DR scheme users took home almost all of their pay tax-free. However, these schemes never worked and the amounts paid were always taxable under the law at the time.

The Government has taken this action to ensure that everybody pays the taxes they owe and contributes towards the public-funded services from which they benefit. HMRC has provided a number of opportunities for DR scheme users to settle their tax affairs, and is actively encouraging scheme users to come forward and settle their tax position ahead of the loan charge arising. HMRC will help those who are in genuine financial difficulty by allowing them to pay their tax bill over time. The charge on DR

357 specifically s26 & Schedule 2 of FA2011. These provisions were debated and agreed

at the Committee stage of the Bill (Public Bill Committee, Eighth sitting, 19 May 2011 cc 267-315),

358 Budget 2016, HC901, March 2016 p60 359 specifically ss34-5 & Schedules 11-12 of F(No.2)A 2017. These provisions were

debated and agreed at the Committee stage of the Bill: Public Bill Committee, Fourth Sitting, 19 October 2017 cc99-102

360 specifically ss11-12 & Schedules 1-2 of FA2018. These provisions were debated and agreed at the Committee stage of the Bill: Public Bill Committee, First Sitting, 9 January 2018 cc27-34

361 EDM 1239 of 2017/18, 8 May 2018. see also, “HMRC tax crackdown victimises easy targets”, Financial Times, 25 September 2018.

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loans is specifically targeted at these contrived tax avoidance schemes and is not expected to have significant effects on the economy or the NHS.

The Government estimates that up to 50,000 individuals will be affected by the charge on DR loans. Further information can be found at the ‘Disguised remuneration: further update’ policy paper. The loan charge applies to all users of DR tax avoidance schemes. It does not single out a specific group or industry. No estimate of the number of individuals affected at sector level is available. Fewer than 30 individuals declared the use of a loan scheme on their Self Assessment tax returns for the 2016/17 tax year. No estimate has been made of the number of schemes currently operating in the UK. HMRC continues to challenge avoidance schemes that are declared, and carries out extensive investigation work to track down those that are not.

Enquiries into DR tax avoidance cases can be time consuming and take several years because of the very complex nature of the arrangements. HMRC also relies on the cooperation of scheme users to provide information and agree to pay the tax they owe. A breakdown of the number of DR cases open by the number of years they have been open is not available, as HMRC’s operational data is not held in a way where this information is readily accessible.

Pay As You Earn (PAYE) liabilities fall on the employer in the first instance. The loan charge will not change this principle and HMRC will pursue employers who have used DR schemes for the tax that is due. HMRC will only go to the employee to settle their income tax liability in cases where it cannot reasonably be collected from the employer, for example where the employer is no longer in existence.

HMRC pursues those who promote or enable tax avoidance schemes to ensure that nobody profits from selling avoidance. HMRC is able to charge tough penalties of up to one million pounds where promoters do not provide clear and accurate information to their clients, and penalties of 100% of the fees earned by anyone who designs, sells, or otherwise enables the use of tax avoidance arrangements.

HMRC is proactively reporting DR scheme promoters to the Advertising Standards Authority and professional bodies where they make misleading claims about their products and services or provide misleading advice. HMRC will also consider criminal investigation where appropriate. Promoters of tax avoidance schemes have been prosecuted, leading to convictions and jail terms.362

As noted in this answer, taxpayers who are potentially liable to pay the loan charge may settle their tax affairs with HMRC, before the change comes into effect from 6 April 2019.363

In January 2019 HMRC confirmed that “approximately 250 different disguised remuneration schemes will be affected by the loan charge. These schemes are detailed and complex … so far over 24,000 scheme users have registered an interest to settle their tax affairs. HMRC has set

362 PQs152724-157732, 20 June 2018. The Minister reiterated the Government’s

position at Treasury Questions on 29 January 2019 (HC Deb cc640-1). 363 For details see, HMRC, Disguised remuneration: settling your tax affairs, 18 July

2018 & Disguised remuneration: detailed settlement terms, 7 November 2017

119 Commons Library Briefing, 30 January 2019

up dedicated email and phone lines to help users settle and is working hard to bring all live cases to an appropriate conclusion.”364 Detailed guidance for taxpayers has also been published by the Low Incomes Tax Reform Group.365

The following pages discuss the Government’s introduction of this legislation and its debate in the House. This includes details on the major legal challenge to the operation of DR schemes (the ‘Rangers case’ in July 2017), HMRC’s actions to report scheme promoters to the Advertising Standards Authority, and the Government’s approach to introducing retrospective legislation.

6.1 Disguised remuneration & Finance Act 2011

In the 2011 Budget, the Coalition Government confirmed it would “introduce legislation to target arrangements intended to disguise remuneration or avoid restrictions on pensions tax relief. The measure ensures that where a reward or a loan is provided, via a third party, in connection with the employee’s employment, an income tax charge arises and the employer is required to account for PAYE.”366 Further details were given in a tax information note published alongside the Budget; an extract is copied below:

A new income tax charge will apply to third party arrangements used by employers where they provide what is in substance reward to employees. The charge will be based on the full benefit of a sum of money paid or assets provided.

This charge will apply where a third party provides an employee with reward, recognition or a loan in connection with the employee’s employment. Third party arrangements that are not tax-avoidance will be excluded, in as far as this is possible without creating additional avoidance risks, from the effect of this measure. Examples include genuine deferred remuneration arrangements common in the financial service sector and which last less than five years and genuine commercial arrangements for the provision of designated employee car ownership schemes.

Third party intermediary arrangements are also used in addition to, or instead of, registered pensions to remunerate individuals above the annual and lifetime allowances, and the legislation applies equally to these vehicles.

The new income tax charge will be based on the full amount provided of:

• a sum of money made available; or

• on the higher of the cost or market value where an asset is used to deliver the reward or recognition, for example where the asset in question is transferred or otherwise made available for an employee’s use and benefit as if the employee owned the asset.

364 HMRC, Tax avoidance loan schemes and the loan charge, 15 January 2019 365 LITRG press notice, Campaigners urge those affected by the loan charge to engage

with HMRC, 20 December 2018. See also, “Living in the shadow of a tax scandal”, Financial Times, 26 January 2018.

366 Budget 2011, HC 836, March 2011 para 2.188

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The amount concerned will count as a payment of employment income and the employer will be required to account for PAYE accordingly.367

It was estimated that these provisions would raise around £750m a year from 2011/12.368 HMRC impact assessment stated that, “in relation to the arrangements known to HMRC, there are approximately 5,000 employers who are currently using these schemes, with an estimated 50,000 employees thought to be indirectly benefiting.”369

Provisions to this effect were included in the Finance Bill published after the 2011 Budget, and debated and agreed, with a series of Government amendments, at the Committee stage of the Bill on 19 May 2011.

On this occasion Treasury Minister David Gauke gave some background as to the approach taken in crafting these provisions:

Our response to the problem of disguised remuneration aims to build on the lessons that have been learned from tackling avoidance on employment income over almost two decades by Ministers in Labour and Conservative Governments, because this is not a new problem. HMRC has learned that narrowly focused legislation is no obstacle to the ingenuity of the tax avoidance industry, no matter how sharp-eyed the official or draftsman. Where that approach has been taken in the past, avoidance in the employment income arena has simply adapted …

For example, from 1991 to 1998, various financial instruments were used for tax avoidance. After that, we saw gold bullion being used, platinum sponge, tradable assets, fine wine, gemstones, exotic tangible assets, slightly less exotic intangible assets and so on. Each time, the schemes got more complex with more steps to achieve the desired outcome, and so did the legislation. Yes, legislation in this area is already complex, but it has been driven by the complexity of tax avoidance behaviour …

We have had to adopt a broad approach that captures the essence and range of avoidance activity. We have used carefully targeted carve-outs to ensure that arrangements that do not involve tax avoidance are not affected …

We have consulted very widely. This is the first anti-avoidance measure that has been subject to consultation; that has never happened before. We published a draft schedule on 9 December 2010, which generated considerable interest, and we rightly made amendments as a consequence. There has been a very constructive dialogue, which I welcome, and I want to take this opportunity to thank all who contributed to it. The legislation is undoubtedly in much better shape than it was on 9 December.

In response to that dialogue, HMRC made significant changes to the legislation, which was published on 31 March 2011, to ensure that various commercial arrangements were not brought into the charge. The consequent amendments built on the feedback provided to ensure that the scope and detail of the exclusions are appropriate. Yes, we have come forward with various additional amendments in Committee … this is the stage at which that should be done. It is not unprecedented …

367 HMRC, Disguised remuneration: tax information & impact note, March 2011 368 Budget 2011, HC 836, March 2011 p43 (Table 2.1 – item 40) 369 HMRC, Disguised remuneration: tax information & impact note, March 2011

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Tax avoidance is a significant issue and a substantial risk to the Exchequer. It is a widespread problem that is difficult to target. We do not want to dance around the issue any more. For every step, the avoidance industry makes a counter-step, but we have marked its card and taken a big step forward. We have consulted widely and have further targeted the legislation in response, but the risk tackled by schedule 2 is broad and long-standing.370

In an article on DR schemes in Taxation in November 2017, Andy Wood (Enterprise Tax Consultants) argued that these provisions “amounted to something of a line in the sand for this type of structure”:

Broadly [EBT schemes] ‘worked’ by having an employer contribute money to a trust, many of whose trustees – although not all – were resident overseas. The trust would then provide the money to the employee, typically in the form of a loan which was often interest-free and without specific repayment terms. It must be said that HMRC was never a fan of this structure…

There are perhaps two seminal cases in this area: Dextra Accessories Ltd v Macdonald (Inspector of Taxes) [2002] STC (SCD) 413 and Sempra Metals Ltd v CRC [2008] STC (SCD) 1062. … [In these cases] arguments that loans paid out by EBTs (or the very similar family benefit trusts) to employees should be subject to PAYE and National Insurance were dismissed. Thereafter, it’s possible to sense how HMRC officials must have bristled at those reverses and, not long after the Sempra case, the government moved to prohibit new EBTs being set up.

Provisions in FA 2011 (of which key parts took effect in December 2010) amounted to something of a line in the sand for this type of structure. It made a clear distinction between what had been ‘up for grabs’ beforehand and the explicit change in the law going forward, which would impose a PAYE charge on such a loan (and other payments and transfers) …

As one might expect, EBTs – together with similar arrangements, such as employer-financed retirement benefits schemes (EFRBs) – have declined in the years since. That said, the scheme promoters and their advisers developed a new generation of arrangements which, through artificial means, reached the same end point; in other words, an arrangement under which the individual owed a debt to the trustees. Unsurprisingly, the government and HMRC took umbrage at these work arounds.371

6.2 DR schemes & the 2019 Loan Charge - Budget 2016

In the 2016 Budget the Government announced that it would introduce a package of measures to deal with the recurrence of disguised remuneration schemes:

1.216 At Statement 2015 the Autumn government announced it would ensure that those who have used disguised remuneration tax avoidance schemes pay their fair share of tax and National Insurance contributions. In 2011, the government legislated to clamp down on these schemes. This action successfully protected £3.9 billion, £100 million more than originally estimated. Since

370 Public Bill Committee, Eighth sitting, 19 May 2011 c278, c279, c281, c290 371 “Removing the disguise”, Taxation, 30 November 2017

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then, new schemes have emerged which attempt to sidestep this legislation.

1.217 These schemes often involve individuals being paid in loans through structures such as offshore Employee Benefit Trusts. The government will raise £2.5 billon by taking action to tackle both the historic and continued use of these schemes, beginning with legislation in Finance Bill 2016 and with further action to follow in future Finance Bills. This will include a new charge on loans paid through disguised remuneration schemes which have not been taxed and are still outstanding on 5 April 2019.372

Promoters appear to have marketed a large number of very complex DR schemes to achieve the same end point. In July 2018 the Times had a story on the loan charge, which included this graphic to illustrate the basic principle:373

Provision for the first part of this package of reforms was made by s18 of the Finance Act 2016.374 This was briefly debated, and agreed, at the Committee stage of the Bill on 27 June.

On this occasion Treasury Minister David Gauke summarised it as follows:

The Government want to ensure that companies and individuals who have used, or continue to use, artificial arrangements to disguise their income, pay their fair share. These avoidance schemes involve income being funnelled through a third party, with the money often then given to the individual in the form of a loan that is never repaid. In 2011, the coalition Government successfully introduced new legislation to tackle the schemes in use at that time. Many of those who used the schemes before 2011 have still not settled. In addition, the tax avoidance industry has been selling new schemes that are even more artificial and contrived. At Budget 2016, the Government announced changes to address these issues. Clause 18 is the first part of that package.

Clause 18 addresses one type of these schemes by disallowing a relief in the current rules that the schemes exploit where there is a tax avoidance motive. It also withdraws a transitional relief and makes three minor technical clarifications to the current rules to

372 Budget 2016, HC901, March 2016 p60. The Budget report estimated the revenue

yield from these provisions as follows: 2016/2017: £100m; 2017/18: £335m 2018/19: £645m; 2019/20: £1,235m; 2020/21: £215m (Budget 2016, HC 901, March 2016: Table 2.1 – item 39). see also, HMT, Budget 2016 Policy Costings, March 2016 p36

373 “Freelancers in tax avoidance schemes hit with bill for £1bn”, Times, 11 July 2018 374 HMRC, Tackling disguised remuneration: TIIN, 30 March 2016

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ensure they work as Parliament intended. The reforms make it clear that everyone must pay their fair share.375

Speaking for the Opposition Rob Marris asked if the Minister would “address the question of lower-paid individuals in small businesses, some of whom feel that these proposals are retrospective because they refer to pre-2011 arrangements? We in this House are always wary of anything that smacks of retrospectivity.” In response Mr Gauke said:

On clause 18 and the concerns that this is retrospective legislation and that it is too complex, let me be clear that the changes introduced here are relatively straightforward. More complex proposals that were announced at the Budget will instead be legislated for in Finance Bill 2017, after the Government have consulted on the technical detail over the summer. One of the main purposes of the consultation will be to ensure that genuinely innocent arrangements are not affected.

On the suggestion that the legislation is retrospective, the Government expect those who have avoided tax to pay their fair share. The Government intend to legislate for the new charge in Finance Bill 2017, following the consultation that I have just mentioned. The public and tax practitioners will be able to comment on that consultation.376

The Government confirmed its plans in the Autumn Statement in November 2016:

Disguised remuneration schemes – Budget 2016 announced changes to tackle use of disguised remuneration schemes by employers and employees. The government will now extend the scope of these changes to tackle the use of disguised remuneration avoidance schemes by the self-employed. This will ensure that self-employed users of these schemes pay their fair share of tax and National Insurance.

Further, the government will take steps to make it less attractive for employers to use disguised remuneration avoidance schemes, by denying tax relief for an employer’s contributions to disguised remuneration schemes unless tax and National Insurance are paid within a specified period.377

These changes were estimated to raise a further £620m over 2016/17 to 2021/22,378 bringing the total projected yield from this measure to £3.2 billion over the five-year forecast period. This remains the official estimate of the Exchequer impact of the loan charge.379

In December 2016 the Government published draft legislation to be included in the forthcoming Finance Bill. A tax information note was also published at this time; an extract, on the operation of the loan charge, is reproduced below:

The loan charge will apply to the outstanding balance of disguised remuneration loans on 5 April 2019 that were made after 5 April 1999. The amount of the loan outstanding is, broadly, the principal of the loan less any repayments. From 17 March 2016, only payments in money made by the relevant person are

375 HC Deb 27 June 2016 c73 376 op.cit. c80, c89 377 Autumn Statement, Cm 9362, November 2016 para 4.46-7 378 Autumn Statement, Cm 9362, November 2016 p23 (Table 2.1 – item 24) 379 For example see, PQ201706, 17 December 2018

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allowable as repayments. Any money repayment connected with a tax avoidance arrangement, excluding the arrangement under which the loan was made, will be disregarded. The loan charge will also apply to loan transfers, referred to in the legislation as quasi-loans.

The relevant person may apply to HMRC for postponement of the loan charge where the loan qualifies as an ‘approved fixed term loan’. An officer of HMRC may grant an application where:

• the loan was made before December 9 2010

• the loan has a term of 10 years, or less

• the loan has not been replaced, or varied, since it was made and

• the relevant person has made repayments of the principal at intervals not exceeding 53 weeks or

• the loan was made on commercial terms that fall short of the commercial transactions exemption

The relevant person can alternatively make a claim for postponement of the loan charge where they are unable to repay the loan because they have paid an Accelerated Payment.380 An Accelerated Payment is a payment of the disputed tax liability arising from an avoidance scheme, before the final amount has been agreed or determined.

Postponement will only be available where the remaining loan balance is equal to, or less than, the Accelerated Payment. If the Accelerated Payment is later repaid to the relevant person, they will have 30 days to repay the outstanding loan balance, after which, the loan charge will apply.381

HMRC’s impact note also addressed the anticipated impact on individuals and households (emphasis added):

This measure is expected to affect up to 40,000 individuals who have entered into DR avoidance schemes. Some of these individuals will be unable to repay the loans, agree a settlement with HMRC before 5 April 2019, or pay the loan charge arising on 5 April 2019. The government anticipates that some of these individuals will become insolvent as a result.382

In answer to a PQ in June 2018 Treasury Minister Mel Stride gave a revised estimate, confirming that “50,000 individuals are estimated to be affected by the introduction of the DR loan charge across the UK.”383

The main legislative provisions to tackle these schemes are set out in ss34-35 of the Finance (No.2) Act 2017, which was debated and agreed in October 2017. Treasury Minister Mel Stride gave a detailed explanation of these provisions as follows:

Clause 34 introduces schedule 11, which makes changes to ensure that businesses and individuals who have used disguised remuneration tax avoidance schemes pay their fair share of income tax and national insurance contributions. Clause 35 and

380 For guidance on accelerated payments see, HMRC, Follower notices and accelerated

payments, December 2016. 381 HMRC, Tackling disguised remuneration – update, 5 December 2016 382 Tackling disguised remuneration – update, 5 December 2016 383 PQs 148628-32, 11 June 2018. This remains the Government’s estimate.

Information is not held at constituency level (PQ203257, 20 December 2018).

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schedule 12 follow on from clause 34 in tackling similar avoidance schemes used by the self-employed, introducing new rules to make those schemes ineffective and ensuring that individuals pay the tax they owe.

Disguised remuneration schemes claim to avoid tax and national insurance contributions by paying individuals through third parties in ways that promoters claim are not taxable, such as loans. These schemes are highly artificial, and it is the Government’s firm view that they have never worked. The coalition Government began tackling the schemes in 2011, introducing legislation to successfully stop the schemes that existed at that time. Since then, HMRC has collected more than £1.8 billion in settlements from scheme users.

However, not every scheme user settled, and since 2011 the tax avoidance industry has created and sold more than 70 new and different schemes aimed at sidestepping the 2011 legislation. These schemes are generally more contrived and aggressive than those that existed before and are growing in popularity, including with the self-employed. These schemes deprive the Exchequer of hundreds of millions of pounds each year and have been used by up to 65,000 companies and individuals. The Government’s firm view is that they do not work. We therefore need to take further action to tackle this avoidance and ensure that scheme users pay their fair share.

The Government introduced legislation in the Finance Act 2017 to put it beyond doubt that new employment income schemes are caught within the existing rules. Schedule 11 will tackle the existing use of schemes by introducing a new charge on loans outstanding from these arrangements on 5 April 2019. Affected scheme users can avoid the loan charge by repaying the loan and replacing it with a commercial loan, or by settling the tax due with HMRC. The Government will bring forward further measures in the coming year’s Finance Bill to ensure that the rules are appropriately targeted.

Clause 35 will put it beyond doubt that these schemes do not work for the self-employed. Where there is an arrangement of this type, the receipt will be taxed as a trading receipt, no matter what form it is received in by the self-employed individual. The clause applies from 6 April 2017 to protect Exchequer revenue and ensure that scheme users pay their fair share. Schedule 12 introduces a new charge on loans outstanding from self-employed schemes on 5 April 2019 in a similar way to schedule 11 …

These changes will ensure that users of disguised remuneration schemes pay the tax they owe and will help to bring in more than £3 billion by 2020-21.384

Speaking for the Labour Party Anneliese Dodds raised concerns as to the impact on those who had entered these schemes but might not have funds to meet any consequential liabilities:

The Opposition want to see change in this area, because abuses have been clearly documented.

However, this measure comes after a long period of relative inaction, at least in the areas where this legislation is focused. That has meant that many people believed the arrangements they entered into were legal and did not constitute tax avoidance. The

384 Public Bill Committee, Fourth Sitting, 19 October 2017 cc99-100

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April 2019 change in these circumstances could, some have opined to us, cause significant problems, for example to individuals whose situation has changed such that they no longer have the funds to meet the tax charge. How will the Minister ensure that this measure will not cause hardship or injustice to individuals who planned on the basis of previous arrangements, and how will that be balanced against the clear and pressing need to prevent the abuse, which the measure is targeted at?385

In response to this the Minister said the following:

The hon. Lady … raised the issue of the retrospection or otherwise of these measures. We will certainly be looking at individuals who may have entered into these kinds of arrangements as far back as 1999. Critically, they have until 2019 to clean those arrangements up, if they wish to. If the schemes are legitimate and above board, they have no reason to be concerned because those schemes will stand the tests that we have set.

Let us be clear about what we are looking at: clear tax avoidance. Put simply, an employer may decide that instead of paying an employee, an employee benefit trust or similar, they will make a supposed loan to the employee that they both know will never be repaid—perhaps the loan is not at a commercial rate of interest, or there are no payments of capital or interest throughout the time of the scheme. The net result is that the employee saves on their income tax and the employer saves on their national insurance payments. We need to be clear that clear abuse is wrong and we are stamping down on it ...

As with all significant revenue-raising measures, we will closely monitor the effect on behaviour as we follow these cases up. … [The hon.Lady] asked how much might be raised and how we will know whether the measure is effective. She gave the example of people struggling to pay after being clamped down on.

HMRC often confronts that circumstance in its line of work. People who are concerned about their ability to make a full payment of tax on time should contact HMRC at the earliest opportunity. It considers all requests for time to pay individually, based on the customer’s financial circumstances.386

In his Taxation piece quoted above, Andy Wood argued that HMRC’s response had been a “staggering development”, and that the retrospective nature of these changes was not justified in these circumstances. He concluded by saying, “I sense that this will be a busy time for those like myself who did not advocate Employee Benefit Trusts but are left dealing with the fallout from their demise”, which would indicate that only some of the profession thought this was a sensible course of action for taxpayers seeking to reduce their tax liabilities.387

In December 2018 Ray McCann (CIOT president) gave evidence to the Treasury Committee on the Loan Charge, and on this issue Mr McCann said the following:

It is undeniably the case that some members of the Chartered Institute of Taxation have at points in the past been involved in

385 op.cit. cc100-1 386 op.cit. cc101-2. In turn these provisions were agreed, unamended, without a

division. 387 “Removing the disguise”, Taxation, 30 November 2017

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giving advice to clients in this area. As the Committee will know, we changed our rules in 2015 to require our members to have more regard to what the tax system is intended to achieve for the country as a whole.388 The intention of Parliament, even though people dispute how to identify that in the legislation, is nevertheless real. It is not the place of the institute or its members to undermine what parliamentarians intend to achieve with the changes that they make to the tax system.

I can say today that, if I came across one of my members advising on loan-type arrangements and pretending that, somehow or other, they were fine and not objected to by HMRC, and if they did not give their clients due warning that they were likely to be involved in a long-running dispute, I would have no problem referring them to the independent Taxation Disciplinary Board, which has the power, in the extreme, to strike a member off. However, I take the point: the claims made by the main promoters of these arrangements were outlandish at best.389

6.3 DR schemes and the ’Rangers case’ - July 2017

As has been noted by Ministers in PQs on DR schemes, “enquiries into DR tax avoidance cases can be time consuming and take several years because of the very complex nature of the arrangements.”390 In July 2017 the Supreme Court published its judgement in the ‘Rangers case’, which considered a DR scheme using Employee Benefit Trusts (EBT) by Rangers Football Club which had been initially set up in 2001.391

In its judgement the Court reviewed the general statutory provisions which determine that earnings are subject to income tax, setting out the principle that employment income paid from an employer to a third party remains taxable as employment income …

“39. I see nothing in the wider purpose of the legislation, which taxes remuneration from employment, which excludes from the tax charge or the PAYE regime remuneration which the employee is entitled to have paid to a third party. Thus, if an employee enters into a contract or contracts with an employer which provide that he will receive a salary of £X and that as part of his remuneration the employer will also pay £Y to the employee’s spouse or aunt Agatha, I can ascertain no statutory purpose for taxing the former but not the latter. The breadth of the wording of the tax charge and the absence of any restrictive wording in the primary legislation, do not give any support for inferring an intention to exclude from the tax charge such a payment to a third party which the employer and employee have agreed as part of the employee’s entitlement. Both sums involve the payment of remuneration for the employee’s work as an employee.”

388 A reference to the “Professional Conduct in Relation to Taxation (PCRT)”, which sets

out the principles and standards of behaviour that members and students of the main tax and accountancy bodies must follow in their tax work.

389 Oral evidence: The conduct of tax enquires and resolution of tax disputes, HC 733, 10 December 2018 Q97

390 PQs152724-157732, 20 June 2018 391 RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v

Advocate General for Scotland (Respondent) (Scotland) [2017] UKSC45

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It went on to review case law in this area, and rejected the approach that had been taken by the Tribunal in two earlier cases: ‘Dextra Accessories’ and ‘Sempra Metals’; an extended extract is reproduced over the next two pages (see in particular, para 57):

“55. In Sempra Metals Ltd v Revenue and Customs Comrs [2008] STC (SCD) 1062 one of the issues which the Special Commissioners had to address was whether payments by the taxpayer company of senior employees’ bonuses into an employee benefit trust involved the payment of earnings for the purposes of PAYE. In 1995 the company established the trust by deed of settlement in order to provide tax-efficient benefits to its employees. The employees could choose to take their annual bonuses in cash or have them paid to the trust. Each employee had the choice of taking the amount allocated to him as a loan or leaving it invested in the trust. No application for a loan was ever refused by the trustee.

After changes were made by the Finance Act 2003 which prevented the deduction from profits for the purpose of corporation tax of sums paid into such trusts unless they gave rise to an income tax charge on employment income and a liability to pay NICs, the company replaced the employee benefit trust with a family benefit trust. The beneficiaries of the family benefit trust were members of the employee’s family as nominated by the employee and the trust operated in a very similar way to the earlier trust.

56. Counsel for the taxpayer company submitted that the employees had received loans and not earnings or emoluments and the trustee had exercised the discretion subject to which it held the funds. Counsel for HMRC argued that the payments to the trusts became emoluments and earnings when they vested unconditionally in the employees and that occurred when the trustee allocated amounts to the individual employees or their nominated beneficiaries.

He referred to Garforth392 for “the principle” that money placed unreservedly at the disposal of an employee amounted to payment. That was one of the principles which the special commissioners adopted in their reasoning, holding (para 142) that the existence of the trusts, the continuing discretion of the trustee and the existence of the loans, in those cases in which loans were made, meant that the employees were not free to do whatever they liked with the funds allocated to them. They concluded (para 144):

“When the appellant made payments to the trusts, no transfer of cash or its equivalent was placed unreservedly at the disposal of the employees. That means that there was no payment by the appellant of emoluments or earnings giving rise to an obligation to deduct income tax and pay it to the Revenue.”

The special commissioners (para 147) reached the same conclusion in relation to NICs. 57. In my view, for the reasons discussed above, Sempra Metals was wrongly decided. HMRC had earlier taken the same approach in its arguments before the special commissioners in Dextra Accessories Ltd v Macdonald (Inspector of Taxes) [2002] STC (SCD) 413, which concerned an employee benefit trust into which a company transferred the bulk of the remuneration of its three director-shareholders. In that case the special commissioners rejected the assertion that funds which an

392 Garforth v Newsmith Stainless Ltd [1979] 1 WLR 409

129 Commons Library Briefing, 30 January 2019

employer contributed to an employee benefit trust and which its trustee allocated to trust sub-funds were at the absolute disposal of the employees. They held that the trustee would have to exercise its discretion and appoint the funds absolutely to the employees as beneficiaries of the sub-trust before those funds could be at the employees’ absolute disposal.

From that conclusion the special commissioners inferred that the sums were not subject to income tax, holding (para 17): “The reason why the employees are not taxed on funds in the EBT is simply that they do not belong to the employees”. For the reasons set out above I do not agree with this conclusion. But their decision on this issue was not appealed and the special commissioners’ decision on the deductibility of the company’s expenditure for the purpose of corporation tax was reversed by the House of Lords393 …

It is therefore sufficient to note that the special commissioners were not presented with the arguments which HMRC advanced in this appeal before the Inner House and this court.

58. In summary,

(i) income tax on emoluments or earnings is due on money paid as a reward or remuneration for the exertions of the employee;

(ii) focusing on the statutory wording, neither section 131 of ICTA nor section 62(2)(a) or (c) of ITEPA, nor the other provisions of ITEPA which I have quoted (except section 62(2)(b)), provide that the employee himself or herself must receive the remuneration;

(iii) in this context the references to making a relevant payment “to an employee” or “other payee” in the PAYE Regulations fall to be construed as payment either to the employee or to the person to whom the payment is made with the agreement or acquiescence of the employee or as arranged by the employee, for example by assignation or assignment;

(iv) the specific statutory rule governing gratuities, profits and incidental benefits in section 62(2)(b) of ITEPA applies only to such benefits;

(v) the cases, to which I have referred above, other than Hadlee,394 do not address the question of the taxability of remuneration paid to a third party;

(vi) Hadlee supports the view which I have reached; and

(vii) the special commissioners in Sempra Metals (and in Dextra) were presented with arguments that misapplied the gloss in Garforth and erred in adopting the gloss as a principle so as to exclude the payment of emoluments to a third party.

59. Parliament in enacting legislation for the taxation of emoluments or earnings from employment has sought to tax remuneration paid in money or money’s worth. No persuasive rationale has been advanced for excluding from the scope of this tax charge remuneration in the form of money which the employee agrees should be paid to a third party, or where he arranges or acquiesces in a transaction to that effect.395

393 Macdonald (Inspector of Taxes) v Dextra Accessories [2005] UKHL 47 394 Hadlee v Comr of Inland Revenue [1993] AC 524 395 RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v

Advocate General for Scotland (Respondent) (Scotland) [2017] UKSC45 p15, pp21-3

130 Tax avoidance and tax evasion

At the time HMRC published a note on the implications of this judgement – an extract is copied below:

The Supreme Court decision

In their decision, the Court agreed with HM Revenue and Customs (HMRC) that the tax avoidance scheme used by Rangers Football Club doesn’t work. They said that Rangers should have deducted Income Tax and National Insurance contributions from payments they made to the scheme, which was an employee benefit trust (EBT). In paragraph 39 of the Court’s decision, they set out the principle that employment income paid from an employer to a third party is still taxable as employment income.

What this means for similar disguised remuneration schemes

HMRC’s view is that this principle applies to a wide range of disguised remuneration tax avoidance schemes, no matter what type of third party is used. This includes:

• EBTs - including variants within these schemes where no loans are made from the EBT but instead the funds remain in, or are invested by, the trust

• disguised remuneration routed through employer-funded retirement benefit trusts

• a range of contractor loans schemes

The facts of each case will determine where the earnings point arises based on decided case law.396

In a piece on the Rangers case which appeared in the Tax Journal David Goldberg and Nigel Doran had criticisms of the Court’s line of reasoning, but went on to say, “can we really expect such blatant, unattractive devices to succeed in avoiding tax? Not today.”397

The impact of the 2019 Loan Charge was raised at Treasury Questions on 3 July 2018, and on this occasion Financial Secretary Mel Stride said, “the activities and arrangements entered into by those who are in scope of this measure were not legal when they were entered into, even though they may have been entered into in the past.”398 The Minister’s point would seem to be that for all of their undoubted complexity, DR schemes do not actually deliver the tax savings that scheme promoters have claimed – following the principle established in the Rangers case.

Tax lawyer and commentator Robert Mass put this in blunt terms in a blog post in March criticising a Sunday Telegraph story about a taxpayer’s use of a DR scheme:

I suspect the reality is that the scheme was indeed perfectly legal. But there is all the difference in the world between something being legal and the arrangement achieving the end result that it was designed to achieve. A couple of weeks ago, I bought a loaf of bread but for various reasons have not eaten much bread in the last fortnight and the bit I have left has gone mouldy so I can’t eat it. That does not make the sale of the loaf

396 Disguised remuneration: a Supreme Court decision (Spotlight 41), September 2017 397 “Analysis: the Rangers FC case: payments to remuneration trust were themselves

remuneration”, Tax Journal, 14 July 2017 398 HC Deb 3 July 2018 c164

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to me illegal. It simply means that my purchase has not achieved the objective that I anticipated when I bought it.399

It has been suggested by some that the comments made by the Minister amount to misleading the House. The Ministerial Code states, “it is of paramount importance that Ministers give accurate and truthful information to Parliament, correcting any inadvertent error at the earliest opportunity. Ministers who knowingly mislead Parliament will be expected to offer their resignation to the Prime Minister.”400 As it is, the Minister has continued to make this point, so, during a debate of this issue at the Report stage of the Finance Bill in January 2019, he said, “at the time when [these schemes] were entered into they were defective. No matter how far we go back, the scheme typically … was defective. It did not work then, it does not work now and the tax is due.”401

In this context it is worth noting that the effectiveness of individual disguised remuneration schemes have been considered in the context of the General Anti-Abuse Rule (GAAR), and the work of the GAAR Advisory Panel that evaluates whether schemes infringe this general prohibition of abusive tax arrangements.

In brief, the GAAR states that tax arrangements are abusive if they are arrangements, the entering into or carrying out of which, cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions - taking into account all the circumstances: the ’double reasonableness test’.402 The GAAR enables HMRC to ‘unwind’ an avoidance scheme even if the scheme successfully exploits a specific provision of the tax code to deliver an unwarranted tax saving. In addition to recovering unpaid tax, HMRC may charge extra penalties for the taxpayer who took up the scheme.

The GAAR was introduced in 2013 and since then HMRC have successfully referred a series of schemes to the Panel.403 Over 2018 the GAAR Panel issued a number of opinions, upholding HMRC’s view that certain schemes contravened GAAR including certain loan schemes for contractors, and for employees.404

In January 2019 HMRC published guidance on the potential implications of the Panel’s assessment of these schemes for taxpayers in similar schemes, and promoters who are marketing them:

What the GAAR Panel opinions mean

A designated HMRC officer will take the panel’s opinions into account when deciding if and how to counteract the tax arrangements under the GAAR. A court or tribunal considering a case where HMRC has issued a notice of final decision must take

399 “Hurrah for tax avoidance?”, Journals of Robert Maas blog, 12 May 2018 400 Cabinet Office, Ministerial Code, January 2018 p1. See also, Erskine May, 24th ed,

2011 para 201-2 (Parliament intranet site only) 401 HC Deb 8 January 2019 c304 402 HMRC, Compliance checks: information about the General Anti-Abuse Rule,

October 2018 403 PQ138559, 1 May 2018 404 GAAR Advisory Panel, GAAR Advisory Panel … employee rewards using loans, &

GAAR Advisory Panel … contractor rewards using loans, 7 November 2018

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the panel’s opinions into account when deciding any issue connected with the GAAR.

What this means if you have used these arrangements

If you have used very similar arrangements to the ones considered by the panel, a designated HMRC officer may issue you with a counteraction notice without going back to the panel for a new opinion.

You may also receive an accelerated payment notice if a GAAR counteraction notice is issued to you. This means you will have to pay the disputed tax upfront while HMRC continues its investigations. Transactions entered into after 14 September 2016 may also be subject to a 60% GAAR penalty, where the GAAR applies.

What this means for tax avoidance promoters

HMRC will consider taking action against promoters where the GAAR Panel decides these arrangements are unreasonable, and relentlessly pursues anyone who promotes or enables tax avoidance.

This includes using the recently introduced penalty regime for anyone who designs, sells or enables the use of abusive tax avoidance arrangements which are later defeated by HMRC. The penalty applies where any of these arrangements have been enabled and entered into on or after 16 November 2017.405

6.4 The Contractor Loan Settlement Opportunity - November 2017

At the time of the Autumn 2017 Budget the Government published further provisions to deal with DR schemes,406 and HMRC published details of how taxpayers could settle their tax affairs so as to avoid the loan charge – the Contractor Loan Settlement Opportunity.

An extract from this guidance is given over the next two pages

405 HMRC, Rewarding employees and contractors using contrived loan arrangements

(Spotlight 46), 16 January 2019 406 Autumn Budget 2017, HC 587, November 2017 para 3.71

133 Commons Library Briefing, 30 January 2019

HM Revenue & Customs, Disguised remuneration: settling your tax affairs – guidance, 7 November 2017

Overview

By contacting HM Revenue and Customs (HMRC) to settle your tax affairs now, you can agree with us what you owe and if required, arrange a payment plan. Settling now will give you certainty about your disguised remuneration scheme and may also mean you:

• don’t have to pay the new loan charge that is being introduced

• pay a lower rate of tax on your disguised remuneration loans - the loan charge will add all your loans together and tax them in one year

• settle on the terms in this guide - if a scheme moves to litigation, these terms may no longer be available

• don’t face extra costs if the scheme moves to litigation. …

How to settle your tax affairs

To start settling your tax affairs, you should register your interest with HMRC by 31 May 2018 …

Pay what you owe

The settlement terms are set out here and in the detailed guidance for tax agents. The settlement terms are different depending on whether you’re classed by HMRC as a contractor, employer or employee.

Contractors

You’re classed as a contractor if you provide your services to clients that don’t directly employ you. You may provide your services through an umbrella company, agency, partnership or your own company. If you’re not sure if this affects you, check if you’ve used a contractor loan scheme. You’ll need to pay:

• Income Tax on the net amount of all disguised remuneration loans or payments made - this will be calculated using the bands and rates in the years the loans or payments were made

• late payment interest for any years where HMRC has an open enquiry into your tax affairs, is within time to open one, or an assessment is in place

• National Insurance contributions (NICs), if you’re a self-employed contractor, including through partnerships

• any penalties and Inheritance Tax, depending on your circumstances

The overall amount may be reduced by any Income Tax you’ve paid because you declared a benefit in kind on the basis of receiving a beneficial loan. This is only an option if the relevant tax year is in time to be amended, or for an overpayment relief claim to be made.

Employers

You’re classed as an employer if you entered into a scheme to reward your employees. You’ll need to pay:

• Income Tax and NICs on the amount contributed to or allocated within the scheme - this will be calculated using the bands and rates in the years you contributed to the scheme or allocations were made

• late payment interest for any years where HMRC has an open enquiry into your tax affairs, is within time to open one, or an assessment is in place

• any penalties and Inheritance Tax, depending on your circumstances and the type of scheme you entered into

The overall amount may be reduced by any NICs paid by you or Income Tax paid by your employee, on the basis of receiving a beneficial loan and declaring a benefit in kind. This only applies for tax years in time to be amended or for an overpayment relief claim to be made.

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HMRC have detailed guidance on its Time to Pay arrangements in its Debt Management and Banking Manual – from para 800000 – there is a useful overview at para 80040.

Initially HMRC set 31 May as the deadline for registering an interest in concluding a settlement, but extended it to 30 September 2018.407

It is worth noting one aspect of the Settlement Opportunity, in the context of HMRC’s powers to recover lost tax for past years.

Generally the time limit for HMRC to make a tax assessment is four years after the relevant tax year, after which the year is ‘closed’. Extended time limits apply where the tax loss in a given year is due to ‘careless’ or ‘deliberate’ behaviour, either on the part of the taxpayer or someone acting on their behalf. In these cases HMRC may go back six years (in cases where there has been a failure to take reasonable care) or twenty years (in cases of fraud).408

407 Disguised remuneration: settling your tax affairs, 13 July 2018 408 These time limits are established under s34 & s36 of the Taxes Management Act

(TMA) 1970.

Employees

You’re classed as an employee if you’re not a contractor and you were paid through a disguised remuneration scheme your employer used.

If your employer hasn’t already settled their tax affairs, to settle yours you’ll need to pay:

• the same amount of Income Tax and NICs that your employer would have paid if they were settling your tax affairs

• late payment interest for any years where HMRC has an open enquiry into your employer, is within time to open one, or an assessment is in place

• any penalties and Inheritance Tax, depending on your circumstances and the type of scheme

This amount may be reduced by any Income Tax paid by you, where you declared a benefit in kind on the basis of receiving a beneficial loan. This is only an option if the relevant tax year is in time to be amended, or for an overpayment relief claim to be made.

If you have problems paying what you owe

If you have difficulty paying, HMRC can help you settle your tax affairs and get out of an avoidance scheme by spreading payments over a number of years. There are no defined minimum or maximum time periods for payment arrangements. We will:

• take into account any changes in your circumstances and discuss options to make sure we manage your case in the best way

• always take a realistic look at your income, assets and essential outgoings, alongside what you owe and any other debts

• always consider how much you’re able to pay, and over what period

• expect you to pay the outstanding amount in the fastest possible time.

Even if you think you have no realistic way of paying what you owe, you should still call us as soon as possible. Telephone: 03000 534 226

We’ll talk about your options with you and make sure we manage your case in the best way.

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HMRC’s Compliance Manual discusses the application of these time limits in detail.409 Interest and penalties may be charged on the lost tax that HMRC recover.

If HMRC miss these time limits, they can ask the taxpayer to make “voluntary restitution”, as HMRC’s Enquiry Manual explains:

Concluding the Enquiry: Voluntary Restitution

You will normally be able to rely on an offence by the taxpayer to recover any tax or NICs lost. This will not always be the case.

For example:

• the taxpayer had a reasonable excuse for his failure … or he pleads successfully either that his incorrect returns (or accounts) were submitted innocently … (no neglect) for periods where the filing date for the return is on or before 31 March 2009

• for periods beginning on or after 1 April 2008 where the filing date for the return is on or after 1 April 2009, that the inaccuracy in the returns arose despite the taxpayer taking reasonable care …

• the taxpayer has died and our right to assess is limited by TMA70/S40410 …

• the taxpayer submitted a return (or accounts) at the proper time but we failed to open an enquiry in time.

In such circumstances the expected offer cannot include these duties, or related interest and penalties. Nevertheless, it is considered that HMRC is justified in inviting voluntary restitution on equitable grounds.

You would then seek from the taxpayer or personal representative:

• the amount of the expected offer, and

• the irrecoverable tax and NIC with simple interest but without any penalty.

This invitation should however be made only after the maximum penalty that could be charged and HMRC’s policy of abatement (or reduction for type and quality of disclosure … for periods beginning on or after 1 April 2008 where the filing date is on or after 1 April 2009) has been fully explained.

Where the suggestion of voluntary restitution is not accepted, it should not be pressed, any subsequent negotiations being conducted without reference to the irrecoverable sums. It will be appreciated that any offer in excess of the expected offer will be acceptable.411

Turning back to the Contractor Settlement Opportunity, HMRC made clear that taxpayers would be required to make voluntary restitution of tax that had not been paid for tax years that are now closed – as the detailed settlement terms for contractors explains:

409 See “Assessing Time Limits” from para ch50000 on (ret’d January 2019) 410 Provision is made by c40 of TMA 1970 for extended time limits to apply when the

loss arises from careless or deliberate behaviour, and the taxpayer has died. 411 Enquiry Manual para em3980 (ret’d January 2019)

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Contractor settlement terms

Settlement will be on a net basis - Income Tax will be applied on all the DR loans, or other payments made for your client’s benefit, rather than the gross amount paid by the client. This means that the fees deducted from the gross amount by intermediaries (scheme expenses) will not be taxed as part of income or profits.

Income Tax is due for years in which loans were paid, or other payments were made, where HMRC has an assessment in place or is still in time to make an assessment (referred to in this guidance as ‘protected years’). The tax is calculated at the rates and bands applicable in the year of the loan or payment.

To prevent future DR charges (including the loan charge) arising on loans or other payments made from funds paid into the DR scheme in years which are not protected, contractors must make a voluntary payment. This voluntary payment (referred to as voluntary restitution) is calculated at the rates and bands applicable in the year the loan or payment was made. Once a contractor enters into an agreement with HMRC to make voluntary restitution, it will become legally enforceable.

Late payment interest is due for protected years. No late payment interest will be payable on voluntary restitution.412

Similar provision was made for the settlement terms for employers, and for employees:

Employer settlement terms

An employer will need to pay Income Tax and primary and secondary Class 1 NICs on the amount contributed to the scheme or, depending on the facts, the amount allocated within the scheme. They will need to pay for all years where HMRC has a PAYE determination or protective NICs claim in place (as appropriate) or is still in time to make such a determination or issue a protective claim (protected years).

To prevent future DR charges arising, including the loan charge, on contributions made to, or allocations made within, the scheme in years which are not protected, they must make a voluntary payment (voluntary restitution). This payment is of the Income Tax and NICs on the contribution to, or allocation within, the scheme in those years. … An employer will need to pay late payment interest for any protected years … No late payment interest will be payable on voluntary restitution. …

Employees

For the purposes of these settlement terms, an employee is someone who has been paid through a disguised remuneration scheme entered into by their employer, and is not a contractor. If their employer has not already settled and does not wish to settle, then the employee can settle without them but will need to be a party to the agreement. A third party, for example the trustee, cannot settle on the employee’s behalf.

Employee settlement terms

The employee will have to pay the same amount of Income Tax and NICs as if their employer was settling on the amount contributed to the scheme or, depending on the facts, the amount allocated within the scheme for their benefit. If the

412 Disguised remuneration: detailed settlement terms, 7 November 2017 para 2.1

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employer no longer exists, the employee will not have to pay any NICs. Late payment interest will have to be paid for any years where HMRC has issued a PAYE determination and/or a protective NICs claim on the employer or is in time to make such a determination or claim. … No late payment interest will be charged where voluntary restitution is made.413

This issue is discussed in more detail below.

6.5 The 2019 Loan Charge & Finance Act 2018

As noted, following the Autumn 2017 Budget, the Government introduced a second tranche of legislation regarding DR schemes.414 The House considered these provisions during the Committee stage of the Finance Bill on 9 January 2018.

On this occasion the Financial Secretary Mel Stride summarised this legislation as follows:

Clauses 11 and 12 make changes to ensure that businesses and individuals who have used or continue to use disguised remuneration tax avoidance schemes pay their fair share of income tax and national insurance contributions. Disguised remuneration schemes are used to avoid tax and national insurance contributions by paying individuals and taking profits through third parties in ways that are claimed not to be taxable, such as loans. Such schemes are highly artificial. In the Government’s and HMRC’s view, they do not produce the declared tax advantage, but that has not stopped their use entirely. The coalition Government first introduced legislation to stop such schemes in 2011. The legislation was successful, and since 2011 HMRC has collected more than £1.8 billion in settlements from scheme users.

Of course, more always needs to be done. The Government continue to tackle disguised remuneration avoidance schemes. The changes announced at Budget 2016 included the 2019 loan charge, which treats all outstanding disguised remuneration loans as taxable income on 5 April 2019. The 2016 package followed the tax avoidance industry’s aggressive response to the 2011 changes: it has created and sold more than 70 new schemes. It is claimed that those schemes achieve the same outcome through the addition of even more contrived steps. The Budget 2016 package will bring in more than £3 billion by 2020/21, and will ensure that scheme users pay their fair share of tax.

The changes made by clause 11 will make clear how the disguised remuneration anti-avoidance rules apply to schemes used by the owners of close companies. The clause also introduces a requirement for scheme users to provide information on disguised remuneration loans outstanding on 5 April 2019 to HMRC, which will help HMRC to enforce the 2019 loan charge. The new information requirement includes an additional penalty regime, which is consistent with existing HMRC information powers.

The clause also includes a clarification to the disguised remuneration rules. It puts beyond doubt the fact that anti-avoidance rules apply even if an earlier income tax charge arises. It

413 op.cit. paras 3.1, 4-4.1 414 HMRC, Disguised remuneration: further update, 22 November 2017

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will prevent any attempts to avoid paying the tax by claiming that HMRC is out of time to collect payment. The disguised remuneration rules prevent any double tax charge on the same income.

Finally, the clause will make a change to ensure that any employee who has benefited from a disguised remuneration avoidance scheme is liable for the tax arising on the 2019 loan charge where the avoidance scheme used an offshore employer. Clause 12 will also introduce a new requirement for self-employed individuals, and partners who have used disguised remuneration schemes, to provide information about loans that are outstanding on 5 April 2019 to HMRC. That will help to ensure that HMRC is able to enforce the loan charge.

Further to this, the Minister said, “the clause may have a significant impact on the users of disguised remuneration schemes. HMRC aims to contact those who are affected and encourages those who are concerned about their ability to make timely and full tax payments to contact HMRC. The Department has an excellent track record of supporting people with financial difficulties who may be finding it hard to pay immediately.”415

Speaking for the Labour Party on this occasion Anneliese Dodds said that the Opposition “obviously welcome tightening in the area of disguised remuneration schemes following widespread concern about practice”, adding, “there should be no excuse for people not to be aware of the situation; there should be widespread understanding of the need for employers and employees to comply in the area and not to enter into such schemes.”416

In turn these provisions were agreed unamended, and form ss11-12 and Schedules 1-2 of the Finance Act 2018.417

In April 2018 HMRC’s director of customer strategy, David Richardson, gave evidence to the Treasury Sub-Committee, as part of its inquiry into tax avoidance and evasion. As part of this Mr Richardson noted the continued prevalence of certain DR schemes …

Q4 Chair: What are the main types and categories of avoidance schemes that are challenging you today?

David Richardson: In terms of new schemes, the marketed avoidance picture has changed quite considerably. We set up a new directorate four years ago to deal with marketed avoidance, both to clamp down and shut down, if possible, any future avoidance, and to deal with the legacy of cases that had built up. There are very few new schemes around. If you go back to 2005-06, we were notified of something like 600 schemes. Last year we were notified of 15, so there has been a huge fall in the number of marketed schemes. As for the big schemes, like film schemes, which are the ones that are commonly reported on, because they are the ones that we have been tackling and litigating from the past, there are no equivalents of those schemes around now.

415 Public Bill Committee, First Sitting, 9 January 2018 cc29-30 416 Public Bill Committee, 9 January 2018 c30 417 For a technical explanation of the operation of the loan charge see, “Disguised

remuneration and the loan charge rules”, Taxation, 11 July 2018

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The sort of avoidance that we see still going on, in quite limited amounts compared with the past, is, generally speaking, the employment sector, where people are being paid with what are described as “contractor loans”, so people are being paid in loans rather than directly in remuneration. Those schemes do not work and we have been busily trying to educate people not to get involved in them.

… while noting the impact of anti-avoidance legislation on the market as a whole:

Q5 Chair: What is the biggest single victory you would like to have in terms of systems to reach your tax yield optimum? What is the biggest change that could come through?

David Richardson: In the avoidance space, we have pretty well got the full hand that we have been looking for as a result of measures that have been introduced over the last five or six years. Probably the biggest game changer that the Government have introduced is accelerated payment notices, which mean that if you enter into an avoidance scheme you have to pay upfront and you will only get the benefit if, after we have investigated it, we conclude that the scheme works, and our experience is that very few schemes do work.

The problem in the past was that people would enter into schemes, they would get the benefit of the relief while we investigated it—and by the nature of these things investigations take a considerable amount of time to get the information, form a position and then litigate it—and people would sit on the money all that time, so even if they lost at the end they would have had several years of benefits from taking part in the schemes.

Introducing accelerated payments has fundamentally changed the economics, because if you now have to pay upfront and then lose, you have had no benefit during that period of time. That is the most fundamental thing that has been introduced, and has had a seriously large dampening effect on new avoidance.

Q6 Chair: Tell us something about the people who are assisting people in evading tax. What sort of firms are designing and promoting schemes? Are they UK? Are they offshore? How do they link up with the taxpayers who are willing to use their schemes?

David Richardson: Again, this has changed over the years. If you go back to the mid-2000s, you will find large parts of the accountancy sector putting clients in touch with schemes. That has changed. You will now not find the large accountancy firms promoting to clients the sorts of schemes that were around in the past. You still get some small firms of promoters, onshore, that will push schemes. They will tend to push them at the small high street accountant, who will then sell them on to clients. The market has changed, but there are still promoters around. We have had success in effectively closing down a number of promoters as they have seen the market dry up.

Last year, the Government introduced one of the other fundamental bits of legislation to tackle avoidance, which is a penalty for enablers of avoidance schemes. In the past, there has always been the criticism that we, rightly, chase after the people who engage in avoidance to get the tax that is collected, and the person who advised them or promoted the scheme to them walks away scot free. Now, anybody at any point in the chain

140 Tax avoidance and tax evasion

of an enabling and avoidance scheme—from the lawyer who designs it and advises on it in the first place, to the promoter who promotes it, to the high street accountant who sells it—will be liable to an automatic penalty if the scheme fails and that penalty will be 100% of their fees.418

At a later stage in his evidence Mr Richardson gave some figures for the numbers of outstanding enquiries HMRC had at this time, which gives some insight into the administrative difficulties in dealing with the sheer number of marketed schemes …

Q73 Nicky Morgan: … In 2012 the National Audit Office talked about the success of HMRC counter‑avoidance at that point. It said that there were 41,000 avoidance cases that were then currently open, representing about £10.2 billion presumably in unpaid tax. I just wondered what the position is now in terms of open cases ...

David Richardson: … The estimate that the NAO came up with … was not a comprehensive estimate … We subsequently did a complete drains‑up exercise when we set up counter‑avoidance, to calculate how many open cases we had, using a systematic way of counting them. In the past, some schemes which involved employees counted as one scheme, rather than counting all the employees. So we moved to having a systematic exercise that counted every single user, and we wrote to the PAC to update them on that following the NAO study.

Our estimate then was that, after that thorough drains‑up exercise, there were 105,000 users. The number of cases we have that are open and not yet closed is now about 80,000. A large number of those have paid up with accelerated payment notices, though … we now have by value 75% of all those open cases in litigation or about to go into litigation.

Q75 Nicky Morgan: It obviously still takes some time. Is there an average age profile of cases? Is it possible to have that sort of information?

David Richardson: I do not have a specific average, but some of the cases go back about 10 years. Some of those big film cases go back to 2005 or so. The Ingenious case we were talking about is in litigation at the moment; it has been through the First‑tier Tribunal. That is the longest case. Largely speaking, new cases dried up three years or so ago. We are talking about cases that are between 12 and five years old.

Q76 Nicky Morgan: You might have already touched on this, but did they dry up because of changes in the law or things like the disclosure of the avoidance schemes?

David Richardson: There has been a set of things. Public attitude has had an impact. Various people now think twice about entering into avoidance schemes, having seen some of the publicity and the public mood. The mood has changed. The market has changed. The big four accountants are not really in that market any more. Then the legal position and the economics of it have changed as well. Accelerated payments, the general

418 Treasury Sub‑Committee, Oral evidence: Tax avoidance and evasion, HC 934, 17

April 2018 Qs4-6

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anti‑abuse rule and increased penalties all make it a very unattractive place to go, I would suggest.419

… and the continuing impact of follower notices on taxpayers whose participation in an avoidance scheme has yet to be challenged by HMRC:

Q77 Nicky Morgan: As for the roughly 25% of cases that are not in litigation, is it expected that they will end up in litigation, or may there not be a case for counter‑avoidance after all?

David Richardson: They may end up in litigation, because it depends on individuals and whether they will settle. But one of the other measures introduced alongside accelerated payments is what we describe as follower notices. One of our problems in the past was that you would litigate a lead case, and then you would expect everybody else in a similar scheme to settle, and they would say, “No, we are slightly different,” and we would then have to pursue them. Follower notices allow us to issue a notice saying, “In our view you are the same as this case we have won in the tribunals or the courts. Therefore, in our view, you should settle.”

It is up to the individual not to, but if they choose not to, then litigate and lose, they will get a penalty that follows from that. The attraction of dragging that out has been removed. I expect that we would be able to settle a number of the 25% that are not in litigation with follower notices off the back of cases that we would hope to win in the courts.420

HMRC’s warnings to scheme users & its action against promoters As noted in the discussion of accelerated payments in section 4 of this paper, HMRC regularly publishes details in its ‘Spotlight’ publication of new tax planning arrangements that it has discovered and is investigating on the grounds that they may well be tax avoidance. In February 2016 HMRC published a Spotlight notice which set out number of claims scheme promoters made which, in HMRC’s view, could easily be misleading, noting that promoters often backed their claims by suggesting their own scheme “is fully compliant with tax law, or strongly backed by Counsel’s opinion, which may make you wonder why insurance against failure is needed … Don’t be fooled by such statements - if something looks too good to be true, it probably is.”421

Subsequently HMRC has issued warnings about specific DR schemes involving contractor loans (Spotlight 33, July 2016) and annuities (Spotlight 35, February 2017), schemes to avoid the loan charge (Spotlight 36, December 2017), schemes using job boards (Spotlight 37, March 2017), and those re-describing loans (Spotlight 39, August 2017) – as well as forcing one DR scheme promoter to withdraw the claims it had made after a successful appeal to the Advertising Standards Authority (ASA) (Spotlight 40, October 2017).

419 op.cit. Qs73-6 420 op.cit. Q77 421 HMRC, Misleading claims from tax avoidance scheme promoters (Spotlight 29),

February 2016

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In the latter case the ASA had judged that a tax and wealth adviser, Knight Wolffe, should withdraw the claims it had made about its DR scheme.422 One of the issues that the ASA considered was the claim by Knight Wolffe that its scheme was not tax avoidance in the light of the ‘Dextra Accessories’ case, which, having been considered by the Tribunal in 2002, was considered by the House of Lords in 2005.

An extract from the ASA’s ruling is copied below:

HMRC challenged whether … claims [by Knight Wolffe that its DS scheme] involved “no tax avoidance” were misleading, because the scheme appeared to involve tax avoidance … [Knight Wolffe] stated that the term “no tax avoidance” was not misleading as they advised clients that the structure used was always declared to HMRC within their tax return … They indicated that Macdonald (Inspector of Taxes) v Dextra Accessories [2005] (‘Macdonald’) provided further information.

We obtained a copy of the judgment. We noted that the Opinions of the Lords of Appeal for Judgment in the cause of ‘Macdonald’ on Thursday 7 July 2005 did not make any reference to Knight Wolffe or any schemes or services they offered.

HMRC provided some further background to the case of ‘Macdonald’, which they did not believe supported Knight Wolffe’s advertising claims. We understood that, at the time in question, if a taxpayer disagreed with an assessment or a determination of liability to tax made by the Inland Revenue there was a right of appeal. Appeals would be considered by the Appeal Commissioners – the Special Commissioners were one of the two distinct bodies of Appeal Commissioners and were independent of the Inland Revenue. The Special Commissioners were a tribunal with full-time members appointed by the Lord Chancellor following consultations with the Lord Advocate. Appeals were normally heard before a single Special Commissioner.

HMRC stated that the Special Commissioners were not a court of record and therefore set no precedent. In the case of‘Macdonald’, HMRC stated that the Inland Revenue had appealed the Special Commissioner’s decision on the sole ground that payments to employees through trusts were disallowable as potential emoluments, and had succeeded in the Court of Appeal and House of Lords on that point.

HMRC maintained that the House of Lords had therefore not ruled on whether or not Income Trust arrangements of the type being advertised by Knight Wolffe amounted to tax avoidance. HMRC further maintained that the facts of the case were not comparable to the scheme being advertised and that relevant new legislation had been passed since that case was decided which made comparisons with the Income Trust scheme invalid …

We did not consider that we had seen sufficient evidence from Knight Wolffe showing how ‘Macdonald’ supported their claims that the House of Lords had formally considered and endorsed Income Trust schemes or that HMRC also endorsed Knight Wolffe’s Income Scheme. We noted we had not seen any other

422 Spotlight 40, October 2017

143 Commons Library Briefing, 30 January 2019

evidence in support of their claims. On that basis we concluded that the claims were misleading.423

Further details of HMRC’s actions against scheme promoters has been given in answer to recent PQs:

Asked by Lyn Brown: To ask the Chancellor of the Exchequer, how many and what proportion people were (a) investigated and (b) prosecuted by HMRC for the (i) promotion and (ii) operation of marketed tax avoidance schemes in relation to activities involving disguised remuneration schemes.

Answered by: Mel Stride : HMRC takes tackling promoters of avoidance schemes seriously.

In recent years, HMRC has been investigating over 100 promoters and others involved in avoidance, including disguised remuneration arrangements. In the last year, HMRC has taken litigation action against 5 scheme promoters for failure to disclose under Disclosure of Tax Avoidance Schemes (DOTAS) with others deciding to disclose to avoid litigation. Further cases will be litigated in the year ahead.

HMRC has used its powers under the Promoters of Tax Avoidance Schemes (POTAS) legislation to challenge promoters and made three successful complaints to the Advertising Standards Authority about misleading advertising; two of which relate to disguised remuneration schemes.

HMRC considers criminal investigation and makes referrals to prosecuting authorities, where appropriate. Since the formation of HMRC’s Fraud Investigation Service on 1 April 2016 more than 15 individuals have been convicted for offences relating to arrangements which have been promoted and marketed as tax avoidance schemes and sentenced to over 95 years custodial with an additional 4 years suspended sentences being ordered, additional matters are the subject of ongoing enquiries.424

*

Asked by Lyn Brown : To ask the Chancellor of the Exchequer, how many people have received a tax avoidance enabler penalty.

Answered by: Mel Stride : The enablers penalty applies to those who have enabled newly implemented arrangements after 16 November 2017 which have later been defeated in the courts or by agreement. HMRC are currently challenging a number of arrangements, seeking to apply penalties at the earliest opportunity under this new legislation.425

Early Day Motion 1239 of 2017-19 In May 2018 Stephen Lloyd MP tabled an EDM criticising the 2019 Loan Charge, arguing that “retrospectively taxing something that was technically allowed at the time, is unfair” and proposing that “the

423 ASA, ASA Ruling on Knight Wolffe Ltd t/a Knight Wolffe, 13 September 2017. As

noted above, in its judgement in the Rangers case in July 2017, the Supreme Court rejected the approach the Tribunal had taken in ‘Dextra’.

424 PQ203862, 11 January 2019 425 PQ203863, 11 January 2019. General guidance on the system of penalties for

enablers is in, HMRC, Compliance checks: penalties for enablers of defeated tax avoidance – factsheet, October 2018

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Charge to apply only to disguised remuneration loans entered into after the Finance Act 2017 received Royal Assent.”426

In this context it is worth noting that in general retrospective tax legislation is defined as legislation that takes effect on a date before its announcement or enactment, that changes a tax liability arising from a transaction or arrangement, undertaken before or after these new rules. It is not illegal per se, though its incidence is quite rare – generally confined to cases where governments are attempting to defeat repeated tax avoidance in a specific area of the law.

In 2011 the Government published a protocol on its use, as part of a strategy paper on tax avoidance; this noted:

Making legislation more robust is key to both preventing avoidance opportunities and countering avoidance when it does arise. This Government is committed to developing strategic defences against avoidance so as to minimise the need for frequent changes in tax law designed to address specific avoidance loopholes. But there will still be a need for such changes to protect the Exchequer from risk …

So there is a balance to be struck between improving stability and predictability in the tax system and moving quickly to reduce risk to the Exchequer.427

Mr Lloyd’s EDM also expressed the view that the 2019 Loan Charge would “affect contractors, freelancers and agency workers, including social workers, supply teachers and bank and locum nurses and doctors” and was “likely to cause financial distress and bankruptcies, impeding HMRC's ability to recover these tax liabilities and causing a devastating impact on people.” In an interview with theTax Journal in June, Ray McCann, president of the CIOT noted “whilst it is difficult to have a great deal of sympathy for someone who knowingly entered into aggressive tax avoidance, there are so many affected by this change that there are bound to be a large number of difficult cases.”428

In this context, Ministers have been asked if HMRC should not have a dedicated helpline for those under financial and emotional distress from facing this new loan charge:

Asked by Mr Roger Godsiff : To ask Mr Chancellor of the Exchequer, what representations (a) his Department and (b) groups representing contractors have made on the establishment of a suicide prevention hotline to support people facing bankruptcy as a result of the 2019 Loan Charge.

Answered by: Mel Stride : The charge on disguised remuneration (DR) loans was introduced to tackle the use of DR tax avoidance schemes. These schemes are contrived arrangements that pay loans in place of ordinary remuneration to avoid Income Tax and National Insurance contributions. The loans are provided on terms that mean they are unlikely to be repaid, so they are no different to normal income and are, and always have been, taxable.

426 EDM 1239 of 2017/18, 8 May 2018. 118 Members have signed this to date. 427 “Protocol on unscheduled announcement of changes to tax law”, in, HM Treasury,

Tackling tax avoidance, March 2011 p17 428 “One minute with … Ray McCann”, 29 June 2018

145 Commons Library Briefing, 30 January 2019

The Government recognises that some people will face significant bills. HMRC wants to help people put things right and has an outstanding track record of helping people, but it can only help those who come forward.

HMRC takes its duty of care very seriously for vulnerable people and people who are worried or anxious about their tax affairs. HMRC have guidance and training in place for their staff on how to provide support. HMRC has an existing dedicated line, which has been widely publicised, for those interested in getting out of avoidance schemes.

The Government would urge anybody who is concerned about their ability to pay to contact HMRC as soon as possible. HMRC will consider all personal circumstances to agree a manageable and sustainable payment plan wherever possible.429

Guidance for taxpayers liable to pay the Charge In July 2018 HMRC published an issue briefing on the Loan Charge. This had a short section on those taxpayers who will be affected by the charge …

It is estimated that up to 50,000 individuals, or less than 0.2% of individual Income Tax payers in the UK, will be affected by the loan charge.

Based on the information available, 65% of those affected work in the business services sector. This includes professions such as management consultants and IT consultants. Ten per cent work in construction. Fewer than 3% work in medical services (doctors and nurses) and teaching.

Disguised remuneration schemes users, on average, earned twice as much as the average UK taxpayer. Seventy per cent of users have used these schemes for 2 years or more. Repeated use of disguised remuneration schemes will inevitably result in large tax liabilities.

… and updated guidance for what scheme users should do:

Users of disguised remuneration schemes should register their interest as soon as possible. All the information required to settle must be sent to HMRC by 30 September 2018.

We appreciate that for some people who have used these schemes, paying the tax due will have a significant impact. Flexible payment arrangements are available to anybody who has genuine difficulty paying what they owe. HMRC will allow scheme users to spread their payments over 5 years if their taxable income in 2018 to 2019 is estimated to be less than £50,000, as long as they are no longer in avoidance.

Those with higher incomes and those who need to pay over a longer period can also request for extended payment periods, which will be considered on individual circumstances.

If anyone is concerned that they have no realistic way of paying what they owe, they should call HMRC as soon as possible on 03000 534226. 430

In October HMRC published a second briefing on the Loan Charge that addressed the issue of outstanding loans …

429 PQ160062, 11 July 2018 430 HMRC, Disguised remuneration charge on loans: issue briefing, 18 July 2018

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Outstanding loans

The loan charge will only apply to outstanding loans.

The loan charge was announced in 2016, giving loan scheme users 3 years to get their affairs in order.

The average amount avoided was £20,000 per year, per person and a large number used a scheme more than once. The tax avoided on their income would have provided them with the luxuries and lifestyle that other people on a similar income, who paid their taxes in full and on time, could not have afforded.

Less than 1% of scheme users have an outstanding loan before 2003 and about half of scheme users have received a loan within the last 7 years.

… and the settlement of outstanding cases:

Settling cases

HMRC has opened tens of thousands of enquiries since these schemes started. As a result, thousands of users have paid what they owed and have stopped using avoidance schemes.

Approximately 250 different disguised remuneration schemes will be affected by the loan charge. These schemes are detailed and complex. Users try to conceal their true income and they require careful and thorough investigation, as well as the co-operation of the person who used the scheme.

So far over 24,000 scheme users have registered an interest to settle their tax affairs. HMRC has set up dedicated email and phone lines to help users settle and is working hard to bring all live cases to an appropriate conclusion.431

In addition to this material, in September 2018 the Low Incomes Tax Reform Group published guidance for those potentially affected by the Loan Charge, on their options for settling with HMRC; an extended extract is reproduced over the next two pages:

The background

In the last few decades, loan schemes have been used by employers and individuals in an attempt to reduce the amount of tax and NICs due to be paid. They are very complex and come in all sorts of shapes and sizes, but for agency workers they generally work something like this:

• a worker finds a temporary assignment through an agency, which then passes them over to an umbrella company to be paid

• workers are employed by the umbrella company which then supplies the worker’s services to an end-client

• the umbrella company invoices the end-client and retains a fee

• the umbrella company pays the worker a salary at, or just above, the minimum wage but below the limits for tax and NIC

• the balance of the money is paid to the worker in the form of a loan – this may have been via a third party like a trust.

431 HMRC, Tax avoidance loan schemes and the loan charge, 23 October 2018

147 Commons Library Briefing, 30 January 2019

Tax benefits arise, in theory at least, because the loan does not count as part of the worker’s employment income (other than as a benefit-in-kind charge on the loan …) and thus, provides the worker with the money tax-free. While, nominally, the loan is repayable, in reality, the worker doesn’t pay the loan back. HMRC say that these loan schemes don’t work – the money is no different from normal employment income and is therefore taxable and subject to NICs …

What is the loan charge?

The loan charge means that HMRC will get a second chance to tax any ‘disguised remuneration’ loans made since 6 April 1999. This include loans made under umbrella company arrangements.

There are many complexities as to how this charge will be applied but basically you will be treated as if you received a notional amount of employment income on 5 April 2019 equal to the value of all the tax-free loans received since 6 April 1999 (provided they would have been caught by the recently beefed up anti avoidance legislation, had they been made on 5 April 2019).

However, the charge will not apply if income tax and NICs have already been properly accounted for – including under the settlement opportunity currently being offered by HMRC … HMRC have wide information gathering powers and are aware of most loan activity already – but as part of the loan charge rules, you will be required to provide as much information as you can about the loans you have received, to make sure they are all captured in the loan charge.

The amounts taken as tax-free loans over the years will be put together and taxed as employment income all in one year – 2018/19 – and at your marginal tax rate (e.g. 20%, 40% etc). As the amount is assessed as one lump sum amount, it will benefit from only one year’s worth of allowances and tax bands, despite the fact it may have arisen over a number of years. While, in theory, the charge falls on the employer to pay … the likelihood is that the charge is going to be payable in line with the normal self-assessment tax return process – meaning any income tax due will need to be paid by 31 January 2020. Provided any tax is paid by this date, there will be no interest or penalties. …

What are my options?

If you have been in a loan scheme in the past and have not yet regularised your tax affairs, realistically, you have two options: 1) pay the loan charge or 2) try and voluntarily settle any income tax that you owe with HMRC before the loan charge comes into play on 5 April 2019.

The second option might be the simplest and offer you the most certainty. You will have the chance to negotiate with HMRC as to what you owe and reach a manageable payment plan to pay your tax liability over time if you need it. There are no defined minimum and maximum time periods for payment arrangements and, indeed, HMRC have recently said that people with income under £50,000 can automatically get a payment plan of up to 5 years as long as you are no longer involved in tax avoidance. If you need longer to pay, this will be considered based on your individual circumstances.

HMRC have a large degree of discretion when it comes to settlements. It is likely that they will be sympathetic towards those who had no real control or tax avoidance motive over entering

148 Tax avoidance and tax evasion

into these arrangements. Detailed settlement terms have been published on GOV.UK (you should check the ‘contactor’ settlement terms, as these will be the ones most relevant to you as an individual settling your own liability). …

Many agency workers move from assignment to assignment, and thus, around umbrella companies, quite a lot. It may be the case that you were only in a loan scheme for a short period of time. If your income is from one year only, you may pay less tax under the loan charge than if you settle now, as interest/penalties will not be due. Taking a chance on the loan charge may also be a better option if it is clear that there was no collusion on your part, your umbrella company still exists, has the means to settle HMRC’s bill and would not require you to repay them (albeit we would have thought this unlikely…). However, HMRC are less likely to consider concessions (for example, extended time to pay) for people they impose this charge on and interest rates in more recent years (when umbrella companies started to get increasingly involved in loan schemes) are comparatively low.

Basically, you need to weigh things up and come to a conclusion about what option is right for you.432

Following the 30 September deadline, the charity published further guidance for taxpayers who had not taken the option to settle:

HMRC say that they would still like people who have missed the deadline to come forward. While it may not now be feasible to reach a settlement with you ahead of the loan charge arising, HMRC tell us they will do their best to do so. It is not like previous settlement opportunities where they had a strict cut-off date, after which you could no longer take advantage of the terms offered.

It goes without saying that the earlier you send HMRC the information, the more chance there is of reaching a settlement before the loan charge arises.433

The charity also cited a series of FAQs provided by HMRC to the Contractor UK site. One of these addresses the vexed question as to whether DR schemes were ‘legal’ or not, prior to the introduction of the loan charge:

Please cite the names of HMRC documents dated 1999, 2000, 2001 or the immediately subsequent years where HMRC stated the loans to be unlawful. Can HMRC please quote from them, because I’d like to hold my accountant responsible for encouraging my use of a loan scheme around those dates. And what’s HMRC’s position on accountants who strong-armed contractors into a scheme?

HMRC’s position is that these schemes don’t work to produce the intended tax result and has challenged their use from the beginning.

HMRC has opened tens of thousands of enquiries into these schemes starting before 1999, making those using them and their representatives aware of their view that they did not deliver the intended tax consequence. You (the individual), or an agent on

432 LITRG, Are you affected by the 2019 ‘loan charge’? Help is available, 13 September

2018 433 Low Incomes Tax Reform Group press notice, Missed the 30 September loan charge

deadline? Don’t panic – help is still available, 12 October 2018

149 Commons Library Briefing, 30 January 2019

your behalf, will have been sent enquiry letter(s) from HMRC to confirm your tax return was under investigation.

HMRC publications have also highlighted that these schemes don’t work. For example, Spotlights 5 and 6, published in 2009 and 2010, highlighted that HMRC considered avoidance schemes using trusts and EFRBS to reward employees were ineffective.

It is not normal, or indeed reasonable, to be paid in loans that are unlikely to be repaid. There are obvious risks in entering into arrangements to receive loans in place of remuneration.

HMRC aren’t able to comment on the advice people have been given in respect of their tax affairs. However, HMRC has a range of powers to tackle those who promote or enable tax avoidance, including imposing penalties of up to £1 million or the whole of the fees earned for attempting to enable avoidance.

HMRC reports promoters to the Advertising Standards Authority and professional bodies, as well as considering criminal investigations, which can lead to convictions and jail terms for those promoting tax avoidance schemes.434

In December LITRG published a third brief to answer a variety of questions being raised by taxpayers. As part of this, it noted that realistically taxpayers have two options:

The loan charge is causing a great deal of debate online and in Parliament. Strong feelings about the loan charge are being voiced by some of those who are affected and it has been suggested that there may be some legal challenges against the loan charge in the near future. Although a challenge to the loan charge will not stop HMRC from seeking to settle any avoidance disputes, all of this this may be causing you some confusion as to what steps to take next.

However, putting all of that aside, the loan charge is the current law and will apply from 5 April 2019. The bottom line is that realistically, in most cases, you have two options:

• try to voluntarily agree to settle with HMRC any income tax and interest on the loans, before the loan charge comes into play on 5 April 2019; or

• pay the loan charge. In many cases this option is likely to be more expensive than settling.

It is therefore important that anyone potentially affected by the loan charge fully understands the alternative ‘settlement’ option and what some of the practicalities are around it.435

The charity has continued to raise concerns that significant numbers of taxpayers are not engaging with this issue and making a proper assessment as to whether they should settle with HMRC or pay the charge.436 The brief includes a number of examples of settlements made under HMRC’s Settlement Opportunity. In November 2018 Ruth Stanier (Director General, Customer Strategy and Tax Design at HMRC) wrote to the House of Lords Economic Affairs Sub-Committee, as part of the 434 Contractor UK, 2019 Loan Charge: HMRC answers ContractorUK readers' questions:

Part 1, and, Part 2, 26-7 September 2018 (FAQ 5) 435 LITRG, Loan charge settlement – separating fact from fiction, 20 December 2018 436 LITRG press notice, Concern grows about low engagement with Loan Charge, 8

January 2019. See also, “Many caught in tax avoidance scheme await final settlement”, Financial Times, 6 January 2019.

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Committee’s inquiry into HMRC’s powers, including the Loan Charge, to provide a typical settlement amount:

Based on settlements made with individuals in the last couple of months, as requested here is an example of a typical settlement where the tax due is over £30,000:

An IT contractor contacted HMRC about their tax position on 23 May 2018. They had used 2 disguised remuneration schemes over 4 years with an average loan amount of £33,400 per year. HMRC agreed a settlement amount of £44,736.87. This figure comprises the total tax owed of £40,465.96 and interest of £4,270.91. No forward interest was applied, as payment was within 30 days of the settlement date of 6 October 2018, and no penalties were applied.437

6.6 Recent developments Budget 2018 The issue has continued to be raised in the House, without an indication of a change in the Government’s position. Members have tabled a number of PQs, asking about the Government’s assessment of the impact of the Charge on taxpayers,438 on the actions HMRC are taking against promoters,439 and the amounts of money recovered to date through the Settlement Opportunity:

Asked by Mr Nigel Evans : To ask the Chancellor of the Exchequer, what proportion of the £3.2 billion that the Loan Charge 2019 is estimated to raise for the public purse by 2021 is projected to be recovered from scheme providers.

Answered by: Mel Stride : The Government estimates that £3.2 billion from the loan charge policy will be collected from scheme users who can be employers or individuals. 75% of the estimated amount is expected from employers and 25% from individuals.

Since the announcement of the 2019 loan charge at Budget 2016, HMRC has agreed settlements on disguised remuneration schemes with employers and individuals of over £650 million. More than 90% of this amount was collected from employers, with less than 10% from individuals. If scheme users repay the loan or agree a settlement for the tax that they owe with HMRC, they will not face the charge. Providers or promoters of tax avoidance schemes are not liable for the loan charge unless they themselves have used arrangements caught by the legislation. HMRC pursues those who promote or enable tax avoidance schemes to ensure that nobody profits from selling avoidance.440

The Chancellor made no mention of the Loan Charge in his Budget speech on 29 October, although Alison McGovern asked Mr Hammond about it when he gave evidence to the Treasury Select Committee as part of their enquiry on the Budget on 5 November:

437 Letter from Ruth Stanier OBE, Director General, Customer Strategy and Tax Design,

HMRC to the Chairman, 19 November 2018 438 PQ186275, 5 November 2018v 439 PQ179147, 23 October 2018 440 PQ185525, 7 November 2018

151 Commons Library Briefing, 30 January 2019

Q312 Alison McGovern: … Can you explain what on earth is going on with the loan charge fiasco? Why we are retrospectively trying to recover money from people who were undertaking an activity, which we may or may not like, but that was entirely legal?

Mr Philip Hammond: It is not about whether we like it. HMRC was always clear that seeking to avoid payment of income tax through the use of loans was tax evasion and was not lawful.

Q313 Alison McGovern: Was that the situation at the time? I think there is some question about the situation that people faced then and, in fact, now.

Mr Philip Hammond: My understanding is that HMRC’s position has always been that tax on these payments could not be avoided by describing them as loans.

I am astonished by this line of questioning. These are people pretending to make loans to themselves from their companies, loans that they have no intention of ever repaying, and then expecting not to have to pay any tax, even though they have enjoyed the money and been able to spend it as if it were income. That seems to me to be grossly unfair and something that imposes an unacceptable burden on all other taxpayers. It is quite right that we sort it out.441

Subsequently the Chancellor clarified his comments in a letter to the Committee on issues raised during this session:

I would like to clarify my comments to the Committee in reference to the use of disguised remuneration (DR) schemes which I described as "tax evasion". I should have said "tax avoidance," and that in the Government's view, tax was always due. DR schemes are examples of contrived tax avoidance that seek a tax advantage that Parliament never intended. It is not normal, or indeed reasonable, to be paid in loans that are not repaid in practice. It is not fair to the vast majority of taxpayers who pay their taxes in full and on time for anyone to benefit from contrived avoidance of this sort and that is why this Government has legislated the charge on DR loans.442

Further comment and debate on the Loan Charge In addition to its enquiry into tax avoidance and evasion, the Treasury Sub-Committee has a second enquiry on the conduct of tax enquiries, and on 10 December took evidence on the Loan Charge and the off-payroll rules (‘IR35’) – from Ray McCann (now CIOT president) and Tony Lennon (from the Prospect Union).443

Mr McCann addressed the issue of retrospection, arguing that the Loan Charge was not retrospective legislation, but the recovery of lost tax had a retrospective effect. One aspect that he was especially critical of was that these provisions would hit even those taxpayers who had notified HMRC of their use of a scheme registered under the ‘DOTAS’

441 Treasury Committee, Oral evidence: Budget 2018, HC 1606, 5 November 2018

Qs312-3 442 Letter from the Chancellor of the Exchequer to the Chair re fixed odds betting

terminals, 19 November 2018 443 Treasury Committee, Oral evidence: The conduct of tax enquires and resolution of

tax disputes, HC 733, 10 December 2018

152 Tax avoidance and tax evasion

regime some time ago, but HMRC had failed to use this information to open an inquiry:

[The loan charge] is unprecedented legislation … From a personal viewpoint, I don’t believe it is retrospective in the conventional sense, but it has a retrospective effect. In reality, the retrospective effect actually displaces all the protections that taxpayers are given by Parliament in terms of getting certainty for their affairs of the past. We have a situation where even an individual who has disclosed the loan arrangement to HMRC will still nevertheless be caught in April for quite an extensive period back—say, to 2006 and 2007—and will have a very substantial liability in relation to that. …

I have seen examples, on request from some of the people who have contacted me, of copies of tax returns with DOTAS numbers on them … I find it quite irritating that HMRC seems on a number of occasions—I don’t know how many, but my hope and suspicion is that it is quite a small number relative to the total—not to have opened inquiries even when there has been a DOTAS number on the return … [When at the Revenue prior to 2006] I feel a touch of personal embarrassment, in the sense that I put quite a lot of effort during 2004 and 2005 into emphasising that if you put a DOTAS number on your tax return, it was certain to get an HMRC inquiry …

If it was actually retrospective legislation—let’s assume that it is retrospective legislation that is still effective from April next year—the extent to which HMRC could apply it to an individual would be determined by reference to the law as it stands, in terms of how far back HMRC could go. If you go back to my earlier example of an individual who has disclosed the loan arrangements and included a DOTAS reference on their tax return, it seems to me that, without some further change in the law, that person would be beyond the reach of HMRC, in terms of applying the loan charge.

In theory, it would still apply for the year, but that person would be protected by the normal estoppel that is on the Revenue under the Taxes Management Act 1970. If the Revenue had cause to believe that the person had deliberately evaded tax—as I say, in this context, that is probably unlikely—they would have a longer period of time. In most cases, it would be well beyond the point at which the Revenue could try to collect the tax.444

As well as criticising this aspect of HMRC’s approach, Mr McCann also raised concerns as to the action of scheme participants and scheme promoters …

From a personal perspective, a change like this was long overdue. These arrangements have just gone on and on and on. I have looked with some incredulity of late at some of the individuals who have used these arrangements right up until 2015-16. While they may be forgiven for having some sense, going back to 2010 and before, that these types of arrangements were sanctioned—if not sanctioned by HMRC, certainly HMRC did not appear to be too fussed by them—I don’t think the same can be true in 2015-16.

There is a failure at all levels in terms of how HMRC have operated over the years. There is the delay in a change like this

444 op.cit. Q92, P94, Q96

153 Commons Library Briefing, 30 January 2019

being brought forward by the Government, but also there is culpability on the part of those who have used these arrangements. Many of them, I suspect, have simply closed their eyes to the fact that they get a very advantageous tax and national insurance position and have been prepared to go along with representations sometimes made by promoters—in fact, quite often made by promoters who are outside the UK. In some of the stuff I have looked at, by and large they will say anything to sell that scheme.445

… while shedding some light on the reasons behind the popularity of DR schemes:

Those schemes became incredibly popular simply because they offered huge advantages to those who were able to use them to pay less in national insurance contributions and less tax under the pay-as-you-earn regulations. That is the simple reason, but they are also popular because they do not require sophisticated arrangements; you just need an individual who is potentially liable to quite high levels of pay-as-you-earn or national insurance contributions, and it works. It is not like a scheme within the financial markets, where you need quite sophisticated facts and so on.

The Revenue at one time used an expression, “plug and play”: anybody could use it, you just had to sign on the dotted line and pay whatever fee was there, and you were away. That is why they gained popularity, and they kept being popular because the fixes that were put in place were never really quite there.

That was combined with an approach the market took: it found an incredible way of differentiating one scheme from another, even though for all intents and purposes the schemes were identical. I describe it as, “The change in law doesn’t apply to our EBT because ours is on blue paper and yours is on yellow paper.” Sometimes it gets as ridiculous as that.446

Notably when asked Tony Lennon from Prospect said that the use of DR schemes was ‘pretty unknown’ in the media & entertainment sector:

I think it is incredibly rare. Out of 14,000 or 15,000 freelance members in film and television, we have been contacted by two. I suspect that if it were a widespread problem, there would have been a lot more phone calls …

These things seem to go on a sectoral basis. A fashion will build up in a given sector where people start to think such things are fairly normal, but it has not happened in film and television. The other explanation is that most engagements in film and television are quite short. As I understand these arrangements, if you are trying to abuse the tax system, it makes much more sense to do it on a long-term basis.447

Mr McCann also discussed the practical difficulties involved in recovering the tax lost from DR schemes from employers. In his answer Mr McCann drew an interesting distinction between these schemes, and the case of comedian Jimmy Carr’s use of an aggressive avoidance scheme. It may be recalled that Mr Carr’s use of the ‘K2’ scheme came to public attention as part of an inquiry on the use of aggressive tax

445 op.cit. Q92 446 op.cit. Q96 447 op.cit. Q92, Q96

154 Tax avoidance and tax evasion

avoidance schemes which appeared in the Times in June 2012,448 and which sparked a much wider debate about what constituted legitimate tax planning or abusive evasion, and how the Government should seek to tackle the problem.

The situation we have here is that the loan charge is, first and foremost, directed at the employer. Where we are going to have a problem is that large numbers of the individuals were involved in effectively fictitious employers … If you go back to the infamous Jimmy Carr, the K2 scheme is a loan scheme. That was 2012 … At the time, I did not believe for a minute that the K2 arrangement involved a real employer requiring a real employee to do real things. It was a cash-flow arrangement, which is, I am sure, why Mr Carr gave it up fairly quickly once it was pointed out to him that it was a tax-avoidance scheme.

The difficulty is that if you are going after the employer, you have to find that employer. I am sure there are a number of probably UK-based employers who are in the firing line from HMRC, but my suspicion is that it will be the minority of users. The numbers involved range from 50,000 to 100,000, so there is bound to be someone who HMRC could catch, but it then defaults down to the user to pay the tax. I suspect that, in many cases, it will quickly default to the user so they will all be in line for quite substantial tax bills—even where they have had relatively modest amounts of loan.

The difficulty for me is coming from how we practically get these things cleared up. Whatever else we might think, I do not see HMRC being able to tackle 100,000 individuals and bring them all to book in a nice orderly fashion whereby they get their chequebooks out and pay their tax. Therefore, we need extraordinary measures to try to get them out of the situation, otherwise we further clog up HMRC’s resources more and more...

From the discussion I have had with HMRC I think that they are keen to try to engage with as many of those people as possible and get them cleared up or on the road to being cleared up before the loan charge comes in. I think they will have less discretion once the loan charge is effective law from April next year, because any settlement they reach would clearly go against what the legislation provides for that person to pay. There is a window in which HMRC can provide better settlement arrangements, but that window is rapidly closing.449

Writing in the Tax Journal, Heather Self (Blick Rothenberg) suggested that DR schemes were “aggressive avoidance” and while much of the blame for their use lay with promoters, “those who entered into them were, at best, naïve or optimistic.” In her view the requirement to make voluntary restitution was “particularly harsh” though “those affected need to take a realistic look at the options available to them.”450

At this time the Lords Economic Affairs Finance Bill Sub-Committee published a report on HMRC’s powers, as part of its wider inquiry on

448 See, “The tax avoiders”, 19 June 2012; and, “Carr admits he was wrong to shelter

millions in tax scheme”, 22 June 2012. see also, “Bound by the call of duty”, Financial Times, 27 June 2012.

449 Oral evidence: The conduct of tax enquires and resolution of tax disputes, HC 733, 10 December 2018 Qs105-8

450 “Self’s assessment: the loan charge”, Tax Journal, 30 November 2018

155 Commons Library Briefing, 30 January 2019

the Finance Bill. The Committee was strongly critical of “the Government’s “approach and rhetoric towards tax avoidance”, arguing that clearer distinctions should be made between “deliberate and contrived tax avoidance by sophisticated, high-income individuals, and uninformed or naive decisions by unrepresented taxpayers.” The Committee also argued that the Loan Charge was retrospective in effect, and should be “amended to exclude from the charge loans made in years where taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been ‘closed’.”451

One concern raised by the Committee was the fact that some taxpayers affected by the Charge were “very different from those generally perceived to be involved in tax avoidance … most of the evidence we received was from a cohort of taxpayers who … were generally individual workers, often in the National Health Service or working for local authorities, who had been denied the opportunity to enter into a normal employment contract. In seeking work, witnesses told us that the alternative contractor arrangements exposed them to involvement with service providers and promoters of loan schemes.”452 As noted above, HMRC’s assessment is that the proportion of scheme users working in the health and community sectors is relatively small:

Of those affected, 65% work in business services, which includes IT consultants, financial advisers, and management consultants. Fewer than 3% work in medical services (doctors and nurses) or teaching and fewer than 2% work in the social and community services sector.

When taking into account the loan they received, loan scheme users have on average twice as much income as the average UK taxpayer, and 70% of users have used a scheme for 2 years or more. The tax bills for people who have repeatedly used schemes will be higher than those who have used them once.453

The Committee’s report cited two sources in this respect: first, written evidence from a freelance contractor …

Since 2009 I have worked as a freelance contractor, engaged by companies to provide consultancy and interim expertise on business development and strategic sales projects.

When the opportunity first arose for me to commence this nature of work, I was advised by my accountant to utilise the services of an umbrella company – AML, part of The Knox Group on the Isle of Man – to facilitate invoicing and payment of salary. Every company I was engaged by would not employ me directly, nor allow me to invoice for my time as a sole trader (ie invoicing under my own name). I was told this was due to IR35 regulations, and that only by working via a separate company would the client use my services as there would be no overhead burden to them, such as NI, pension contributions, holiday pay, sick pay, benefits, etc.

451 House of Lords Economic Affairs Committee, The powers of HMRC: treating

taxpayers fairly, HL Paper 242, 4 December 2018 paras 26, 76, 78. See also, “HMRC censured for ‘aggressive’ pursuit over tax avoidance”, Financial Times, 4 December 2018.

452 The Powers of HMRC: Treating Taxpayers Fairly, HL Paper 242, 4 December 2018 para 70, para 69

453 HMRC, Tax avoidance loan schemes and the loan charge, 15 January 2019

156 Tax avoidance and tax evasion

After some thorough due diligence, and with further reassurance from my accountant that the proposal to use AML was not only fully above board, but also HMRC registered (and hence allocated a DOTAS number) and compliant with tax laws, I signed up and used their services between 2009 and 2014. It facilitated all dealings with the companies engaging my services as AML would invoice them, then pay me a base salary (PAYE with tax and NIC deductions) and cover the balance of money owed via a loan from an EBT.454

… and second, the answer given by Graham Webber CTA, WTT Consulting, when he gave evidence to the Committee in October:

I have a client who is a social worker. She was made redundant by her local council. She was told to join a particular agency and was re-engaged as a contractor for five years. At the end of those five years, the council told her it would re-employ her as an employee, which it did. She was unaware of what was going on. She now faces a loan charge equal to probably a year and a half’s salary. She has no means of paying it. She is the only worker in that particular house; she has a young child and her spouse stays at home. If she goes bankrupt and it comes up on her next criminal records check, she cannot work. This is not a rich merchant banker who has done something wrong. This is a dedicated social worker. That encapsulates what the loan charge does; it is unfair and pernicious.455

In this context it is worth noting some other comments made by Ray McCann to the Treasury Sub-Committee in their session some days after the Lords report was published:

It has been put to me that a number of people were put into a situation where it was this arrangement or no job. I have never met anyone who was actually in that situation. I do not know the extent to which it is a myth. However, if someone is happy to show me some information to make clear that that is the case, by all means I would accept that it had probably happened.

There are so many people involved that I would not lightly dismiss the possibility that there is some category of individuals who fall into that type of scenario, but I think that the majority of people in these loan schemes knew exactly what they were trying to get out of it. I have seen some numbers that are really difficult to look at without wondering how someone could possibly have believed that that was an appropriate way to manage their affairs. How could they possibly think that earning £7,000 a year and getting £150,000 in a loan could possibly be an appropriate way to run their affairs year after year?

It is quite a challenge for someone who has any knowledge and experience of these arrangements to look at this with great sympathy. However, I am sympathetic to the situation that a lot of people end up in. That should be resolved with more generous terms whereby they can get out of those arrangements.456

The Chartered Institute of Taxation welcomed the report by the Lords Sub-Committee, and on the Loan Charge noted that HMRC’s ability to

454 House of Lords Economic Affairs Committee, The Powers of HMRC: Treating

Taxpayers Fairly, Written Evidence: Ms. Sabina Mangosi (DFC0015) 455 Corrected oral evidence: Finance Bill 2018, 17 October 2018 Q40 456 Oral evidence: The conduct of tax enquires and resolution of tax disputes, HC 733,

10 December 2018 Q97

157 Commons Library Briefing, 30 January 2019

use discretion in recovering lost tax had to be on “the basis of a sensible and realistic view of the individual’s circumstances”, which underlined the importance of affected taxpayers approaching HMRC “on an individual basis.”457 One of the Committee’s wider recommendations was for the Government to review if an independent body should be established to scrutinise HMRC’s actions.458 On this point John Cullinane, CIOT Tax Policy Director, made a thoughtful observation as to how HMRC’s approach to tackling tax avoidance and evasion has been considered in Parliament in recent years:

“It is interesting that the case for greater scrutiny of HMRC is being made from two very different angles: for the Lords it is primarily as a safeguard to protect taxpayers from an apparently overmighty tax authority; for many MPs such as those on the Public Accounts Committee it is as a watchdog to ensure HMRC is being sufficiently dogged and aggressive in its pursuit of big business seen as paying suspiciously low rates of corporation tax.“

“That does not make the committee’s call wrong, but it does mean that we need very careful consideration of how any independent body would operate and what its remit might be. Historically great effort has gone into keeping politics out of tax collection at the level of the individual firm or taxpayer. It is important that any new scrutiny body retains that separation.”459

Finance (No.3) Bill 2017-19 On 8 January 2019, at the report stage of the Finance Bill, Sir Edward Davey tabled a new clause – New Clause 26. The clause would require a review of provisions in the Bill to extend the time limits HMRC have to open an enquiry in cases involving non-deliberate offshore non-compliance (set out in clauses 79-80460). The review would also have to compare these provisions with other time limits placed on HMRC’s recovery of lost tax, including the loan charge. The text of the new clause is reproduced below:

NC26 : Review of changes made by sections 79 and 80

(1) The Chancellor of the Exchequer must review the effects of the changes made by sections 79 and 80 to TMA 1970, and lay a report on that review before the House of Commons not later than 30 March 2019.

(2) The review under this section must include a comparison of the time limit on proceedings for the recovery of lost tax that involves an offshore matter with other time limits on proceedings for the recovery of lost tax, including, but not limited to, those provided for by Schedules 11 and 12 to the Finance (No.3) Act 2017.

457 CIOT press notice, Institute welcomes Lords report on HMRC, 4 December 2018 458 The Committee noted that “it appears from our evidence that current oversight

arrangements do not provide the full range of protections, checks and balances that taxpayers and their representatives consider necessary”, although “few specific proposals were offered as to how such an independent body could be set up and function” (The Powers of HMRC: Treating Taxpayers Fairly, HL Paper 242, 4 December 2018 para 191).

459 CIOT press notice, Institute welcomes Lords report on HMRC, 4 December 2018 460 For details see, HMRC, Extension of offshore time limits for Income Tax, Capital

Gains Tax and Inheritance Tax – tax information & impact note, 6 July 2018. The proposal was the subject of a consultation exercise earlier in 2018.

158 Tax avoidance and tax evasion

(3) The review under this section must also consider the extent to which provisions equivalent to section 36A(7)(b) of TMA 1970 (relating to reasonable expectations) apply to the application of other time limits.”

Member’s explanatory statement This new clause would require the Treasury to review the effect of the changes made by sections 79 and 80 and compare them with other legislation relating to the recovery of lost tax including specifically the loan charge provisions of Schedules 11 and 12 to the Finance (No. 3) Act 2017.461

It is important to underline that the new clause made no change to the Loan Charge itself. The Bill had no provisions relating to the Loan Charge; as noted above, statutory provision imposing the charge has already been made in two earlier Finance Acts. This had implications for the drafting of this clause. Generally the scope of any amendments that Members can table to the Finance Bill are quite restricted, as Ministers may only introduce provisions to propose new taxes or increase existing taxes. However, in the last two years the Government has adopted an approach to further restrict Members’ discretion in this area – in effect, the scope of amendments is limited to revising the provisions that are already in the Bill.462

As Sir Edward explained, his main concern was not about the proposed change to be made by clauses 79-80, but that a general review of time limits in recovering unpaid tax could, in turn, lead to a change in the Government’s position on the way the Loan Charge should apply:

The introduction of loan charges in the Finance Act 2017 to stop future abuse was correct, and the review my new clause proposes would not seek to prevent the Treasury from stopping that abuse from the 2016 Budget announcement. Instead—somewhat inelegantly, due to the rules of Finance Bill debate—new clause 26 aims to focus the minds of Treasury Ministers on the gross unfairness of the way the 2017 Act went about closing an unacceptable tax loophole.

I believe that the review envisaged in the new clause would reveal the unfairness of the retrospective nature of the current loan charge legislation in two ways. First, it would show how that retrospective nature is even more severe than non-retrospective but backward-looking proceedings for the recovery of lost tax elsewhere in our tax legislation. Secondly, it would show that the test of reasonableness included in proposed new section 36A, if applied to the loan charge, would in fact prevent any retrospective tax collection from the loan charge …

The Treasury should, after the review, ditch the retrospective nature of this measure, delay April’s implementation and amend the charge so it focuses only on payments made after 2016 … It is simply not acceptable for a Government to introduce a law that

461 Clause 79 would insert a new provision – s36A – to TMA 1970, setting a 12 year

time limit for HMRC to reopen assessments. Under new ss36A(7)(b), HMRC would not be able to apply this if “it was reasonable to expect the assessment to be made before that time limit.”

462 There is more general information about the House’s procedure for considering the Finance Bill in a Commons Briefing paper, and the last section mentions this change: The Budget and the annual Finance Bill, CBP813, 5 November 2018.

159 Commons Library Briefing, 30 January 2019

makes illegal something someone did years ago, when that action was considered legal. That is a clear principle.463

On this occasion the Chair of the Treasury Select Committee, Nicky Morgan, raised concerns about the terms of the Settlement Opportunity that would see taxpayers being required to make voluntary restitution:

For the avoidance of doubt among those on the Treasury Bench, I will not be supporting the new clause, but, as Chair of the Treasury Committee, I want to put on the record some concerns about the loan charge on behalf of the many individuals who have contacted the Committee and of the Committee members who have expressed concerns about it …

HMRC’s contractor loan settlement opportunity requires people who want to put their affairs straight to waive those protections, with the threat of the loan charge looming over them. It is not clear why it is necessary for that settlement opportunity to pressure people into paying tax for years that HMRC calls “not protected”—years where HMRC is out of time—even though it may have had the information it needed to open inquiries or raise assessments at the proper time …

It is troubling to hear that tens of thousands of people who want to settle with HMRC before the 5 April deadline have yet to receive calculations from HMRC. It is impossible for them— I think it would be for most of us—to settle large bills within a matter of months if they do not know what they will be asked to pay, let alone if they cannot start to make arrangements for how to pay them. These individuals need to know how much they have to pay, and I ask Treasury Ministers to step in and make clear what will happen to those people if they do not hear from HMRC by 5 April.464

In the event the House did not vote on this new clause, as Treasury Minister Mel Stride announced that the Government would agree to it:

The new clause requires the Government to lay before the House a report reviewing the effects of changes made by clauses 79 and 80 no later than 30 March 2019. While I should note that such a report will come too soon for the measures to have had a real effect, the Government of course remain committed to setting out the rationale for their policies as well as their impact, and in that spirit we will not oppose the new clause ...

One issue that has been raised on a number of occasions is the question of whether HMRC’s loan charge arrangements are themselves retrospective. They are not retrospective because, critically—this is where I take issue with the right hon. Member for Kingston and Surbiton (Sir Edward Davey)—at the time when they were entered into they were defective. No matter how far we go back, the scheme typically—I have described the way it works—was defective. It did not work then, it does not work now and the tax is due. These schemes have been taken through the courts on many occasions. A scheme used to the benefit of Rangers Football Club was taken to the Supreme Court—the highest court in the land—and was found to be defective…

463 HC Deb 8 January 2019 c300-1 464 HC Deb 8 January 2019 cc296-7

160 Tax avoidance and tax evasion

However, as I have said, the Government will accept this new clause. It is absolutely right that, when HMRC deals with the public, it has a strict duty of care, a duty of proportionality and a duty to be as sympathetic as it can be relevant to the circumstances of those with whom it is dealing. In my dealings with HMRC, I have made those points forcefully clear. …

HMRC has recently come forward to say that those earning £50,000 or less—which is over twice the average national salary of somebody working in our country—will automatically be granted, without requirement for additional paperwork, a minimum of five years’ time to pay as an arrangement to settle their affairs. Of course for those who come forward before April there is effectively in most cases no penalty as such; they will simply be required to pay that tax which was due in the past—and it was always due in the past—plus the interest that is rightly applied.465

Further to this the Minister has given some details of the review in answer to a recent PQ:

Asked by Zac Goldsmith : To ask the Chancellor of the Exchequer, whether the Government's review of the loan charge is planned to (a) seek external evidence about, (b) evaluate all aspects of and (c) be able to recommend any changes to the loan charge.

Answered by: Mel Stride : The government chose to accept New Clause 26 during the passage of the Finance Bill, and will lay a report in line with the requirements of that New Clause no later than 30 March 2019. The report will include a comparison with the time limits for the recovery of lost tax relating to disguised remuneration loans. The government also consulted extensively on the detail of the charge on disguised remuneration loans after it was announced at Budget 2016.466

Writing in the Tax Journal, tax practitioner Andrew Hubbard argued “while we will have to wait and see what HMRC comes up with, it would be a major surprise if the loan charge itself was scrapped”:

Many people have settled their tax affairs in anticipation of the charge being introduced and it is likely that those who did not use remuneration arrangements involving loans might well complain that people who used these arrangements were being let off paying tax which they should have paid years ago.

Time is in any case running out. By 30 March (the last date for the HMRC report) many companies will already have set up their payroll runs to account for the PAYE on the loan charge, which has to be paid by 19 April. Individuals and companies caught by the loan charge have no option but to continue to assume that the charge will be payable.467

In a press notice on the proposed review the Low Incomes Tax Reform Group argued that those potentially affected by the loan charge should not interpret this as sufficient reason not to engage with HMRC:

The Low Incomes Tax Reform Group (LITRG) welcomes a government review of the effects of changes to the offshore time limit rules, to be completed by March 2019. The review also

465 HC Deb 8 January 2019 cc804-5 466 PQ210060, 23 January 2019 467 “Loan charge concession in Finance Bill”, Tax Journal, 18 January 2019

161 Commons Library Briefing, 30 January 2019

requires a comparison with other time limits, including the loan charge, but will not necessarily lead to any changes to the law relating to the loan charge and its application from 5 April 2019. This has led a concerned LITRG to continue to urge low-paid workers potentially affected by the charge to contact HMRC, saying it is important that they do not decline to come forward because of exaggerated expectations of what may come out of the review.1

Victoria Todd, Head of the LITRG team, said: “Time is running out for workers to settle with HMRC before the loan charge applies on 5 April 2019 … This latest amendment to the Finance Bill, whilst generating a great deal of comment, will not necessarily lead to any changes to the law relating to the loan charge and its application from 5 April 2019. Indeed any changes to the loan charge, whether through Parliament or via legal challenge, will not stop HMRC seeking to settle any avoidance disputes using other powers available to them in the vast majority of the cases we are most concerned with.” …

“We welcome the fact that the review will be looking further at the extension of time limits in offshore matters in light of the serious concerns we have raised about this … The extended time limit applies to those who have made innocent mistakes and not just those who have failed to take reasonable care or taken deliberate action, a change which we think is unfair and unnecessary. Post-legislative review of whether measures are achieving their objectives at an acceptable cost should be a routine part of the tax system and we would continue to urge the Government to consider making such reviews part of the normal process when new changes are introduced.”

Notes 1 The amendment says that the Chancellor of the Exchequer must review the effects of the changes made by sections 79 and 80 to TMA 1970 (offshore time limits), and lay a report on that review before the House of Commons not later than 30 March 2019. The review under this section must include a comparison of the time limit on proceedings for the recovery of lost tax that involves an offshore matter with other time limits on proceedings for the recovery of lost tax, including, but not limited to, those provided for by Schedules 11 and 12 to the Finance (No.2) Act 2017 (the loan charge). This is being widely interpreted as meaning that there might be some statutory relaxation of the loan charge - but there is no guarantee whatever that this will be the case, and in any event, very little time for any such thing to occur. The review under this section must also consider the extent to which provisions equivalent to section 36A(7)(b) of TMA 1970 (relating to reasonable expectations) apply to the application of other time limits.

If large numbers of people who might have genuine complaints of hardship fail to come forward as a result of ‘false hope’, then HMRC will have less reason to be aware of the extent of hardship, and the risk is that their report on the operation of these changes will then give a more favourable impression than would have been the case if the full extent of hardship had been identified. If this happens it will make the prospect of any change even less, rather than more, likely.468

468 LITRG press notice, Taxpayers affected by the loan charge should still engage with

HMRC, despite new review, say tax campaigners, 10 January 2018

162 Tax avoidance and tax evasion

In a recent story on the Loan Charge, the Financial Times quoted Steven Porter (partner and head of tax investigations at law firm Pinsent Masons) as saying, “people will be grabbing on to this review, wanting it to show that the loan charge is unlawful, but my expectation is it is a bit of a paper tiger.” The paper also quoted HMRC as stating “the amendment does not change the legislation but will ensure that a review of the impact of the loan charge is published before that date.”469

469 “Living in the shadow of a tax scandal”, 26 January 2018. see also, “Treasury to

review ‘unfair’ tax avoidance measures”, Financial Times, 9 January 2019.

BRIEFING PAPER Number 7948 30 January 2019

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