Are You a Tax Avoidance ‘Enabler’?

Jane Ellison

(Jane Ellison, Financial Secretary to the Treasury)

Here is Why You Need to Know Now.

Suppose:

John Combos devises a tax avoidance scheme aimed at contractors and freelancers, requiring them to become employees of a special purpose employer and to receive money in the form of loans. A company is created to become the employer of the contractors and freelancers and Combos offers cash incentives to existing users of the scheme for each new user they sign up.

Say, he also offers similar fees to a variety of accountants and IFAs for any business they refer his way.

The enablers of tax avoidance are:

  • Combos as he receives fees for the scheme
  • IFAs for receiving referral fees
  • Accountants for receiving referral fees
  • The company set up to employ the contractors · Individual contractors that have received referral fees.

Under the current rules in the UK, although all of these players have a role in enabling the avoidance, currently none of them face sanctions if the scheme is defeated by HMRC.

If the  the proposals in the consultation paper released by the HMRC titled document, “Strengthening Tax Avoidance Sanctions and Deterrents”published on 17 August 2016, become law then  each of the above mention , so-called ‘enablers’ would fall within the cope of new proposed penalties detailed in the Paper.

However, the definition of ‘enabler’ which is central to the scope and operation of the regime described in the Paper will  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.

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 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

Proposed penalties

An enabler who has an involvement in a tax avoidance scheme that is defeated by HMRC will be subject to a penalty. HMRC have proposed that this new penalty regime should be modelled on the legislation in the new Finance Act 2016 governing penalties for offshore evasion.

The penalties for enablers could be based on:

  • the financial (or other) benefit that the enabler receives as a result of their services. This could be 100% of the benefit, however the extent of the benefit (especially non-financial) could be difficult to assess; or
  • the amount of tax understated by the user as a result of the avoidance being defeated. The penalty would be imposed for each user that the enabler has assisted. The government indicates in the consultation paper that a tax-geared penalty would be its favoured approach.

It is noted that, as penalties could be significant, it may be necessary to provide for a cap to ensure that the penalty remains proportionate. It is also envisaged that there may be a provision for a reduction in the level of the penalty imposed depending on the nature and timing of disclosures made by an enabler to HMRC. This would be consistent with the existing penalty regime applicable to tax inaccuracies or errors in tax returns.

Penalty Trigger

Unlike the penalties for offshore evasion, it is not envisaged that the enabler penalty should be conditional on there being a penalty imposed on the avoider. The trigger will instead be the defeat of the tax avoidance arrangement by HMRC. Arrangements will be “defeated” where they have been held to be ineffective upon final judicial determination (or otherwise by agreement with HMRC) and they are arrangements that:

  • have been counteracted by the General Anti Abuse Rule; or
  • are subject to a Follower Notice; or
  • are notifiable under the Disclosure of Tax Avoidance Schemes or VAT disclosure regimes; or
  • are the subject of legislative targeted anti-avoidance rules.

This approach to tax avoidance could have significant implications for non-UK based professionals and for governments seeking to stay on the right side of international tax disciplines. The supply chain approach broadens the ‘net’ of professionals who could trigger a penalty under the new proposed dispensation.

The new law would certainly dampen  innovation in legal tax mitigation and cause legal practitioners to think twice about being part of the ‘supply chain’ because not only could they be subject to the penalty they could also be at risk

Similarly, difficult issues may arise where legal advisers may be prevented from demonstrating that they were not enablers, where they would not be permitted to waive legal professional privilege over their communications concerning an arrangement which has been found to constitute avoidance.

Failing which they could  also be slapped with a lawsuit from a client based on breach of the rules on client-lawyer privilege.

Summary

If PM May gets her way while it is not certain if the professionals who implement tax avoidance schemes will face the penalties proposed in a new what is clear is but ‘enablers’ of tax avoidance will be heavily penalised, even if you are not in the United Kingdom.

Applying the ‘supply chain ‘model the government hops to disincentivise tax avoidance – although it remains a legal means of tax mitigation – by targeting promoters of tax avoidance schemes, and IFAs, accountants, banks, trustees, accountants and lawyers.

Moreover, it is also proposed that special new measures be imposed on companies that engage in so-called ‘persistent tax avoidance’. This stands alongside rules against ‘aggressive ‘ tax avoidance.

The new rules are designed to  capture all those who earn commission or fees from marketing tax avoidance schemes as well as those who advise on or are involved in the operation or implementation of avoidance arrangements, although it is noted that safeguards are required in order to exclude those who are “unwittingly party” to the avoidance arrangements.

From the opening paragraph the Consultation document seeks to describe the legal tax avoidance as schemes which exploit tax laws in a way parliament never intended and secure for themselves or their clients an unfair financial advantage. According to the Paper. “These tax avoiders undermine the public finances, and place a disproportionate demand on government resource, which must be deployed to investigate, litigate and legislate to challenge and change their behaviour.”

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