Impact of recent UK Anti-Avoidance measures

18th Cross Atlantic and European Tax Symposium

21 November 2014

David Edney

HM Revenue & Customs

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What is Tax Avoidance?

• Not Evasion

• A lot of disagreement

• Some argue that anything within the law can and should be done to reduce tax

• Others argue that almost everything done to reduce tax can be tax avoidance

• HMRC definition is ‘gaining a tax advantage in a way not intended by parliament when it passed the legislation’

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Estimates of tax avoidance

• Vast majority of UK tax receipts come in without any intervention by HMRC

• The ‘Tax Gap’ – total around £34 billion; tax avoidance is about £3.1 billion so only a small part

• Avoidance element is under 1% of total annual tax receipts

• Some external commentators put it at many times higher because they include a wider range of claims to losses, capital allowances, etc

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Who is involved with tax avoidance?

• Historically thought to be an issue involving relatively limited and specialised market, but also involving significant amounts

• Schemes and arrangements often tailored to circumstances, and in response to specific taxable amounts

• For example, the Ramsay case involved sheltering a known chargeable gain, although the scheme itself was described as ‘ready made’

• ‘Marketed schemes’ started to appear

• Initially an extension of what was already happening, but then became more widely marketed to high earners

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Tackling tax avoidance

• The government has regularly changed the law to close loopholes in response to different schemes and arrangements

• From time to time there have been wider changes to make the law stronger against avoidance, such as ‘Disguised Remuneration’ (2011)

• The ‘Ramsay’ case gave HMRC another approach to tackling tax avoidance

• But Ramsay had its limits

• Disclosure rules (DOTAS) introduced in 2004

• GAAR introduced in 2013

The public debate

• Newspaper articles in summer 2012 focussed on marketed schemes and high profile users

• Exposed the role of scheme promoters

• Debate later moved on to multinational companies

• Continued public pressure on named high profile individuals

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Marketed avoidance schemes

• Standardised products

• Aim to fit wide range of individual circumstances

• Less likely to be tailored to the individual

• Less likely to succeed

• Less likely to be implemented correctly

• More likely to need litigation rather than legislation

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The problem

• HMRC very successful in litigating avoidance cases

• Around 80% success rate

• Schemes are complex so litigation takes time

• And thousands of scheme users to get through

• Need to change the economics

New measures to tackle avoidance

• General Anti Abuse Rule (GAAR)

• Follower Notices

• Accelerated Payments

• High Risk Promoters

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General Anti Abuse Rule

• History – government and HMRC had looked at a possible GAAR a few times over the last 10 years or so

• Problems around scope of the rule and the need for a clearance or ruling system

• New government in 2010 committed to look at it again

• Commissioned an external expert report led by Graham Aaronson QC

• Recommended a narrower anti-abuse rule

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How the GAAR works

• Works when all other legislation does not apply

• HMRC can run GAAR at the same time as other arguments

• ‘Double Reasonableness’ test

• Can the arrangements ‘reasonably be regarded as a reasonable course of action’?

• Came into effect July 2013 for tax, and early 2014 for NIC, so still early days

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Indicators of being ‘abusive’

• Lower amount of Income or profits taxed than the economic profit

• Higher amount of tax relief than the economic amount of the loss or expenditure

• Amounts excluded from tax altogether

• What the taxpayer did and how they did it is also important

• Also includes failing to deduct tax under PAYE for example

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Changing the economics

• Measures like the GAAR change the outcome, and should have some deterrent effect, but won’t necessarily deter everyone: and won’t speed up settlement of older cases

• Speed up settlement by using follower notices

• Take away cash flow advantage by requiring early payment

• And reduce the supply by new measures to tackle High Risk Promoters

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Follower Notices – why?

• In a marketed scheme there may be many hundreds of users

• Not practical to take each of them to litigation one by one

• HMRC approach is to litigate a small number and then apply the result to the rest

• But taxpayers are reluctant to agree – they argue that there are differences

• So, even though HMRC wins the initial case, the remaining cases still need to be decided

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Follower Notices – how they work

• HMRC decides that a court decision applies to other cases

• HMRC issues a notice to the taxpayer stating this opinion and warning of a penalty if the taxpayer carries on and loses the case

• No appeal against the Notice

• Taxpayer can appeal against any eventual penalty. Specific grounds include cases where:

• The final outcome is decided on a different argument, or

• They had reasonable grounds to carry on the dispute

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Accelerated Payment – why?

• The self assessment system means that most taxpayers can simply state on their tax return that their tax avoidance scheme works and only pay to HMRC the tax they think is due

• This means that large amounts of tax are outstanding even though HMRC expects to win the vast majority of these cases

• Accelerated payment means the money is paid to the Exchequer while the case is being challenged

• Puts them on the same basis as the majority who pay all their tax immediately under PAYE

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Accelerated Payment – how it works

• AP notice can be issued if:

• A follower notice has been issued, or

• The scheme has been disclosed under DOTAS, or

• The scheme is challenged under the GAAR, and the Advisory Panel has given an opinion that supports HMRC’s view

• Taxpayer has 90 days to make representations about the notice

• Applies to existing schemes as well as to new ones

• Taxpayer is repaid, with interest, if their case is upheld

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High Risk Promoters - background

•A small minority who promote tax avoidance schemes are not or do not want to be transparent with HMRC.

•They commonly design, market and implement avoidance products which overwhelmingly do not work.

•They often rely on non-cooperation with HMRC to attempt to achieve a tax advantage for their clients, and their products may rely on concealment and misdescription of elements to succeed.

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High Risk Promoters – new legislation

• To tackle this behaviour, the ‘High Risk Promoters’ legislation was introduced in 2014

• This enables HMRC to categorise and engage with such promoters and gives the promoters the opportunity to improve their behaviour.

• The legislation requires HMRC to engage with promoters prior to a conduct notice being issued in order to discuss ways in which improvements could be made, and to agree the conditions of the notice.

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How does the new legislation work?

• Promoters falling under this legislation will be issued with a ‘conduct notice’ if they trigger a threshold condition. Conduct notices will last for up to 2 years and require promoters to change their behaviour.

• If promoters fail to comply they will be issued with a ‘monitoring notice’ which must be approved by the Tribunal.

• A monitoring notice allows HMRC to use specific information powers against promoters, their intermediaries and their clients to get full details of schemes.

• HMRC can also publically name the promoter as being subject to a monitoring notice, and the promoter is required to tell its intermediaries and customers.

• Failure to comply with these obligations can lead to penalties of up to £1 million.

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Impact of the new measures

• Follower Notices, Accelerated Payment and High Risk Promoter rules do not change outcomes in terms of tax paid

• Impact is on behaviour and appetite for risk

• Rules apply equally to large and small, individuals and corporates

• Mainly expected to deter schemes that HMRC would expect to win and currently has to spend considerable time and resource investigating and litigating

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