HMRC: Lifting the lid on tax avoidance schemes

Comments from ACCA to the HM Revenue and Customs (HMRC), October 2012.

Executive summary


ACCA welcomes the opportunity to comment on the proposals for enhanced disclosure of, and publicity around, structured avoidance schemes. It is of fundamental importance that any engagement with the public and taxpayers over the possible dangers of tax avoidance schemes is undertaken in a measured and controlled way through established and regulated mechanisms which incorporate appropriate constitutional controls and safeguards. HMRC needs to have an integrated programme of communications geared to target the whole gamut of non-compliant behaviour.


The proposed amendments to the hallmarks and the disclosure process serve simply to highlight the difficulties of imposing a regulatory regime on a population which is by definition averse to such controls. Those who comply with the current regime will continue to comply with the future proposals, while those who seek to interpret the current terms to their own advantage will apply the same approach to any revised terms.


We remain committed to working alongside HMRC and other compliant stakeholders to improve and consolidate the regime in the interests of taxpayers and the public generally.


Opening comments


The role which the disclosure scheme plays in the UK tax system is an important, but ultimately self-cancelling one. The regime exists solely due to the complexity of the UK tax system If tax were simple then there would be no need for taxpayers or their advisers to notify the authorities of transactions whose treatment could be construed as anything other than the intentions of parliament. However, the system is anything but simple, and for those with complicated financial affairs, whether businesses or individuals, the scope for uncertainty over tax treatments is rife. Moreover, the opportunities to structure affairs and transactions in such a way as to attract different levels of tax will inevitably lead to taxpayers opting for the path which places the least burden on their own finances.


The aim of the DOTAS regime is of course to reduce the number of such options which are purposefully created by taxpayers and their advisers setting out to organise affairs so that the redistribution of wealth from taxpayers to the state is kept to a minimum.


It is of fundamental importance that any engagement with the public and taxpayers over the possible dangers of tax avoidance schemes is undertaken in a measured and controlled way through established and regulated mechanisms which incorporate appropriate constitutional controls and safeguards. Regular public pillory of high profile figures in the media, without appropriate regard for considerations of equity or confidentiality will serve to inflict as much damage on public confidence in the system as would the original tax avoidance activities. It is well established that highlighting breaches of the rules by some actors will simply bring the opportunity to do so to the attention of individuals who might otherwise not have bothered or dared to behave in a particular way.


Highlighting the compliant attitude of peers is in fact far more effective in promoting wide scale compliant activity. A trivial example is the notices in hotel bedrooms exhorting reuse of towels rather than daily laundering; results are far more effective when the notice reports on the 80% of guests who help the environment by reusing, rather than emphasising the costs incurred in regular laundering.


It seems perfectly reasonable to assume that the same pattern will hold true for tax avoidance, and therein lies the challenge for HMRC. It appears that a far more successful approach to tackling tax avoidance would be to highlight the vast number of compliant taxpayers and businesses, and encourage concurrence with their example. If HMRC wish to highlight the risks attendant upon engaging in complex tax avoidance, then they must present a credible argument that egregious behaviour is indeed doomed to failure, and will have a greater long term cost for the taxpayer than compliance would have done in the first place


Perhaps more importantly, HMRC must be able to demonstrate that alongside the esoteric realm of the DOTAS regime and the highly structured and formalised arrangements to which it applies, there is a coherent and effective program addressed toward the kind of low grade evasion which many taxpayers would perhaps confuse with avoidance, and are perhaps more likely to consider as “OK” as their own substitute for DOTAS notifiable tax planning. There is a significant risk that in focusing on an apparent culture of tax avoidance in business and among high earners, and the expense and resource directed towards it by HMRC, that the perception will grow that firstly failure to comply with tax obligations is the social norm, and secondly that HMRC are concentrating their efforts on high value, high profile ‘formal’ tax avoidance. The extension of this is that firstly it will be socially acceptable to eg pay a tradesman a lower cash price so as to evade VAT, and secondly that HMRC will have neither the time nor the resource to police such activity.


This is not to say that HMRC should not divert energies to engaging with those who might otherwise become involved in expensive and ultimately fruitless schemes which are ‘too good to be true’, but the messages must be clear and comprehensive, and should emphasise the opportunities which the tax system can offer for tax efficient investment and operation with the full support of HMRC. They must be part of a coherent overall strategy which seamlessly addresses all areas of deliberate non-compliance, however they may be perceived by taxpayers in general.


Consultation questions


Q.1 Do you have any comments on programme of work suggested in Chapter 3 for improving public information about tax avoidance arrangements and the risks associated with using them ?


Spotlights on the HMRC website – is a worthwhile and useful resource, but its positioning on the HMRC website means that people are unlikely to stumble across it, particularly those who are already inclined to aggressive avoidance behaviour. To maximise its impact, it needs to be flagged to a wider audience, which brings us to the next suggestion, ‘more effective use of new social networking media’.


As more and more transactions move on line, and a greater proportion of social and financial activities take place via the internet, so a presence on the world wide web will increasingly ensure exposure to the target audience, particularly since those relevant to the DOAS regime are highly unlikely to fall within the ‘digitally excluded’ sector of the population.


HMRC is already using twitter, and a number of other users regularly retweet HMRCs own output – which (as with Spotlights) is probably the only way that a lot of people are ever going to see it; the ‘casual avoider’ is unlikely to follow HMRC, and others linked with avoidance who do follow HMRC are more likely to be doing so in a spirit of ‘know your enemy’.


Facebook is of course an aspect of social media which HMRC do not yet exploit; as the current generation of Facebook users mature, so may be that this is increasingly an avenue which, mindful always of course of the risks attendant with such exposure, HMRC should explore.

Q.2 Do you have any suggestions for improving the communication of information about tax avoidance?

Communication about tax avoidance is far, far wider than just DOTAS and the sorts of notifiable schemes to which that regime relates. HMRC needs to have an integrated programme of communications geared to target the whole gamut of non-compliant behaviour, and also to recognise that many of those who engage via social media for example are perhaps more prone to ‘low grade evasion’ such as cash in hand work for small sums which fails to be reported for either income tax or VAT purposes. Tax is very much an agenda item in the public eye, but it is important that the messages are clear, consistent and correct remaining at all times proportionate to the risk addressed and considering the potential negative effects publicising that risk.

Q.3 Do you agree that the options suggested in Chapter 4 for widening DOTAS would be feasible ways of achieving the described objectives?

Enhanced information about the detail of avoidance schemes (paragraphs 4.3 and 4.4);


An obligation on all promoters to disclose greater detail in the initial report would impose additional burdens on every promoter who reports a scheme, regardless of whether HMRC will be able to establish from a less detailed disclosure whether it is one they believe should be challenged. If several promoters operate a similar scheme, HMRC will receive the ‘full’ report every time, even though they may need only a summary of the principal features to establish whether it falls into the same category as structures which are already well known to them.


ACCA understands that in certain circumstances the authorities may need to request clarification or expansion of details in order to fully understand a particular structure, beyond the requirements which are generally applicable under the legislation. In these cases, HMRC should have the scope to make a request for further detail. However, this would need to be balanced by safeguards, such as a specific right of appeal allowing the promoter to refer the request to the tax tribunals for a ruling on whether the further detail is necessary. The mere existence of this right would hopefully be enough to ensure that it is never exercised.


Enhanced information about the parties involved in a scheme (paragraphs 4.5 to 4.8);


It is difficult to see how any of the proposals would deal with the case of an offshore entity which falls outside HMRC’s jurisdiction. Any obligation on the promoter or intermediaries to actually identify end users would have to be modified with ‘reasonable endeavours’ clauses, but would then of course be vulnerable to manipulation.


A higher hurdle for ‘reasonable excuse’ in cases of failure by a promoter to disclose a scheme (paragraphs 4.10 to 4.13);


We are concerned that the ‘fact and law’ formulation reduces certainty, and is aligned too closely to the effects of the current draft GAAR legislation which has recently been the subject of consultation.


Imposing additional reporting obligations on persons who fail to disclose a scheme (paragraph 4.14)


The existence of an escalating disclosure regime would operate both as a knowledge gathering tool for HMRC and also a deterrent for promoters, as the additional administrative burden of becoming caught up in such an enhanced regime could significantly increase costs.


Imposing a personal obligation upon an individual, alongside that on the firm, to ensure that DOTAS obligations are complied with (paragraph 4.15).


If HMRC wish to impose a personal obligation alongside the existing business obligations then serious consideration should be given to the option of a criminal, rather than simply a civil, sanction. Provided that it is directed only at the class of serial offender who has demonstrated their refusal to be influenced by civil penalties, it would represent a proportional response, and operate as an extra level of deterrent. While it may be hard to feel any sympathy for the ‘victims’ of individuals who persist in trafficking doomed schemes which HMRC persistently close down, the need to dissuade those who would encourage others to indulge in such antisocial behaviour is clear. The offence should of course exist solely as a deterrent for those on the utmost fringes of such behaviour. There is no question that where there is genuine doubt over the status of a scheme, then the correct course would remain to be financial action against the business.


But in the most egregious of cases the threat of criminal conviction and imprisonment may be the only viable deterrent. Economic analysis of deterrence in other spheres of financial regulation has determined that monetary sanctions may fail to achieve their effect in many ways. Accurately assessing an effective level of personal financial liability can be problematic, and even in the event that fines are levied there is the risk that the individual may avoid them. Those who would be the subject of this type of measure will by definition be financially literate, highly motivated, and legally articulate. Their antipathy to legal regulation is inherent in the nature of the offence of which they have been convicted, so they will undoubtedly have both the means and the motive to arrange their affairs in such a way as to try to put their wealth beyond the reach of the authorities, or to arrange that the financial burden of the fine is borne by others, such as their business. Depriving them of their liberty is a sanction which would apply equally heavily to the wealthy as to the impoverished (or apparently impoverished) subject, and it will not be possible for the individual to evade the burden of the punishment by passing its effect on to others.


Q.5 Would the proposed changes to Hallmark 1(paragraphs 5. 16 to 5.18) be proportionate and effective?

The clarification of the first test by substitution of ‘a’ for ‘the’ at paragraph 5.16 appears to have some merit. However, we are concerned that it may simply result in further confusion, or a risk of tipping the balance too far towards disclosure of existing schemes and structures. The move to an ‘objective’ analysis of any promoter’s likely reaction, rather than the subjective test of specific promoter’s reaction, would aid clarity only if it were clear when the test is to be applied. If the problem is that promoters are deciding that they need not disclose as the scheme displays insufficient novelty, then any rational promoter considering the scheme at the same time might reasonably come to the same conclusion. Conversely, requiring promoters to apply the test as if they were a hypothetical ‘first to market’ developer would inevitably result in them wishing to protect that commercial advantage, regardless of any other longer term considerations of confidentiality. Resolving that ambiguity can only be achieved through further specific wording in the hallmark.


The clarification of confidentiality at paragraph 5.17 may potentially be more problematic for scheme promoters, as it strikes at the heart of the business model for any provider of structuring services and advice, whether the principal driver of the models is the direct financial advantage of a tax saving or the indirect savings of eased regulatory compliance, smoother internal reporting or cashflows, or other economic benefits. It is perfectly understandable that a business whose profitability relies upon knowledge, which now more than ever can be freely disseminated and is infinitely reproducible at next to zero marginal cost, will wish to protect that knowledge and restrict its circulation to those prepared to pay them for it. While it may be the case that there is clearly a level of secrecy which would indicate more than normal commercial sensitivity, the problem is as always the grey areas inherent in any value based judgement on such factors.


While it is clear that the condition would be effective against certain kinds of mass marketed avoidance schemes, its application would be more problematic, and may potentially be more easily circumvented in the case of more tailored schemes.


The expanded definitions at 5.18 are mostly sensible, although we would have concerns about the second and fourth proposed bullet points. In many cases the promoter may be happy to offer such reactive promises simply as a measure of the confidence they have in their advice. ‘No win, no fee’ arrangements are legal in many other fields, and a promise to fund litigation if but only if there is a challenge (as opposed to the ‘prepayment’ of litigation costs in bullet 1, or the speculative success fee in bullet 3) does not in itself indicate any particular extreme of risk. Indeed, given the huge expense of any enquiry or litigation involving HMRC and the relative resources of large advisory firms as against those of their clients, it is not inconceivable that the risk averse client may be prepared to consider a particular structure only if comfortable that the costs will be capped at a certain, affordable level. Inevitably the adviser will be in a better position to assess the likelihood of any challenge, and will of course attach different weights to the competing factors of cost, relationship management with HMRC and reputation. If the adviser is comfortable enough that no case would ever proceed to litigation then the promise would be valuable to both taxpayer and adviser, as it would secure the work for the adviser, and give comfort to the taxpayer.

Q.6 Would the proposed changes to Hallmark 2 (paragraph 5.22) be proportionate and effective?

Attempting to resolve the subjectivity issue by asking scheme developers to consider a hypothetical taxpayer rather than themselves will face the same difficulties as in Hallmark 1.


Q.7 Would the proposed safeguard in Hallmark 6 (paragraph 5.27) address concerns about catching ordinary business start ups?


To the extent that no ‘ordinary’ business start up would operate through a UCIS, yes.

Q.9 Would an employment income via intermediaries hallmark based upon the characteristics described in paragraphs 5.44 to 5.46 be workable?

As unfortunately seems to be inherent in all measures linked to the disguised remuneration provisions, the proposed hallmark would not be easily understandable or applicable.


Q.10 Would a ‘but for’ test (paragraph 5.54) be reasonable for determining whether a financial product is an active ingredient of an avoidance scheme or merely incidental to it?&

ACCA has some doubts as to whether the proposed test would objectively aid clarity. The effect would be to require an analysis of the irreducible minimum ingredients of the ‘scheme’; easy to identify in marketed structured products, but rather less amenable to analysis in more bespoke situations, or where a particular scheme, product or structure is integrated into a larger transaction or corporate restructuring programme. Would the ‘but for’ test be satisfied if there were more than one ‘type’ of financial product which could be inserted at the crucial juncture to achieve the same result? What of situations where no result at all can be achieved without employing the relevant financial product, for example restructuring of an existing loan or share structure where it is exiting the old form, rather than necessarily the nature of the new form, which triggers the advantage? It is hard to see that external factors operating on the taxpayer to create a situation where this advantage might be available, especially if other commercial factors are driving the underlying transaction, is sufficient to characterise ‘use’ of the product as ‘active’.


Q.11 Would filters based upon standard products or the amount of the tax advantage (paragraph 5.56) be workable? If not, what are the alternatives?

We are concerned that tests around standard products or fixed values would not be easily workable, and could result in significant uncertainty for large numbers of advisers and taxpayers. There is also no guarantee that they would necessarily deal with the proposed target, since the promoters of those schemes which are targeted would inevitably attempt to deliberately engineer themselves outside the hallmark, in exactly the same way that their underlying products attempt to follow an unintended path through the principal tax legislation.