Strengthening the tax avoidance disclosure regimes

Comments from ACCA to HM Revenue & Customs
October 2014



DOTAS has perhaps been broadly a success in the UK – it has provided plenty of information to HMRC about avoidance, and has heightened the awareness of both clients and advisers in respect of HMRC’s approach.

The current proposals sit though in the context of a sea-change in public opinion. Tax avoidance has become a bête noire of the press and social media activists, with compliant businesses being pilloried for claiming capital allowances, and individuals “implicated in tax avoidance” simply for accessing statutory incentives. There have been instances of apparently compliant business being driven into offering “voluntary payments” to the treasury simply in order to appease public concern over their published financial statements. Disclosures under the DOTAS regime have fallen, perhaps a sign that the appetite for tax risk is waning.

There is also evidence that those who are determined to keep their money away from the Exchequer are going to increasing lengths in their efforts to circumvent the law. There are two possible reasons for the reduction in DOTAS notifications in recent years – either there are fewer schemes which need to be notified, or the schemes which should be notified are not being made open to HMRC.

The shift in public attitudes towards other peoples’ taxes is sure to account for some part of any reduction. Anecdotal evidence is rife from tax professionals that their clients are no longer prepared to countenance tax planning, of any hue. Disclosable avoidance schemes in particular have fallen out of favour, as businesses seek to protect their reputations as best they can.

HMRC have also identified a tendency on the part of some tax payers to focus on the “disclosable” aspect, rather than the avoidance itself, and seek specifically to implement structures which fall outside the disclosure regime. Such a response is perhaps an inevitable part of the ‘avoidance arms race’. However, it does indicate a determination on the part of those involved to reduce the impact of tax obligations on their own finances.

But DOTAS does not exist in a vacuum. In particular, the APN proposals have shifted the context for those contemplating entering into tax planning schemes. Submitting a scheme for DOTAS registration is no longer perceived to be an expression of openness and cooperation. Rather, it is now seen by many simply as invitation to HMRC to require early payment of sums which may in fact never fall due and identify and categorise the adviser. Any constructive overtones that the regime may historically have enjoyed have been significantly eroded by the AP Notice regime.

Extending the scope of DOTAS just at the moment it becomes a revenue extraction tool is all too easily characterised as an overly heavy-handed response which will ultimately prove counterproductive. Evasion is more easily defined and identified than avoidance. By seeking to increase the burdensome outcome of perceived avoidance HMRC is shifting the balance against what it has identified and an antisocial behaviour.

However the categorisation and financial penalising of those within the DOTAS regime has destroyed the middle ground of disclosure, and will drive a wedge between the two models of behaviour. Those at the “compliant” end of the spectrum will move away altogether from avoidance type behaviours, and it seems likely that HMRC will receive very few “borderline” cases to review (from which they could extract details of the sorts of planning identified by advisers) because firms will simply not be able to sell the structures to their clients if there is any risk of an SRN being issued.

But at the other end of the spectrum are those who probably would have undertaken the avoidance activities anyway, regardless of the stigma. What will prompt them to change their behaviours is taking their money away, and in order to escape the punitive consequence of an APN they will continue to avoid, as aggressively as before if not more so, but they will now simply add to their armoury the practice of failing to disclose and register. HMRC might point to the enhanced penalty regime, but that will be of consequence only where the avoiders are actually caught, and many will still be sure that they won’t be caught


Specific comments

Q1 – Will removing grandfathering in this way deliver greater consistency in the application of this hallmark?

Given the length of time for which DOTAS has now been in place, and the significant shift in public attitudes over that period, it is difficult to put together a coherent argument for allowing the continued implementation of structures which facilitate clearly counter-purposive results.

A note of caution should be sounded here. Tax systems should allow for certainty of outcomes, and stability is an important element in their efficacy. Revisions to treatments should be based upon sound and demonstrable legal principles. Where public opinion can be shown to coincide with consistent administrative operation and coherent application of the underlying legislation, then the case for change is strong. Public opinion, while of course relevant to policymakers, especially in the formation of novel policy initiatives, should not by itself drive legislative change.

Q2 – Do you foresee any issues with removing grandfathering prospectively for schemes made available or implemented from a certain date?

The DOTAS rules are by definition aimed at those who view the legislation as determinative of the outcome. Where due warning is given of the change to the legislation there should be no difficulties in principle in complying with the proposed rules from their effective date.

However, the removal of the grandfathering rules, especially when combined with the extension of other hallmarks, would significantly extend the range of financial products to which the DOTAS regime may end up applying. It is clearly not in the interests of either HMRC or the banks and building societies whose products may end up apparently caught within the scope of the revised rules to require disclosure of what may otherwise be perfectly acceptable structures.

Consideration should be given in implementing any changes to ensuring that the administrative burden on advisers, especially in the financial services sector, is kept to a reasonable level. While it will be clear to both the providers and HMRC that the vast majority of products are in line with both the letter and the spirit of the law, prudence and the legislation will nevertheless require a documented review of all existing offerings to confirm continued compliance with the regime, and in some cases disclosure to HMRC of the relevant products.

An essential feature of the DOTAS programme is that it remains manageable for HMRC. Changes which might result in a flood of ‘false positive’ reports would defeat the object of the regime, as valuable energies would be diverted to unproductive bureaucracy and schemes which should be addressed properly may escape proper scrutiny due to lack of HMRC resource.

Q3 – Will recasting the hallmark to consider the overall product being offered rather than the underlying documentation and scheme structure ensure greater consistency in the application of this hallmark?

Broadening the application of the test will increase the extent to which outcomes rely upon the discretion of HMRC. Whether this will increase consistency across the piece by removing the distortions introduced by unduly narrow interpretation of certain conditions, or whether it will unnecessarily, and unhelpfully, extend the grey areas around what is, or is not, notifiable would therefore rest upon the consistency of approach from HMRC over time.

It is of course true that in the context of purposive legislation such as the DOTAS regime, reliance upon discretion and analysis of complex fact patterns and interactions is increased. There is a concomitant increase in uncertainty; whether this is justified on the basis that it should impact only upon those who have voluntarily assumed the risk of designing structures which seek to exploit shortcomings elsewhere in the legislation is of course a question for policymakers. However, the impacts of that uncertainty would reduce the effectiveness of the administration and the economic efficiency of business, and should be highlighted in the relevant decision making process.

Q4 – Do you agree that widening the main purpose test to “the, or one of the, main purposes” will help ensure the policy objective is met?

Widening the main purpose test would massively increase the range of business structures and setups to which the hallmark could apply. While this would therefore increase the likelihood of the specific policy objective being achievable, it would also significantly widen the scope of advisers who might have to consider the potential application of the hallmark to otherwise inoffensive structures.

Q5 – Would including additional characteristics such as the existence of a fighting fund in this hallmark ensure disclosure of all schemes which include such elements or would a separate hallmark be a better way to achieve this?

The creation of additional hallmarks would not in itself necessarily be considered a successful outcome of the consultation. That having been said, it is clear that refinement of the existing gateways into the DOTAS regime may involve some additional explicit features and filters.

If this hallmark is going to catch any “product” (regardless of form or documentation) which has as one of its aims the creation of a tax advantage then there it seems unlikely that any structure which includes a fighting fund would not already be within the (now very wide) scope of the hallmark.

However, the concept of a taxpayer compromising their right to settle their own tax affairs with HMRC is an important area and worthy of attention. As a matter of public law, and taking into consideration the concept of tax as an intrinsic element of the compact between individual and state, allowing a third party to abrogate to themselves the right to compromise that relationship seems inherently unjust. It is clearly not in the interests of either the public or the individual taxpayer to allow for a situation where taxpayers, as part of a conscious plan to distort their relationship with society, further compound the situation by attempting to reallocate personal rights. There is of course a clear distinction between such cases and say the transfer of powers under a Power of Attorney. The level of formality involved in executing such powers is a clear indication of the seriousness with which such transfers are regarded.

While it is clearly right that taxpayers take advice on the best course of action in respect of their tax affairs, the responsibility for the return and its contents will always remain with the taxpayer. There seems to be no good reason for allowing taxpayers to restrict their freedom of action in respect of specific aspects of their affairs, while there could be a number of undesirable reasons for others wanting to control taxpayers’ freedom of action.

Specifically in the DOTAS sphere, the interaction of the existence of such “collective action” groups with the assessment of whether the related structures are indeed bespoke, or should more properly be characterised as a mass scheme, will be relevant. If the features of each participant’s return are so similar that the outcome of one enquiry might reasonably be expected to be relevant to the assessment of the likelihood of success in other enquiries then it is likely that the services provided with a view to creating the offending circumstances were part of a scheme, not individual advice. While the final decision as to the outcome of each individual’s affairs is rightly the decision of the tax tribunals, the assessment of generic risk is nevertheless an acceptable basis as a hallmark for disclosure.

Q6 – Do you think that a combination of the new draft Financial Products hallmark and the revisions proposed to the loss hallmark will result in more tax avoidance schemes being disclosable without adversely impacting on normal business activity?

The proposed revisions are closer to a workable model which would reduce the risk of catching genuine business ventures. Given the rapid evolution of business models and funding structures in recent years, and the expected continuing growth of innovative structures and models in the future, tying the hallmarks into specific legislative forms alone is unlikely to remain a viable option for dealing effectively with new developments. The imbalance between risk and reward is however likely to be common to all artificial structures which seek to create tax attributes without any corresponding substantial economic engagement or productivity on the part of those involved.

Q7 – To what extent do the proposals strike the right balance between ensuring that IHT avoidance is brought within DOTAS but that legitimate estate planning is not disclosable? If not, how might this balance be best achieved?

As with the introduction of the GAAR, a key issue in the area of inheritance tax is the long timescales, relative complexity and emotional importance to those involved of trying to plan for a death.

As is acknowledged in the consultation document, IHT is an extremely complex area, and it can also be an extremely sensitive one for those involved. The underlying purpose of many of the reliefs which may be open to abuse is to ensure continued economic activity in situations where the state would otherwise assert a right to private property and as a consequence destroy valuable business or agricultural activity. Where access to the reliefs is dependent upon questions of fact (for example qualification for BPR) it is perhaps unlikely that there would be many common features to the related advice given to different taxpayers.

Q8 – Does the proposed approach ensure so far as possible that legitimate claiming of reliefs and exemptions does not have to be disclosed? If not, what alternative proposals would achieve that aim?

The structure of the IHT regime is such that an immediate charge to IHT will arise during the donor’s lifetime only where significant assets are being transferred. Transactions of such magnitude should realistically only ever be taken in the light of advice from qualified professionals. Identifying abusive transactions in such circumstances should pose less difficulty, since those engaged should be well aware of their responsibilities under the legislation. It is of course the case that not all advisers comply fully with their obligations, or even deliberately attempt to circumvent them. Relying upon the cooperation of advisers will require the implementation of sensible and effective sanctions for those who seek to avoid their responsibilities. In this context, the reliance upon the “informed observer” test, while it allows for accurate targeting of the provisions, also introduces an additional subjective element into the process which will increase the level of uncertainty.

Planning for death charges on the other hand is more widespread, and especially in the light of the ongoing freeze in NRB levels an increasing number of businesses will look to consideration of how to ensure that the relevant reliefs are available. Reliance on potentially subjective hallmarks will be less desirable where a larger number of cases are involved, and the range of individuals potentially affected so much broader.

The confirmation that HMRC would not automatically issue a SRN and impose an AP notice in respect of every disclosure is welcome. However, the long term practicality of inviting additional disclosures against the background of straitened HMRC resources must be highlighted.

Q9 – To what extent will these changes help ensure that HMRC is able to identify those responsible for making a disclosure where people are seeking to sidestep their obligations?

Viewed objectively, the step of improving HMRC’s ability to look both down as well as up the chain of related parties in any marketing structure is fully in line with the historic character of DOTAS as an information gathering tool. However, with the revised emphasis on DOTAS as a revenue raising mechanism engagement with the process is perhaps likely to be viewed less favourably as a constructive act of cooperation between advisers and HMRC.

Q10 – Do you think this will help ensure there is consistent treatment of users of avoidance schemes and their promoters irrespective of where the scheme was designed?

Q11 – To what extent would requiring persons working with the offshore promoter ensure the proposed special rule applies appropriately?

Q12 – Are there any other steps which could be taken to strengthen DOTAS in this area to ensure that those required to disclose comply with their obligations?

Introduction of, effectively, joint and several liability for disclosure where an offshore promoter is involved should act as a reasonable incentive for all those involved to ensure that the legislation is complied with. Difficulties may however arise around the area of introducers and their relationship with other business contacts. A measured and proportional approach by HMRC will be essential in order to avoid disruption to legitimate business relationships between fully compliant actors, whether within or outside the UK.

A further difficulty may arise where those falling within the definition of “introducer” have limited tax knowledge, and may not appreciate the difference between a disclosable and a non-disclosable scheme. Introducers may on the one hand innocently fail to disclose a notifiable scheme, or may inundate HMRC with client and promoter lists in respect of structures which HMRC themselves have already considered and discarded in the context of DOTAS.

Q13 – Do you agree that aligning penalties in this way is proportionate given the significant financial gains users can obtain through failing to correctly report their use of a disclosed tax avoidance scheme?

Failure to report an SRN is likely to relate to a significant sum of potential tax, and is by definition only going to affect individuals who have engaged an adviser to assist with their tax affairs. Accordingly it is reasonable to impose a penalty for failure to then failing to carry out the mechanical process of completing the relevant return. Increasing the penalty to a level where it might be considered more fully to reflect the time/value benefit which a user might otherwise expect to derive by failing to disclose would certainly be one effective way to discourage such conscious behaviour.

The comparison with PRNs is not quite perfect, since the aims of the two processes are different, and the final tax outcome may be different. The designation of monitored promoter status is designed to stigmatise those so branded, and its ultimate success would be measured (as with all deterrents) by its lack of use. One of the strengths of DOTAS on the other hand has been its value as an information gathering power, and while it may increasingly be the case that HMRC will challenge and deny the validity of any arrangements falling within the hallmarks, it is nevertheless the case that disclosure does not automatically equal failure of the scheme.

If, as appears to be the intention, HMRC will issue an APN in respect of every SRN return then the failure to disclose the SRN will have a clear financial motivation. However, it seems unlikely that many taxpayers will bother with SRN bearing schemes, or that many advisers will put much effort into creating and disclosing them. The schemes will either be created and then (legitimately or otherwise) not disclosed, or they will not be created at all.

Q14 – To what extent will this help ensure employees are fully aware of the fact that they are becoming involved in tax avoidance?

By HMRC’s own admission this is a relatively small field. There is perhaps a parallel here with the hallmark of taxpayers signing away their right to determine their own tax affairs, as the proposals seem to come from a perspective that the employee will have no say in ultimately determining the tax treatment of amounts received by them in return for their employment services. There is a complex question around whether the employee should actually be liable for penalties arising as a result of their employer’s behaviour over which they have no effective control. While it may be the case that most employment related schemes are in fact implemented by, and for the benefit of, employees who have significant influence over the terms of their employment, the structure of any provisions should take account of that factor so as to avoid potential difficulties in the interaction with other provisions of employment and European law.

Q15 – Do you think that the Government’s preferred option is the more effective and least burdensome way to achieve this objective?

Yes. There is of course a difference between scheme which applies to all employees under a given PAYE scheme, which are perhaps relatively easily disclosed and dealt with by HMRC, and those schemes which are made available/applied to only selected employees. In the latter case it can be difficult for HMRC to establish the impact of the scheme, and the introduction of what is effectively a “client list” for the structures will greatly assist HMRC in assessing the importance of any given disclosure.

Q16 – Are there other ways in which this information could be cost effectively obtained from employers or employees?

Imposing a reporting obligation on employees would seem to serve no useful purpose in and of itself, beyond alerting employees to the existence of the employer’s scheme. It cannot be far from the minds of those proposing such a step that the principle likely outcome of any such course would simply be to reduce the appetite of employers for such schemes, as it seems likely that in the current broader environment of public opinion one or more employees would be likely to object on principle to implication in a tax avoidance scheme, regardless of any financial implications.

Q17 – To what extent would a provision of this nature provide a suitable safeguard to those wishing to provide information about avoidance to HMRC?

As with the earlier comments around comparing SRN disclosure to the PRN disclosure regime, HMRC are attempting to read across to a far broader set of circumstances. How would the ‘indemnity’ offered by these provisions operate where the whistle-blower’s disclosure is inaccurate or vexatious? Would the provision still operate? How are HMRC to handle information disclosed under these provisions, especially where it brings to light other potential tax issues or offences of some other nature? Would the public interest in sharing the information with other regulators in order to restrict anti-social (in its broadest sense) behaviour also extend the whistleblowing protection in respect of those aspects of the disclosure? And will HMRC’s promise of safeguards operate across international borders so as to tie the hands of legislatures and regulators in offshore territories which may be connected to the allegations?

Would the proposed safeguard displace all legal liabilities for the information provider, even where criminal offences such as theft and burglary are involved? How would the proposal interact with offshore regimes which may criminalise certain aspects of the information gathering? Will the offerings to whistle-blowers go beyond the simple amnesty, and if so is HMRC encouraging behaviour which would otherwise be prosecuted? How far will HMRC distinguish between gathering of information with the express intention of disclosing a breach of the DOTAS rules, and speculative gathering of confidential information by those in a position of trust?

Q18 – To what extent would a threshold condition in HRP ensure promoters do not seek to use DOTAS as a test-bed or clearance regime when devising new schemes and what other steps might the Government take to prevent abuse of this sort?

The concern that promoters might devote more effort to ensuring that no SRN would be issued in respect of their schemes is perhaps an inevitable consequence of ratcheting up the undesirable outcomes from disclosure and registration of a scheme. While deterrence of such behaviour, and the diversion of productive energies into more societally useful activities, is a worthwhile aim, the proposed mechanism is somewhat unwieldy and of uncertain application.

If it does have what is presumed to be the intended effect, this is likely to be as much a consequence of fear and ambiguity in the administrative process as is it is the direct outcome of clarity and certainty. It should go without saying that deliberately creating fear and uncertainty in the tax system is a bad thing. However it is the inevitable consequence of shifting the emphasis in the DOTAS regime from disclosure of potentially troublesome structures to being a mechanism for accelerating collection of tax, effectively displacing the role of the tax tribunals in dictating the final outcome.

Q19 – To what extent would the preferred option deliver a balance between providing greater certainty for the taxpayer while ensuring HMRC can give due consideration to the need to issue a SRN?

This problem arises purely as a result of the decision to repurpose the existing mechanism and integrate it into the APN process. There is no satisfactory solution which can align the competing pressures of constructive engagement and punitive treatment of those who disclose their structures compared to those who, on one basis or another fail to do so.

What will become of those who HMRC decide have implemented (perhaps for fully understandable commercial reasons) a structure which is now considered to be the equivalent of one which would have had an SRN, and an APN? Can the taxpayer apply for a clearance instead?

The concern here is that taxpayers whose situation is analogous to circumstances pursuant to a notifiable scheme are now penalised as though they have done something wrong – even if the structure is actually abnormal because their circumstances are abnormal. The system would need to be able to distinguish between eg the case of a group with existing Spanish operations which chose to structure its treasury operations so as to access favourable tax treaty provisions, and on the other hand a group which artificially created a Spanish group member purely so as to access those treaty provisions. Could the first group apply for, and receive a clearance, and how would that interact with the APN regime?

In the field of personal planning structures, the Huitson case offers an illustration. While it is unlikely that any innocent taxpayer might have stumbled across the precise structure employed in that case, it is not impossible. How would the legislation cope in such a case, and how would it interact with the GAAR?

Q20 – Are there other ways in which this could be achieved?

No. The introduction of the APN regime and the HRP provisions have shifted the balance so far in favour of the Exchequer that the cooperative elements of DOTAS have been overwhelmed by the newly punitive character.

Q21 – To what extent does the draft hallmark deliver the policy objective of bringing arrangements involving financial products into the view of DOTAS?

The proposed hallmark is certainly wide enough to bring arrangements involving financial products within the scope of DOTAS.

Q22 – Does the approach deliver the safeguards requested by respondents to the previous consultation?

The only element of the safeguards which would definitively exclude a conventional loan or subscription for ordinary shares is that “the arrangements involve one or more contrived or abnormal steps without which the tax advantage could not be obtained”. While “abnormal” may be susceptible to some reasonable degree of definition it does pose difficulties in the context of novel circumstances and legislation. Until there is a base of behaviour against which to measure normality it may be difficult to determine that any particular feature or course of action is not “abnormal”.

The draft legislation distinguishes at proposed Reg 19 (3) and (4) respectively between “a tax advantage” and “the tax advantage”. It would be in the interests of certainty to clarify the precise interaction between those terms in respect of structures deemed to be objectionable.

This is particularly important given the potentially wide reach of the provisions. Take for example the incorporation of a personal service company by a married individual who gifts 50% of the shares in the company to their spouse, in a structure similar to that employed by the taxpayers in the Arctic Systems case. The fact that HMRC were prepared to countenance action under the discovery provisions in that case suggests that (notwithstanding the promotion of such structures by other government departments) HMRC considered the structure not to fall within the ‘prevailing practice’ exception. The crossover between abnormal and prevailing practice is likely to prove problematic in practice for many, while the prospect that a business structure ruled lawful by the House of Lords might nevertheless fall within the hallmarks of the DOTAS regime and require disclosure does not seem consistent with the policy intention of the proposals.