Comments from ACCA to HM Revenue and Customs (HMRC), August 2011.
ACCA supports HMRC in its attempts to ensure a level playing field for all businesses and tax payers within a fair and efficient tax system. However, ACCA is concerned that as currently framed the proposals have the potential to catch too wide a range of transactions.
If tax payers are withholding tax liabilities properly due to the Exchequer based upon spurious filings then this gives them an unfair advantage over those taxpayers whose returns and payments of tax accurately reflect what they reasonably believe the law to permit. These proposals would aim to act as a preventative deterrent measure, discouraging tax payers from adopting particular positions in their returns unless they were absolutely confident of winning their case before the courts.
Under the UK system of self-assessment, taxpayers are responsible for assessing their own liability to tax, and paying the liabilities so resulting by a set date. The current proposals reverse that assumption, substituting HMRC's judgement of the taxpayers' position for that called for under the legislation. Such a fundamental shift in the relationship between taxpayers and the tax authority can be justified only in the most extreme circumstances.
The safeguards currently proposed are insufficient to allay concerns that HMRC could use these powers to substitute its view of the law for that of taxpayers, penalising those who seek to take the most favourable position in areas of genuine uncertainty. We have no doubt as to the good intentions of the authors of this policy, and support their desire to frustrate the efforts of those who cynically exploit the self assessment system. None the less, the current proposals would themselves be too susceptible to 'mission creep' on the part of HMRC. The recent track record of HMRC at the Tribunals and at the hands of external review does not support the degree of certainty needed in HMRC's ability to effectively administrate discretionary powers of this type without further safeguards and monitoring.
Question 1: Do you agree that the taxes listed are the right taxes to include (in the primary legislation providing the power to list a scheme)? Should any taxes be added or deleted from the list and if so, why?
The list of taxes subject to listing under the proposed regime seems appropriate.
Question 2: Do you agree with the proposed criteria for listing a scheme? If not what should the criteria be?
The proposed criteria are too broad to be effective in their own right without the safeguards outlined below being incorporated into them. Specifically, HMRC's belief that the scheme does not deliver the claimed tax advantage must be reasonable based upon opinion from a leading tax counsel.
As the definitions stand, the hallmark that a scheme might be entered into for the purpose of seeking a tax advantage is so weak as to be of no practical use. In almost any situation where there are two or may ways to achieve a particular end, the varying circumstances of different taxpayers will admit that all of the different approaches 'might' be entered into for the purpose of securing a tax advantage.
The second bullet is of little further help in narrowing the field of schemes which might be caught. Starting from the premise of eg a specialised loss creation scheme, it is unlikely that anyone would enter into such a scheme unless they had significant (other) tax liabilities which they wished to shelter. It is clearly unlikely that an individual would enter into a transaction, or series of transactions, which are expected to create a tax loss with little or no economic profit unless tax was the main driver.
However, the proposed wording would also catch a situation where a business chose to implement a particular funding structure which before tax cost (say) 5% more than other alternative structures, but gave a tax benefit worth (say) 10%. It is highly unlikely that without the tax advantage taxpayers would use the 'more expensive' structure. Equally, to take an even more extreme example, the costs and regulatory requirements involved operating a registered pension scheme could be argued to fall within the general category of schemes which taxpayers would not enter into were it not for the tax advantages. Loss of registered pension scheme status can of course be triggered in much the same manner as failure of a tax scheme through botched implementation, inadequate documentation etc.
While it may be clear in context and with the benefit of guidance what sort of transactions the legislation is aimed at, viewed objectively the current classifications would (without integration of safeguards) be far too wide.
Question 3: Do you consider that the safeguards described are sufficient to ensure that schemes listed are firmly targeted on high risk tax avoidance? If not, what further safeguards would you suggest?
The three proposed safeguards go some way towards restricting the schemes which could be listed under the regulations. The first safeguard should be amenable to legal drafting, although care may be needed in the precise level of assurance required from tax counsel for the listing requirement to be satisfied.
The second safeguard, while eminently pragmatic, is likely to prove more troublesome to legislate. In particular, disputes would be hard to resolve since the need to preserve confidentiality would effectively prevent publication of anything but the most general details about such consultation either before or after the event.
The third is perhaps of limited value. While the affirmative procedure means MPs will consider the schemes to be listed, the issue will still arise of how many MPs will be able to take the time to scrutinise the measures, and what value their scrutiny will add. There are few enough qualified accountants in parliament as it is; fewer still will have the necessary tax knowledge to fully appreciate within the necessarily tight time frame the precise details of the structures, and the potential ramifications of listing them.
A further safeguard which ACCA would recommend would be the introduction of a disincentive to HMRC using the powers too freely or in inappropriate cases (ie those where there is an arguable case for the taxpayer's position). In the event that a listed scheme is subsequently found to be viable, HMRC should be subject to the same level of punitive interest as the taxpayer, calculated over the same period as would be applied to taxpayers. While this represents a significant departure from the normal rules of interest applied by HMRC it is one which is commensurate with the significant departure from the norms of self assessment put forward by HMRC in the rest of this proposal.
Question 4: Do you believe that informal consultation would be feasible in the circumstances described? If so, what form might it take and how long would it take?
Informal consultation of the kind described will be feasible only where officers at HMRC can reliably identify individuals within the tax advisory community who have sufficient knowledge and experience to act as independent sounding boards. ACCA is in no doubt that such experts exist, and that HMRC will know who they are and have suitable working relationships with them to make such informal consultation a realistic and effective possibility.
However, relationships of this kind are built upon trust built over many years. The level of personal interaction required is the antithesis of the nationalised process driven approach which has been implemented throughout the operational functions of HMRC over the period since the merger between HM Revenue & Customs and the Inland Revenue. As a direct result of the demise of the localised working practices previously familiar to taxpayers and their agents, trust in HMRC has been eroded to the point where in some areas it is now almost non-existent.
In order to be, and remain, effective, informal consultation would not be amenable to detailed record keeping or publicity. Speed of reaction would be of the essence in the first instance, so operating to a fixed timetable of physical meetings is unlikely to be appropriate. Even after the event, the details of any discussion are unlikely to be of interest to anyone other than those seeking to frame future schemes in such a way as to avoid a listing under the rules. The public would not be able to demand proof from HMRC that the system was operating according to the rules; they would simply have to trust this to be so. Unfortunately, that trust has now been eroded.
ACCA believes that informal consultation of this kind could and should be a feature of a healthy tax system. It would be limited in scope, and would be consultation rather than collaboration. However, ACCA is concerned that in the current environment it would prove difficult if not impossible to frame legislation allowing for 'formalised informal discussions' which would not be subject to sustained attack from both those who would see it as an establishment ruse to forewarn favoured advisers, and on the other hand those who would see it as no more than a smokescreen behind which nothing actually useful is taking place leaving HMRC to operate unfettered by any real need to consult.
Question 5: Do you agree with the proposed time and manner of reporting a listed scheme number?
The principles for reporting requirements set out in the consultation appear sound. A further advantage of using (in most cases) the return as the reporting mechanism is that scheme promoters should be aware of the deadlines by which users of their products will have to make their disclosure to HMRC, or alternatively submit an amendment to the annual return within the enquiry window where circumstances change, ie where the LSN is issued only after some users have implemented the scheme.
We note however that there does not appear to be any mechanism requiring promoters to inform users of the LSN even where it is known. Simply placing the onus upon the tax payer to establish the existence of, and then return, the LSN in the sorts of circumstances targeted by HMRC seems to introduce an unnecessary element of uncertainty into the process. By their own admission, HMRC are targeting situations where high net worth individuals are sold schemes which are subject to aggressive marketing by advisers determined to engineer any possible advantage for their clients. It does not seem sensible to rely upon the altruism of the adviser to inform the scheme purchaser of the LSN if there is no legal compunction on them to do so.
Question 6: Do you agree with the proposed penalty model for failure to report the use of a listed scheme?
Yes, although it should include penalties for promoters who fail to notify their clients of an LSN where one is issued.
Paragraph 7: Can you suggest ways to avoid requiring a listed scheme user to report both the SRN allocated under DOTAS (if there is one) and the listed scheme number?
No, and nor do we believe there is a need to in the limited circumstances where this legislation should apply. If the safeguards discussed above have been applied properly then an LSN will be issued only in respect of schemes which have already involved a significant degree of contrived artificial behaviour. Tax payers prepared to go to so much trouble in the conduct of their tax affairs should be able to report an extra reference number on their return.
Question 8: Do you agree that HMRC should inform promoters and users when it is satisfied that a scheme disclosed under DOTAS is a listed scheme? If so, what would be the best way of doing this?
Via the DOTAS pages of the website, and also by confidential mailing to the scheme promoters.
Question 9: Do you agree with the general principle, described in chapter 5, governing the design of the additional charge?
The design proposed in the consultation document strikes a fair balance between simplicity and fairness.
Question 10: Do you agree with the model described in chapter 5 for the additional charge? If yes, to what periods (days, months, quarters, etc) should it apply to? If no, please suggest your preferred alternative model.
The design proposed in the consultation document strikes a fair balance between simplicity and fairness.
Question 11: What would be the best way to ensure a fair outcome for all individuals who use a listed scheme in circumstances described in chapter 5?
Where schemes are put forward by promoters, the promoter will have records which enable them to contact taxpayers prior to the submission of the return and payment of the outstanding liability. (Where the promoter has no means of contacting the tax payer it is likely that either or both of the two parties will be susceptible to other avenues of action). There seems to be no good reason why promoters who have sold a scheme which is sufficiently aggressive to merit allocation of a listing number should not be under a duty to inform all users of that scheme of the listing number, either as part of the initial sales process or subsequently, where listing post dates the sale.
Question 12: Do you have any comments upon the taxes impact assessment?
The taxes impact assessment states that the effect of the proposals would be to level the playing field for all businesses and tax payers by removing the potential short term advantages to be gained by engaging in certain types of aggressive tax avoidance behaviour. Provided that the regulations only target those schemes which are bound to fail then this will be the case.
However, in the absence of appropriate and fully effective safeguards to ensure that only the most objectionable of schemes are targeted there is a risk of a negative impact on investment and an increase in costs to business. As matters stand, a scheme could in theory be listed on no more than a single counsel's opinion that it should fail. However, it is a truism that for every dispute which proceeds to a hearing there are two sides who believe their opponent's case should fail. If the regulations are applied and schemes listed in situations where businesses believe they have an arguable case to win before the courts then the effect will be to discourage legitimate tax planning. Faced with the cashflow impact of filing what they might otherwise consider to be the correct return, businesses would be forced as a matter of commercial expediency to adopt what they consider to be a technically incorrect position.
Taking the possibilities further, there is no mention in the proposals of any mechanism for refunding, with interest, any amounts wrongfully demanded by HMRC in a situation where the courts ultimately decide in favour of the tax payer. Clearly if the system is working properly there will never be such a case, but the possibility is there and should be legislated for. A simple mirror of the provisions for penalising the tax payer where they retain the use of funds which are ultimately found to have been due in tax is probably the fairest workable option, although the impact upon a single business of having its funds held by HMRC for months or years pending the resolution of a dispute is likely to be far greater as a proportion of cash available than the impact upon the Exchequer of the same sum.
There is little doubt that the sorts of schemes initially envisaged as being targeted by the proposals would be undertaken only by the wealthiest of taxpayers, aided by skilled and experienced advisers. Where HMRC exceed the powers conferred on them by law, the sums at stake would doubtless justify a judicial review of HMRC's acts. Those involved in detailed planning for such high sums would doubtless be willing and able to initiate such a review.
However, judicial review is a slow and expensive process, and the potential for such a review would not act as an effective control on HMRC's discretion to list schemes under the current proposals. To properly reflect the concerns of tax payers and legislators alike, the regulations should include mechanisms for publication of the legal advice, an independent review of HMRC's decision if needed, and the payment by HMRC of punitive interest to wronged taxpayers at a level commensurate with the penalties imposed upon those who abuse the self assessment system in the manner targeted.