With great power, comes great responsibility.
Andrew Watters considers HMRC’s evaluation of its powers and safeguards and the implications for tax advisers.
Since the 2008 financial crash, there has been a steady flow of articles in Taxation commenting on new legislation designed to assist tax compliance and combat tax avoidance. Often such comments have touched on a perceived tilting of the balance of rights and obligations between taxpayer and HMRC in the favour of the latter. The decision last year by HMRC to carry out an evaluation of the powers and safeguards introduced since 2012 was perhaps a recognition of such concerns (tinyurl.com/y4bkogu7).
Understandably, work on this project has been delayed by Covid-19. However, HMRC has stressed that this is a postponement rather a cancellation of the project which is part of a commitment to improving public trust and confidence in HMRC.
The Evaluation of Powers and Safeguards exercise (hereafter “EPS”) is an opportunity to look at just how extensive HMRC’s new powers are. To put the project into context, we can consider some of the other current consultations and developments which, one assumes, are also intended to develop public trust in HMRC. These include:
- a revision to the HMRC Charter;
- new proposals for tackling promoters and enablers of tax avoidance schemes;
- a call for evidence with a view to raising standards in the tax advice market; and
- proposals to amend HMRC’s civil information powers.
It will be noted that, with the exception of the first, all are designed to further increase HMRC’s powers.
Growth in powers
The EPS exercise shows the substantial growth in HMRC powers since 2012. While it mentions more than 120 reforms, about 80 are out of scope of the Evaluation because these are deemed to be technical reforms (for example close company loans to participators or closing of loopholes in corporation tax loss relief rules) or subject to separate review. Of the remainder, some are in scope for “first order” scrutiny while others will be subject to “second order” scrutiny. While the latter cover some significant areas such as HMRC’s data gathering powers, automatic exchange of information agreements and limiting the scope of a “reasonable care” defence for penalties, for reasons of space I will focus on powers that merit ‘first order” scrutiny. HMRC have categorised these powers into three “themes”:
- Tackling avoidance;
- Ensuring compliance; and
- Tackling enablers.
The article suggests that some of these powers may merit more ‘first order’ scrutiny than others.
Tackling avoidance
Of the five measures identified in this theme, 2 are focused on large players. FA 2014, s 285 empowered HMRC to name an institution which is in breach of the Banking Code of Conduct. More generally, under large busines tax compliance, FA 2016, s 161 and Sch 19 introduced a “special measures” regime which could be imposed on businesses persistently adopting aggressive tax planning. There was also a requirement for publication of tax strategies (Sch 19 Pt 2). These measures placed substantial obligations on banks and public limited companies (PLCs) but such institutions should have the financial resources and professional support to cope.
There is a Serial Tax Avoiders Regime with a special reporting requirement on those taxpayers identified with a surcharge being imposed for repeat offenders (FA 2016, Sch 16). I understand that HMRC have used this power with some discretion and in fact some tax advisers perceive that this can be a useful tool in moderating the planning aspirations of more ambitious clients.
By contrast, other advisers will have clients who have been adversely affected by the introduction of accelerated payment notices (APNs) and follower notices (FNs). These were intended to change the economic drivers of entering into avoidance schemes on the basis that there was little disadvantage to “having a go” and there was the advantage of deferring the payment of tax, sometimes for several years. The legislation in FA 2014, Pt 4 had severe financial consequences for some caught by an unexpected tax bill while the scheme in question was still going through the courts. One would hope that, in future, taxpayers tempted to enter avoidance schemes will have the economic consequences of APNs and FNs clearly explained irrespective of the likelihood of whether the scheme will be ultimately successful.
General anti-abuse rule
The fifth measure in the Tackling avoidance theme is the introduction of the general anti-abuse rule (GAAR) in FA 2013, Pt 5 and Sch 43 with a penalty being added by FA 2016 s 158. The detail of how the GAAR is triggered and the complex procedural arrangements which follow are, while fascinating, likely to be of interest to a limited readership. What should be of more general interest is the likely growth in the use of the GAAR Advisory Panel.
Although the full weight of the GAAR involves fairy cumbersome procedures, referral by HMRC to the GAAR Panel for an Opinion Notice is a relatively straightforward process. The Panel then passes it to a sub-Panel to consider and provide the Opinion Notice. If the Notice states that the tax advantage is to be counteracted, the HMRC officer will pass on that message to the taxpayer detailing the adjustments required to give rise to the counteraction. There is no legal obligation on the taxpayer to accept the counteractions but failure to do so will almost certainly result in extended litigation with the Courts taking note of the original Opinion Notice.
So while some advisers, including myself, thought the original GAAR legislation was so byzantine that it would seldom be used (on the Cold War principle of Mutually Assured Destruction), the Sub-Panel Opinion Notice is in effect a battleground nuclear weapon.
We have now had some anonymised Opinion Notices (see ’The final nail’, Taxation, 24 October 2019, page 8). While the tax planning discussed in that article had not been on the outer edges of egregiousness, nonetheless the Panel concluded unanimously that the entering into and carrying out of the tax arrangement was not a reasonable course of action in relation to the relevant tax provisions (tinyurl.com/y68ufp6b).
In considering the GAAR “double reasonableness” test, the question hovering in the air has been ‘reasonable to whom?’. Such limited information as we have suggests that the GAAR Panel, when considering whether actions could be considered reasonable, do not consider the question in the rarefied context of complex tax provisions but ask whether such actions could be considered reasonable in the real world. That is a very different question to the one often addressed by tax professionals. Apart from the impact on taxpayers, it has potential consequences for their advisers. (See Tackling enablers below).
Ensuring compliance
Again there are 5 measures identified in this theme. All relate to clients with some form of offshore interest.
FA 2016, s 166 introduced 3 new criminal offences: failing to notify chargeability; failing to deliver a return; and delivering an incorrect return. If a loss of tax is linked to an offshore element, it is a criminal offence. Crucially, and unusually for a criminal prosecution, HMRC does not have to prove intent. Although EPS states that the legislation is aimed at the most serious cases, as many commentators have pointed out this is not what the legislation says. There is a defence of “reasonable excuse” or “reasonable care” but any such defence is likely to be rigorously tested by the department. As such, we have legislation with a wide remit to apply automatic criminality on a taxpayer with the taxpayer’s protection being largely reliant on whether a civil servant judges criminality to be an appropriate consequence.
In another unusual example of differentiating against taxpayers where there is an offshore element to their affairs, FA 2019S s 80 & s 81 extended the default time limit for HMRC to raise assessments to 12 years without needing to establish careless or deliberate behaviour. At the time HMRC explained that this extension reflected the long time-lags which offshore affairs can take to filter through into the light. In an era of automatic exchange of information and CONNECT technology this was found by some to be an unconvincing argument.
Civil penalties for offshore tax evasion
The other 3 measures deal with increasing civil penalties for non-compliance involving offshore tax. Perhaps the legislation which received most publicity was the Requirement to Correct legislation introduced in F(No 2)A 2017 s 67 & Sch 18. Those with undeclared tax liabilities had up to end September 2018 to disclose. After that the Failure to Correct part of the legislation can impose penalties of up to 300% of tax and 10% of asset value. There are opportunities to mitigate penalties but the default level is 100% of tax. While that is subject to a reasonable excuse defence, the legislation introduces restrictions. For example if advice is given by an adviser who is seen as in some way tainted by association with the taxpayer, following that advice is not grounds for a reasonable excuse defence.
Looking at the draconian penalties introduced by F(No 2)A 2017, it will be noted that they look back to past years. However the present and the future were taken care of by FA 2015 and FA 2016 which introduced a range of measures designed to increase the penalties applicable to any non-compliance relating to offshore tax. (FA 2015, s 120 and Schs 20 & 21; and FA 2016, ss 162-166 and Schs 21 & 22). Apart from the sheer size of the penalties, there were also innovations such as the “name and shame” regime (FA 2016, s 164 amending FA 2099, s 94) and a new requirement on non-compliant taxpayers to provide relevant information, often of a finger-pointing sort, to mitigate higher financial penalties.
While the legislation introduced in FA 2015 and 2016 may not be welcomed by advisers, at least they know the rules for the future. By contrast, the Failure to Correct legislation judges past events in the light of new penalties and indeed new attitudes to what is acceptable (for example in the treatment of loans). Being judged by today’s standards on what was done 20 years ago may be an uncomfortable experience.
Tackling enablers
In this theme, the focus switches from measures targeted at taxpayers to measures targeted at their professional advisers. That will include a range of professions including accountants, lawyers, bankers and trustees.
There are four measures, two of which relate to promoters of tax avoidance schemes (POTAS) and two relate to professionals whose work might ‘enable’ non-compliance.
The POTAS regime was introduced in FA 2014 (Pt 5 and Schs 34 - 46) and included powers to deal with what were rather coyly called ‘non-cooperative’ promoters of tax avoidance schemes. FA 2016, s 160 then widened the regime to include promoters whose schemes were regularly defeated by HMRC. Life is pretty tough for such promoters. Of course in some instances their life cycle is akin to an exotic organism, disappearing at the first hint of frost in the air to reappear phoenix-like in a sunnier clime. There is no expectation of any lightening of the HMRC attack on POTAS.
Turning to enabling legislation, this is of two types. While they were introduced in consecutive years, they are quite different.
Enabling offshore tax evasion
HMRC’s EPS document refers to the introduction of civil penalties for enablers of offshore tax evasion. This was introduced in FA 2016, Schedule 20. While the EPS document says the legislation is targeted at enablers of offshore evasion, and while that is what HMRC talked about in consulting on the new legislation, that is not a correct claim. Some would say that it was an untruth; at best a partial truth. If an adviser consistently provided information to HMRC in an enquiry which was an untruth or a partial truth, that adviser would no doubt be for the high jump via the HMRC drive to raise standards in the tax advice market. Such an adviser would not be representing all relevant facts clearly and that, in HMRC’s judgement, would not be acceptable.
I think it unlikely many advisers would disagree. However, they might suggest HMRC should hold itself to a similar standard.
What is introduced by FA 2016 Schedule 20 is a regime introducing “Penalties for enablers of offshore tax evasion or non-compliance”. The detail of the regime, while perhaps not being entirely clear on what ‘enabling’ actually means in practice, is crystal clear that penalties are not limited to where there has been tax evasion. All that is required to trigger a penalty is the enabling of non-compliance. The test is whether an adviser has “encouraged, assisted or otherwise facilitated conduct by the taxpayer that constitutes offshore tax evasion or non-compliance.” So while we can probably look forward to some interesting case law in the years ahead on what is meant by “otherwise facilitating”, it is clear that if you have so facilitated, and if the result is non-compliance, then the adviser is potentially liable to a penalty.
There is one more hurdle. The tax evasion or non-compliance by the taxpayer must be classified as a “relevant offence”. However, the legislation then lumps together under that criterion everything from cheating the public revenue, to fraudulent evasion of tax, to a penalty under any provision of the Taxes Act. That includes a penalty for careless behaviour. Of course, from the HMRC perspective, if a taxpayer has filed a tax return incorrectly they have not satisfied their duty under self assessment to correctly assess and so, at a minimum, the taxpayer behaviour has been careless. As such, the default position of HMRC in the vast number of cases involving non-compliance is that there has been an element of carelessness. This leads to a penalty position on the taxpayer, which will trigger the enabling penalty on the adviser.
So while one adviser may have “encouraged the fraudulent evasion of tax”, and another adviser has “otherwise facilitated non-compliance”, both are caught by the legislation and are liable to financial penalties and possible naming and shaming. Even if one is not named and shamed, having financial penalties imposed under a regime referred to by HMRC as dealing with tax evasion is likely to have adverse reputational consequences. In terms of the HMRC Charter, the adviser has moved from the type who helps “the honest majority [who] get their tax right” to one who is assisting “the dishonest minority to cheat the system”. And they didn’t even know.
Tax avoidance that is defeated by HMRC
The other piece of enabling legislation was enacted in F(No 2)A 2017, Sch16. This introduced a new penalty for any person who has enabled another person to use a tax avoidance arrangement that is later defeated by HMRC. In the HMRC EPS document which I hold, the “power type” is described as “civil penalties for enablers of defeated offshore avoidance”. That is incorrect. This piece of enabling legislation, unlike that introduced in FA 2016, is NOT limited to offshore avoidance. The legislation is, however, novel in a number of ways.
A “defeat” can occur either by the action of the taxpayer or the action of HMRC. Thus for the former, if a taxpayer enters in to a settlement agreement with HMRC which concedes the arrangements have not been effective, that will be a defeat. However, an alternative would be for HMRC to take the initiative and make an assessment which counteracts the advantages. Before that can happen, one of two requirements must be met: either a GAAR final decision notice must have been given; or an opinion of the GAAR Advisory Panel must have been received which allows HMRC to counteract the arrangements.
The procedure for this was discussed in the Tackling avoidance section above and, in my opinion, this is likely to prove a regular route to triggering a ‘defeat’ penalty.
Although the legislation is likely to be used in tackling certain tax schemes which HMRC believe to be abusive, it is NOT limited to schemes. It applies to any “arrangements” which are seen as abusive and thus has a far wider application than if it was limited to schemes.
The definition of what constitutes an “enabler” is different to the 2016 regime for offshore evasion/non-compliance. For example, one might be a “designer” or a “financial enabler” or an “enabling participant” (Sch 16 Pt 4). Although the legislation does provide some detail on what each category is meant to cover, phrases such as “to any extent responsible” and “could reasonably be expected to know” suggest scope for future litigation.
The penalty charge
Another novel feature of the legislation is that the penalty is not linked to lost tax but to “total amount or value of all the relevant consideration received or receivable” by the enabler. In effect, the penalty matches the amount the enabler was due to receive for the enabling services. Of course, a challenge to the arrangements in question will sometimes involve a number of enablers, for example a “designer”, a “financial enabler” and, in what may become a fairly ubiquitous category, an “enabling participant”. The legislation seems to anticipate that in some instances it may not be a simple matter to divide the amounts due to the various enablers involved in the failed arrangements. Apart from instances where there were more than one enabler, there will also be instances where one enabler will be due fees relating to more than one set of transactions. In such instances, the relevant consideration is to be “apportioned on a just and reasonable basis”. This is a simple principle which may raise complications in practice.
The enabling legislation introduced in FA 2016 directed at Offshore evasion/non-compliance has perhaps received more publicity than the “defeated avoidance” legislation introduced the following year. Nonetheless, the latter legislation may have more impact. The term “arrangements” has power to cover a range of planning. If the GAAR Advisory Panel is minded to apply the ‘double reasonableness test” as the hypothetical and reasonable traveller on the Clapham omnibus might do, then many professionals could find themselves falling under the wheels.
Summary
Looking at the EPS, few would disagree that it includes legislation which merits ‘first order scrutiny’. The question is whether it will receive it or whether it will be a PR exercise by HMRC with the conclusion that, on balance and taking everything into account, all is well. Such an outcome is unlikely to improve public trust and confidence in HMRC.
The proposed revisions to the HMRC Charter are also designed to improve confidence in HMRC. The CIOT has published a submission which welcomes the review (tinyurl.com/y2f4x7z2) but details some concerns. These include pointing out that the current commitment to presume taxpayers are telling the truth unless there is good reason to think otherwise sometimes seems to be replaced by a default assumption that the truth is not being told. The commitment is turned on its head with the onus being on the taxpayer to prove innocence. There is also a concern about the level of technical expertise amongst some HMRC staff and the Charter’s commitment to have one’s affairs dealt with by people who have the right level of expertise is not always met. Certainly that is my experience. However, like many advisers, I could also point to instances where HMRC officers have gone out of their way to be helpful, to be understanding and to have used their technical proficiency to move forward my own understanding of a position.
Levels of competence in HMRC, as in private practice, are going to vary. Nonetheless it seems fair to argue that the greater the powers provided to HMRC, the greater is the need for public trust in the institution. The EPS exercise indicates the large powers provided to HMRC since 2012. The continuing growth of these powers is reflected in consultations such as that on raising standards (where HMRC wish the power to judge the abilities of those advisers who represent taxpayers against their challenge); and amending their civil information powers (where the amendment envisaged is to extend their powers by removing the oversight of the Tribunal on HMRC’s right to issue certain third party notices).
Apart from a ‘nice to have’, how important is it that the substantial growth in HMRC powers, existing and proposed, should be balanced by any growth in public trust? And is that public trust likely to increase without some balancing of public rights? And should feeling uncomfortable about the growth in HMRC powers imply one is a friend of tax avoiders and evaders?
Conclusion
As a former civil servant, I understood that our constitution is founded on a clear separation of powers between parliament, the judiciary and the executive. HMRC is part of the third. Some of the powers detailed in the EPS provide HMRC with the power when to and when not to apply legislation (as in the assurance that they will only apply the automatic criminality legislation when HMRC deem it appropriate). If the executive can decide whether or not to apply legislation, then it is appropriating, or being gifted, a power properly belonging to parliament.
Further, looking at the new civil penalties which HMRC are empowered to impose, in principle the imposition of such penalties can be appealed to the courts. However, in practice the replacement of the previous General and Special Commissioners by the Tax Tribunal has, despite the best efforts of Tribunal judges, put the costs of appeal beyond the reach of many. De facto, HMRC now have the power to impose penalties knowing that the de jure right of appeal is, for many, meaningless.
So the EPS exercise is an important moment. Will HMRC accept that there has been a huge increase in its powers over taxpayers and their representatives which should lead to a recalibration of respective rights and obligations? Or will it conclude that good guys can’t have too much power?
This article was first posted in, Taxation 8 October 2020
