Lifting the Lid on Tax Avoidance Schemes - Consultation document

Lifting the Lid on Tax Avoidance Schemes

Consultation document

Subject of this consultation:

Measures to improve the information available to HM Revenue & Customs and customers about tax avoidance schemes and the risks of using them, including proposals to revise and extend the Disclosure of Tax Avoidance Schemes (DOTAS) regime, which requires promoters and users of tax avoidance schemes to provide information to HMRC.

Scope of this consultation:

HMRC seeks views on a programme of work for improving public information about tax avoidance arrangements and the risks associated with using them. It also seeks views as to whether options for:

  ♦  extending the DOTAS information to be reported to HMRC, and

  ♦  ensuring that persons required to disclose a scheme do so at the right time;

would be feasible ways of meeting the described objectives

HMRC also seeks views as to whether proposals to revise and extend the DOTAS 'hallmarks' (the descriptions of schemes required to be disclosed for income tax, capital gains tax and corporation tax purposes) are too widely or narrowly drawn, and on their impacts upon compliance costs and administrative burdens.

Who should read this:

We would like to hear views from representative bodies, tax agents and scheme promoters, as well as businesses and individuals who may receive marketing and advice about tax avoidance schemes.

Duration:

This is a 12 week consultation from 23 July to 15 October 2012

Lead official:

David Easton, HMRC

How to respond or enquire about this consultation:

H M Revenue and Customs, CTIAA AAG, 3C/18, 100 Parliament Street, London SW1A 2BQ

e-mail philippa.staples@hmrc.gsi.gov.uk

Additional ways to be involved:

HMRC intends to meet with representative bodies and other interested parties.

After the consultation:

A summary of responses will be published after the consultation. If the hallmark proposals move to the next stage, draft legislation will be published.

Getting to this stage/previous engagement:

A formal consultation that included extending the DOTAS hallmarks took place in 2009/10. This was followed up by an informal consultation in the summer of 2011 with specialist interests.

1. Executive Summary

This consultation document describes a significant new programme of work the Government is developing to improve the information available to HM Revenue and Customs ('HMRC') and customers about tax avoidance schemes and the risks of using them.

Firstly, it describes a range of options to improve the provision of information about tax avoidance - to ensure that where tax avoidance schemes are identified, the public knows about the risks of using them. That is key to the Government's strategy of ensuring that everyone pays their fair share of tax and in making it clear that tax avoidance is unacceptable.

Secondly, it considers some detailed options to improve the information available to HMRC about tax avoidance through the Disclosure of Tax Avoidance Schemes ('DOTAS') regime, in order to make this an even more effective tool. In particular, it proposes changes to the descriptions of schemes required to be disclosed to HMRC Any changes, insofar as they affect income tax, will be extended to the DOTAS National Insurance contributions regime at the same time as the tax changes come into force.

Chapter 2 is introductory. It describes HMRC's anti-avoidance strategy, changes in the tax avoidance environment and the need for the elements of the strategy, including DOTAS, to respond effectively to them.

Chapter 3 describes a range of options to improve the provision of public information about tax avoidance and the risks of using tax avoidance schemes.

Chapter 4 describes options intended to enable DOTAS to ensure that HMRC has sufficient information and documents to understand how a scheme works and who is intended to use it, and to ensure that the rules are complied with.

Headline options include:

  ♦  Extending the information disclosed to HMRC about disclose able avoidance schemes;

  ♦  Extending the information reported to HMRC about users and other parties involved in a disclose able avoidance scheme;

  ♦  Raising the threshold of 'reasonable excuse' for a promoter who fails to notify a disclose able scheme;

  ♦  Imposing additional reporting obligations on a promoter who incurs a penalty for failure to disclose a scheme; and

  ♦  Imposing a personal responsibility on an individual, to sit alongside the firm's obligations, to comply with a promoter's DOTAS obligations.

Chapter 5 describes proposed revisions and extensions to the existing 'hallmarks', the descriptions of schemes required to be disclosed under the 'main regime' of income tax, capital gains tax and corporation tax.

The proposed revisions to existing hallmarks are:

  ♦  Amending the 'confidentiality where promoter involved' hallmark to remove inconsistencies in the interpretations being applied by promoters to the hallmark;

  ♦  Amending the 'confidentiality where no promoter involved' hallmark to cover instances where the firm designing the scheme for use in-house is also a promoter who is capable of selling the scheme to clients; and

  ♦  Amending the 'loss scheme' hallmark to ensure that marketed loss schemes are disclose able, and extending the hallmark (currently limited to schemes intended for individuals) to schemes for corporate users.

Chapter 5 also proposes adding two new hallmarks:

  ♦  A hallmark that targets schemes seeking to circumvent the disguised remuneration rules concerning employment income provided via intermediaries; and

  ♦  A hallmark targeting schemes that rely upon certain financial products.

Chapter 6 is a summary of impacts in table form.

Chapter 7 is a summary of the consultation questions

2. Introduction

Tax avoidance

2.1 Tax avoidance represents nearly 14% of the UK tax gap. It involves using the tax law to gain an advantage that Parliament never intended and frequently involves contrived, artificial transactions that serve little or no purpose other than to reduce tax liability. And it enables some taxpayers to gain an unfair advantage, undermining confidence in the tax system.

2.2 In March 2011, the Government introduced a new HMRC anti-avoidance strategy in the document Tackling tax avoidance.¹ The strategy focuses on three core strands:

  ♦  preventing avoidance at the outset where possible;

  ♦  detecting it early where it persists; and

  ♦  countering it effectively through challenge by HMRC.

2.3 The Government has taken robust measures to tackle tax avoidance; e.g. announcing legislation that, in effect, has closed schemes down with immediate (and in one exceptional case, retrospective) effect. The Government is currently consulting on a General Anti-Abuse Rule ('GAAR') that is targeted at artificial and abusive tax avoidance schemes. The GAAR is expected to act as a deterrent to those engaging in such schemes in the first place; and where avoidance persists it will provide an additional tool to enable HMRC to challenge and defeat these.

2.4 More robust legislation has led to both a reduction in the quantity and 'quality' of avoidance schemes being marketed. Fewer schemes are now being sold and more are being challenged operationally, rather than through a change in the law, because it is clear that they do not work and simply do not deliver the tax advantages advertised by those who promote them.

2.5 In this changed environment, it is increasingly important for HMRC to prevent avoidance by communicating with promoters, tax agents, businesses and the public about the risks of entering into avoidance schemes. Chapter 3 of this consultation document suggests a range of options for building upon existing communications.

2.6 The Disclosure of Tax Avoidance Schemes ('DOTAS') regime is a key component of the detection strand of the strategy, and it also plays an important role in deterring avoidance, and hence in preventing it at the outset. A summary of the DOTAS objectives and how it works is at Annex C.

2.7 The initial focus of DOTAS was upon gaining information about avoidance schemes, particularly new and innovative schemes, to identify loopholes in the law that were being exploited and inform legislation to close them down. DOTAS has performed this role well and has informed over 60 measures in Finance Acts since 2004.

2.8 DOTAS also needs to adapt to keep in step with the changed avoidance environment described in paragraph 2.4. In particular, it is increasingly important for DOTAS to identify avoidance schemes, regardless of whether or not they are new and innovative, to enable communication with users and inform counteraction by operational challenge. Chapter 4 describes options for ensuring that HMRC receives sufficient information to understand how a disclosed avoidance scheme is intended to work and who is intended to use it. It also describes options for ensuring that persons required to disclose a scheme do so, and at the proper time. Chapter 5 describes proposals for revising and extending the hallmarks to ensure that avoidance schemes, whether or not they are new and innovative, are disclose able. These Chapter 5 proposals build upon previous consultation.

2.9 Regulations extending the descriptions of Stamp Duty Land Tax (SDLT) schemes required to be disclosed have been published on HMRC's website for comment² with a view to implementation in September. This is separate from the consultation exercise covered by this document. However, the main objective (to ensure that HMRC receives disclosures of SDLT avoidance schemes incorporating sub-sale relief) reflects the changed avoidance environment described in paragraph 2.4.

3. Improving public information about tax avoidance

3.1 The Government wants to increase and improve the information available to the public about tax avoidance arrangements and the risks associated with using them by building an environment where responsible tax agents, businesses, individuals and HMRC work together to combat tax avoidance.

3.2 To that end, the Government is developing a programme of measures for improving information about avoidance arrangements and the risks associated with using them. The Government wants to do this co-operatively with representative bodies and reputable tax agents and businesses (the vast majority), many of whom have publicly and strongly condemned artificial and abusive schemes. The Government has already begun discussing practical options with interested parties and wants to open up that discussion to wider views and approaches.

3.3 The following paragraphs describe suggested options for improving communications about tax avoidance schemes that HMRC will be exploring with interested parties. However, the Government is open to suggestions and is willing to explore other options that may be suggested.

3.4 HMRC will be exploring what further information (subject to its legal duties of confidentiality) it could publish about avoidance schemes and the risks and consequences attached to those schemes. For example, it will be exploring what further information it could publish about schemes that are proved not to work, about the promoters of those schemes, and the consequences for the users of those schemes. It will also be exploring the ways and means of communicating information about avoidance scheme. For example, HMRC is looking at ways of improving the content and raising the profile of the 'Spotlights' section on its website, which provides a 'buyer beware' warning to potential users of certain schemes or schemes that incorporate certain features. HMRC is also looking at ways of making more effective use of new social networking media.

3.5 HMRC will also be exploring ways in which it could communicate more directly with users of tax avoidance schemes where it considers the schemes to be ineffective, and, in particular, warning of the risks of using those schemes which rely upon some degree of misrepresentation or concealment of the facts in order to deliver the purported tax advantage. Misrepresentation, and concealment are indicators of fraud and evasion and they can result in prosecution or tax penalties.

3.6 One suggestion put forward from outside government is to build on the financial services mis-selling rules as a response to the promoters of schemes that patently do not deliver the advertised tax advantages. The Government believes this is an interesting suggestion that it would like to explore further with interested parties.

3.7 HMRC is also considering ways in which it can share (non-confidential) information about tax avoidance with professional bodies and engage further with them about the advice that should be given to clients who may be invited by third parties to enter into avoidance schemes.

3.8 The Government wants to encourage representative bodies, tax agents, businesses and individuals to share information about tax avoidance schemes with HMRC. If it transpires that confidentiality conditions imposed by promoters put persons who share information with HMRC at risk of being sued, the Government is prepared to consider introducing a statutory override to such conditions.

Q.1 Do you have any comments on this proposed programme of work?

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

4. Enhancing DOTAS

4.1 The Government has identified certain objectives that it wishes DOTAS to achieve. This section sets out options and suggestions for achieving those objectives and invites comments as to their feasibility. If the consultation indicates that these, or other, options are feasible, they will be worked up into detailed proposals.

4.2 The Government's first objective is to ensure that HMRC is either supplied with, or is able to call upon, sufficient information and documents to:

  ♦  understand fully how a disclose able tax avoidance scheme works;

  ♦  identify all the parties involved in the marketing and implementation of the arrangements and what role they play; and

  ♦  in particular, identify the end user of the scheme, i.e. the person or persons intended to obtain the expected tax advantage.

4.3 The information that a promoter is currently required to disclose to HMRC is an explanation of each element of the scheme, including the structure, from which the expected tax advantage arises. In other words, it is a high- level description of how the scheme works. But it is often impossible for HMRC to decide, absent more detailed information about the facts, whether or not the scheme works and whether the appropriate response should be legislative or operational.

4.4 In practice HMRC often asks promoters for such further information about the detail of a scheme and many provide it voluntarily. Others do not. One option is to impose more detailed reporting obligations on promoters. Another option is to provide HMRC with additional powers to require further information and/or documents in relation to certain schemes. A third option is a mix of the two. Currently the power to call for further information is restricted to cases where the promoter has failed to provide the information already required by the legislation.

4.5 Client lists have fulfilled their original, and limited, objective which was to provide information about the number and type of persons using a scheme so that HMRC could risk assess the scheme and choose the appropriate response. Where the response is operational challenge, early knowledge of the numbers of users enables HMRC to ensure that resources are in the right place at the right time.

4.6 The information that promoters are required to provide on client lists is not sufficient, where the scheme is mass-marketed to individuals, for HMRC to readily match the data to specific customers.

4.7 Moreover, the client may be merely an intermediary, not the end user who is intended to obtain the expected tax advantage. There is no onward reporting obligation on intermediaries, so in such cases client lists will not inform HMRC who the end user is. For example, HMRC has had disclosures of employment income schemes where the client is an offshore umbrella company. Further, since it is offshore, it cannot be compelled to pass on the scheme reference number to those parties (UK companies and individuals) who intend to obtain income tax and NICs advantages. So, at present it is inherently difficult for HMRC to identify the end users of such schemes.

4.8 The Government wants to ensure that HMRC obtains sufficient information to be able to cut through the chain of introducers and intermediaries in such cases and identify who the end users are. One option is to impose additional 'client list' reporting obligations on promoters and intermediaries. Another option is to provide HMRC with additional powers to require persons involved in marketing a scheme to identify the other parties in the scheme and what their role is. A third option is a mix of the two.

4.9 The Government's second objective is to ensure that those persons, primarily promoters, who are required to disclose a tax avoidance scheme meet their obligations and at the correct time.

4.10 Finance Act 2010 provided for a tribunal to impose higher maximum penalties, up to £1 million, for a promoter who fails to disclose a scheme. Higher penalties and increased powers have been helpful in securing compliance from certain promoters. But others do not disclose and HMRC then becomes involved in a protracted enquiry in order to establish that the scheme was disclose able.

4.11 If the promoter eventually agrees that the scheme is disclose able, they will generally rely upon the fact they have legal opinion that the scheme was not disclose able as providing 'reasonable excuse' for non-disclosure. Where reasonable excuse applies, the effect is that there is no failure to comply with the rules. HMRC's view, as described in its published guidance, is that whether or not the obtaining of legal advice provides reasonable excuse is contextual and not absolute. However, it acknowledges that not all promoters agree with that view.

4.12 The Government recognises that there is a difficult balance to be struck in ensuring compliance. Disclosure is 'self-assessing' and a promoter has to interpret the law as to whether or not any particular scheme is disclose able. On the one hand, it would be wrong to penalise a promoter who has relied upon a reasonable interpretation of law and fact. It would also be wrong to force a promoter to disclose a scheme in order to prove it is not disclose able On the other hand, the later a disclosure is made, the less its value to HMRC and the more that promoter has gained an unfair advantage over those competitors who have disclosed a similar scheme.

4.13 The Government considers that, in the particular circumstances of DOTAS, there is a case for raising the hurdle for a reasonable excuse as extinguishing a prima facie breach of the rules (e.g. to where the promoter relied upon a reasonable interpretation of both fact and law).

4.14 The Government also considers that where a promoter incurs a penalty for a serious failure to comply with DOTAS, there is a case for imposing additional reporting obligations on it. Those could extend to providing information about all of the promoter's marketed schemes and clients, not just the schemes it has disclosed or the scheme that was the subject of the penalty.

4.15 Finally, the Government considers that there is case for imposing a personal obligation upon an individual, alongside the obligation on the firm, to ensure that a promoter's DOTAS obligations are complied with. This would be of particular significance where the firm is dissolved, moves offshore, or the individual moves from firm to firm. The Government does not want to impose any additional obligation on the vast majority of accountants, solicitors etc who do not engage in avoidance schemes and are in practice never promoters for DOTAS purposes.

4.16 In summary, the options being considered are:

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

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

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

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

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

Q.3 Do you agree that the options suggested would be feasible ways of achieving the described objectives?

Q.4 Can you suggest alternative options for achieving the same objectives?

5. Changes to the DOTAS hallmarks

Abbreviations used in this Chapter

CIS is collective investment scheme

CTA is the Corporation Tax Act 2010

FSA is the Financial Services Authority

ITEPA is the Income Tax (Earnings and Pensions) Act 2003

Part 7 is Part 7 of the Finance Act 2004

Part 7A is Part 7A of ITEPA

SAAC is the Special Annual Allowance Charge

SRN is the scheme reference number issued by HMRC to a disclosed scheme

UCIS is unregulated collective investment scheme

Introduction

5.1 The main regime was initially restricted to two known high risk areas, schemes that sought to avoid income tax on employment income and schemes that involved the use of certain financial products.

5.2 The hallmarks were introduced in August 2006 and there are currently seven. Four of these are 'generic' hallmarks. They describe generic features that are indicative of avoidance. The other three hallmarks are 'specific' hallmarks. These are more narrowly focussed descriptions that target specific high-risk areas: leasing arrangements, loss schemes and pensions. The pensions hallmark is effectively now redundant (see paragraph 5.35).

5.3 HMRC has identified a number of avoidance schemes which have not been disclosed because they are outside the existing hallmarks, or at least the matter is not free from doubt. In order for the regime to be effective, DOTAS depends upon a scheme being disclosed at the correct time. A disclosure made belatedly following a protracted dispute is of limited value to HMRC.

5.4 Moreover, as described in paragraph 2.4, avoidance schemes increasingly do not work (i.e. they do not provide the tax advantages advertised by the promoter). HMRC wants to know about such schemes so that it can challenge the users operationally.

5.5 Consequently, the Government proposes to revise and extend the existing hallmarks to put beyond doubt that certain types of avoidance scheme should be disclosed to HMRC. However, HMRC is equally concerned to ensure that the changes are narrowly focussed on avoidance and do not impose unnecessary administration burdens and compliance costs on promoters, other businesses or individuals.

Previous steps

5.6 In 2009/10 there was a formal consultation on five measures concerning DOTAS, one of which was a proposal to revise and extend the hallmarks. This led to some minor revisions to the hallmarks that came into force on 1 January 2011 (the other four measures were implemented in Finance Act 2010 and subsequent regulations).

5.7 More substantial changes to the hallmarks were deferred for two reasons. Firstly, responses to the consultation had identified that a number of the proposed new hallmarks were too wide in scope and would catch a significant amount of ordinary tax planning. HMRC expressed an intention to continue discussions with interested parties and develop the hallmarks in an iterative process.

5.8 Secondly, the Government initiated a number of measures which directly concerned tax law targeted by avoidance schemes. For example, employment income schemes involving the provision of employment income though third parties were the subject of legislation in Finance Act 2011. It was sensible to await the outcome of these changes and consider their implications for DOTAS.

5.9 An informal consultation in the summer of 2011 was intended to identify options for further changes to the hallmarks. HMRC issued a briefing paper, which invited comments, to all parties who had previously contributed to a DOTAS consultation, and followed that up with discussions with interested parties. Some parties said they would not comment until more formal proposals were put forward.

Proposed revisions to existing hallmarks

Hallmark 1: Confidentiality where promoter involved

5.10 There are two parts to this hallmark which can be expressed as two tests. If either test is met, the scheme is disclose able:

  ♦  The first test asks the promoter of a scheme whether any promoter of such a scheme would wish to keep any element of the scheme, which gives rise to the expected tax advantage, confidential (at any time after a 'material date') from any other promoter;

  ♦  The second test asks the promoter of a scheme whether they would wish to keep any element of the scheme, which gives rise to the expected tax advantage, confidential from HMRC (at any time after a 'material date') in order to facilitate repeated or continued use of the same element.

In both tests:

  ♦  'Any element' of the scheme includes the way that the scheme is structured; and

  ♦  The 'material date' is the date of the event that triggers the disclosure; e.g. the date the scheme is first made available for implementation.

5.11 The assumption implicit in the first test is that a promoter would be concerned that if another promoter had access to that information, they would develop their own version of the scheme and take away potential clients.

5.12 The assumption implicit in the second test is that the promoter would be concerned that if HMRC had access to that information, it would take action to prevent further or repeated use of the scheme.

5.13 HMRC has seen a number of schemes that it would have expected to have been disclosed under this hallmark, in particular under the second test, which have not been disclosed (e.g. schemes that purport to circumvent the Disguised Remuneration legislation in Part 7A of ITEPA). These non-disclosures include schemes which are aggressive and contain a number of features that suggest the promoter either expects, or considers there to be a high risk, that HMRC will challenge them operationally.

5.14 HMRC has discussed this hallmark with promoters as part of the informal consultation and in regular liaison meetings and it is clear that there is a divergence of views as to how the second test is to be interpreted. Some promoters take the view that the test can be met only if either:

  ♦  The promoter attaches some specific condition upon third parties, or takes specific steps, to keep the scheme confidential from HMRC; or

  ♦  The scheme is new and innovative. A promoter may consider this applies where, for example, they have evidence that certain other promoters are already promoting a scheme that is substantially the same as their own.

5.15 Other promoters take the view that the test applies to any scheme that HMRC would be likely to take action to counter (legislatively or operationally) if it knew about it. This would apply, for example, to a scheme that does not incorporate particularly new or innovative features, but is being used to circumvent a new piece of legislation in a way that is clearly unintended.

5.16 The Government proposes to amend the hallmark to put beyond doubt that the second test applies in the way described in paragraph 5.15. HMRC suggests the way to do this is to align it with the first test so that it applies where it might be reasonably expected that a promoter (as opposed to the promoter) would wish to keep any element of the scheme (or the scheme itself) confidential from HMRC in order to facilitate repeated or continued use of the same scheme.

5.17 The Government also proposes to make explicit that a scheme will fall within the second test if the promoter imposes specific conditions of confidentiality on the client, which will include instances where the promotion or implementation of the scheme is conducted with a degree of secrecy such that the client is not given or allowed to keep the promotional material, plans, legal, tax or financial analysis and opinions or commentaries from advisers, counterparties or promoters.

5.18 Finally, the Government proposes that a scheme will fall automatically within the second test if it includes certain features that are indicative that it is a scheme that the promoter considers HMRC is likely to challenge. These features might include:

  ♦  A 'fighting fund' to fund litigation in the event of HMRC challenge;

  ♦  A commitment by the promoter to fund litigation in the event of HMRC challenge;

  ♦  Fees that will be earned if HMRC challenges the scheme and it is eventually settled or decided in the client's favour;

  ♦  The promoter indemnifies users' costs in the event that the scheme fails to achieve any tax advantage.

Q.5 Would the proposed changes to Hallmark 1 (paragraphs 5.16 to 5.18) be proportionate and effective?

Hallmark 2: Confidentiality where no promoter involved

5.19 This hallmark applies to schemes developed 'in house' and applies only where the person who is expected to obtain the tax advantage is other than a small or medium-sized enterprise. It is similar to the second test in Hallmark 1. It asks the firm designing the scheme for use in-house whether they wish to keep any element of the scheme (where that element gives rise to the expected tax advantage) confidential from HMRC at any time after the 'material date' in order to:

  ♦  facilitate the repeated or continued use of the same, or substantially the same, element;

  ♦  reduce the risk of HMRC opening an enquiry into the return, etc. affected; or

  ♦  reduce the risk of HMRC withholding a claim for repayment