For many years, there was a notable difference between tax avoidance, which is legal, and evasion, which is not. In recent years, however, the prevailing mood from government, the media and the public as a whole has shifted, on the back of high-profile cases such as the K2 scheme, used by a number of celebrities including comedian Jimmy Carr and footballer Wayne Rooney.
Now the view is that schemes designed purely to help businesses or individuals reduce their tax liability should not be tolerated, even if such arrangements may be technically within the letter – if not the spirit – of the law.
HMRC has also acted to reduce the opportunities available for people and organisations to avoid paying their share of tax. “We have seen a significant strengthening of positions in recent years,” says Frank Haskew, head of tax at ICAEW. “It really started in earnest with the disclosure of tax avoidance scheme rules back in 2004.” These rules have been amended virtually every year since, he says. “The pace of change increased further with the introduction of the general anti abuse rule [GAAR] in 2013, followed in 2014 by follower notices, accelerated payments and rules aimed at countering the promoters of tax avoidance schemes.”
Other measures have included the senior accounting officer (SAO) regime introduced in 2009, the large business tax strategy regime and the serial tax avoiders regime of 2016. Finally, there are proposals for penalties on the enablers of tax avoidance, which are likely to be reintroduced in the Finance Bill published after the election on 8 June 2017.
The early signs are that such measures are having an impact. HMRC says its most recent figures reveal an extra £26bn was brought in as a result of the crackdown, with £7.3bn coming from the 2,100 largest and most complex businesses in the UK. “We are clear that all businesses must pay the taxes due under the law,” an HMRC spokesman told economia. “Everyone must play by the same rules.”
One area that has certainly focused attention is the SAO regime, which introduced the concept of holding individual finance directors or CFOs personally accountable for ensuring their tax reporting systems are up to speed. Initially HMRC took a light-touch approach, failing to issue fines for the first three years, but in 2015/16 handed out 181 fines of £5,000, according to Pinsent Masons; a rise of 17% from the previous year.
“Senior executives and finance directors are, and will be, expected to play a leading role in ensuring compliance with the various regimes and ensuring increased transparency,” warns Lee Ellis, a barrister in the tax litigation team at Stewarts Law. “With large fines and much greater reputational damage at stake, it seems certain that breaches of these various regimes will have career-defining effects for many senior executives and finance directors.”
A particular requirement for finance directors is to ensure financial statements disclose any form of tax planning, warns Steven Brice, partner, financial reporting advisory, at Mazars. “Ensuring that the substance of the transaction is reflected and that the transaction is adequately disclosed are two key ingredients,” he says.
A further issue is that of advance payment notices, which requires those who have entered into certain tax planning arrangements to make payments of disputed amounts of tax in advance of those amounts being found to be due. “Even though HMRC has withdrawn hundreds of these following a judicial review, the issue has nevertheless made finance directors reconsider their attitude to tax risk,” says Brice.
Further moves to hold individuals accountable are in the pipeline, including the introduction of a criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion by those who act for them or on their behalf, including employees.
“In our experience finance directors at best may have an awareness of this, but few are taking any steps to address the issue,” says Jon Claypole, a tax partner at Mazars.
HMRC is already challenging finance directors when they feel teams are not sufficiently resourced, he adds, including cases of team members who process invoices and employee expenses claims without sufficient tax knowledge to do so correctly.
Advisers and other facilitators are also coming under the spotlight. The proposed new enablers regime being introduced means HMRC now has the power to tackle anyone involved in the supply chain of tax avoidance schemes that have been challenged and defeated at a tribunal.
“It’s all part of the same thing; a complete shutdown on anything they deem to be avoidance or tax planning schemes that are against the spirit of the law,” says Isobel Clift, manager at Blick Rothenberg. Penalties for enablers are based on the level of fees that have been charged in connection with the schemes, raising the possibility that HMRC may target schemes that have been used by large numbers of businesses or individuals, she adds.
There is potential danger here for accountants too, warns Clift. “Accountancy firms have to be careful if they’re asked for second opinions about a particular scheme,” she says.
“A lot of firms are considering developing some training on this in the same way that they have anti-bribery or anti-money laundering training, because while the penalties might not be too much of a burden, firms risk being named and shamed if tax is over a particular limit, and that’s something they will want to avoid at all cost.”
There are also concerns over just who could be embroiled in any investigation. “Pretty much everyone in the supply chain, from IFAs and banks to lawyers and accountants, could be considered an enabler, so they have to ensure on a case-by-case basis that they are not classed as such in the relevant circumstances,” says Haydn Rogan, tax partner at Weightmans LLP. “This is a far from straightforward process.
While the government has responded to some of these concerns by looking to limit the scope of the provisions, the measures remain broad and there will always be room for different interpretations.” HMRC, meanwhile, is already claiming an early victory, pointing to the decision by EDF Tax, a promoter of tax avoidance schemes, to close down, citing the enablers penalty as one reason.
The recent Professional Conduct in Relation to Taxation (PCRT) code, which has been developed by seven professional bodies including ICAEW and came into force in March, also emphasises operating within the spirit of the law. While signing up to the code does not in itself constitute a defence against criminal liability, those who adhere to it are unlikely to find themselves at risk of unwanted investigations from HMRC. “It is having an effect; we’ve had a number of firms asking about it and expect that to continue,” says Haskew. “Members need to look at it carefully and reflect on what they are doing when giving tax advice.”
There are other developments in the pipeline, too. Clift points to the requirement to correct period, which effectively gives firms or individuals with undeclared offshore tax until September 2018 to rectify the situation, including paying any tax due, or face penalties of up to 300% of the amount owing. A consultation around the requirement to notify offshore structures also recently closed, which is likely to lead to legislation further down the line.
“It’s similar to the new enabler penalties that have come in; if you’re responsible for setting up arrangements which involve offshore structures and these have certain hallmarks, which we’re yet to have details on, then you’re obliged to notify HMRC of that particular arrangement and of any clients that have used this,” she says.
But there is some concern that such a raft of measures could result in legislative overload, particularly for those in in-house finance departments who also have to contend with running the business. “Even professional advisers are struggling with all the material and what the differences are,” says Haskew. “There is a danger that people have difficulty in understanding what all these provisions are doing, and the question then is whether it will really address the problem. But if there was a magic bullet to try and stop all this, HMRC would have used it a long time ago.”
Cutting its cloth
After years of job cuts and tax office closures, there will understandably be concerns over just how much resource HMRC has to devote to a tax avoidance crackdown. “HMRC’s resources are always being cut,” says Frank Haskew, head of tax at ICAEW. “To give it some credit, it is an organisation that is struggling with organisational changes and a constant reduction in headcount and resources. That’s a very challenging environment in which to work.”
For its part, HMRC told economia it does have resources to focus on this area, and Isobel Clift, manager at Blick Rothenberg, also suggests that penalties have been made a priority area. “In recent years they have been putting their efforts into where they believe it’s needed, which is mostly into counteracting avoidance and evasion,” she says. “That’s not to say there’s not a resource issue, but it would be foolish to introduce all these changes without the manpower to back it up.”
The organisation is also being helped by more effective use of IT and data, suggests Jon Claypole, a tax partner at Mazars. “It now has a powerful IT system, which can collate all the information it holds in one place and make it possible for a team of tax specialists to identify tax risks across all the heads of tax,” he says.
“It is evident that the department is asking more pertinent questions too,” he adds. “The recruitment of qualified accountants means the challenges from HMRC also have an accounting angle and the quality of those questions is on many occasions impressive.” There is, however, a need to ensure that staff are trained in the commercial realities of being in business, as well as tax and accounting issues, he adds.