On 17 August, HMRC launched a consultation on imposing potentially ruinous sanctions on those who "enable tax avoidance" where HMRC defeats the arrangement in question. The proposals are unworkable in their current form and one has to hope they were only a "ranging shot" in a battle between HMRC and the profession.
As drafted, they target anyone who provides advice, acts as an introducer or intermediary or simply facilitates the implementation of avoidance schemes. The proposed sword of Damocles hanging over these "enablers" is naming and shaming and a penalty of up to 100% of the financial benefit they enjoy or, more seriously, up to 100% of the tax understated by the user(s). For those advising Vodafone this would have meant bankruptcy.
The target is anyone in the "supply chain" of avoidance arrangements who benefits from implementation of the arrangements and without whom they could not be implemented. This casts the net very wide: not only tax advisors, but trustees, Independent Financial Advisors and company formation agents, regardless of whether they understood or promoted the arrangements.
There is no carve-out for those merely advising on the legality of arrangements rather than promoting them
These proposals don’t just overshoot the target but fail to define the potentially right target and then impose self-defeating sanctions.
There is no carve-out for those merely advising on the legality of arrangements rather than promoting them. Advisors are left torn between their professional duty to their client and their obligations to their insurers. Taxpayers will no longer receive unbiased advice, which would in future be hedged with unnecessary qualifications. This in turn will frighten trustees and service providers, who will refuse to act.
Most noticeably, there is no exemption for honest error by the enabler. This is not surprising. Under these proposals nobody can be clear about what it is they should refrain from enabling. The definition of avoidance arrangement is largely taken straight from that in FA2016 for enablers of criminal evasion, which was understandably cast extremely wide to include anything notifiable under DOTAS.
DOTAS itself is strictly not even about avoidance but, under s318 FA04, about a "tax advantage", a far wider concept which guidance tells us includes any "relief or exemption from tax".
After the introduction of Hallmark 9 in February of this year, in theory there is now a duty to notify under DOTAS any use of a loan or share where one of the main benefits is a tax advantage and there is at least one term or condition that would not have been included except for the tax advantage. This covers numerous ordinary commercial arrangements.
Advisors can be relied upon to use common sense on what to notify under DOTAS because notification exposes their clients to APNs. But to adopt the grapeshot approach of what is notifiable under DOTAS to define the type of avoidance for which "enablers" could be fined crippling sums gives HMRC almost limitless discretionary powers.
Fostering fear among advisors and intermediaries may stop some undesirable avoidance by the medium wealthy. But it is naïve to assume it could ever prevent sophisticated tax planning by the seriously wealthy or major corporates. Instead, implementing these proposals would only drive much advisory work offshore, costing HMRC tax on the advisory fees, and/or hugely boost the insurance industry with increased PI premiums. It certainly spells the end of the Working Together partnership.
What should HMRC do instead? If it really feels it has too few powers after DOTAS and POTAS and penalties for enabling offshore evasion, it could consider a far more targeted definition of enabling avoidance and exempting those who notify and ensure their clients leave sufficient security for any tax risk. It would suit the advisory industry and HMRC much better.
Tom Wesel, partner, Milestone International Tax Consultants