Solicitors who advise clients on tax avoidance schemes successfully challenged by the authorities would be caught by new penalties outlined by HM Revenue & Customs today.
An HMRC discussion document, Strengthening Tax Avoidance Sanctions and Deterrents, proposes that 'enablers' of a defeated tax avoidance scheme be required to pay a penalty equivalent to the sum of tax the scheme sought to avoid.
The government is inviting comments on the document, which was published following the 2016 budget announcement that the government would act against ‘enablers of tax avoidance’.
HMRC has won a series of recent high-profile court victories against film investment schemes which maximised tax relief by inflating their losses. However ministers are understood to be angry that some of the schemes’ promoters benefited by being paid for their advice.
According to the discussion document, the new proposals ‘aim to shrink the avoidance market, by introducing stronger and more certain sanctions on all those in the avoidance “supply chain”, ensuring that no one can walk away without consequence after implementing tax avoidance arrangements that HMRC defeats’.
The document proposes that penalties be proportionate to the services provided by the enabler and the financial reward they obtained.
It suggests several possibilities, including basing the penalty ‘on the financial or other benefit enjoyed by the enabler in providing their services’, in effect seizing their fees.
An alternative would be a ‘tax-geared penalty’, equivalent to the sums understated under the failed scheme. The document notes that where an avoidance scheme is marketed to a wide population, ‘the aggregate amount of penalties for each individual enabler could quickly become significant’.
The proposals note that it will be necessary to exclude from the definition of enabler advisers who are unwitting parties or who are not responsible for the design of any element of the tax avoidance arrangement.
‘For example, a promoter may seek advice from an accounting or law firm on whether two companies are “connected” for any purpose of the taxes acts,’ the document states.
‘Provided the advice goes no further than explaining the interpretation of words used in tax legislation, the person would be within this exemption. However, if the advice contributed to the tax (or national insurance contributions) advantage element of the arrangements they would not.’
In the foreword, Jane Ellison MP, financial secretary to the Treasury, says: ‘Tax avoidance takes money away from public services and places disproportionate demands on the government’s resources.
‘Those who seek an unfair advantage, or who provide the services that enable it, and who then frustrate HMRC’s efforts to identify, investigate and resolve these cases, should bear real risks and costs for their choices.’
The proposals are likely to attract fierce criticism from the tax advice sector. Fiona Fernie, partner and head of tax investigations at international firm Pinsent Masons, said: 'Some aspects of these proposals go too far and could end up capturing traditionally accepted tax planning. The document lays out a definition of tax avoidance which is far too broad at present.'
John Cullinane, tax policy director of the Chartered Institute of Taxation, warned that the penalty regime could prevent taxpayers from getting access to honest, impartial advice on the law. ‘Definitions will be crucial,’ he said.
‘We are concerned about a scenario where a taxpayer goes to their tax adviser for advice on risks attached to participating in a scheme, receives appropriate advice setting out these risks and the likelihood of the scheme being defeated, but decides to join the scheme despite this.
‘It would be extremely harsh to penalise a tax adviser in this scenario where all the tax adviser has done is advise the taxpayer on the law as it stands.’
A spokesperson for the Law Society said: ‘The proposals raise significant implications for solicitors working with tax law, and we intend to review them carefully. We sincerely hope the government will design these proposals with the greatest of care, to ensure that in their desire to respond to public concern on this issue they do not inadvertently prevent millions of people from accessing legitimate professional advice on their tax obligations.’
The consultation closes on 12 October. Any changes to legislation will be taken forward as part of a future finance bill, the Treasury said.
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