Tom Wesel, Partner, Milestone International

HMRC’s proposals of August 17 to impose penalties on ‘enablers’ of tax avoidance raise grave civil liberties concerns. As they stand, the proposals are one-sided, ludicrously draconian, and need to be revised.

The frustration directed at tax avoidance is understandable. HMRC are looking for ways to prevent mass market tax avoidance schemes that are often backed up by carefully caveated opinions from barristers paid for by the scheme’s providers. The proposal, therefore, is to charge ‘enablers’ of such schemes (tax advisors, lawyers, trustees) a penalty of up to the amount of tax their clients would have saved in cases where the ‘arrangements’ are later defeated by HMRC, either in court or by agreement. The heavy penalties proposed are unlikely to lead to any settlements in the future.

While there is sympathy for the intent of the government’s proposals, they have been put together using definitions inappropriately borrowed from other provisions in the Finance Bill. They are so wide that, if enacted in their current form, there would be little scope for clients to receive unbiased advice in tax matters. Advisors would be forced to err overly on the side of caution, to protect themselves rather than their clients.

Who is an enabler?

The first serious issue in the proposals can be found in the definition of enabler, which has been taken from the new regime of fines in the Finance Bill 2016 for advisors who enable offshore tax evasion. This defines an ‘enabler’ as anyone who ‘has encouraged, assisted or otherwise facilitated conduct that constitutes [offshore tax evasion or non-compliance]” (Part 1, Schedule 20, Finance Bill 2016). This may be an appropriate definition for conduct that facilitates a criminal offence, as anyone engaged in such conduct is likely to have an inkling that something is amiss.

However, the wide scope of who is an enabler in relation to avoidance alongside the lack of any requirement for fault means ‘enabling’ avoidance would make advisors potentially liable in a huge variety of situations. This would include a client seeking professional advice on whether to participate in a scheme, being responsibly advised on its risks and likely consequences, but deciding to go ahead anyway.

One can understand why HMRC is reluctant to concede the need for fault, negligence or collusion with the client – otherwise, peddlers of potentially dubious schemes could claim ignorance and ‘blame the barrister’ (whose opinion will be conveniently vague). Unless HMRC is willing to rethink and distinguish the responsible advisor who points out risks from one wilfully negligent, or one colluding with clients, tax will end up as the one area of law where advisors fear state reprisals. Achieving a balance between not having advisors forever fearfully looking over their shoulders and putting reasonable pressure on them to be more conservative is not easy to achieve.

To try to maintain that balance, liability for the enabler must depend on what they can be assumed to know or be expected to discover. Only where it can be shown that an ‘enabler’ should reasonably have been aware of a significant risk that the advice contravenes the likely purpose of the relevant tax rules can one fairly consider imposing such extreme, and potentially ruinous, penalties. Simply leaving the degree and manner of their imposition up to HMRC and ‘trusting the executive’ is likely to provoke a climate of fear and concern. Lawyers often intone about the rule of law, but in this context it’s not just a cover for professional self-interest.

What is avoidance?

A second serious issue is that HMRC has proposed a concept of avoidance so wide that it catches almost any arrangement that involves a tax saving, whether legitimate or not. The definition is taken from the scheme of sanctions for repeated ‘Promoters of Tax Avoidance Schemes’ (POTAS) in Part 10 of Finance Bill 2016. Once again, while POTAS may require the broadest possible definition of avoidance to sanction serial promoters, it is of little help to responsible advisors and others in knowing what kind of arrangements to ‘avoid’.

Such arrangements consist of those which:

• have been counteracted by the General Anti Abuse Rule;
• are subject to a Follower Notice;
• are notifiable under the Disclosure of Tax Avoidance Schemes or VAT disclosure regimes;
• are the subject of legislative targeted anti-avoidance rules.

Of these four, the real problem is the ambit of the Disclosure of Tax Avoidance Schemes (DOTAS) rules introduced in 2004, which has been continually widened to the point where it encompasses almost anything.  Originally, it was a system obliging advisors to notify mass-marketed schemes to HMRC, so that HMRC could stop them in time to limit the tax loss. That is no longer the case.

Under regulations introduced earlier this year (SI 2016 No. 99), DOTAS has been expanded so that any arrangement (whether marketed to just one client or many) that employs shares or loans is notifiable wherever that arrangement is likely to have been entered into for tax reasons. That includes a vast number of ordinary commercial transactions that are structured to be tax efficient. There does not even need to be a tax avoidance motive involved, merely a ‘tax advantage’, another extremely wide term.

It is perhaps understandable that HMRC would like to keep the strict legal definition of what is ‘notifiable’ under DOTAS very wide so as to collect as much information as possible, while relying on advisors to use their common sense on what not to report. It is even understandable why it might have wanted to build on this for POTAS to catch the serial providers of schemes. However, the vast scope of the strict legal test of what is ‘notifiable’ under DOTAS means that HMRC could impose a penalty on ‘enablers’ wherever an entirely benign arrangement to save tax is implemented using shares or loans and HMRC ultimately defeat this.

All this may not be the intention, but as currently drafted the proposals give HMRC the widest possible discretionary powers to impose immense and crippling fines without proof of fault. The challenge will be finding clear principles that stop those who devise and market avoidance schemes from profiting from them while preserving the rights of taxpayers to seek unbiased advice on often unclear areas of law. Just as taxpayers need to be able to plan their affairs within the law and not lay themselves open to unintended liabilities, so to do their advisors.