Share this content

Ineffective tax avoidance: targeting the enablers

An all-party parliamentary group on Anti-Corruption and Responsible Tax chaired by Dame Margaret Hodge launched a pre-emptive strike to lobby for stronger anti-avoidance measures head of this week’s draft legislation.

23rd Jul 2020
Share this content
Margaret Hodge leads parliamentary ginger group to stiffen anti-avoidance law
Dame Margaret Hodge_CC

Just before the Treasury and HMRC released proposals for tackling promoters of tax avoidance on Tuesday, Dame Margaret popped up as the head of an all- party parliamentary group (APPG) that put out a policy paper from the The Policy Institute and funded by the Joffe Trust & CIPFA.

This APPG picks up on the redoubtable Dame’s previous efforts when chair of the House of Commons Public Accounts Committee. APPGs are more informal, however, and are effectively ginger groups of members of both Houses of Parliament with no official standing.

Agenda

Hodge set out her stall by repeating her long-held view that “It is high time that the government acted to curtail aggressive tax avoidance facilitated by lawyers, banks, accountants and advisers.”

As she elaborated, “Much revenue is lost from tax avoidance schemes that simply do not work. It is this tax avoidance of the most egregious kind with which this paper is concerned. We are not trying to start a witch hunt against honest advisers that make a mistake….. We’re looking at the very worst end of the tax advice spectrum.…. It is this criminality that we aim to address.”

The policy paper’s initial thesis suggested that sophisticated taxpayers implement schemes that they know contravene the law hoping that HMRC will not find out about the arrangements.

Advisers and clients effectively dare HMRC to contest a resource-intensive tax appeal that could last years, sometimes relying on limitation periods or arguing that the HMRC assessment is procedurally flawed rather than the soundness of their schemes.

The criminal regime

The APPG believes that current criminal law is ineffective because a defendant can successfully claim that they genuinely believed that the scheme could be effective, even where the underlying legal arguments are not credible.

In their view, many advisers recommend schemes that constitute a criminal tax fraud but remain completely safe from prosecution, provided that the documents are in order and full disclosure is made as and when required.

The civil regime

As many readers will be aware, Finance (No 2) Act 2017 was introduced to attack promoters of tax saving schemes but, according to the group, the law is ineffective for two reasons.

First, the financial penalty is inadequate, being limited to the fee.

Second, in order to fall foul of the legislation, it is necessary to fail the GAAR (General Anti-Abuse Rule) double reasonableness test, which is “notoriously high”.

The APPG policy paper suggestsed that “people should only be achieving tax savings where advisers would be confident, on a conservative view of the legislation, that Parliament intended the saving”.

That word “conservative” could raise a few eyebrows.

The upshot is that the most bullish advisers get the best results, often by knowingly contravening the law or taking a position that is unjustifiably aggressive.

Potential improvements

The group pointed out three notable defects in these regimes:

  • the evidential problem faced in prosecuting the criminal offence in most avoidance cases
  • the high (ie criminal law level) hurdle of the GAAR test in the context of the civil penalty regime, and
  • the fact that the civil penalty is relatively trivial.

Proposed policy interventions

  1. Make the GAAR test an alternative route to establishing dishonesty for criminal prosecutions in tax avoidance cases, thus removing the need for HMRC to prove separately that there is dishonesty.
  2. In the regime of civil penalties for enablers of defeated tax avoidance schemes, replace the GAAR test with a “more-likely-than-not-to-fail” test. A number of professionals already use a “greater than 50%” probability test to determine whether a tax avoidance scheme is legitimate and one could argue that a higher percentage might be even more “conservative”. One potential problem here is that HMRC would need to decide the percentages and then leave their conclusion open to appeal.
  3. The financial penalties for the enablers of ineffective tax avoidance should be increased.

Conclusion

It could be argued that the 2017 legislation is still very new and relatively untested. In addition, this is only an informal body rather than a government or quasi-government organisation. The draft legislation that emerged on Tuesday was more circumspect, and sought mainly to prevent promoters from delaying or sidestepping HMRC compliance efforts while they continue to sell their schemes. 

However, as Hodge pointed out, the Exchequer is desperately in need of funds to fill the coronavirus hole and one possible route might be a further crackdown on tax avoidance schemes that are deemed to be abusive and, as such, unfair to taxpayers.

As so many advisers have pointed out for decades, if the tax regime was simplified this would eliminate many of the problems that the APPG seeks to address.

Replies (23)

Please login or register to join the discussion.

avatar
By Justin Bryant
23rd Jul 2020 16:51

Rather than Margaret Hodge, why don't HMRC simply pay someone like me to kill off DR etc. schemes? I could have done that with a very small stroke of the pen back in 2010, but instead they implemented the ridiculously complicated and loophole filled P7A regime.

Thanks (2)
avatar
By Trethi Teg
24th Jul 2020 09:26

I recommend that you all look into the affairs of the "Honourable Margaret Hodge" and that of her family. You will find it interesting. Family companies not paying thier "fair share" of tax and her and her children involved in various trusts which I am assume have tax avoidance motives.

Typical corrupt politician.

Thanks (7)
Replying to Trethi Teg:
avatar
By jonathanw
24th Jul 2020 10:07

While it wouldn't surprise me in the least if this were the case, but do you have anything to back this up?

Thanks (1)
Replying to jonathanw:
avatar
By Payroll Pete
24th Jul 2020 10:29

https://www.google.co.uk/search?q=margaret%20hodge%20family%20trust%20ta...

first search result is from some dodgy website accountingweb.co.uk - but the other should provide enough info

Thanks (1)
Replying to Payroll Pete:
avatar
By jonathanw
24th Jul 2020 10:35

Then I apologise for doubting! I'd forgotten I was on an accountancy discussion board rather than a Facebook free-for-all!

Thanks (0)
Replying to jonathanw:
avatar
By Trethi Teg
24th Jul 2020 10:34

Here we are. I could provide other information but this gives you a flavour.

https://www.accountingweb.co.uk/tax/hmrc-policy/margaret-hodge-benefited...

Thanks (0)
Replying to Trethi Teg:
avatar
By Rgab1947
24th Jul 2020 10:44

Exactly!

Thanks (0)
Replying to Rgab1947:
avatar
By Exfoliate
01st Aug 2020 18:14

It's always the hypocrisy of politicians that stand in the way of finding a solution to any issue, even if there is lack of forethought that results in the problem arising in the first place. Any of us could solve the problem in a very short time.

Thanks (0)
avatar
By Mr J Andrews
24th Jul 2020 09:46

The final paragraph says it all.

Thanks (1)
By jon_griffey
24th Jul 2020 10:47

The way to stamp out aggressive tax avoidance seems very easy to me. They just need to make every accountant, lawyer, introducer, banker, agency, promoter,tea boy etc who is any way involved in the scheme to have joint and several liability for the tax lost. That will soon focus minds.

Thanks (1)
avatar
By johnjenkins
24th Jul 2020 10:49

Same old, same old. There is only one way to curb fraud (cos that's what avoidance with artificial elements in it, are) and that is court action.
Of course you could always simplify the tax system.
So expect more compliance fines for the many and more tax breaks for the big boys and multinationals.
Justin is that an H or an R.

Thanks (0)
avatar
By NeilW
24th Jul 2020 10:57

"However, as Hodge pointed out, the Exchequer is desperately in need of funds to fill the coronavirus hole "

I'm surprised that any accounting site would allow such a comment to pass without pointing out the silly fallacy. Tax avoidance causes more activity in the economy since it means that people retain money and can spend it- which means the taxation point just moves somewhere else and somebody else pays the tax. Since my spending is your income less tax and vice versa, the total tax take depends upon the level of saving. Scared people save more, which by accounting identity leaves a larger deficit.

The issue with tax avoidance is one of distribution and control. Some people get more spending power than the Exchequer intended. It's a question of distributional fairness and integrity of the tax system.

Tax Avoidance is nature's way of telling your your tax system is too complex. Make it simple and ensure those who then evade tax or help others evade tax do jail time.

Thanks (1)
Replying to NeilW:
avatar
By johnjenkins
24th Jul 2020 11:23

Tax avoidance schemes with elements that are artificial are not tax avoidance, they are tax evasion. Unfortunately HMRC keep lumping avoidance and evasion together. They are not the same. It really is black and white.

Thanks (0)
Replying to NeilW:
Profile
By indomitable
25th Jul 2020 13:47

Couldn't put the argument better myself. If the government really wanted to tackle aggressive tax avoidance it needs to make the tax system simpler rather than building layer over layer

Thanks (0)
avatar
By fbdconsultancy
24th Jul 2020 11:25

It is my considered view that before we go chasing these so called wrongdoers, HMRC should clean up its act and cease its underhanded, bullying and dirty behaviour towards the many innocent taxpayers it attacks.

Firstly, HMRC is the administrator of tax law, not the law maker - this seems to have been lost somewhere along the way in the last few years.

Secondly, unreasonable and aggressive behaviour by HMRC should result in the individual perpetrators also being subject to fines and imprisonment - that would curtail some of the unacceptable behaviours and tricks we are currently witnessing as accountants and tax advisors.

Thirdly, government officials, who are supposedly the leaders of our democratic society should abide by their own laws. In that way taxpayers could at least believe in the tax system as a "fair" (there's an oxymoron) system.

Finally, whilst I do accept that "tax fraud" is being committed and "unacceptable tax avoidance" takes place, most of what I see is the attacking of naive and innocent taxpayers who have not known the rules or have made innocent mistakes. Instead of immediate penalties, it would be more appropriate to educate (or warn only with explanation) in the first instance and only penalise if the same mistake persisted. Equally, it should be the case that if HMRC makes a mistake (in the current regime) it is mandatory to pay a penalty back to the taxpayer - not just tax returned with interest. Lets get some equality and (dare I say it) "fairness" back into the system.

Thanks (2)
avatar
By Ian Bee
24th Jul 2020 11:54

Please can someone explain this comment:

As she elaborated, “Much revenue is lost from tax avoidance schemes that simply do not work...."

If the scheme doesn't work, no tax will be avoided.

Thanks (0)
Replying to Ian Bee:
Psycho
By Wilson Philips
24th Jul 2020 12:46

It’s ‘lost’ to the taxpayer (in the global sense) until such time as the scheme is defeated and the tax repaid - which can take years.

Thanks (0)
Replying to Wilson Philips:
avatar
By johnjenkins
24th Jul 2020 12:57

HMRC said many years ago that if a scheme had an element that is artificial then it would ban it. They never did and this is why we are in this mess now.

Thanks (0)
Replying to johnjenkins:
Psycho
By Wilson Philips
25th Jul 2020 16:36

Problem is that it is not HMRC’s place to ban anything. That is down to the courts and the legislators.

Thanks (0)
Replying to Wilson Philips:
avatar
By johnjenkins
27th Jul 2020 09:04

My point was that if HMRC had taken action when they said they would then we wouldn't be in this position.
If HMRC says it doesn't like a scheme and bans it then the courts will only decide if that decision is appealed against. Had this been done years ago these schemes would never have come on the market.

Thanks (0)
Replying to Wilson Philips:
avatar
By moneymanager
28th Jul 2020 15:16

"the Courts" and some decisions are really on a knife edge, many of the film realted schemes turned on incredibly arcane interpreattions of what expenditure were of a capital or revenue nature, as they say, a different judge a different day.

Thanks (0)
avatar
By moneymanager
24th Jul 2020 14:16

On the basis of her argument every S42 and S48 film partnership that had the film passed as qualifying by the DCMS and on which initial tax relief was grante should have any subsequent penalty restored, clearly HMRC thought they worked at the time and it was only a change in poitical climate that casued them to change their opinion. I have, by the way,no truck with the "chancer" end of the perfectly legal tax reduction activity.

Thanks (0)
avatar
By AndrewV12
04th Aug 2020 10:54

Its 2020 and the tax avoidance debate rumbles on, it will still rumble on in 2030 and beyond. A further crackdown, just goes to show the previous crackdowns have been useless, intentionally or otherwise.

However, as Hodge pointed out, the Exchequer is desperately in need of funds to fill the coronavirus hole and one possible route might be a further crackdown on tax avoidance schemes that are deemed to be abusive and, as such, unfair to taxpayers.

Thanks (0)