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.
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.
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.
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
- 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.
- 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.
- The financial penalties for the enablers of ineffective tax avoidance should be increased.
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.