HMRC takes tough stance on tax avoidance

HMRCThe difference between tax avoidance and tax evasion is that avoidance seeks to minimise the tax paid, generally by legal means, for example ordering one’s affairs through bespoke planning advice.

Evasion, on the other hand, is knowingly not paying tax; for example, hiding income-producing assets or bank accounts offshore to conceal them. We often witness evasion that has been brazenly dressed up as allowable avoidance. It is this behaviour that encourages HMRC to suspect planning/avoidance motives in vanilla tax structures and has contributed to the swathes of negative media concerning tax avoidance.

In the 1936 Duke of Westminster case, Lord Tomlin stated: “Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds…he cannot be compelled to pay an increased tax.”

Exploiting the rules

Tax is imposed by law and it is possible to take advantage of deductions, reliefs and different tax rates to ensure a lower tax bill. However, many avoidance schemes are artificial in the way they operate. Instead they are used to exploit or bend the rules in an advantageous way not intended.

There are some laws that remain mechanistic in the way they operate. In this case, a literal construction of that law, which examines each step in a series of linked transactions, without regard to the wider scheme, might be appropriate.

Key points

  • Tax is imposed by law and it is possible to take advantage of reliefs to ensure a lower bill.
    In 1981, the House of Lords decision in W T Ramsay Limited vs CIR meant the meaning of tax legislation had to be considered in context.
  • Disincentives to tax avoidance include the naming and shaming of scheme promoters.
  • Lawmakers are increasingly ensuring that statutes build in purposive provisions, as opposed to mechanistically operating laws. These provisions clearly define the purpose of a particular tax, relief or exemption, based on the behaviours it is intended to drive.

Where the purpose is clear and the facts show that the intended purpose has been disregarded – for example, because a scheme has been entered into mainly for tax avoidance – it can be expected that HMRC will challenge this.

The courts may then decide to deprive the taxpayer of the artificial advantage they had sought through entering the scheme. This approach is not new. In 1981, the House of Lords decision in W T Ramsay Limited vs CIR was hailed as an intellectual breakthrough, but for most it just put tax law on the same footing as all other law. This meant it required the words to be considered in the context and scheme of the relevant legislation as a whole, with regard to the purpose of the statute.

This purposive construction allows courts to ascertain the legal nature of any transaction and to consider the tax consequence accordingly. If it emerges that a series or combination of linked transactions are intended to operate as such, then the court can consider that series or combination. If there is an artificial ‘allowable’ tax loss created, which is designed to be offset against a real chargeablegain, the self-cancelling transaction can be ignored.

Dozens of cases followed Ramsay, where purposive interpretation and its extent has been considered. Advisers seeking to avoid a step looking pre-ordained, introduced artificial elements of risk or built-in contingencies that sought to provide a lack of certainty of outcome. But HMRC and other governments then ensured laws were introduced, which focused on the substance of the transaction rather than its mere form.

Film schemes

The legislation concerning film schemes, for example, has changed in an attempt to ensure that the beneficial tax relief is used as intended – to incentivise projects in the UK film industry. This is after they were being used as a means of generating artificial tax losses to offset against taxable income and/or gains in the hands of third parties.

This does not mean that the schemes before were not avoidance, but that the avoidance was not robustly challenged. For more than a decade, the statistics published in the UK show that more than 80 per cent of cases taken through the courts are being decided in HMRC’s favour. Despite this, many avoidance schemes flourished.

For numerous reasons, the future of mass-marketed tax avoidance schemes might be finite, due largely to the introduction of the Disclosure of Tax Avoidance Schemes regime in 2003. This means mass-marketed schemes and arrangements that seek to exploit a loophole in the legislation must be reported to HMRC, putting it in a much better position to react more quickly.

Despite the disincentives, tighter legislation and the government having more information inflows than ever before, the UK’s tax gap still sits at about £37bn.

Further disincentives introduced in recent years include the naming and shaming of promoters of such schemes, reputational damage for serial avoiders and new legislation. These included both targeted and general anti-avoidance rules, to help catch particularly abusive transactions.

Furthermore, the government has recently sought to deprive people of any cash flow benefits of entering into avoidance schemes. It has done this with accelerated payment notices and follower notices demanding that any tax is paid up front, even where the scheme’s effectiveness might still be the subject of a dispute. Other disclosure facilities are now closed/closing, and tax-geared penalties for failing to report offshore assets can be up to 300 per cent of the tax due.

In addition, since 2010, the government has invested an additional £1.8bn to help tackle tax evasion, avoidance and non-compliance. One of the latest weapons is the introduction of two corporate strict liability offences for the failure to prevent tax evasion by employees, agents or other persons performing services for the corporate. This is part of a move by the UK to shift responsibility for enforcement and compliance to corporates themselves. With unlimited financial fines and no de minimis limits, this piece of legislation cannot be ignored.

Despite the disincentives, tighter legislation and the government having more information inflows than ever before, the UK’s tax gap still sits at about £37bn.

The UK is one of the only countries in the world to regularly publish a tax gap figure, which makes direct international comparison difficult. However, experts generally agree that the complexity of our global tax system creates inefficiencies in the collection of taxes and opportunities for abuse.

Tax avoidance has come under the media spotlight in a major way. Large corporations have been boycotted, and there has been regular criticism of HMRC by the Public Accounts Committee, including arguments over immoral behaviour.

Tax is imposed by law, but we also want to encourage behaviour that means individuals and corporates are responsible taxpayers and see it as a part of their civic responsibilities. If there is a shift in the way that taxes are perceived, from one of real-life cost to real-life benefit, then the desire to avoid tax may be reduced.

Businesses want to restore and retain the public’s trust. Larger corporations are already required to publish tax strategies that set out statements about the company’s risk appetite, attitude to tax planning, use of tax havens, approach to risk and approach to working with HMRC. It might be that one day we will all be expected to make similar statements.

Scandals in the news

With recent tax scandals highlighted in the media, even where businesses or individuals might have operated within the law, the perception is that they have behaved immorally. I think the global transparency measures will mean there will be greater scrutiny of business accounts, and the public will expect businesses to pay tax in the country in which the revenues are earned.

Simplification of the tax system could help businesses by removing the ambiguity in tax laws and creating fewer opportunities to exploit loopholes. As further discoveries are made, for example the Paradise Papers, the perception of avoidance schemes conflates the meaning of evasion and avoidance, and creates the view that avoidance is just another form of evasion.

HMRC’s wins case against ‘Liberty’ schemers

Let us consider HMRC’s recent court win against the users and promoters of the ‘Liberty’ scheme.

It is worth pointing out that the Upper Tribunal judges’ decision was to uphold the First-Tier Tribunal’s original decision that the scheme or arrangements were “artificial and uncommercial”. This meant that artificial tax losses were created for 1,600, predominantly UK, taxpaying scheme users, involving a Jersey partnership and Cayman Islands company.

News of this was released towards the end of October 2017, but HMRC and the scheme’s users had decided to formally proceed much earlier, with a hearing in around 2014. This demonstrates the length of time people are waiting to have their day in court. Also, HMRC investigators would have picked this scheme up for investigation many years before, where they would have had the hard task of identifying the facts before considering the tax consequences.

It was reported that some £18m in revenues will be protected by HMRC as a result of the latest court decision, with similar arrangements consequently expected to fall too, helping to net an expected £325m. The numbers involved are substantial, with some amounts having been paid in tax refunds to the scheme users and others being blocked by HMRC while under investigation. HMRC has won 22 of the 26 such cases litigated in the past year.

The court’s finding is very important, if not monumental, because it publicly stated that the scheme was artificial, thereby it had no discernible commercial purpose. This differs significantly to the vanilla – often bespoke – type of tax planning most professionals are involved in.

Note that those carefully analysing the arrangements have done so with regard to the many connected steps (purporting to achieve something legal and allowable for tax purposes), whereas when the steps are considered together, the overall intention becomes clear.

By |2017-12-18T10:12:13+01:00December 1st, 2017|News|

About the Author:

mm
Local independent financial advisers based in Haxby, York. Corville Wealth Managements offers professional and straight forward advice to all clients.