The media of late seem to be confused between enabling tax evasion and enablers of defeated tax avoidance. It is no wonder really given the clouding of what constitutes avoidance and evasion. In summary avoidance is the legal manipulation of one’s affairs to reduce a tax liability and is severely frowned on by HMRC. Evasion involves intently acting in a manner not to pay tax that is clearly not permitted by law.
HMRC counter avoidance by challenging arrangements through technical arguments, whether the arrangements are commercial and whether the purported outcome was intended by Parliament. Ultimately, where avoidance is identified, case law results to determine the tax treatment and the Treasury may seek to alter legislation or introduce legislation to deter avoidance.
Where HMRC suspect fraud, they will either offer the contractual disclosure facility or investigate with a view to prosecute. The contractual disclosure facility or code of practice 9 enable a taxpayer who accepts they have acted deliberately to regularise their tax affairs in return for not being prosecuted. It is also illegal to knowingly assist a taxpayer to evade tax.
On 14 May 2021, HMRC confirmed that it was investigating 153 suspected enablers of tax evasion. The enablers include unregulated tax advisers and other professionals. Information originally came to light following a Freedom of Information Act 2000 request by Money Marketing in February 2020.
The 2017 Finance Act introduced penalties for any person enabling the use of abusive tax arrangements and those found to assist in tax evasion could be fined up to 100% of the tax evaded. The measure was considered to bring in £100m in Revenue although efforts have not yet had results. This is not surprising given the disruption brought about by Covid.
A number of articles during 2020 and 2021 have highlighted that promoters of tax avoidance schemes may be within those investigated as suspected enablers of tax evasion. Subject to the scheme details, that may be the case although there is legislation for:
- Those that fail to prevent tax evasion (s45 and 46 Criminal Finance Act 2017), and
- Enablers of defeated tax avoidance were introduced by Schedule 16 Finance (No.2) Act 2017.
When the legislation was introduced, HMRC singled out financial advisers as one of the groups that would be covered because of the potential fees and commissions they could earn from marketing abusive schemes.
HMRC has confirmed that the potential for enabling of tax evasion was not limited to those within professional services but also includes non-financial services such as storage and distribution facilities, construction, and software development. Since April 2017 there have been more than 60 prosecutions under HMRC’s enablers of criminality programme.
Failure to prevent tax evasion
Part 3 The Criminal Finance Act 2017 (CFA 2017) introduced legislation for corporate offences of failure to prevent facilitation of tax evasion. SI 2017/739 brought the legislation into effect from 30 September 2017 although section 47 “Guidance about preventing facilitation of tax evasion offences” was brought into force on 17 July 2017.
Tax evasion is a criminal offence. Facilitating tax evasion is also a criminal offence. However, historically, attributing criminal liability to a corporation or partnership had been difficult. Since 30 September, Part 3 CFA 2017 made this easier.
The legislation applies to a “relevant body” and “acting in the capacity of an associated person” (S44 Pt3 CFA 2017): broadly defined as a body corporate or partnership. A partnership may be incorporated or otherwise. A person acts in the capacity of a person associated with the company or partnership if they are an employee acting in that capacity, and agent acting in that capacity or any other person who performs services for an agent acting in that capacity.
The offences include the failure to prevent facilitation of UK tax evasion (S45 pt3 CFA 2017) and foreign tax evasion (S46 pt3 CFA 2017).
UK tax evasion offence means:
“(a) an offence of cheating the public revenue, or
(b) an offence under the law of any part of the United Kingdom consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax.”
UK tax evasion facilitation offence means:
“(a) being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax by another person,
(b) aiding, abetting, counselling or procuring the commission of a UK tax evasion offence, or
(c) being involved art and part in the commission of an offence consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax.”
The definition of foreign tax evasion and facilitation are similar (see S46 pt3 CFA 2017).
There is a defence if it can be proven that, when the UK tax evasion facilitation offence was committed:
- prevention procedures as it was reasonable in all the circumstances to expect were in place, or
- it was not reasonable in all the circumstances to expect any prevention procedures to be in place.
A relevant body guilty of an offence can be liable to prosecution and an unlimited fine (excluding a summary conviction in Scotland or Northern Ireland where it may not exceed the statutory maximum).
Enablers of defeated tax avoidance
The penalty for enablers of defeated tax avoidance was introduced by Schedule 16 Finance (No.2) Act 2017. However, many avoidance schemes involve an offshore structure, and we should not forget that Finance Act 2016 actually introduced the first penalties for ‘enablers’ of tax avoidance, focusing on offshore evasion of:
- Income tax.
- Capital Gains Tax (CGT)
- Inheritance Tax (IHT)
The legislation provides for a penalty where a person who enables another to carry out offshore evasion where the certain conditions are met:
- The person knew that their actions would be likely to enable (by encouraging, assisting or otherwise facilitating) another to carry out offshore tax evasion or non-compliance, and
- The enabled person has been convicted of a relevant offence or found liable for a relevant penalty.
Schedule 16 Finance (No.2) Act 2017 introduced specific penalties applying to ‘enablers’ of failed tax avoidance arrangements. There was also a change in the way penalties apply to users of failed tax schemes.
The term ‘enabler’ is intended to include anyone in the supply chain who benefits from an end user implementing arrangements which are later defeated. Penalties will be linked to the enabler’s fees. An enabler could be a person who is involved with the design, promotion, financing arrangements, or providing advice relevant to the avoidance objective or implementation.
Finance (No2) Act 2017 provides that:
- Penalties will apply to defeated schemes.
- A 100% fee-based penalty may be imposed on everyone in the supply chain.
- Penalties will apply to advice provided or actions taken after Royal Assent of Finance (No2) Act 2017 (16 November 2017).
- The defence of taking Reasonable care is removed for those who rely upon non-independent advice.
A defeated scheme or arrangement is:
- When there is a final determination of a tribunal or court that the arrangements do not achieve their intended tax advantage, or
- When a taxpayer and HMRC agree that their arrangements do not work.
Whether an arrangement is an avoidance arrangement will be based on the General Anti-Abuse Rule (GAAR) double reasonableness test rather than being linked to schemes notifiable under DOTAS or defeated by a Targeted Anti-avoidance Rule (TAAR).
Finance Act 2021 gave HMRC additional powers (from 10 June 2021) to:
- Use Schedule 36 powers to obtain information about enablers of schemes as soon as they are identified.
- Ensure penalties can be issued and enablers named without delay.
- It also makes changes to the number or percentage of defeats which need to take place before penalties can be issued for multi-user schemes. Defeats here does not just mean a defeat in court and can include users settling with HMRC.