If you were tasked with countering tax avoidance schemes, what would you do? Would you target the users of the schemes, the promoters or both? You might start with targeting the schemes, which is just what HMRC did with the introduction of Disclosure Of Tax Avoidance Schemes (DOTAS) in 2004. When that wasn’t a big enough deterrent, it was only a natural step to offer settlement opportunities indicating a change in approach; these were largely successful. Settlement opportunities require resources and as we know HMRC has limited resources. The next step was to introduce accelerated payment notices (APNs). It’s not like our profession to accept change easily and certainly without a battle so APNs were greeted with fisticuffs. It’s no wonder that attacking promoters of tax avoidance schemes is the next combative technique. The issue is, does an adviser know if they are a promoter or not?
Recent years have seen numerous measures introduced in order to curb tax avoidance. Avoidance occurs where the taxpayer operates within the letter, but not the spirit, of the law in order to obtain a tax advantage other than that originally intended by the legislation.
As well as specific anti-avoidance provisions, there are various wider anti-avoidance tools, the best known of these are the Disclosure of Tax Avoidance Schemes (DOTAS) regulations, the General Anti-Abuse Rule (GAAR) and, controversially, the power to issue Accelerated Payment Notices (APNs).
Less widely known is the regime for Promoters of Tax Avoidance Schemes (POTAS). Rather than providing HMRC with information about potential avoidance schemes or counteracting tax advantages (as is the case with DOTAS and GAAR), the POTAS regulations seek to modify the behaviour of agents who offer high-risk avoidance schemes to their clients.
In addition to introducing numerous measures aimed at ‘serial users’ of tax avoidance schemes, the Finance Act 2016 has significantly widened the scope of POTAS.
Scope of POTAS
The POTAS legislation takes the form of a series of graduated sanctions against promoters, beginning with the issue of a conduct notice, escalating with the issue of a monitoring notice and culminating in substantial fines and a potential prison sentence.
POTAS applies to any person who designs the proposed arrangements, approaches another person with a view to making the proposal available for implementation by them or any other person or makes the proposal available for implementation by other persons.
It should be noted that by token of these terms an individual need only be associated with part of the life cycle of design, communication and implementation of a scheme in order to fall within the regulations. The regulations therefore affect not only the promoters of tax avoidance schemes but also any intermediaries who represent them.
Where an officer of HMRC becomes aware that a person is operating as a promoter and that they have breached any of a wide variety of threshold conditions in a significant manner, the officer must issue them a conduct notice.
The threshold conditions include, amongst others, where a promoter:
- Is subject to publications as a deliberate tax defaulter
- Is named in a report for a breach of the Code of Practice on Taxation for banks
- Receives a conduct notice as a dishonest tax agent
- Fails either to disclose a tax avoidance scheme, or to provide details of clients to HMRC
- Has been charged with a specified tax offence
- Has been found guilty of misconduct by a professional body
- Failed to comply with an information notice issued by HMRC
- Continues to market or make available a tax avoidance scheme after being given a notice to stop following a judicial ruling
A conduct notice requires that the recipient complies with various conditions stipulated within the notice. The terms can cover a broad range of requirements, from requiring the promoter to provide additional information to their clients to requiring that they stop promotion of a given scheme.
Subject to the right to override or withdraw the notice, a conduct notice will be in effect for a period of two years.
There is no right of appeal against a decision to issue a conduct notice.
Where a conduct notice is in effect and an officer determines that its terms have been breached the officer must apply to the tribunal for approval to issue a monitoring notice.
Upon receipt of a monitoring notice, the promoter must write to each of their existing clients and any new clients, whilst the notice is in effect, to advise them that they are a monitored promoter.
Their clients in turn most notify the Commissioners if they expect to obtain a tax advantage from the relevant arrangements and must include the Promoter Reference Number (PRN) on their returns to HMRC.
Furthermore, failure by a client to pass on a PRN makes them subject to an extended assessing period of 20 years if any tax is lost due to that failure.
Following the issue of a monitoring notice, and subsequent to an appeal period, an officer of HMRC has the right to publish various details of the monitored promoter, including:
- Their name
- Business address
- The nature of their business
- Any other information that they think appropriate to make clear their identity
Once a monitoring notice is in place, HMRC have broad information powers to obtain documents from monitored promoters and their intermediaries in order to consider the consequences of the monitored proposal and to check their clients’ tax positions.
The may also give notice to the monitored promoter and their intermediaries to provide details of their clients.
Subject to the right of appeal, where there is a failure to provide the requested information the officer may appeal to the tribunal for an order requiring the promoter to provide specified information.
Care must be exercised upon receipt of such a notice as the information powers are limited in numerous respects, such as by legal professional privilege, tax advisors, journalistic or personal information.
Penalties and Offences
FA2014 also introduces a number of offences where individuals are required to produce documents under the terms of act after they have been given notice, but conceal, destroy or otherwise arrange to conceal or destroy the document. The penalties consist of a fine or imprisonment for a term of up to 2 years or a fine, or both.
The fines are substantial and range from £5,000 to £1,000,000 dependant on which duty has not been complied with. Once a penalty has been imposed, daily penalties arise for each day the failure continues. These can be up to £10,000 per day.
Finance Act 2016
The most recent finance act has greatly expanded the scope of POTAS by introducing a new threshold condition in connection with Defeated Arrangements.
In consequence of this amendment where a promoter has fewer than three promoted schemes which have been are defeated within a three year period and further schemes are subject to challenge, they can be issued with a provisional conduct notice.
Where a subsequent challenge is successful the provisional conduct notice may become a full conduct notice. This in turn may result in the issue of a monitoring notice if it is not complied with.
The consequence of these amendments should not be underestimated; in the rules, original-format-only schemes which were within GAAR were within the threshold conditions. Within the new definition promoters who engage in the proliferation of numerous, ineffective schemes will also fall within POTAS. Continued failure to comply with HMRC’s requirements will ultimately bring them within the scope of criminal charges.