Combatting avoidance is messy and time consuming

HMRC’s attack on disguised remuneration schemes began in 2010. Last month (October 2021), CIOT, ATT and LITRG representatives joined a call with HMRC to discuss their upcoming communication campaign about disguised remuneration tax avoidance schemes. Furthermore, the Budget contained draft legislation following the consultation announced on 23 March 2021: Clamping down on promoters of tax avoidance.

We have a system to so called combat avoidance that takes decades. HMRC will attribute the timescale to the pesky advisers designing avoidance scheme whilst some advisers will put is down to the Treasury’s incompetence. If Mr Owen Paterson implemented some tax planning later found to be incorrect, would the Government change the law to allow the tax planning? Maybe, whilst simultaneously disallowing the tax planning for other taxpayers?

We are looking forward to seeing the campaign aimed at self-employed contractors and those employed through agencies. The campaign intends to help contractors make informed choices and ‘recognise….…what they are being offered could be a tax avoidance scheme’. By way of insight, a tax avoidance scheme often offers a significant tax saving (in return for a comparable fee) through arrangements purported to be legitimate. If there is a significant tax saving, any normal taxpayer with an ounce of intelligence might question the validity of the arrangement. They will most likely want the arrangement to be legitimate and require just enough confirmation that it is.

Whether something is legitimate will be dependent on the arrangements and normally the intentions of the person utilising the arrangements. The recent Dukeries Healthcare Ltd v Bay Trust International Ltd & Ors [2021] EWHC 2086 (Ch) (23 July 2021) and Marlborough DP Ltd v Revenue and Customs Commissioners [2021] UKFTT 304 (TC) are testament to how difficult it is to regard an arrangement as disguised remuneration. Evidently, HMRC sought to treat arrangements as disguised remuneration but did not quite succeed.

So we have an intention to communicate yet according to cases, HMRC are not quite sure according to the law what may amount to disguised remuneration. As mentioned, communications could be interesting and yet could not reflect the legislation.

Thankfully and as stated above, there are also proposed legislative changes which comprise:

• a new power for HMRC to seek freezing orders
• new significant penalties for UK entities, which facilitate the promotion of tax avoidance by offshore promoters
• Enabling HMRC to present winding-up petitions to the court for companies or partnerships operating against the public interest
• new legislation to name promoters, details of the way they promote, the schemes they promote and help those already involved to leave the arrangements

Freezing orders

The intention is that a freezing order would prevent promoters dissipating or hiding their assets before paying the penalties.

The proposed legislation is intended to apply where HMRC seek a freezing order from a court in relation to a relevant penalty before the penalty is determined, and:

‘the court considering the application is satisfied that HMRC have a good arguable case in relation to the penalty and –
(i) have commenced proceedings in relation to it, or
(ii)intend to commence proceedings in relation to it within the initial period.’

Thank God (deity or similar ‘figure’) the legislation writers have sought to introduce more clarity with the terminology ‘good arguable case’. Obviously that statement contains some sarcasm which would seem warranted given the aforementioned Dukeries and Marlborough cases! Within 72 hours the order could have affect. The legislation doesn’t define or guide on what may constitute ‘good arguable case’.

The legislation is not, in some views, drafted with fairness but instead to simply empower HMRC to disrupt.

Penalties for facilitating avoidance schemes of non-resident promoters

• The intended new penalty will apply to UK-based entities who facilitate tax avoidances schemes of non-resident promoters. The penalty applies if there has already been certain other penalties including ones for enablers of defeated tax avoidance, disclosure of tax avoidance schemes, promoters of tax avoidance schemes, and information and inspection powers. The penalty is for 100% of the total fees, or the amounts which are the economic equivalent of fees, received by all entities involved in the promotion of that avoidance scheme. All seems reasonable until ‘the amount of penalty is left to the such lower amount as the person assessing the penalty considers just and reasonable’ although the penalty may be appealed.

Winding-up petitions

Assuming other provisions have failed, HMRC could under the new proposed legislation seek a winding up of a limited company or partnership.

The potential ability to petition to wind up applies where ‘it appears to an officer of Revenue and Customs that it is expedient in the public interest, for the purposes of protecting the public revenue, that a relevant body should be wound up’. The court may wind up the body if the court is of the opinion that it is just and equitable that it should be wound up. Whilst the legislation is dressed to apply to promoters of tax avoidance, the legislation might be a tad wider. The court does have a high hurdle to determine the petition demonstrates that the winding up is just and equitable. Again, there may be concerns over reliance on what appears to an officer based on those aforementioned cases.

Conclusions

Those preparing the legislative response to tax avoidance have in some people’s opinion failed miserably for at least a decade if not longer. The failure to concisely deal with the issue (which is arguable undefined) remains prevalent today as it did in 2010.

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