Now that the dust has settled on the draft legislation at Schedule 20 of the Finance Bill 2017, entitled “Penalties for Enablers of Defeated Tax Avoidance” we thought it would be interesting to take a look at the detail of the draft legislation and how it is likely to affect professional practices
The legislation will take effect when the Finance Bill receives Royal Assent, most likely in Summer 2017.
Background to the Draft Legislation
The attack on what the government has labelled “Enablers of Tax Avoidance” is part of their ongoing war against those involved in the promotion and marketing of what has been referred to as “Abusive” tax arrangements. As well as going after the users of tax avoidance arrangements the government has the creators of these arrangements in their sights and is looking to hit them where it hurts – in the pocket – and to make the marketplace as toxic as possible.
Professionals Fears and a Word of Reassurance
One unfortunate collateral result of this new legislation though is to make accountants and lawyers extremely nervous as to whether the general tax planning advice they offer is likely to be caught by the new legislation. This has been compounded by the cautious guidance on professional standards being issued by the main governing bodies.
It is our opinion that this is unlikely to be the case, and HMRC themselves have gone on record as saying that advisers engaged in legitimate tax planning have “nothing to fear”. However, given the uncertainty we felt that a review of the draft legislation may offer some clarity for our readers.
A Detailed Look at the Draft Legislation
The draft legislation states at the outset that there will be a liability to a penalty where a person has entered into abusive tax arrangements and incurs a defeat in respect of those arrangements. When this happens, a penalty is payable by each person (our emphasis) who enable the arrangements.
The legislation then goes on to define the terms used.
Firstly, what is a “tax arrangement”? For the purposes of the legislation a tax arrangement is one where, having regard to all the circumstances, it would be “reasonable to conclude” that the obtaining of a tax advantage was the main purpose or one of the main purposes of the arrangement.
The legislation also requires the tax arrangement to be “abusive”. They are regarded as being abusive if the arrangements cannot reasonably be regarded as a course of action in relation to the relevant tax provisions, having regard to all the circumstances. Essentially, it seems that there is almost a “common sense” test, or as we call it a “giggle” test. If you look at the arrangements and it makes you giggle, then it is likely to be abusive!
Subsections 2(3) to 2(7) of the draft legislation go into much greater detail than what is “abusive” than our giggle test, but don’t in our eyes add much more clarity than our giggle test does. They talk about arrangements involving contrived or abnormal tests, whether the tax result of an arrangement is significantly different to the economic result and that the GAAR Advisory Panel can provide opinion in this area.
Having defined the terms “tax arrangements” and “abusive” the draft legislation then looks at what is meant by “defeat”. Defeat, for these purposes, is effectively when any adjustments, assessments etc can no longer be varied on appeal or otherwise.
For multi-user schemes HMRC cannot proceed with a penalty until they have defeated more than 50% of the related arrangements.
The draft legislation then moves on to considering who “enablers” are. Broadly, the term enabler includes designers of the arrangements, managers of the arrangements, marketers of the arrangements, enabling participants in the arrangements and financial enablers in relation to the arrangements. This can bring within the scope of the legislation the accountants devising the arrangements, the marketers, the lawyers (including Counsel) providing opinion and legal advice, banks, lenders or other financial intermediaries, company formation agents etc. Also, and crucially, it is our opinion that care needs to be taken by accountants who may in the past have made their client lists available to scheme promoters in return for commission payments for successful introductions, as if the implementation of tax arrangements that are later defeated result from such introductions then those commission payments are likely to be vulnerable under the terms of the draft legislation.
The next point covered is the quantum of the penalty. Broadly, for each person who enable the arrangements the penalty payable is the total value of all the relevant consideration received. HMRC collect the penalty by raising an assessment, and the penalty is payable within 30 days of date of issue of the penalty, subject to the customary appeal and review rights. HMRC have two years from the date of “defeat” referred to above to actually issue the assessment.
The legislation includes the power to publish details of persons found to be liable to penalties under certain circumstances.
Finally, and crucially, the draft legislation includes a provision that the legislation only applies in respect of arrangements entered into on or after the day on which the Act is passed, and that any action of any person carried out before the day on which the Act is passed is to be regarded.
It is clear that the “Enablers” legislation is aimed at the devisors and promoters of particular tax avoidance schemes. It is unlikely that high street accountants, lawyers of Financial Advisors are going to be caught up in the main, unless they do offer up their clients to promoters in return for a commission when tax avoidance arrangements are likely to be on the menu.
Care needs to be taken, and it is well worth keeping an eye on developments, as this issue is likely to continue to cause a great deal of disquiet. The big unknown is quite how HMRC will play this, given the often blurry line between tax planning and tax avoidance.
Please feel free to contact us if you have any concerns.