In the 2016 Budget, the then Chancellor, George Osborne, signalled an intention to explore options to introduce harsher penalties for those who partake in tax avoidance schemes. As part of this the government confirmed that clarification would be given on the definition of ‘reasonable care’ in relation to the penalty provisions where a person uses tax avoidance arrangements which HMRC later defeats.
Finance Act 2016 introduced a new ‘serial tax avoidance’ regime targeted at taxpayers who engage in tax avoidance schemes which are defeated by HMRC. This regime comes into effect on 6 April 2017 and whilst the legislation uses the word ‘serial’ it is not only aimed at frequent users of avoidance schemes. Even if a taxpayer only uses one scheme which is later defeated by HMRC they are affected by the new rules.
The regime applies to any schemes which HMRC defeats on or after 6 April 2017. HMRC have however confirmed that the regime should not apply to schemes entered into before 15 September 2016 where either:
- The taxpayer advises HMRC before 6 April 2017 of their firm intention to relinquish their position and settle their case; or
- Where ‘full disclosure’ has been made before 5 April 2017
The schemes or arrangements caught under this regime include those:
- Disclosed or disclosable under DOTAS or VADR;
- Arrangements for which HMRC have given a follower notice to the taxpayer;
- Arrangements counteracted under the GAAR.
Following the first defeat HMRC will issue the taxpayer with a warning notice that should the taxpayer partake in any further tax avoidance schemes within the next 5 years which are defeated by HMRC, any penalties levied by HMRC will be at a higher rate and the warning period will be extended.
During the warning period the taxpayer will also be required to send details to HMRC about any tax avoidance schemes entered into.
If HMRC defeat three tax avoidance schemes whilst the taxpayer is on warning the taxpayer’s names and other details will be published.
In addition to the above measures in August 2016 HMRC released a consultation document ‘Strengthening tax avoidance sanctions and deterrents’.
The Government’s proposals set out in this document were to:
- introduce penalties for those who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC; and
- to look at modifying the way the penalty regime works for those whose tax returns are found to be ‘inaccurate’ as a result of using such arrangements, by defining what does not constitute the taking of ‘reasonable care’ and placing the requirement to prove ‘reasonable care’ onto the taxpayer.
The consultation closed on 5 December 2016 with the draft legislation to be included in the 2017 Finance Bill published the same day.
The legislation introduces a penalty for those who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC, and focuses on abusive schemes rather than reasonable commercial arrangements.
By introducing these measures the Government is sending a clear message of much tougher sanctions to not only those who partake in such schemes, but also to those who promote such arrangements.