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BRIEFING PAPER

Number 7948, 14 December 2017

Tax avoidance: recent developments

By Antony Seely

Contents: 1. Tax avoidance and tax

evasion 2. The tax gap 3. The Coalition Government’s

strategy 4. Follower notices &

accelerated payments 5. The Conservative

Government’s approach

2 Tax avoidance: recent developments

Contents Summary 3

1. Tax avoidance and tax evasion 5

2. The tax gap 9

3. The Coalition Government’s strategy 21 3.1 HMRC’s compliance yield 27 3.2 Concerns about the scale of tax evasion 28 3.3 Recent debate of HMRC’s performance 30

4. Follower notices & accelerated payments 35 4.1 ‘Raising the stakes on tax avoidance’: summer 2013 35 4.2 Budget 2014: introduction of accelerated payments 41 4.3 Finance Bill 2014 46 4.4 Impact of the new regime 56 4.5 Subsequent proposals regarding ‘serial avoiders’ and offshore evasion 62

5. The Conservative Government’s approach 67 5.1 Budget 2015 67 5.2 Offshore evasion & the Panama Papers 70 5.3 Spring Budget 2017 77 5.4 The Paradise Papers & Autumn Budget 2017 95

Cover page image copyright Chamber-066 by UK Parliament image. Licensed under CC BY 2.0 / image

cropped.

3 Commons Library Briefing, 14 December 2017

Summary In recent years tax avoidance has been the subject of considerable public concern, although there is no statutory definition of what tax avoidance consists of. Tax avoidance is to be distinguished from tax evasion, where someone acts against the law. By contrast tax avoidance is compliant with the law, though aggressive or abusive avoidance, as opposed to simple tax planning, will seek to comply with the letter of the law, but to subvert its purpose. As Treasury Minister David Gauke has observed, there is a distinction between tax planning and tax avoidance, “although there will be occasions when the line is a little blurred.”1

In recent years HM Revenue & Customs has produced estimates of the tax gap, the difference between tax that is collected and that which is ‘theoretically due’:

The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law) ... An equivalent way of defining the tax gap is the tax that is lost through non-payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attack.2

In October 2017 HMRC published revised estimates, which put the total tax gap at £34 billion for 2015/16, representing 6% of total tax liabilities.3 HMRC’s analysis provides a breakdown of the gap by reference to the different types of taxpayer behaviour that lead to a shortfall in receipts, though as HMRC note, the “estimates give a broad indication of behaviours and are calculated using assumptions and judgment.” This work suggests that in 2015/16 the annual cost of tax avoidance was £1.7 billion, while the cost of tax evasion was £5.2 billion.4

UK tax law is specifically targeted rather than purposive: in tackling the exploitation of loopholes in the law, governments have legislated against individual avoidance schemes as and when these have come to light. Often the response to this legislation has been the creation of new schemes to circumvent the law, which in turn has seen further legislation – an ‘arms race’ between the revenue authorities and Parliamentary counsel on one side, and on the other, taxpayers aided and abetted by the legal profession. In recent years concerns as to the scale of mass marketed tax avoidance schemes have led to three major initiatives to undermine this market, and encourage a sea change in attitudes: the Disclosure of Tax Avoidance Schemes regime (DOTAS); the General Anti-Abuse Rule (GAAR); and the system of follower notices & accelerated payments.

Over the past twenty years many commentators have suggested having legislation to counter tax avoidance in general: by providing certainty for both sides as to the tax consequences of any transaction, a ‘general anti-avoidance rule’ might dissuade the most egregious efforts to avoid tax, encourage taxpayers and legal counsel to redirect their energies to more productive activities and allow the authorities to simplify the law without fear of it being systematically undermined. In the late 1990s the Labour Government consulted on an anti-avoidance rule before deciding against it. Concerns over the scale of tax avoidance rekindled interest in the idea, though in its 2004 Budget the Labour

1 HC Deb 12 July 2010 c706 2 Measuring Tax Gaps 2013, October 2013 p6. HMRC’s work on the tax gap is collated on Gov.uk 3 HMRC press notice, Unpaid tax at a record low, 26 October 2017 4 Measuring Tax Gaps 2017, October 2017 p5

4 Tax avoidance: recent developments

Government announced a new ‘disclosure regime’ as an alternative, whereby tax avoidance schemes would be required to be disclosed to the revenue departments.5 Under ‘DOTAS’ accountants, financial advisers and other 'promoters' selling tax avoidance schemes are required to notify the tax authorities of any new scheme they are to offer to taxpayers. Each scheme is given a reference number which, in turn, taxpayers have to use in their tax return, if they have used it. HMRC have used this information to track the take-up of avoidance schemes, challenge individual schemes in the courts if HMRC have assessed that they do not work in the way the promoter claims, or to address unintended loopholes in the law that some schemes seek to exploit.

In its first Budget in June 2010 the Coalition Government announced it would consult on a general anti-avoidance rule, and commissioned a study group, led by Graham Aaronson QC, to consider the case. In his report, published in 2011, Mr Aaronson recommended a narrowly focused rule targeted at ‘abusive arrangements’ only, and following a consultation exercise, in December 2012 the Government announced the introduction of a General Anti-Abuse Rule (GAAR) in 2013.6

In 2014 the Coalition Government announced the introduction of a system of follower notices & accelerated payments.7 Broadly speaking, in cases where someone is in dispute over their assessment, HMRC may issue a ‘follower notice’ if this arises from the use of an avoidance scheme that is either the same or has similar arrangements to one that HMRC has successfully challenged in court. Taxpayers must settle their affairs, or pay a penalty. HMRC may also issue a notice for an accelerated payment, where the taxpayer is required to pay the disputed sum ‘up front’, before their assessment had been definitively decided – either by the taxpayer agreeing HMRC’s assessment, or the courts making a final judgement in their case. Taxpayers do not have the right to appeal HMRC’s decision to the Tribunal.

Controversially, the Government announced these arrangements would apply to outstanding disputes for past tax years, and that HMRC would also issue demands for accelerated payments in relation to avoidance schemes notified under ‘DOTAS’. Despite concerns as the ‘retrospective’ nature of the new regime, the new rules were agreed, with only minor amendments, in July 2014. To date HMRC has issued over 75,000 notices worth in excess of £7 billion and collected nearly £4 billion.8

Following these initiatives the Government has continued to introduce provisions to tackle tax avoidance and tax evasion, including measures in both the Spring Budget and Autumn Budget this year.9 This note provides an introduction to the issue of tax avoidance and evasion and the measurement of the tax gap, looking in detail at the development of follower notices and accelerated payments, before discussing the current Government’s approach. Two other notes look at the Labour Government’s assessment of a general anti-avoidance rule and the establishment of DOTAS, and the Coalition Government’s decision to introduce a GAAR.10

5 Budget 2004, HC 301, March 2004, p202. Guidance on DOTAS is on Gov.uk 6 Autumn Statement, Cm 8480 December 2012 para 1.178. Guidance on the GAAR is on Gov.uk 7 Budget 2014, HC 1104, March 2014 para 1.198-201 8 HMRC Annual Report 2016/17, HC 18, July 2017 p24. Guidance on follower notices & accelerated

payments is on Gov.uk. 9 Spring Budget 2017, HC 1025, March 2017 para 3.42-49; Autumn Budget 2017, HC 57, November 2017

para 3.65-77. See also, PQ117106, 7 December 2017. 10 Tax avoidance: a General Anti-Avoidance Rule - background history (1990-2010), CBP2956, 13 April 2016;

and, Tax avoidance: a General Anti-Abuse Rule, CBP6265, 11 December 2017.

5 Commons Library Briefing, 14 December 2017

1. Tax avoidance and tax evasion During a debate on tax avoidance and tax evasion in July 2010 Treasury Minister David Gauke drew the following distinction between these two terms:

Tax evasion occurs when someone acts against the law. Tax avoidance involves compliance with the letter but not the spirit of the law, and it is right that the Government seek to minimise that. Tax planning is a case of acting in both the spirit and the letter of the law. There is a distinction, although there will be occasions when the line is a little blurred.11

A longer definition was provided in answer to a PQ in the Lords a few years before:

Lord Patten asked Her Majesty's Government: Whether they will clarify their use of the terms "tax avoidance" and "tax evasion".

Lord McKenzie of Luton: These terms lack any single or universally applied legal definition and their meaning will depend upon the context in which they are used. The term "tax evasion" refers to reduction of tax liability by illegal means. The term "tax avoidance" is usually used to refer to an inappropriate reduction in tax liability and was described by Lord Nolan in the following terms: "The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability."12

The reference is to an expression used by Lord Noland in a case heard by the House of Lords in 1997, when he distinguished between avoidance and actions where the taxpayer mitigates his tax liability:

The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option.13

(The appeal of this definition is not unchallenged – as one standard guide to the law notes, “the trouble with this explanation is that while it provides a coherent reason for saying in a particular case that the facts do not amount to avoidance and so do not trigger the application of some rule, it does not provide a way of telling whether those particular facts fall one side of the line or the other – it is a conclusion, not a test - and so it restates the problem rather than solving it.”14)

While it is often noted that tax avoidance is not illegal, in the past governments have drawn a distinction between the exploitation of the

11 HC Deb 12 July 2010 c706 12 HC Deb 24 May 2006 ccWA111-2 13 IRC v Willoughby & Another [1997] 14 Tiley & Collison’s UK Tax Guide 2016/17 para 3.2

6 Tax avoidance: recent developments

tax system and simple compliance with the law – for example, in answer to a PQ in July 2010:

Andrew George: To ask the Chancellor of the Exchequer what definition of the terms (a) tax avoidance and (b) tax efficiency his Department uses.

Mr Gauke: The Government have not published a definition of avoidance. However it is widely understood to entail taking a view of the tax treatment of a transaction that is tenable but has tax consequences that were not intended by the legislature. This does not prevent taxpayers organising their affairs in an efficient manner, consistent with the intentions of the legislation. Tackling tax avoidance is essential and we make every effort to do so. The Government consider the economic efficiency of tax measures as part of the tax policy-making process.15

The House of Lords Economic Affairs Committee considered this question in their 2013 report on the Government’s proposals for a ‘General Anti-Abuse Rule’ – or GAAR. The Committee cited Mr Gauke’s distinction between avoidance and evasion, reproduced above, but went on to quote the evidence of Ms Judith Knott (then HMRC Director, Corporation Tax International Anti-Avoidance) when she appeared before the Committee:

“What we mean by legitimate tax planning is tax planning that is very much in line with Parliament’s intentions when it passed the rules. A good example would be putting cash into an ISA account. That is legitimate and what Parliament intended to happen. Avoidance, on the other hand, is behaviour that seeks to bend the tax rules in a way that Parliament did not intend. It is often accompanied by artificial transactions—trying to seek a result that was not intended.”16

The Committee observed that the definitions “depend on the existence of a common interpretation of what the original lawmakers had in mind in enacting a particular tax statute”:

The courts interpret Parliamentary intention as that revealed by the wording and context of the legislation itself and extraneous comment or other guidance can be taken into account only in very limited circumstances. This is a much narrower definition of Parliamentary intention than the wider colloquial definition which might either infer intention or take into account external information.

Consequently, in practice, a good deal of uncertainty can often attach to the question of whether a particular arrangement constitutes ‘tax avoidance’ and, if so, whether it is to be regarded as ‘acceptable’ (tax planning or tax mitigation) or ‘unacceptable’ (aggressive or abusive avoidance).17

The concept of “parliamentary intention” is not a simple or obvious one – as noted in a paper on tax avoidance published by the Oxford Centre for Business Taxation:

15 HC Deb 12 July 2010 c544W 16 The draft Finance Bill 2013, 13 March 2013, HL Paper 139 2012-13 para 12 17 HL 139 2012-13 para 14. For a recent summary of the distinction between evasion

and avoidance see, Hamilton v Hamilton & Anor [2016] EWHC 1132 (Ch) (13 May 2016) para 37.

7 Commons Library Briefing, 14 December 2017

The aim of the courts is to construe legislation in a way that gives effect to “parliamentary intention”. Parliamentary intention in this context is a term of art, extensively debated in legal literature and should be distinguished from a colloquial usage. Lord Nicholls has explained: "...the 'intention of Parliament' is an objective concept, not subjective. The phrase is a shorthand reference to the intention which the court reasonably imputes to Parliament in respect of the language used.

It is not the subjective intention of the minister or other persons who promoted the legislation. Nor is it the subjective intention of the draftsman, or of individual members or even of a majority of individual members of either House.”18 In other words the political and authoritative process of Parliament passing legislation produces the text of legislation, the intention of which is found by the courts looking at the wording of that legislation.19,20

Further to the questions of legal interpretation, the choice of words in this area has important political consequences. Graham Aaronson QC made this point when he gave evidence to the Lords Economic Affairs Committee in January 2013:

“Avoidance” is a rather unfortunate word in this context because avoidance can be regarded as a particularly nasty thing to do or, if it is an accident, it is a very sensible thing to do—you avoid an accident. So I would rather use words that are less emotive when describing the intellectual process in determining whether you should be paying a smaller amount of tax than you would otherwise pay.

You can call that tax planning because it is planning. Whether it is good planning or bad planning, whether it is abusive planning or innocent planning, it is planning. Tax avoidance is a very dangerous expression to use if you want to have a serious debate because one person’s avoidance is another person’s perfectly reasonable planning.21

Nevertheless the term has continued to be widely used, and in a paper on its tax policy over the 2010-15 Parliament, the Coalition Government provided a terminology that, arguably, illustrates how the debate about this issue changed over this period:

Clarifying tax terminology

Tax evasion is always illegal. It is when people or businesses deliberately do not declare and account for the taxes that they owe. It includes the hidden economy, where people conceal their presence or taxable sources of income.

Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often

18 R v Secretary of State for Environment, Transport and the Regions [2001] 2 AC 349. 19 See also Lord Reid in Black-Clawson International Ltd v Papierwerke Waldhof-

Aschaffenburg AG [1975] A.C. 591, at 613: “In seeking for the intention of Parliament we are seeking not what Parliament meant but the true meaning of what they said”. On Parliamentary intention see also Judith Freedman, “Interpreting tax statutes: tax avoidance and the intention of Parliament”, Law Quarterly Review 2007, 53 at 72 et seq. especially the literature referred to there.

20 Michael Devereux, Judith Freedman & John Vella, Tax Avoidance, OCBT December 2012 p4. See also, “Seeking after meaning”, Taxation, 21 April 2016, and for another view barrister Jolyon Maugham’s blog post, “Is tax avoidance like hardcore pornography?”, Waiting for Godot blog, 30 August 2016.

21 The Finance Bill: Oral & Written Evidence, March 2013 pp12-13 (Q10)

8 Tax avoidance: recent developments

involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter – but not the spirit – of the law. Most tax avoidance schemes simply do not work, and those who engage in it can find they pay more than the tax they attempted to save once HMRC has successfully challenged them.

Tax planning involves using tax reliefs for the purpose for which they were intended, for example, claiming tax relief on capital investment, or saving via ISAs or for retirement by making contributions to a pension scheme.

However, tax reliefs can be used excessively or aggressively, by others than those intended to benefit from them or in ways that clearly go beyond the intention of Parliament. Where this is the case it is right to take action, because it is important that the tax system is fair and perceived to be so.22

22 HM Treasury, Tackling tax evasion & avoidance, Cm 9047, March 2015 p5 (Box 1.A:

Clarifying tax terminology). See also, PQ HL4794, 25 February 2015

9 Commons Library Briefing, 14 December 2017

2. The tax gap In recent years HM Revenue & Customs has produced estimates of the tax gap - the difference between tax that is actually collected and that which is ‘theoretically due’.23 As HMRC explain:

The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law) ... An equivalent way of defining the tax gap is the tax that is lost through non-payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attack.24

In October 2017 HMRC published revised estimates, which put the total tax gap at £34 billion for 2015/16, representing 6% of total tax liabilities.25 HMRC estimate that the gap, as measured as a % of total tax liabilities, has been falling consistently over the last decade:

• The UK tax gap in 2015-16 is estimated to be £34 billion. This is 6% of total theoretical tax liabilities and matches the lowest level it has been since 2005-06.

• There is an overall downward trend over the past decade, with some year-on-year variations.

• The VAT (Value Added Tax) gap in 2015-16 is 9.8% — its lowest level since 2010-11.

• There is a long-term reduction between 2005-06 and 2015-16 for the duty only excise tax gap (8.0% to 5.5%) and the Corporation Tax gap (13.7% to 6.4%). The Corporation Tax percentage tax gap is at its lowest level in 2015-16.

• The hidden economy tax gap has been revised due to more accurate data being available as a result of a new survey

23 The department’s work on the tax gap is collated on Gov.uk 24 Measuring Tax Gaps 2013, October 2013 p6 25 HMRC press notice, Unpaid tax at a record low, 26 October 2017

10 Tax avoidance: recent developments

commissioned by HMRC. For 2014-15 it has been revised down by £2.7 billion.

• There is a steady downward trend for the avoidance tax gap since 2012-13, to £1.7 billion in 2015-16.26

HMRC suggest that the percentage tax gap provides a better measure of compliance over time, “because it takes account of some of the effects of inflation, economic growth and changes to tax rates, whereas the cash figure does not. For example, in a growing economy where the tax base is increasing, even if the percentage tax gap remained level, the cash figure would grow.”27 Notably HMRC describe the tax gap as “a useful tool for understanding the relative size and nature of non-compliance”:

This understanding can be applied in many different ways:

• Firstly, it provides a foundation for HMRC’s strategy. Thinking about the tax gap helps the department to understand how non-compliance occurs and how the causes can be addressed.

• Secondly, drawing on information on how other countries manage their tax gaps, our tax gap analysis provides insight into which strategies are most effective at reducing the tax gap.

• Thirdly, although the tax gap isn’t sufficiently timely or precise enough to set performance targets, it provides important information that helps us to understand our long-term performance.28

The report provides a breakdown of the gap by reference to the different types of taxpayer behaviour that lead to a shortfall in receipts, though as they observe, the “estimates give a broad indication of behaviours and are calculated using assumptions and judgment.” This suggests that the annual cost of tax avoidance in 2015/16 was in the region of £1.7 billion:29

26 Measuring Tax Gaps 2017, October 2017 p6 27 op.cit. p7 28 op.cit. p3 29 op.cit. p11

11 Commons Library Briefing, 14 December 2017

The report gives a more detailed description of exactly what type of behaviour falls under each of these categories:30

1 More information and frequently asked question on the OECD’s Inclusive Framework

on BEPS can be found at: www.oecd.org/ctp/beps-frequentlyaskedquestions.htm

30 op.cit. p20

12 Tax avoidance: recent developments

In September 2011 the Treasury Committee took evidence from HMRC on its action to close the tax gap; during this session Dave Hartnett, then Permanent Secretary for Tax and his colleague, Melanie Dawes, Director General, Business Tax, explained how analysis of the size of the tax gap shaped the department’s priorities:

Dave Hartnett: I think … for us, the tax gap is quite an important tool, if I can put it that way, in promoting understanding of all the causes of non-compliance and helping us to focus on ways of reducing them. If I can put it this way, it is a bit like a long-term health check for us. A definition of it is the difference between what the Government can expect to receive and actually do receive, but I think, as you may have seen, unlike some other countries, we include avoidance in it, and also the slightly contentious issue of measuring that in line with the spirit of the law-what the intention of Parliament might have been …

Q180 Stewart Hosie: … Some of the professional bodies take the [the department’s estimate of the tax gap] and say it is inflated because it includes legitimate disagreements over legal interpretation, which is a perfectly valid position for them to take. Others say it is understated due to inadequate information. You say it is your best guess but you invest a lot in calculating it … What more do we all need to do to get this right, given how important it is?

Dave Hartnett: …On legal interpretation and other things in particular, the focus we put on legal interpretation is where we lose-but not while the argument is going on-and where the Government are therefore going to receive less than expected. We recognise that "legitimate debate" contention around issues will always happen.

Melanie Dawes: Yes, and it is important to say on avoidance that where we resolve an issue with a taxpayer and we agree with their legal interpretation, we do not record that as a tax cut. We record that as the tax gap having been closed because the treatment has been agreed. In terms of what we should be doing with this …we think it is a very useful strategic tool. We used it to get a feel for the overall big areas of risk when we were putting together our plans for the spending review, for example, so it is very helpful. The important thing is not to use it in the wrong way, so we are not using it for performance targets to measure up actual operation performance in the business.31

In 2010 HMRC’s approach to measuring the tax gap was questioned, in the context of alternative estimates published by Tax Research UK, which put the tax gap in the region of £70-£120 billion.32 In a debate on tax avoidance in June 2010, Treasury Minister David Gauke acknowledged that this analysis had suggested the tax gap was much, much greater than HMRC had estimated, but went on to argue that it was ‘deeply and systematically flawed’ in a series of respects; the Ministers comments are worth reproducing at some length:

31 Administration and effectiveness of HMRC: closing the tax gap, HC 1371-iii Oral

Evidence 12 September 2011 Q178, Q180 32 Tax Research UK is run by the writer Richard Murphy. See, Tax Justice and Jobs: the

business case for investing in staff at HMRC, March 2010. These estimates have been widely quoted in the press: eg, “On charity George Osborne must stand up to the self-interested super-rich”, Guardian, 16 April 2012 & “Editorial - Tax: share the burden fairly or anger will grow”, Observer, 15 April 2012.

13 Commons Library Briefing, 14 December 2017

It must be accepted that in preparing estimates, organisations external to Government have access to much less data than HMRC ... However, having considered the methodology used to produce the figure of £120 billion, I must tell the House that even a brief analysis reveals that it is deeply and systematically flawed.

For example, Tax Research LLP estimates total revenue lost due to tax evasion at £70 billion. That figure is obtained by applying the percentage tax gap from VAT to direct taxes. There are two main problems with that. First, different tax regimes have different tax gaps. According to independent research by the OECD, for example, the operational experience shows that tax regimes such as pay-as-you-earn that withhold tax at source have far smaller tax gaps than other types. To apply the VAT gap percentage to taxes collected by PAYE or otherwise at source greatly overstates the tax gap, because the VAT tax gap is considerably higher.

Secondly, an element of double counting is involved, although, to be fair, that might not be apparent from the numbers used by Tax Research. The VAT gap already includes amounts due to tax avoidance and tax debt. Applying that percentage to direct taxes and then adding additional amounts for both avoidance and tax debt, as does Tax Research, results in the double counting of losses from the avoidance of direct taxes and non-payment.

The Tax Research estimate of tax debt is £28 billion. That is a snapshot figure of all tax owed to HMRC on 31 March 2009, which does not represent the actual losses to the Exchequer from non-payment. Almost all tax owed to HMRC is eventually paid, sometimes within days of becoming due. A proportion of debts outstanding are in staged repayment plans, such as those covered by the business payment support service. Only the tax debt written off as uncollectable by HMRC is an actual loss to the Exchequer from debt. That is therefore the amount that HMRC uses in its estimate of the tax gap, which in the 2007-08 tax gap figures was not £28 billion but £3 billion …

The final and most significant point concerns tax loss due to tax avoidance, which Tax Research estimates at £25 billion. That estimate includes the use of legitimate reliefs promoted by the Government to encourage certain activities, such as capital allowances to encourage investment and research and development tax credits to encourage innovation. Tax avoidance is generally regarded as the use of legal structures and allowances to reduce tax bills in manners not intended by Parliament when enacting the legislation. It is simply nonsense to categorise as tax avoidance the use of allowances for purposes intended by Parliament ... Furthermore, the Tax Research estimate does not provide HMRC with any credit for the significant amount of tax that it recovers by challenging avoidance schemes. The figure of £25 billion therefore seems somewhat wide of the mark.33

In a follow-up report published in March 2012 the Treasury Committee expressed some doubts as to the value of completing such a detailed annual assessment of the tax gap: “HMRC should not be aiming to collect more tax at any cost, but should be ensuring that all taxpayers pay the correct amount of tax … [in addition] the tax gap calculation is … misleading as a comparison from year to year, because its size depends on a number of factors which have nothing to do with

33 HC Deb 16 June 2010 cc190-1WH

14 Tax avoidance: recent developments

whether the correct amount of tax is being paid, for instance the applicable rates of tax.”34 A longer extract is given below:

The tax gap can be a useful concept for assessing trends in the amount of possible unpaid tax. We are not, however, convinced that the process of calculating, publishing and publicising an aggregate figure for the tax gap is a sensible use of HMRC's limited resources. The aggregate tax gap figure is misleading and risks focusing HMRC on the wrong task as it only provides an order of magnitude.

We recognise that it is useful for HMRC's employees to have some idea of the difference between what HMRC should be collecting and what is collected, particularly in the case of criminal activity. However, in other areas it would be more useful for it to identify ambiguities in tax law rather than employ resources in calculating how much tax would be collected if everyone shared its interpretation of the law. Separate reports on how much tax was lost through criminal activity and areas where HMRC had encountered different interpretations of tax law would be a better use of resources. We would welcome further submissions from HMRC and tax experts both on how the tax gap calculation can be improved, and on whether it serves any useful purpose in HMRC's work.35

In turn the Government gave a robust defence of HMRC’s approach:

HMRC believes the aggregate tax gap analysis is a valuable tool in prioritising resources, as the Committee recommends, and agrees that the focus of work on tax gaps needs to be proportionate and help the best use of the resources available. HMRC does identify areas where there are different interpretations of tax law. Quantifying the scale of these issues helps set priorities for policy development and resource deployment. This allows the department to compare these priorities against tax losses resulting from other types of behaviour.

There have been recommendations from both the Public Accounts Committee and the National Audit Office36 to develop and use tax gap estimates in this way, and to publish the figures. In the interest of clarity HMRC thinks it makes sense to describe all of our tax gap estimates in one document so that a reader can understand more easily how the figures are calculated and the methodological issues which underpin them.37

HMRC also provided a detailed submission on measuring the gap, specifically in relation to the estimates published by Tax Research UK.38 The department argued that the £120bn figure “could be dangerous if not countered by HMRC’s published estimates … partly because they

34 Twenty-ninth report: Closing the tax gap – HMRC’s record at ensuring tax

compliance, 9 March 2012, HC 1371 of 2010-12, para 14-15 35 HC 1371 of 2010-12 para 16-18. For a critique that these estimates should ignore

the sums that would be paid if taxpayers complied with ‘the spirit of the law’ see, “The tax chink”, Tax Journal, 19 December 2014.

36 Following the NAO 2003 report Tackling Fraud against the Inland Revenue PAC recommended ‘The Revenue should focus their work on making a reasonable estimate of the tax gap so they can judge the effort needed for a given reduction in losses’. Following the NAO 2007 report Management of Large Business Corporation Tax PAC recommended ‘The department does not have a robust measurement of the corporation tax gap… it should develop such a measure and publish the result, with separate estimates for large businesses and small and medium sized businesses.’

37 First special report, 18 May 2012, HC 124 of 2012-13 p2 38 Appendix 2, First special report, 18 May 2012, HC 124 of 2012-13 pp11-18

15 Commons Library Briefing, 14 December 2017

give a misleading view of HMRC’s effectiveness and the amount of uncollected revenues. But also because they encourage the perception that deliberate non-compliance in the UK is the norm—a perception which could encourage further non-compliance.”39

The submission raises similar concerns to those set out by the Exchequer Secretary to the House in June 2010 – quoted above – though further detail is given on the question of measuring tax evasion. Richard Murphy had claimed the annual cost of evasion was £70 billion – while HMRC had put it at £26 billion. The primary explanation for this disparity is that Mr Murphy had assumed that the size of any tax gap would be the same across all taxes:

Tax Research UK particularly criticises HMRC’s use of bottom-up methodologies to measure the direct tax gap and applies the VAT gap rate to arrive at an evasion figure for all direct taxes. This is highly inappropriate for three reasons:

• the VAT gap includes all forms of non-compliance such as non-payment, avoidance and criminal attack as well as evasion. So the VAT gap arises from much more than just suppression of turnover that might feed through to evasion of direct taxes;

• the use of the VAT gap in this way counts debt and avoidance twice for direct taxes—an arithmetical error, and

• very importantly, tax gaps vary considerably by type of tax.

Tax gaps for taxes using deduction of tax at source, or with significant third party reporting requirements are much lower than for taxes without these features. This is established by very detailed research in the US and Denmark40 and borne out by UK experience. Using the percentage VAT gap—9.7% for 2010–11 is the latest estimate—to estimate a tax gap for business profits of companies and sole traders may give an answer of the right order of magnitude. But it gives completely the wrong answer for the income tax due from employees where PAYE is operated. International research suggests a tax gap for this of around 1%. This incorrect assumption accounts for £30bn of the £120bn estimate.

Tax Research UK have supported their evasion estimate through comparison with an academic paper produced for the World Bank41 which contains estimates of the size of the hidden economy for a number of countries including the UK. The estimate for the hidden economy in the UK is 13% of GDP which Tax Research UK then convert to a tax gap estimate of £73bn. Rather than support the Tax Research UK figure we believe that this comparison, if anything, further undermines it. The methodology uses a variant of a ‘currency demand’ model to estimate the size of the hidden economy. The use of ‘currency demand’ models for this purpose has been comprehensively and

39 op.cit. p15 40 Unwilling or Unable to Cheat? Evidence from a Randomized Tax Audit Experiment in

Denmark, Henrik J Kleven, et. al.;Tax Gap for Tax Year 2006, IRS 41 Shadow Economies All over the World New Estimates for 162 Countries from 1999

to 2007; Friedrich Schneider, Andreas Buehn, Claudio E. Montenegro July 2010

16 Tax avoidance: recent developments

extensively criticised in unusually strong terms by other academics42,43 and national statistical bodies.44,45

The main theme of the criticism is that the methodology relies upon the application of assumptions which result in estimates that are much too large to be plausible. For example the Australian Bureau of Statistics explore what it would mean for Australia to have a hidden economy of 15% (as predicted in an application of this methodology by the same author).

Critically they point out that a hidden economy of this overall size implies much higher levels of non-compliance in the areas of the economy where there is scope for underreporting. For example it implies underreporting of around 50% for every single self-employed taxpayer—which they reject as being implausible. Certainly non-compliance of the scale suggested for the UK is completely incompatible with all of our customer research and operational data.

As a result of the general concern about the use such models a body consisting of a number of international organisations including OECD, IMF, the World Bank, UN and the European Commission have issued a strongly worded statement advising against use.46 Part of their statement says: Unofficial estimates are often based on macroeconomic models. For instance, they may assume a fixed relation between the size of the economy and money in circulation. Such methods may yield grossly exaggerated results, attracting the attention of politicians and newspapers and thereby gaining wide publicity.

In a more recent report ‘Reducing opportunities for tax non-compliance in the underground economy’,47 OECD comment: the OECD (and other international organisations) reject these methods as being useful in obtaining exhaustive estimates of GDP or in estimating underground production and have observed that when applied they produce for most countries spectacularly high estimates of NOE [Non Observed Economy] activities which have no sound scientific base but which, nevertheless, attract much attention from the media and other parties.48

Following these exchanges, these arguments were reiterated in a pair of articles published in the journal Taxation in summer 2012 – first by Ed Hagger, a deputy director at HMRC, and second by Mr Murphy.49 Reviewing the exchange, the then editor, Mike Truman, suggested one reason for the disagreement was that the Tax Justice approach was trying to measure something fundamentally different; in Mr Murphy’s view the gap was the difference between the contribution society ‘expected’ in tax and the amount actually paid, so that the legitimate

42 Estimating the Underground Economy MIMIC models—Trevor Breusch, November

2005 43 The Shadow Economy in OECD Countries : Panel Data Evidence—Konstantin

Kholodilin, Ulrich Thiessen, May 2011 44 The Underground Economy and Australia’s GDP—Australian Bureau of Statistics,

March 2004 45 Estimating the Underground Economy in Canada, 1992–2008—Statistics Canada

June 2011 46 Estimates of the unrecorded economy and national accounts, Declaration of the

ISWGNA 47 Reducing opportunities for tax non-compliance in the underground economy, Forum

on Tax Administration : SME Compliance sub-group 48 HC 124 2012-13 pp17-18 49 “Mind the gap” & “What’s the tax gap?”, Taxation, 8 & 23 August 2012

17 Commons Library Briefing, 14 December 2017

use of corporate tax reliefs, say, could be termed ‘avoidance’: “this is a logical and consistent approach, but it does not measure the gap between the tax HMRC could collect and what they do collect.”50

In December 2013 the Public Accounts Committee published a report on HMRC’s annual accounts, in which it was strongly critical of the tax gap, arguing that it did not “include an assessment of the amount of tax lost through tax avoidance” and so “represents only a fraction of the amount that the public might expect to be payable.”51

In evidence Edward Troup (Tax Assurance Commissioner, HMRC) and Jim Harra (then Director-General, Business Tax, HMRC) were both asked if these figures included estimates of the amounts of money that many felt companies, like Starbucks, Amazon and Google, should be paying.52 Both witnesses suggested that this would be misleading:

Q231 Chair: Am I right in saying that the sort of issues that we were discussing in relation to Starbucks, Amazon and Google … and the tax that could have been payable from those companies is not included, because it is not seen to be within the rules?

Edward Troup: The tax gap that we measure is a compliance tax gap.

Q232 Chair: It does not include that. I am asking whether it includes the Starbucks scenario, the Amazon scenario or the Google scenario.

Edward Troup: It does not include the amounts of tax that some of the commentators have said these companies should pay. That is correct …

Q258 Chair: At the moment … your tax gap is purely the tip of an iceberg.

Jim Harra: Our tax gap is a complete measure of non-compliance with current tax law. It does not include a measure of how much additional tax might be collected if you changed the policy.53

Many commentators have continued to criticise this approach to estimating the tax gap, and have made the case that this type of analysis should provide figures for the amounts of tax that should be paid. In January 2015 an alliance of charities, including Christian Aid and Oxfam, published proposals for a ‘Tax Dodging Bill’, to ensure that companies, particularly multinationals, paid their “fair share” of taxes.54 The authors argued that “tax dodging” encompassed three different types of behaviour (emphasis added):

50 Mr Truman concluded that “as a definition, and an estimate, of the tax gap”, Mr

Hagger had made “a better, if less philosophically satisfying case” (“The third round”, Taxation, 13 September 2012).

51 HMRC Tax Collection: annual report and accounts 2012/13, 19 December 2013, HC 666 of 2013-14 p8

52 In late 2012 there was considerable media coverage, contrasting the scale of these multinationals, and their operations in the UK, and the amounts of UK corporation tax they paid – an issue on which the Committee published a critical report (HC 716 of 2011-12). This is discussed at length in a second Library paper: Corporate tax reform (2010-2015), Commons Briefing paper CBP5945, 25 July 2016.

53 HC 666 of 2013-14 para 3 (fn 7), Ev25, Ev27 54 TaxDodgingBill.org press notice, Parties given 200-day challenge to fight back at

global tax dodgers, 26 January 2015

18 Tax avoidance: recent developments

There is no single, agreed, definition of “tax dodging”, but it is a phrase that has become widely accepted and understood by the public in the UK and is thus used here in place of a more specific definition of the behaviours that we are asking parties to tackle in this campaign.

In this case we include in our definition three broad types of behaviour: 1) Using opportunities provided by the tax system to attempt to reduce tax payments in a way that, on examination, would be deemed to be outside the law and thus illegal; 2) Using opportunities provided by the tax system to attempt to reduce tax payments in a way that is deemed legal, but is contrary to the intention of the law; 3) Using tax incentives, that are provided for in law, but which are not proven to provide the economic or social benefits that would justify the loss of tax revenue.55

Writing on this question some years ago, Judith Freedman, Professor of Taxation Law at Oxford, argued, “how much tax should be paid is not a question of moral intuition but a question of what is imposed by law.”56 Taking up this point more recently, the tax barrister Jolyon Maugham, suggested that “as a tool for delivering tax outcomes, morality is highly imperfect: subjective, imprecise, and enforceable indirectly at best.” However, there was a risk for the tax community from ignoring the truism: that which is legal isn’t always moral:

Discrimination on the grounds of ‘colour’ (to use the language of the Act) did not become immoral only on 8 December 1965 when the first Race Relations Act received royal assent … At the second reading of the Race Relations Bill, Peter, later Baron, Thorneycroft, argued that one should not legislate against discrimination on the grounds of ‘colour’; it was too soon. As he put it: ‘The British people can be led, but they cannot be driven.’

Thorneycroft was right, albeit in only the narrowest sense. That there can be a relationship between law and morality is a basic requirement of the law. The law becomes difficult to enforce if it is too advanced of morality: this was the Baron’s contention. However, the law falls into disrepair where it fails to keep pace with changing mores. And that, Dear Reader, is what we have here.57

Turning back to the tax gap, in their report in December 2013 the Public Accounts Committee argued that HMRC “should be explicit about the limitations of its current measure of the tax gap”:

The tax gap is a theoretical concept to assess tax revenues lost to the Exchequer. It does not cover the full amount lost through tax avoidance. It sets out to measure the difference between the amount collected and the amount that should be collected. The stated tax gap underestimates the amount of money lost to the Exchequer … HMRC should be explicit about the limitations of its current measure of the tax gap and gather intelligence about the value of tax lost through aggressive tax avoidance schemes.58

55 TaxDodgingBill.org, The Tax Dodging Bill: what it is and why we need it, January

2015 p19 56 “Chapter 8: Is tax avoidance ‘fair’?”, in, Chris Wales (ed)., Fair tax: towards a modern

tax system, Smith Institute 2008 p94. 57 “The uses of morality in tax”, Tax Journal, 19 December 2014. See also Mike

Truman’s valedictory editorial in Taxation: “So long …”, 4 March 2015. 58 HC 666 of 2013-14 p5

19 Commons Library Briefing, 14 December 2017

At the time HMRC published a press notice in which they took issue with this point:

HMRC’s methodology for measuring the tax gap is robust and has been endorsed by the International Monetary Fund (IMF). Contrary to what the PAC report says, the published tax gap does include a measure of the tax lost from avoidance, as well as evasion, but it can only measure non-compliance with existing tax law – it cannot estimate how much tax might be due if tax laws were different.

HMRC can only bring in the tax that is due under the law and we cannot collect what is not legally due, however much the Committee might want us to.

The Public Accounts Committee already knows that we cannot prosecute multinational companies for activities that are lawful within the international tax framework and has itself acknowledged that the kinds of international tax planning by large businesses that it has reviewed are lawful.59

Subsequently the Government published a response to the Committee’s report, endorsing HMRC’s approach:

The Government disagrees with the Committee’s recommendation. The tax gap definition, calculation and the limitations are described in detail in the departments’ annual tax gap publication. The tax gap measures compliance with existing tax law and is informed by the intelligence the department gathers on the use of avoidance schemes. It does not cover how much tax might be paid if tax laws were different.60

HMRC has continued to produce these estimates each year, and following the publication of its 2015 report, Edward Troup, HMRC Permanent Secretary, restated why, in his view, it was “one of the most important documents we publish”:

An Ipsos MORI poll of the British public in September 2015 showed that they believe 36% of their compatriots have avoided paying the full amount of tax on income or purchases in the past year. However, the proportion of people who admitted they had done so in the same anonymous survey was just 6%. Due in part to our work in tax gap estimation, we know that more than 90% of the tax that is due is paid with little or no involvement from HMRC.

This “perception gap” between what people think about non-compliance and the objective truth is important; if people think everybody is at it, they are more likely to dodge tax themselves. If HMRC can show objectively, transparently and clearly that non-compliance is not nearly as big a problem as people’s assumptions suggest, we can increase tax morale, reinforce social norms and – cyclically – reduce the tax gap further.61

In June 2016 Mr Troup gave evidence to the Treasury Select Committee, and on this occasion the then Chair of the Committee, Andrew Tyrie, asked “just how much of the tax gap is ever going to be eradicable in

59 HMRC press notice, HMRC responds to PAC report, 19 December 2013 60 HM Treasury, Treasury Minutes, Cm 8819, February 2014 p13 61 “Measuring the gap”, Taxation, 15 October 2015

20 Tax avoidance: recent developments

practice, given human nature.” In response, Mr Troup made a couple of points:

[The tax gap is] in a very real sense, the best measure of the long‑term performance of a tax administration, because it is effectively the tax that is not collected, for whatever reason, and our goal should always be to reduce [it] …

We are always going to have a tax gap, because there are always going to be criminal attacks; there is always going to be evasion … We think what we are doing, particularly with our digital transformation, will give taxpayers, particularly business taxpayers, the tools that effectively allow them to reduce their errors … [Moreover] no country in the world has an observed tax gap significantly lower than ours, which means we are already pushing at the boundaries of what is doable with current technology, with the current tax system.62

62 Oral evidence: HMRC Executive Chair and Chief Executive, HC 232, 8 June 2016

Qs9-11

21 Commons Library Briefing, 14 December 2017

3. The Coalition Government’s strategy

The Coalition Government set out its priorities for tax policy in its agreement published in May 2010, announcing that as a whole the tax system should be made “more competitive, simpler, greener and fairer.” On avoidance, the agreement stated that the Government would make “every effort” to tackle it “including detailed development of Liberal Democrat proposals.”63

In Opposition the Liberal Democrats had pin-pointed a number of anti-avoidance measures, including a new General Anti-Avoidance Principle - or ‘GAAP’ - that they estimated could raise up to £2.2bn a year. In their General Election briefing on the major parties’ tax proposals the Institute for Fiscal Studies (IFS) commented on the viability of a GAAP, citing earlier work by the Tax Law Review Committee:

A general anti-avoidance principle (GAAP) is intended to help prevent behaviour that reduces tax liabilities through transactions that satisfy the letter of the law but are said to violate the spirit of the law in some way. In the past, concerns have been raised that a GAAP would be inherently vague and would potentially create uncertainty for taxpayers, and therefore that a resource-intensive ‘pre-clearance’ mechanism would be required whereby taxpayers could check in advance with HMRC whether particular arrangements would fall foul of the GAAP. The Liberal Democrats’ response to these concerns is to propose that ‘pre-clearance’ be provided by a new branch of HMRC which would charge commercial rates for such advice. This is a reasonable solution, but note that in effect it simply shifts the cost of pre-clearance from HMRC to the taxpayer.

The effects and effectiveness of a GAAP would depend a great deal on exactly how it was worded and on how the courts interpreted it. International experience has been varied in these respects. It is not a panacea and is unlikely to remove the need for more specific anti-avoidance legislation, but it could potentially raise some revenue.64

To estimate how much a GAAP would yield, the Liberal Democrats have taken the Government’s estimates of how much it loses from both ‘avoidance’ and differences in ‘legal interpretation’, and simply guessed what fraction of this total a GAAP would deliver: 20% for income tax, NICs and capital gains tax, and 25% for corporation tax. Yet a GAAP of the kind they describe would do little to address differences in ‘legal interpretation’.

The HMRC document from which the Liberal Democrats take their estimate of the tax gap describes the difference between ‘avoidance’ and ‘differences in legal interpretation’. Avoidance, according to HMRC, is “the use of schemes or arrangements that seem to HMRC to have been implemented primarily in order to

63 HMG, The Coalition: our programme for government, May 2010 p30 64 See Bowler, T. (2009), Countering tax avoidance in the UK: which way forward?, IFS

Tax Law Review Committee Discussion Paper No. 7 … for an analysis of the impact a GAAP might have had on tax avoidance had the current Government introduced one following consultation in 1998.

22 Tax avoidance: recent developments

deliver a tax advantage”; by contrast, “Legal interpretation relates to the potential tax loss from cases where HMRC and customers have different views of how, or whether, the law applies to specific and often complex transactions. Examples include the correct categorisation of an asset for allowances, the allocation of profits within a group of companies, or VAT liability of a particular item. In these situations the customer will have an alternative view of the law and of how it applies to the facts in their case to that held by HMRC.”

A GAAP as normally envisaged would address avoidance but not differences in legal interpretation, on these definitions; and indeed it is notable that the stated aim of the Lib Dems’ GAAP is to target transactions “constructed in such a way that the sole or main purpose, or one of the main purposes, is to reduce or eliminate tax liability” – a phrase that is almost indistinguishable from the above definition of ‘avoidance’ rather than ‘legal interpretation’

To raise £2.2 billion, therefore, the fractions of ‘avoidance’ alone that a GAAP would need to eliminate are much larger than the 20% and 25% that Liberal Democrats assume. Since these percentages are arbitrary guesses in any case (and we have no better way of estimating the yield), it is possible that larger percentages would turn out to be accurate. But relying on bringing in £2.2 billion is clearly less cautious than the 20% and 25% numbers might suggest.65

In its first Budget in June 2010 the Government stated that as part of “wider work on improvements to the tax policy making process” it would “engage informally with interested parties to explore whether there is a case for developing a General Anti-Avoidance rule.”66 In September, just prior to the Spending Review, the Chief Secretary to the Treasury announced that HMRC would receive an extra £900m of funding for a number of additional activities over 2011-2015 to improve its collection record, by reducing the current incidence of both avoidance and evasion.67 In turn the Spending Review the next month stated that this extra £900m would bring in “an additional £7bn a year in tax revenues by 2014/15”:68

This will include:

• a five-fold increase in criminal prosecutions to act as a deterrent to others;

• a new dedicated team of investigators to crack down on offshore evasion;

• more resources for the prevention of tobacco and alcohol fraud, an increase in registration checks, and a cyber team to address repayment fraud;

• dedicated tax experts to extend HMRC’s coverage of large businesses, focused on providing resources to tackle high risk areas; and

65 Taxes and Benefits: The Parties’ Plans, IFS April 2010 p39 66 Budget 2010, HC 61 June 2010 para 2.114. The Government published more details

of its approach at the time in, Tax policy making: a new approach, 22 June 2010 67 Liberal Democrats press notice, Alexander announces major clampdown on tax

avoidance and evasion, 19 September 2010 68 Cm 7942 October 2010 pp 71-2

23 Commons Library Briefing, 14 December 2017

• improving the scope of in house debt collection and placing up to £1 billion per year of tax debt to private sector debt collection agencies.

It should be noted that this investment was in the context of a department-wide spending cut:

Owen Smith: To ask the Chancellor of the Exchequer what effects he expects the outcomes of the comprehensive spending review to have on his Department's funding for HM Revenue and Customs in each year of the spending review period.

Mr Gauke: The outcome of the spending review is that HMRC will be required to make savings of 25% in real terms on a straight line basis over the next four years and that they will re-invest £900 million to tackle non-compliance in the tax system. The overall net effect is a real terms reduction of about 15%.69

At the time there were some concerns that the reductions to the HMRC’s budget and consequent cuts in staff would see an increase in tax evasion and avoidance,70 though the Government argued that there was not a binary relationship between the two:

Mr Jim Cunningham: To ask the Chancellor of the Exchequer what his most recent assessment is of the relationship between the number of staff employed by HM Revenue and Customs (HMRC) and the amount of tax revenue obtained by HMRC.

Mr Gauke: The amount of tax revenue received by the Government in any given year depends on a number of factors, including:

• the state of the economy eg the level of personal and corporate income, consumption, saving and investment;

• the structure of the tax system eg the rates, thresholds and reliefs in operation;

• the level of compliance by taxpayers; and

• HM Revenue and Customs' (HMRC) administration of the tax system, and the productivity of its compliance activities.

Through the use of new technology and increases in staff productivity HMRC has increased the amount of revenue bought in as a result of its compliance activities from £7.5 billion in 2005-06 to £12 billion in 2008-09. Over the period April 2005 to April 2010, HMRC has reduced the number of full-time equivalent staff it employs by 23% (excluding the transfer of 4,641 FTE staff to the UKBA).71

The Treasury Committee were critical of this funding decision, as part of their report on tax compliance published in March 2012:

In the 2010 Spending Review, HM Treasury allocated £917 million to HMRC with the intention of generating an additional £7 billion in compliance yield annually and £18 billion over the four-year life

69 HC Deb 23 November 2010 c278W 70 For example, The Association of Revenue & Customs, Being bold : a Radical Approach

to Raising Revenue and Reducing the Deficit, September 2010 & FDA press notice, Tax gap figure reinforces case for increased HMRC resourcing, 17 September 2010; see also, “A challenge to the Chancellor”, and “Closing the gap”, Taxation, 5 May & 6 October 2010

71 HC Deb 11 October 2010 c242W

24 Tax avoidance: recent developments

of the Spending Review.72 Given HMRC's estimate of the 2009-10 tax gap of £35 billion, this is a reduction of 20%, which is a very ambitious target … We accept that, based upon figures in HMRC's latest tax gap report, these seem to be sensible areas in which to invest. However the process by which the areas to be invested in, the amount to be invested, and the estimated additional yield were calculated and decided lacks transparency.

Mr David Gauke MP, Exchequer Secretary, explained the process as follows: “[HMRC] came forward with a proposal saying, "This is what we think we can do to reduce costs and this is what we can do to reinvest in a way that would increase the yield". I think it would be fair to say that pretty well the HMRC bid was accepted by the Government. The Treasury kicked the tyres very hard and examined all the detailed proposals that were contained within it, which broke down to, "Well, this particular programme we think would cost X and produce Y". We examined the various proposals and, by and large, the HMRC bid was accepted, and that is why we reached the settlement that we did [HC 731 Q372].

In a further memorandum intended to elaborate on this point, the Exchequer Secretary told us that: “HMRC came forward with a number of investment cases to further increase compliance and reduce the tax gap that the Treasury were satisfied with on that basis... The final £917m reinvestment proposals therefore met the test of standing up to intense Treasury scrutiny [HC 731 Ev 130].”

Neither the Minister's oral evidence nor his supplementary evidence makes clear what criteria were applied to assess HMRC's proposals for investment, or whether this assessment was systematic. This makes it difficult for us to scrutinise in detail whether the areas to be invested in are the right ones, whether the estimated yield from each area is accurate, and whether proposals which were rejected should have been accepted.73

The Committee went on to raise concerns that investments in this area might encourage an overly aggressive attitude by tax officers:

We welcome the Exchequer Secretary's view that "the Treasury could, in theory, seek to invest in HMRC until the marginal pound invested brought not less than a pound in return... [but] in practice the Treasury considers each additional investment in HMRC on a case-by-case basis". However we encourage the Treasury to include in its consideration the question of whether the activity invested in will yield the right amount of tax and not just the greatest possible amount.74

At the time of the 2011 Budget the Government published a strategy document on its anti-avoidance strategy. In the foreword to this, the then Exchequer Secretary, David Gauke, made the case for a new approach as follows:

We inherited a tax system with a ‘tax gap’ of around £40 billion. More than a sixth of that is due to tax evasion – that is, illegally understating tax liabilities. But a further one sixth is estimated to be due to tax avoidance – that is, reducing tax liabilities by using the tax law to get a tax advantage that Parliament never intended.

72 Spending Review Settlement 2010, Cm 7942, October 2010; Treasury Committee,

Administration and effectiveness of HM Revenue and Customs, 30 July 2011, HC 731 of 2010-12 Q258

73 HC 1371 2010-12 pp7-8 74 HC 1371 2010-12 p8

25 Commons Library Briefing, 14 December 2017

And the problem is a persistent one … Clearly, there is a problem we need to tackle and we are committed to tackling it differently from our predecessors. That means a more strategic approach that gets to the root of the problem, rather than treating the symptoms.75

The document went on to summarise the key elements of this approach…

• making the most of opportunities to make the tax system more watertight against avoidance, for example, as part of wider policy reform;

• reviewing areas of the tax system that have been under repeated avoidance attack, to get to the heart of the problem and develop sustainable solutions; and

• creating new generic defences against avoidance, going beyond closing identified avoidance loopholes, including considering the case for a General Anti-Avoidance Rule (GAAR).76

… and to set out four strands of work on legislative defences against tax avoidance:

• a new proposal to reduce the cash flow benefits that taxpayers can gain from using high risk avoidance schemes;

• a new rolling programme of reviews on high risk areas of the tax code;

• work in hand on a GAAR; and

• the targeted tax measures that sit alongside this strategic work to address specific avoidance risks that have emerged.77

With regard to the specific proposal to consider a ‘GAAR’, in November 2011 the Treasury published a report by a study group, led by Graham Aaronson QC, which recommended a narrowly focused rule targeted at ‘abusive arrangements’ only,78 and following consultation,79 the Government introduced provision for this tax avoidance legislation in 2013. This is discussed in detail in a second Library paper.80

In their report on Finance Bill 2011, the House of Lords Economic Affairs Committee looked at this issue, asking a number of witnesses about the Government’s new approach:

[The Government's strategy and the three elements to this strategy identified in Tackling Tax Avoidance] … met with wide-spread approval from our private sector witnesses. The Chartered Institute of Taxation (CIOT) thought that "the idea of a strategic approach to tackling avoidance is sensible and in many ways much needed ... We are pleased to note that the new Protocol on unscheduled announcement of changes to tax law explicitly

75 HM Treasury/HM Revenue & Customs, Tackling Tax Avoidance, March 2011 p3 76 op.cit. p5 77 op.cit. p9 78 HM Treasury press notice 130/11, 21 November 2011 79 HMRC, A General Anti-Abuse Rule (GAAR) - consultation document, June 2012 80 Tax avoidance: a General Anti-Abuse Rule, Commons Briefing paper CBP6265, 11

December 2017

26 Tax avoidance: recent developments

recognises that retrospective changes to tax legislation will be wholly exceptional …" [Written evidence (WE)81].

The Institute of Directors (IoD) thought that although the "detailed articulation of the strategy may be new, we would be surprised and concerned if more than a small proportion of the practices that it mentions were new."[WE] They agreed with taking "away the cash-flow advantage of using high-risk avoidance schemes that fail."[WE] The CBI echoed this ... The Institute of Chartered Accountants (ICAEW) thought that "Tackling Tax Avoidance makes a number of sensible recommendations. We have welcomed previously the new Protocol on unscheduled announcement of changes to tax law which reiterates the fundamental principle that any tax changes should be made prospectively and not retrospectively."[WE]

Mr Alex Jackman of the Forum of Private Business (FPB) was positive … but he had a concern "We do not want to see small business unfairly targeted … while there are a few big wins out there, I think the view might be taken by HMRC that there are a few more easy wins at the lower end of the business spectrum. That is something we would be seeking to avoid."[Q231]

On the rolling programme of reviews of high-risk areas of the tax code, most of our private sector witnesses were content with HMRC having chosen income tax losses and unauthorised unit trusts ... Only Mr Murphy82 thought that these areas "seem to be relatively minor compared to major issues such as profit shifting, the use of tax havens, the abuse of the domicile rule, the residence rules and what they are giving rise to."[Q90]83

Witnesses raised two specific concerns: first, that the department should be stopping avoidance schemes more quickly, and second, that it should improve the drafting of legislation.84

On the first of these issues, officials pointed to the impact of the ‘disclosure regime’, DOTAS for short, under which promoters of avoidance schemes are required to give HMRC information on the nature of the scheme, and those taxpayers that they have provided it to.85 For its part the Committee concluded that tackling evasion was just as important as tackling avoidance, if not more so:

Some of our witnesses enjoined us not to forget about evasion. In their evidence, the CIOT wrote "As a final point in this section, we would urge the Government not to lose sight of evasion and other criminal activity, which can have a far greater impact on Exchequer revenues than avoidance."[WE] … [Richard Murphy] agreed "Let's be blunt about it; the biggest issue with regard to loss of revenue is not with regard to avoidance, it is with regard to evasion, and most people who are evading would in fact be basic rate taxpayers, probably not high rate taxpayers at all. This is cash put in pockets …."[Q85]

81 Written evidence to the Committee, collated on the Committee’s site. 82 Richard Murphy, Tax Research LLP 83 Select Committee on Economic Affairs, The Finance Bill 2011, 17 June 2011 HL

Paper 158 2010-12 pp32-33 84 HL Paper 158 2010-12 p33, pp35-36 85 For more details see, National Audit Office, Tax avoidance: tackling marketed

avoidance schemes, HC 730, 21 November 2012, and, Commons Briefing Paper CBP2956, 13 April 2017 (see section 2.1).

27 Commons Library Briefing, 14 December 2017

Dave Hartnett (Permanent Secretary for Tax at HMRC) outlined for us what was happening to tackle evasion and stated that he was "expecting our numbers from compliance interventions to be very good for 2010-11—probably our best ever … We are in the throes of recruiting 200 more criminal investigators. We particularly want to focus on people who have hidden money offshore over a number of years, as a product of tax fraud. We have set up new groups around the country, with task forces looking at particular industries … We have teams of specialist investigators who are pursuing people working in the hidden economy."[Q270]

On the basis of HMRC's figures the tax lost from all forms of evasion and default is very much greater than that lost from avoidance: £22 billion compared with £7.5 billion. We welcome action to tackle evasion. We recommend that the Government should publish an anti-evasion strategy in the same way as for anti-avoidance.86

3.1 HMRC’s compliance yield As noted above, HMRC seek to assess the effectiveness of their strategy to increasing tax revenues by estimating “compliance yield”: that is, the additional revenue it generates through its activities to identify and prevent tax losses arising from avoidance, evasion and criminal attack. As the National Audit Office explain:

HMRC estimates compliance yield to provide accountability and to support decision-making. The long-term aim of compliance work is to reduce the tax gap: the difference between the tax that is theoretically due and the tax HMRC actually collects.

But a more direct measure of compliance yield is also necessary as the tax gap is subject to long reporting delays and is affected by factors outside HMRC’s control, such as the strength of the economy and changes to tax rates. HMRC therefore estimates the additional tax revenue attributable to its compliance activities, both to provide accountability for its overall performance and to manage its business and the performance of its compliance teams on a day-to-day basis.87

In 2014 it came to light that HMRC had made a £1.9bn error when it had established the baseline for these estimates in 2010, something for which it was strongly criticised by the Public Accounts Committee.88

Nevertheless, in an overview of the department’s work published in February 2015, the NAO found that HMRC had made “significant progress since the 2010 spending review in delivering its strategic objectives, successfully reducing the cost of tax collection while increasing the tax it raises from its compliance work.” The report goes on to provide details of HMRC’s (corrected) estimates of its compliance yield over this period:89

86 HL Paper 158 2010-12 p42 87 NAO, Her Majesty’s Revenue & Customs 2013-14 accounts, 3 July 2014 pR19. Part

Two of the report discusses the measurement of the compliance yield in detail. 88 HMRC’s progress in improving tax compliance and improving tax avoidance, 18

November 2014, HC 458 of 2014-15 pp7-10 89 Increasing the effectiveness of tax collection: a stocktake of progress since 2010, 6

February 2015, HC 1029-I of 2014-15 p7, pp10-11

28 Tax avoidance: recent developments

HMRC estimates that it secured compliance revenue of £23.9 billion in 2013-14, over £7 billion more than the baseline set at the beginning of the spending review period. Despite an error in the baseline that HMRC originally set, it met the additional compliance yield targets agreed in the 2010 spending review. In 2013-14, it generated an increase of £7.3 billion against the target of £5.3 billion. HMRC believes it is on track to meet its 2014-15 target.

Figure 3 shows HMRC’s reported compliance yield since 2011-12:

HMRC’s updated estimates for its compliance yield over the last three years – 2014/15 to 2016/17 – have been £27-£29 billion a year.90

3.2 Concerns about the scale of tax evasion When HMRC’s 2015 estimates of the tax gap were published, the Chartered Institute of Taxation noted that despite the amount of press coverage given to the scale of tax avoidance, the costs from tax evasion and other illegal activities were much higher: “This total includes an estimated £2.7n lost to tax avoidance … However, £5.1bn was lost to criminal attacks, £4.4bn to evasion and £6.2bn to the ‘hidden economy’, a total of £15.7bn from illegal activity.” John Cullinane, CIOT Tax Policy Director, commented: “These figures suggest that tax evasion and other illegal activity are costing the Exchequer nearly six times as much as tax avoidance.”91 Writing at this time barrister Jolyon

90 PQ113407, 24 November 2017; HMRC Annual Report 2016/17, HC 18, July 2017

pp23-4 91 CIOT press notice, 22 October 2015

29 Commons Library Briefing, 14 December 2017

Maugham suggested that without a significant reduction in the scale of the hidden economy “our scope for improvement is limited.”92

Similar concerns were raised the following year when HMRC published estimates of the tax gap for 2014/15: of a total tax gap of £36 billion, £2.2 billion was attributed to tax avoidance, and £16.2 billion to various types of illegal activity (the hidden economy, evasion and criminal attacks). In a press notice from the CIOT Mr Cullinane observed:

“These figures suggest that tax evasion and other illegal activity are costing the Exchequer more than seven times as much as tax avoidance. The CIOT has long argued that HMRC needs to put more effort into investigating and prosecuting those who seek to evade tax. The Government are right to have put extra resources in this direction, as well as tackling artificial and abusive attempts to avoid tax.

“Taxpayers will be reassured that HMRC is making good progress on tackling and managing the tax gap. We welcome HMRC’s continued commitment to providing impartial statistics that should inform the unprecedented debate about taxation and we will continue to push for the more simplified and workable tax system that personal and corporate taxpayers tell us they want.”93

In December 2015 the NAO published a report on HMRC’s approach to dealing with tax fraud; the authors underlined the inherent difficulties to effectively prioritising risks in this area, despite HMRC’s work in estimating its compliance yield and the size of the tax gap:

It is inherently challenging for HMRC to understand whether it is using the best mix of measures to tackle tax fraud in the long term.

HMRC uses compliance yield as a direct measure of the effectiveness of its compliance work, while its annual tax gap calculation provides an indicator of the long-term impact of HMRC’s work overall. However, it is difficult for HMRC to know how its interventions interact with one another or whether it is achieving the best outcome from the resources it deploys to tackle tax fraud in the round. It is also hard to detect or quantify potential unintended consequences of its compliance work, such as whether disrupted criminal activity is displaced to other gangs, or the long-term effect on taxpayers’ behaviour of encouraging tax evaders to volunteer information about their income and assets so they can benefit from lighter penalties than might otherwise have been imposed.

The problem of measuring outcomes is one faced by all tax administrations worldwide. HMRC recognises this complexity and is developing its thinking on how to design a new range of performance measures that will give it a better understanding of the impact from its work.94

The report discussed a number of initiatives to tackle evasion, including provision to give HMRC powers to obtain data from payment providers

92 “The tax gap, updated”, Waiting for Godot blog, 22 October 2015 93 CIOT press notice, ‘Tax gap’ figures – help the compliant comply, and bear down on

those who do not, 20 October 2016. See also, CIOT, ‘Tax gap’ continues its slow fall, 26 October 2017.

94 Tackling tax fraud: how HMRC responds to tax evasion, the hidden economy and criminal attacks, HC601, 17 December 2015 p9

30 Tax avoidance: recent developments

and business intermediaries to identify hidden economic activity. Further details of this were published in December 2015,95 and provision to this effect was included in the Finance Act 2016 (specifically ss176-7).

3.3 Recent debate of HMRC’s performance In April 2016 the Public Accounts Committee published a report following the NAO’s work on tax fraud, which was critical of HMRC’s record to reducing its scale – and in particular, the relatively small numbers of investigations and prosecutions in this area.96 Among its recommendations the Committee argued that HMRC should improve the way it reported its performance, clarify its strategy, and tackle public perceptions that wealthy individuals were able to evade tax successfully:

We cannot judge how effective HMRC is at reducing the tax gap because the way it reports its performance is too confusing. HMRC told us that its performance in addressing tax fraud was good. But HMRC’s assessment of the tax gap shows that the level of tax fraud has remained virtually static over the last five years, at around 3% of all tax liabilities. The impact that HMRC claims for its work far exceeds any reduction in the tax gap …

Recommendation: HMRC should clearly set out in its annual reports the relationship between its compliance yields and changes in the tax gap. It should also publish this information in a way that is accessible for everyone to understand.

HMRC has not set out a clear strategy for tackling tax fraud. HMRC referred to a number of areas where it plans to focus its activities to tackle different types of tax fraud including the risks posed by illicit alcohol and evasion by wealthy individuals. HMRC is missing key information that would be necessary to inform a properly strategic approach. For example, HMRC could not tell us how much resource it puts into tackling tax fraud compared to other types of compliance work, such as dealing with tax avoidance or error ...

Recommendation: HMRC should set out its strategy to tackle fraud by November 2016. It should identify how much resource is devoted to tackling different tax risks and the corresponding yield in each area of the tax gap.

The perception that HMRC does not tackle tax fraud by the wealthy needs to be addressed … HMRC told us it investigates around 35 wealthy individuals for tax evasion each year, but did not know how many wealthy individuals it had successfully prosecuted. We welcome the fact that HMRC has sought and received funding to increase the number of investigations it undertakes into corporates and wealthy individuals to 100 a year by 2020, indicating that the current level is insufficient.

Recommendation: HMRC must do more to tackle tax fraud and counter the belief that people are getting away with tax evasion. It needs to increase the number of investigations and prosecutions, including wealthy tax evaders, and publicise this

95 HMRC, Tackling the hidden economy: extension of new data-gathering powers – tax

information & impact note, December 2015 96 Public Accounts Committee press notice, New measures and greater clarity needed

to fight tax fraud, 15 April 2016

31 Commons Library Briefing, 14 December 2017

work to deter others from evading tax and to send out a message that those who try will not get away with it.97

In its response the Government accepted that HMRC should improve its performance reporting, and engage with public perceptions about tax evasion, though it rejected the suggestion that the department did not have an effective strategy to reduce fraud.98 Subsequently HMRC’s 2015/16 Annual Report had a section discussing both the tax gap and the compliance yield, with some comments on the difficulties to trying to explicitly link the two.99 However, as the NAO observed, in its commentary on the annual accounts, “this is a useful step in explaining the relationship, but it will take longer-term work to address the issues raised by the Committee of Public Accounts about how HMRC’s reported headline performance measures relate to each other.”100 In its report HMRC also stated that in future years it would amend the way it reported the ‘future revenue benefit’ of its compliance interventions – that is, the impact this work is estimated to have on tax receipts over future years.101 As the NAO noted, “from 2016-17, following our recommendation, HMRC will report future revenue benefit in the year of impact rather than the year in which it is assessed. The new method is more consistent with the way the rest of compliance yield is reported, although there will still be a degree of uncertainty around the estimation … The new approach will help to improve the transparency and internal consistency of HMRC’s performance measurement.”102

The Committee reiterated its concerns about public perceptions of the scale of tax evasion by the wealthy in a report in January 2017,103 and in response HMRC stated that it would publish more details of this aspect of its work in its next Annual Report.104

In July 2017 HMRC published its 2016/17 Report, which presented its latest estimates of its compliance yield, as well as separate short papers on the element of this accounted for by future revenue benefit,105 and on the relationship between compliance yield and the tax gap. In the latter case, this paper observed, “the amount of compliance yield HMRC generates and the size of the tax gap are related but the links are not straightforward”:

Compliance yield records many aspects of compliance work, including tax recovered directly from our work, future revenue benefit and losses prevented. It can also cover more than one tax year. Different factors, such as the number of new businesses, new customers, changes in levels of voluntary compliance, economic factors, tax policy and rate changes all affect the tax

97 Tackling tax fraud, 15 April 2016, HC 674 of 2015-16, pp5-6 98 Treasury Minutes, Cm 9323, July 2016 pp1-3 99 HMRC 2015/16 Annual Report, HC 338, July 2016 pp16-19 100 HM Revenue & Customs 2015-16 Accounts, July 2016 para 1.33 101 For details see, HMRC, HMRC compliance revenues – how HMRC will change how it

reports ‘Future Revenue Benefit’, July 2016 102 HM Revenue & Customs 2015-16 Accounts, July 2016 para 1.32 103 Public Accounts Committee press notice, Government must take tougher stance on

taxing the very wealthy, 27 January 2017. See also, Collecting tax from high net worth individuals, 27 January 2017, HC 774 of 2016-17

104 Treasury Minutes, Cm 9433, March 2017 pp5-7 105 HMRC's Compliance Yield: How HMRC reports future revenue benefit – an update

for 2016-17, July 2017

32 Tax avoidance: recent developments

gap. Because the tax gap reflects a single year, and some compliance cases can cover multiple years, it is possible that the amount of compliance yield HMRC secures might increase while the percentage tax gap remains the same or reduces.106

The National Audit Office’s report on the accounts has a short section on this issue, describing HMRC’s paper on the compliance yield and the tax gap as “a useful step in explaining the relationship”, but going on to say, “it will take longer-term work to address the issues raised by the Committee of Public Accounts on how HMRC’s reported headline performance measures relate to each other.”107

HMRC estimate that its compliance yield for 2016/17 was £28.9 billion; as this section of the report explains, one new element to HMRC’s compliance yield in recent years has been use of ‘accelerated payment notices’ – discussed in the next section of this paper:

The main components of our £28.9 billion compliance yield are:

• £10.3 billion of cash expected — the amount of additional revenue due when we identify previous non-compliance, reduced by a discount rate to reflect the fact that some of the amounts that we identify will not be collected, for example where a business becomes insolvent. While the amount of tax due from these cases is very clear, we cannot trace every compliance assessment through to final payment so there is an element of estimation involved in this figure

• £7.9 billion of revenue loss prevented — the value of our activities where we have prevented revenue from being lost to the Exchequer that impacts on our tax receipts. This includes stopping fraudulent repayment claims, totalling £4.8 billion and disrupting criminal activity, which amounted to £3.1 billion

• £6.3 billion of future revenue benefit — the estimated effect of our compliance interventions on customers’ future behaviour

• £3 billion of product and process yield — the estimated annual impact on net tax receipts of legislative changes to close tax loop holes and changes to our processes which reduce opportunities to avoid or evade tax. This estimate is subject to independent scrutiny by the Office for Budget Responsibility

• £1.3 billion of revenue from Accelerated Payments notices — the disputed amounts of tax that people using tax avoidance schemes are now required to pay up-front within 90 days, as well as an estimate of the behavioural change that the policy has generated. Last year we issued more than 9,000 ‘follower notices’ to tax avoidance users with an associated accelerated payment to a value of more than £520 million. Follower notices urge tax avoiders to settle their tax dispute after court rulings in similar cases find in our favour, or face a penalty of up to 50% of the value of their tax and/or National Insurance in dispute. We issued 99

106 The tax gap and compliance yield – what they are and how they relate, July 2017 107 Her Majesty’s Revenue & Customs Annual Report and Accounts 2016-17, July 2017

para 1.20

33 Commons Library Briefing, 14 December 2017

follower notice penalties last year, with a collective value of £6 million.

If we calculate future revenue benefit using the old methodology (reporting future revenue benefit in the year we completed our compliance activities) our total compliance yield for 2016-17 would be £28 billion, of which future revenue benefit would be £5.4 billion. The new methodology records future revenue benefit against the year in which the exchequer benefit is expected and amounts to £6.3 billion.108

On the specific issue of prosecutions, the report adds:

A total of 886 criminals and fraudsters were prosecuted in 2016-17, mostly for tax-related offences, serving a collective total of 806 years in prison. We are committed to increasing the number of criminal investigations that we can undertake into serious and complex tax crime, focusing particularly on wealthy individuals and corporates, with the aim of increasing prosecutions in this area to 100 a year by the end of the Parliament.109

On 6 November the Public Accounts Committee held an evidence session on HMRC’s report, and on this occasion, Jon Thompson (Chief Executive and Permanent Secretary), and Jim Harra (Director General, Customer Strategy and Tax Design), said a little as to the department’s ambitions to reduce the tax gap …

Q76 Chair: …We have talked a lot on this Committee about the tax gap, and the good news is that there is a downward trend over the last nine years, from 8.3% in 2005-06 to 6.5% in 2014-15. How much further can we realistically expect the tax gap to fall, Mr Thompson? It is a prediction we’re asking for.

Jon Thompson: A prediction? Yeah, well—

Q77 Chair: To measure you against.

Jon Thompson: The next question will be, “Am I prepared to sign up to a target?” Look, we will strive to get it as low as possible. It is actually really rather difficult to work out what is the

108 HMRC Annual Report 2016/17, HC 18, July 2017 pp23-4 109 op.cit. p24. As noted recently, “a large part” of compliance yields “covers money

that the Government thinks it will get in future … rather than what it has saved so far”: “How much has the government recouped from tax evasion and avoidance?”, Full Fact, 2 November 2017.

34 Tax avoidance: recent developments

lowest possible level that you can go to. Jim and I have been having some interesting conversations about this. With more powers, more people, more intervention and more data, you can continue to reduce the tax gap, and indeed there is a whole range of measures in the pipeline now and I guess there will be further measures in the upcoming autumn Budget. It is quite difficult. It cannot be zero, otherwise every other person would need to be a tax inspector, but quite how low it can go is difficult to estimate. We believe that we have the most comprehensive measurement of the tax gap and that it is the lowest published one in the world, but we still need to strive to get it lower and there is a whole range of measures in the pipeline that we think will reduce the tax gap further.

… and the most significant obstacles to achieving this:

Q78 Chair: … We have picked at this issue before, but which parts of the tax gap are you most worried about? Which are the hardest bits to crack?

Jim Harra: It is all hard to crack in different ways. The largest part of it is really the small businesses. That poses a number of big challenges for us. First, there is a very large number of small businesses, so, case by case, it can be a relatively small amount and therefore it can be very difficult to tackle that in a cost-effective way. Also, the way that we have traditionally tackled that issue could be quite intrusive and stressful for a small business, because it involves in-depth investigation.

And we are seeing in the economy a movement away from employment towards small businesses, so the underlying pressure is people moving out of an area of taxation that is highly compliant into an area that is highly non-compliant. That is a key challenge for us. We want to find different ways of tackling that, other than the traditional method of having a lot of boots on the ground investigating a lot of small businesses, although that will always be part of it.

A key measure that Parliament has passed in the last couple of weeks is Making Tax Digital for business, which is starting to modernise the small business tax system and drive out some of the error and failure to take reasonable care. We can build on that in future.

There are a couple of other areas where we can make a big difference. First, there is a new set of intermediaries in the self-employment arena. You have had eBay and Amazon here before you, and there are also taxi and takeaway apps, and we need to look to exploit these intermediaries more in the future to help small businesses to comply and prevent opportunities for them not to. Secondly, there is the tax agent industry, which has a very high level of penetration into small business taxation, yet its clients are often presenting as non-compliant. We need to drive up the value the tax system gets from agents in the system.110

110 Oral evidence: 2016-17 HMRC Standard Report, HC 456, 6 November 2017 pp17-

18. For more background on HMRC’s plans for digital tax returns see, Making Tax Digital, Commons Briefing Paper CBP7949, 12 October 2017.

35 Commons Library Briefing, 14 December 2017

4. Follower notices & accelerated payments

4.1 ‘Raising the stakes on tax avoidance’: summer 2013

In summer 2013 the Coalition Government published a consultation paper, Raising the stakes on tax avoidance. In this, HMRC focused on the difficulties in dealing effectively with “high risk promoters”, a relatively small number of individuals and firms who “would commonly encourage tax advisers’ clients to enter into avoidance schemes, attempt to impose conditions of confidentiality on clients and disrupt the relationship between the tax adviser and their client.” The paper noted that in general the types of scheme being sold “overwhelmingly do not work and have very little chance of succeeding at the outset.”111 Given this, “a key question to consider is why they continue to be used by taxpayers, usually at the cost of a significant fee”:

Since summer 2012 HMRC has gained a better understanding of the market for avoidance schemes and the key players involved. Key factors emerging from the research to date are:

• provision of minimal amounts of information by promoters to potential clients and their ‘mainstream advisers’;

• disclosure to HMRC of the avoidance scheme only when absolutely necessary, and a willingness to challenge the application of DOTAS;

• reassurance to potential clients that the product is backed up by legal advice, but with only minimal information about how and why; and

• a willingness by taxpayers to accept a level of risk on the basis that a product might succeed or that they will not be challenged by HMRC.112

The paper noted that when schemes had been marketed to a significant number of taxpayers, HMRC incurred considerable costs in challenging each taxpayer who had used it:

Buyers of a tax avoidance scheme will submit their returns to HMRC on the assumption that the scheme reduces their tax liability. Where a tax avoidance scheme is mass-marketed, as they often are, HMRC is presented with a large number of returns all based on the same assumption that the scheme will have reduced the person’s tax liability in a particular way. Where HMRC holds that the scheme does not work, it follows that it will argue that any returns based on that scheme are incorrect.

111 [In a subsequent consultation, HMRC stated “over 80% of avoidance cases heard in

the courts and tribunals were won by HMRC in the last financial year. In addition, piloting of behavioural change work has resulted in hundreds of users approaching HMRC to withdraw from avoidance arrangements, some as early as the start of HMRC’s investigation” Tackling marketed tax avoidance, January 2014 para 2.3.]

112 Raising the stakes on tax avoidance: consultation document, 12 August 2013. See also HMRC’s guidance for taxpayers informed by this research: Tempted by tax avoidance? A warning for people thinking about avoidance schemes, March 2014.

36 Tax avoidance: recent developments

When faced with a large number of very similar cases, it is sometimes most efficient for HMRC to investigate ‘representative cases’, taking them to litigation if necessary. However, when HMRC wins a representative case in the courts, other taxpayers who have used the same or very similar schemes sometimes see little incentive to settle their cases with HMRC.

When HMRC pursues litigation in a number of very similar cases the Tribunal rules allow for the cases to be heard together in certain circumstances, but this only applies to cases which have been notified to the Tribunal. To get to this stage HMRC has to investigate these cases to litigation standard and close them. Not only does this use up the Tribunal’s resources, but it also places a strain on HMRC’s compliance resources, wastes HMRC’s time and delays the collection of the right tax.113

As noted above, during this period the Public Accounts Committee published a series of reports on corporate tax avoidance, in which it was strongly critical of HMRC’s efforts.114 The approach taken by the Committee chair, Margaret Hodge, and the other members of the Committee, particularly in evidence sessions with witnesses, was not uncontroversial,115 but in an essay on tax avoidance over the last century, Graham Aaronson QC, argued that the Committee’s work had had a significant impact on the Government’s legislative approach:

Depending on our viewpoint, Margaret Hodge’s and the PAC’s harsh criticism of HMRC was either excessive or wholly justified. In my opinion it was in fact both: it was excessive because it failed to do justice to the radical steps which HMRC was already taking to deter and counteract tax avoidance; but it also responded to and harnessed public intolerance of tax avoidance and so created a climate where HMRC could equip itself with the means needed to combat avoidance more effectively.

So, like a surf-boarder rising a giant wave off Hawaii, the Treasury moved to introduce a succession of anti-avoidance measures having the aim of counteracting and deterring tax avoidance strategies across a range of taxes.116

In the Autumn Statement in December the Government confirmed that it would pursue two options set out in this consultation to deal more effectively with users of ‘failed schemes’ and the promoters who sold them:

1.308 Autumn Statement 2013 confirms that the government will:

• introduce new requirements for users of failed avoidance schemes to oblige them to settle the dispute where the avoidance scheme they are using has been defeated in another party’s litigation through the Courts, with penalties attached for non-compliance

• increase obligations and sanctions for high-risk promoters of tax avoidance schemes, by introducing objective criteria for identifying and publishing the names of high-risk

113 Raising the stakes on tax avoidance …, 12 August 2013 para 5.1-2 114 See, for example, Tax Avoidance–Google, 13 June 2013, HC 112 of 2013-14. 115 See, for example, “Tax prat of the year” & “So farewell then …”, Taxation, 6

February 2013 & 10 June 2015 116 “Insight and analysis: The swing of the pendulum: tax avoidance in modern times”,

Tax Journal, 30 September 2016

37 Commons Library Briefing, 14 December 2017

promoters, seeking more information from them and applying penalties where there is failure to comply. Their clients will also be required to identify themselves to HMRC.117

The Government also announced that it would introduce new powers to require taxpayers in this situation to pay tax ‘upfront’, possibly extending this system of accelerated payments to other taxpayers using avoidance schemes:

1.309 Autumn Statement also announces that the government will:

• introduce a new power that requires taxpayers who are using avoidance schemes that have been defeated through the Courts to pay the tax in dispute with HMRC upfront. This will provide HMRC will an additional tool to address a legacy stock of an estimated 65,000 avoidance cases, around 85% of which date back to before 2010. It will remove the cash advantage of sitting and waiting during an avoidance dispute, and bring in £700 million over the forecast period

• consult on the scope for extending this power by widening the criteria for which taxpayers are required to pay any disputed tax upfront.118

Writing in the Tax Journal, James Bullock (Pinset Masons) observed, “one of the enticements to taking part in a tax-avoidance scheme is the cashflow benefit that such schemes bring. Even if the scheme is found ultimately to fail, a taxpayer undertaking a scheme can (and could until recently even for PAYE and NIC) generally secure the benefit of holding the tax whilst the dispute is determined. With ‘marketed’ schemes the deal was even better, as generally only one taxpayer is litigated – and it is open to so-called ‘follower’ taxpayers to argue that their fact patterns are different – and therefore they have to sit and wait until HMRC gets around to them. HMRC is now acting to end this particular party.”119

The scale of the Exchequer risk posed by disputed tax was set out in HMRC’s consultation document published in January:

The existence of around 65,000 open cases involving marketed tax avoidance schemes illustrates how the current position can lead to a build-up of avoidance schemes that HMRC needs to tackle through investigation and litigation, which can take several years to complete. Over 85 per cent of these cases date back to 2009-10 or earlier … reflecting a market for avoidance products which was very active in earlier years.

These 65,000 taxpayers have used a wide range of avoidance schemes to reduce their liability to SDLT, Capital Gains Tax, Corporation Tax, Income Tax and National Insurance Contributions (NICs). However the largest areas of legacy

117 It was estimated that these two measures would raise £35m a year from 2015/16

(‘high-risk’ promoters), and £75m in 2015/16, falling to £30m a year in later years (penalties for ‘follower’ cases): Budget 2014, HC 1033, March 2014 p59 (Table 2.2 – items be & bf). Details of these changes are set out in: HMRC, Raising the stakes on tax avoidance - summary of responses & draft legislation, January 2014.

118 Autumn Statement, Cm 8747, December 2013 p74 119 “Views on the Autumn Statement: enforcement and compliance issues”, Tax Journal,

6 December 2013

38 Tax avoidance: recent developments

avoidance include:

Some of these users have used the same scheme more than once whilst others have used more than one scheme.120

The document set out the range of circumstances where disputed tax would be held by either the Exchequer or the taxpayer, before a final tax liability is determined:

There is no inherent presumption that tax under dispute should sit with the taxpayer rather than the Exchequer. Under current law, there are a number of circumstances where the tax sits with the Exchequer while the liability is finalised.

Currently:

• HMRC is able to deny claims for tax repayments pending final resolution;

• HMRC can enforce tax payment when there are claims for other years that might reduce or eliminate that tax;

• Tax is payable following a court or tribunal decision, despite a continuing appeal; and

• There are general circumstances where tax is withheld and repaid (eg: PAYE, tax on interest),

but

HMRC cannot normally intervene in a taxpayer’s self-assessment, even when the taxpayer deducts amounts claimed as a result of attempted tax avoidance.121

It went on to give an overview of how, once HMRC had identified ‘follower cases’ to a given scheme that had been struck down in the courts, it would require those taxpayers to amend their tax return, and pay over the disputed amount of tax:

[Under the Government’s proposals for ‘follower notices’, HMRC would] issue … a notice to taxpayers involved in avoidance schemes where there has been a final judicial decision in another taxpayer’s case on the same or similar arrangements. The notice

120 Tackling marketed tax avoidance – consultation document, 24 January 2014 para

1.1, paras 2.6-8. Interested parties were given only given a month to response to this follow-up document – ie, by 24 February.

121 op.cit. para 3.5-6

39 Commons Library Briefing, 14 December 2017

requires the taxpayer to amend their tax return (if the return is still under enquiry) or agree to settle the dispute (where a closure notice or tax assessment or determination has been made and is under appeal).

At the heart of this notice is the proposition that the likelihood of the taxpayer’s scheme succeeding is remote, given that a tribunal or court has made a decision on the same or similar arrangements. In HMRC’s experience, it is extremely rare for a taxpayer to even proceed to their own litigation in the face of such a decision, but while the vast majority do eventually concede they prolong the dispute for as long as they are able, often agreeing to settle only as the date of litigation approaches. In the Government’s view, the delivery of a related judicial decision fundamentally changes the presumption of where the tax should sit during this period.

The sum would be estimated by HMRC, though subject to revision if the actual amount due was larger, or, if the taxpayer successfully pursued an appeal that, in their own case, their use of the scheme was legal:

Taxpayers receiving a ‘follower notice’ are required to tell HMRC the amount of the tax advantage being sought. However, this figure may not be available until the taxpayer agrees to resolve the dispute in response to the notice – and will not be provided by the taxpayer at all in cases where the taxpayer chooses not to resolve the dispute.

It is proposed, therefore, that HMRC will issue a Payment Notice to the best of their judgement. In the majority of cases HMRC would expect to have a reasonable indication of the amount in dispute as the matter will have been under enquiry, or HMRC will have issued an assessment or determination.

The amount of tax to be paid under the Payment Notice is the amount of additional tax that would otherwise have been paid if the arrangements had not been entered into. This is meant to be a simple recalculation of the additional tax due on the return (or similar document) having removed the effects of the avoidance scheme, less any relevant amounts already paid. It is not a calculation whereby the taxpayer can say that in the absence of these arrangements another structure would have been employed instead.

The amount to be paid will be the amount remaining after any part of the tax in dispute that is already subject to a withheld repayment.

It is important to note that this will simply be a form of payment on account and not a payment that determines the amount of the final liability. If the amount paid is less than the final amount due, the taxpayer will still be liable to pay any remaining balance when the dispute is finally resolved. Equally, if the taxpayer continues to pursue their claim and is successful then they will get their money back with interest.122

The most contentious aspect of this consultation was the proposal that the system for accelerated payments would apply not only to ‘follower cases’ but to two other categories of taxpayer: those in dispute with HMRC because they have used a scheme notified under DOTAS, or those using a scheme which HMRC are seeking to frustrate, using the

122 op.cit. paras 3.7-8, paras 3.15-9

40 Tax avoidance: recent developments

new GAAR.123 Indeed the consultation document notes that although this would have an impact on a “significant proportion of avoidance schemes”, it would plan to keep the criteria “under review to determine whether any further broadening may be appropriate.”124

In a press notice issued after the end of the consultation, the Chartered Institute of Taxation argued that the proposals to tackle follower cases should be used only for a limited time:

The Government’s proposals would link together cases which are deemed to be similar, so that if a court ruled against one taxpayer, not only that taxpayer but all others deemed to have ‘follower cases’ would have to pay straight away the tax HMRC believe is due. They would get the tax back if they pursued the case and ultimately won …

CIOT President Stephen Coleclough commented: “We have sympathy with the Government's need to accelerate dealing with some tens of thousands of outstanding mass marketed avoidance cases which are jamming up the courts … However, handing HMRC almost unprecedented executive powers to decide who falls within the mischief they intend to deal with, without the usual safeguards and appeal rights, is not something which should be done lightly …

If this is to proceed, HMRC should issue comprehensive guidance at the same time as the Bill is published to show what situations are to be tackled in this way. It should only apply to members of the same scheme or very close variants of it. Additionally the legislation should include a sunset clause repealing the legislation after, say, three years as the exceptional circumstances that are currently in existence should be dealt with in that time. These emergency measures should not become a permanent state of affairs.”

The Institute went on to strongly oppose extending accelerated payments to existing schemes, which had been notified under DOTAS, as this was “in effect introducing retrospective legislation”:

[CIOT President, Stephen Coleclough said] “the fact that there has been disclosure indicates an intention to be open and transparent with HMRC. In a number of cases the disclosure has been made even if the promoter or taxpayer did not believe it to be strictly necessary ‘to be on the safe side’. To now introduce a retrospective change of law leading to an accelerated payment of tax is unreasonable. To extend HMRC’s powers without safeguards to taxpayers who by definition have been transparent with the tax authority is unjustifiable. If these provisions are to come in at all then they should only apply to arrangements entered into after Finance Bill 2014 is passed.”125

123 For example, “Wealthy investors protest against new UK tax rules”, Financial Times,

9 March 2014 124 Tackling marketed tax avoidance, para 4.3. The case for these changes was also set

out by David Richardson, director of HMRC’s counter avoidance directorate, in a piece in Taxation: “Accelerated payment”, 20 February 2014.

125 CIOT press notice, Tax avoidance schemes: 'Emergency measures' tolerable for dealing with courts backlog, but wider application goes too far, 4 March 2014. The CIOT also published formal responses to both consultation papers.

41 Commons Library Briefing, 14 December 2017

In their response, the Institute for Chartered Accountants also set out their concerns about the retrospective aspect to these proposals, as well as the relatively short amount of time for interested parties to respond:

[The consultation] proposes that taxpayers who have participated in DOTAS schemes right back to 2004, which have still not been settled, will be required to pay the tax that would become payable if the schemes are ultimately held not to succeed … This is in effect retrospective legislation as it means that all DOTAS registered tax planning arrangements under enquiry by HMRC would come within the accelerated payment scheme, even if they were entered into many years previously and in some cases a DOTAS registration was submitted as a precautionary measure. In principle we believe that retrospective legislation of this nature is wrong.

We have seen a proposal that the accelerated payment regime should not apply to existing DOTAS registered schemes ‘where it can be shown that the promoters/taxpayers have taken all reasonable measures, and have acted with reasonable expedition, to enable the dispute to be brought before the statutory appeals tribunal.’ That sounds a reasonable suggestion.

The proposal is also likely to lead to a perverse outcome in that it will offer no incentive for HMRC to reach closure on the case. Given that the tax may not legally be due that sounds completely contrary to natural justice and must inevitably result in further litigation … The proposals have created a very considerable amount of concern amongst our members, quite a number of whom have sent it their own representations to HMRC, while others have contacted us to make sure that their concerns are appropriately reflected in this representation from their profession body ICAEW.

Finance Bill 2014 will be published, probably before the end of March ... we strongly urge the government to withhold those of the current draft clauses which they accept will need further improvement. We would welcome the opportunity to work with HMRC to deliver the necessary amendments and the improved clauses can then be introduced, as a Government amendment, during the course of the Public Bill debates on the Finance Bill.126

4.2 Budget 2014: introduction of accelerated payments

Despite these concerns, in his Budget on 19 March the Chancellor confirmed the introduction of a system of accelerated payments, which would provide a substantial cash flow boost to the Exchequer:

While the vast majority of wealthy people pay their taxes, there is still a small minority who do not. We will now require that those who have signed up to disclosed tax avoidance schemes pay their taxes, like everyone else, up front. This will apply in future to schemes covered by our general anti-abuse rule too. If people feel they have been wronged, they can of course go to court. If they win, they get their money back with interest. We have already consulted on this idea; now we will implement it. The OBR confirms that this will bring forward £4 billion of tax receipts and

126 ICAEW (Tax Faculty), Tackling marketed tax avoidance (TAXREP 16/14), 26 February

2014 para 19, paras 45-7, paras 20-23

42 Tax avoidance: recent developments

it will fundamentally reduce the incentive to engage in tax avoidance in the future.127

The Budget report gave more details, noting that accelerated payments would apply to follower cases and to those within DOTAS or counteracted by the GAAR:

Following a consultation that closed in February 2014, the government will legislate to provide that HMRC may issue a notice to the user of a tax avoidance scheme that they should settle their dispute with HMRC when the claimed tax effect has been defeated in other litigation. If the taxpayer does not settle they risk a penalty and must make upfront payment of the tax in dispute. Budget 2014 announces that the requirement to pay upfront will also apply to the disputed tax associated with any scheme that falls within the disclosure of tax avoidance scheme rules (DOTAS) and with schemes that HMRC counteracts under the general anti-abuse rule (GAAR).128

The report also underlined that the new power “will only apply to tax avoidance schemes that are disputed by HMRC”:

The legislation will make it clear that HMRC will only be able to issue an accelerated payment notice where they have first sent the taxpayer an enquiry notice or issued them with a notice of assessment. It is not a new tax demand and does not make any changes to tax liabilities. If the taxpayer subsequently wins their case in the courts, they will be reimbursed with interest.129

It was estimated that applying accelerated payments to follower cases will raise around £300m in both 2015/16 and 2016/17, with the annual yield falling to £100m by 2018/19. Extending the scheme to DOTAS and GAAR schemes was projected to raise considerably more:130

The department’s Policy Costings document underlines the significant size of the amounts of tax that are under dispute, as a consequence of marketed avoidance schemes:

The total value of tax under dispute by HMRC related to marketed, artificial avoidance cases is around £14 billion, associated with a population of around 65,000 taxpayers. Of this, £2.5 billion concerns avoidance arrangements that fall outside the scope of the Budget and Autumn Statement measures as the schemes are outside the DOTAS rules and relate to taxpayers will not be issued with follower penalty notices.

To arrive at the £7.1bn that is estimated to be the value of accelerated payments notices that will be issued in relation to existing cases the following adjustments are then made:

• for cases where the issuance of a notice is dependent on future court decisions, the costing assumes a HMRC win

127 HC Deb 19 March 2014 c785 128 Budget 2014, HC 1104, March 2014 para 2.188 129 Budget 2014, HC 1104, March 2014 para 1.201 130 Budget 2014, HC 1104, March 2014 pp57-8 (Table 2.2 – item r; Table 2.1 – item

52). see also, HM Treasury, Budget 2014: policy costings, March 2014 p37.

43 Commons Library Briefing, 14 December 2017

rate of 80 per cent. This is based on HMRC‘s win rate in associated avoidance cases between 2010 and 2013

• an adjustment is also made for individuals that already concede their position and settle once their scheme is shown to fail in the courts in another party’s litigation

• an adjustment is made to take account of the fact that in a relatively small number of cases some taxpayers will have already paid the amounts in dispute, while continuing to dispute the amounts in question

• HMRC will also issue notices in relation to the future flow of cases which would arise from new avoidance, for which the estimated value of tax that would be disputed in the absence of this measure is estimated to be around £700 million per annum.

To arrive at its costings, HM Treasury had made a number of assumptions:

The costing is produced by making adjustments for:

• The responses by taxpayers issued with payment notices. It is estimated that the majority of those issued with notices will pay, either (a) within the allowed 90 day payment period, (b) through managed payment plans (this will be evaluated on a case-by-case basis and will result in some payments being spread over time), or (c) following payment enforcement action by HMRC.

• Repayments. HMRC will make repayments with interest in cases where upfront payments of tax have been made but where a taxpayer wins a subsequent tribunal or court decision.

• Behavioural responses. A further adjustment is made for those taxpayers who stop using avoidance schemes as a result of this measure, which increases tax yield from this group. In line with the standard methodology for anti-avoidance costings, a behavioural adjustment is made to reflect evidence of attrition in the yield from previous anti-avoidance measures.

• Tax under dispute which would have been collected in later years but which is now collected upfront. This reduces the costing by around £500 million in each year from 2015-16.

• Amounts scored under the follower notices measure announced in Budget 2013 and the accelerated payment measure announced at Autumn Statement 2013 are subtracted from the final costing to avoid double counting.131

The Office for Budget Responsibility is required to certify that all Budget costings represent a ‘reasonable and central view given the information currently available’. In some cases the OBR highlights that the cost is subject to a greater level of uncertainty – so, with regard to the estimates for this scheme, the OBR noted these were “dependent on a

131 Budget 2014: policy costings, March 2014 pp36-7

44 Tax avoidance: recent developments

large number of assumptions, some of which … concern the behavioural response of those affected.”132

In September 2017 the OBR published a working paper which looked at the costings of a variety of HMRC anti-avoidance and operational measures over the 2012-2016 period, including the introduction of accelerated payments.133 This found that current estimates of the amounts that accelerated payments would raise from 2014/15 to 2018/19 were about 15% less than the original estimates. There were a variety of explanations in this case, including the fact that the regime appears to have had a stronger deterrent effect than initially assumed:

Tax base: The initial estimate of the existing stock of disputed tax that would be subject to AP notices was too high, partly due to some cases falling out of scope and partly due to more taxpayers choosing to settle with HMRC than expected.

AP notices: The original costings underestimated the number of notices issued, but also the length of time required to do so. This is partly due to HMRC needing to issue separate notices for tax and NICs, but also because the original costings underestimated both the number of relevant avoidance cases and the proportion of cases where AP notices would be used. Outturn data also suggest the average value of cases was lower than assumed in the original costings.

Timing: More payments were made upfront than assumed in the original costings and, for those that made payment arrangements with HMRC rather than paying upfront, the time period was shorter than originally expected.

Behavioural response: It appears that the threat of receiving an AP notice has acted as a stronger deterrent than originally assumed. The number of avoidance schemes disclosed under DOTAS and declared usages of DOTAS schemes on tax returns, though already on a downward trend prior to the introduction of APs, has fallen significantly faster since … HMRC estimates that the number of DOTAS scheme usages has fallen by over a half due to the deterrent effect of AP notices.134

In two impact notes on this measure, HMRC confirmed that the new rules would take effect from the date of the Finance Bill’s Royal Assent: specifically, they would cover “all cases where there is an open enquiry or open appeal on or after [this date]”.135 These notes also give some details of the cohort of taxpayers which would be affected:

It is estimated that accelerated payment notices relating to existing avoidance cases currently under dispute will be issued to approximately 33,000 individual taxpayers concerning £5.1 billion of tax under dispute under this measure and the Autumn Statement 2013 measure applying accelerated payments to follower cases.

132 Budget 2014: policy costings, March 2014 p67. See also, OBR, Economic & fiscal

outlook, Cm 8820, March 2014 para 4.43 133 OBR, Working paper No.11: Evaluation of HMRC anti-avoidance and operational

measures, September 2017 134 op.cit. pp22-23 135 HMRC, Accelerated payments of tax for avoidance schemes & Avoidance schemes:

relevant judicial ruling - notice to settle dispute, 19 March 2014. In the case of ‘follower cases’ there will also have to be a relevant qualifying judgement.

45 Commons Library Briefing, 14 December 2017

Estimates of the distributional impacts of these measures are affected by the use of avoidance schemes that deflate the income reported on self-assessment returns.

Having noted this caveat, analysis shows that the population of individuals affected:

• have a mean gross income of £262,000, compared to £29,000 for the wider income tax paying population;

• around 85 per cent of individuals have multiple sources of income, with employment income (including self-employment) the predominant income source for 54 per cent and non-employment, non-pension income the predominant income source for 42 per cent of the individuals affected respectively, compared to 78 per cent and 5 per cent for the wider income tax paying population respectively.136

Budget 2014 also confirmed that the Government would proceed with one other measure first proposed in Raising the stakes on tax avoidance: the Promoters of Tax Avoidance Schemes (‘POTAS’) regime. Under these rules HMRC have powers to issue conduct notices to promoters, and in turn any breach of this notice triggers enhanced information powers with large financial penalties for non-compliance.137 At the time it was anticipated that about 20 businesses might be designated in this way,138 with a relatively small Exchequer impact,139 and in general the regime has attracted very little attention compared to accelerated payments.140

Generally press coverage of the Budget focused on other measures, though the Chartered Institute of Taxation issued a press notice, arguing that extending accelerated payments “beyond follower cases to DOTAS schemes raises serious questions about the breadth and proportionality of these proposals.” It went on to argue that it was incumbent on HMRC “to publish a list of DOTAS schemes to which this legislation will apply as quickly as possible.”141 The Financial Times quoted Jason Collins, head of tax at Pinset Masons, saying, “this is an audacious move. The backlash against tax planning is allowing them to push this change through without consultation.”142 By contrast the Times quoted Bill Dodwell, head of tax at Deloitte, who suggested it was “a realistic reaction to the current situation … The Revenue win almost all the cases in this area. There is no reason why they should have to wait 10 years to get their money. I hope this will discourage the sort of mass-market tax scheme from being sold in the future.”143

136 HM Treasury/HMRC, Overview of tax legislation and rates, 19 March 2014 ppA94-5 137 Budget 2014, HC 1104, March 2014 para 2.187 138 HMRC, Promoters of tax avoidance schemes (TIIN), 17 July 2014 139 £5m in 2014/15, rising to £35m a year in later years (Budget 2014, HC 1104, March

2014 p59, Table 2.2 – item be). 140 For details of how POTAS operates see, HMRC, Promoters of tax avoidance schemes:

guidance, September 2015 141 CIOT press notice, Tax avoidance schemes: Retrospective measures without proper

taxpayer safeguards go too far, 19 March 2014. 142 “Anti-avoidance measures attacked”, Financial Times, 20 March 2014 143 “Revenue wins power to raid bank accounts in battle over avoidance”, Times, 20

March 2014; see also, Law Society hits at tax crackdown plan”, Financial Times, 7 April 2014

46 Tax avoidance: recent developments

4.3 Finance Bill 2014 Provisions with regard to these proposals for follower notices and accelerated payments were included in the Finance Bill 2014, published on 25 March.144

When the Bill was published, HMRC also published a summary of the responses it had had to its consultation on tackling marketed avoidance schemes. Many responses had “acknowledged the underlying policy issue”, but had gone on to argue “that there was no problem to address” – a position based “on three contentions”:

• All taxpayers are entitled to have their dispute considered and resolved without being forced to pay over the tax in the meantime, irrespective of the nature of the dispute, and that in effect the taxpayer would be treated as being in the wrong until they were able to prove their case;

• Any delays are caused by HMRC’s “slow and tardy response” and not by taxpayers, advisers and scheme promoters; and

• HMRC already has adequate powers to force progress in these types of dispute and this gave more power and discretion than was necessary.145

The document presented the Government’s reasons for not accepting these contentions – first, on the cause of these delays and the suggestion that the proposals invoke a new principle:

There is ample evidence that those who enter into these schemes do so in the expectation that they will, as a minimum, keep hold of the tax for many years, exploiting the current structure of the enquiry, appeals and postponement legislation. The Government is not prepared to let this continue.

HMRC can under current law deny repayments claimed while a dispute is in progress. It is also the case that many taxpayers pay their tax upfront under PAYE, or through deduction of tax at source from interest. These proposals therefore introduce no new principle – instead they extend the current circumstances where the Exchequer holds the disputed tax.146

The document also set out HMRC’s existing powers in this respect and why, in the Government’s view, they were not sufficient to deal with this problem:

HMRC currently has powers in section 28C of Taxes Management Act (TMA) 1970 to issue a determination of tax where there has been no return submitted – but that cannot be applied to these avoidance cases, where returns will have been submitted, claiming the tax advantage from the avoidance scheme.

Section 9C of TMA permits HMRC to amend a taxpayer’s self-assessment where tax is at risk. This power is applicable in circumstances where HMRC believes that the subsequent settlement of the liability may be in jeopardy (for example, the

144 specifically, part 4 of the Bill (clauses 192-226). The text of the Bill, explanatory notes

and details of its scrutiny are collated on its Parliament Bill page. 145 Tackling marketed tax avoidance - Summary of Responses, 27 March 2014 para

2.14 146 op.cit. para 2.15-6

47 Commons Library Briefing, 14 December 2017

taxpayer may leave the UK). This is not applicable to the generality of avoidance cases.

Where there is an appeal, the taxpayer may make a postponement application under section 55 of TMA. If HMRC disagrees with the postponement, the matter must be resolved by the tribunal. Therefore, opposing postponement applications in many thousands of cases under the current rule would impose a substantial burden on the resources of the Tribunal Service. Furthermore this route can only be used where there is an appeal and not where an enquiry is still open.

In the vast majority of cases there is an open enquiry rather than an appeal. HMRC has been criticised for delaying the issue of closure notices. However, as a number of recent published tribunal and court decisions show, these cases involve complex and contrived arrangements that take a significant length of time to resolve. HMRC cannot issue a closure notice prematurely as that would risk the wrong amount of tax arising from the return.

Some responses pointed to HMRC’s ability under section 28ZA of TMA to refer matters to the tribunal during an open enquiry. However, this would make little impact on the overall problem in that it would to a large extent require consideration of the substantive tax point at issue.147

The paper went on to address the charge that the proposals would be retrospective:

[The proposals] do not change the underlying tax liability. Where an accelerated payment is made and the taxpayer subsequently wins their dispute the tax will be repaid with interest – no different to the situation where, currently, a repayment is denied whilst the dispute is resolved. Application of the proposals to existing disputes will ensure that all taxpayers in an avoidance dispute after Royal Assent will be in the same position, irrespective of when their dispute began.148

Annex C to the document gave more detail on how the new system would work in practice, including a diagram of the ‘typical taxpayer journey’, reproduced below, where someone has purchased an avoidance scheme, submitted their assessment, and then had that assessment investigated by HMRC:

147 op.cit. para 2.18-22 148 op.cit. para 2.25

48 Tax avoidance: recent developments

The teal line shows the journey before accelerated payments was introduced … The red line shows how accelerated payments will fit in with the existing customer journey and require payment sooner in the process. The journey can halt at any point when the taxpayer decides to drop their claim and settle, or where HMRC decides that the scheme works and repays the tax.

In its description of accelerated payments, HMRC emphasized that “this measure in no way alters the underlying tax liability”:

When a person is advised to reduce their tax liability, they are often introduced to a promoter who explains the scheme to them, then the person signs documents to enter into the scheme and pays a fee. The promoter tells the taxpayer that the scheme is a Disclosed Tax Avoidance Scheme and gives them a reference number which needs to be included in their tax return in the tax avoidance section.

The taxpayer then submits their tax return with the scheme reference number or their adviser submits it for them. In either case, the taxpayer is responsible for the form being correct and a declaration is made to that effect. This is the stage at which a person would normally pay the tax due. The avoidance scheme has reduced that amount but not the income that the person has.

HMRC considers the self-assessment tax return and considers more tax may be due than has been paid as a result of the avoidance scheme. An enquiry notice is issued … Even where taxpayers and promoters co-operate in full, the investigation and litigation process inevitably takes a considerable time and some take full advantage of that to hold onto the tax. From now on, tax in dispute in suspected avoidance cases will sit with the Exchequer …

HMRC will only be able to issue an Accelerated Payment notice where they have sent the taxpayer an enquiry notice or where they have issued a notice of assessment for the disputed tax. So, as a minimum, everyone who receives an AP notice will have been notified by HMRC that their tax affairs are under consideration.

49 Commons Library Briefing, 14 December 2017

Once an accelerated payment notice is issued the tax payer will have 90 days to pay. If they cannot pay, they can contact HMRC in that time to agree arrangements for payment. If they think the tax due is incorrect they can also raise that with HMRC who will review the facts. HMRC will then issue a decision notice confirming the amount of tax due to be paid up front at which point the taxpayer has a further 30 days to pay.

This measure in no way alters the underlying tax liability. A person will still have full access to the courts to determine their tax liability. HMRC wins around 80% of avoidance cases in the courts. If HMRC loses, they will repay the tax with interest.149

The response document noted that some revisions would be made to the legislation as initially drafted 150 The Government also confirmed that it would issue detailed guidance on the scheme in the next weeks, and, picking up a point made by the CIOT after the Budget, publish a list of existing DOTAS schemes to be subject to accelerated payment by the time the Finance Bill received Royal Assent.151 However, the Government rejected the case, made by many respondents, that taxpayers should be able to formally appeal HMRC’s decision to issue a demand for an accelerated payment:

Many respondents objected to the discretion that HMRC would have to determine the amount and the absence of a formal appeal right at this stage. One response referred to this as appearing to make HMRC “the sole arbiters of the tax law.” Most responses, where comments were made, restated the view that there should be an appeal right to the tribunal, or recommending “some more independent review”, and that the proposed objection criteria were not sufficient in themselves. Other responses suggested a modified appeal right to restrict the possibility of the appeal being simply a delaying tactic …

The Government does not intend to extend an appeal right against the issue of the accelerated payment ... Provision of a formal appeal right would in practice involve arguing the substantive issue of the dispute itself, which would do nothing to change the current position.

HMRC is committed to applying clear and strong governance to the use of this measure and only “designated” officers will be authorised to calculate the tax due for the payment notice. It is also the case that taxpayers will have 90 days in which to dispute the amount calculated with a view to getting the correct figure agreed.

The accelerated payment does not determine the final liability. Whilst the amount will be calculated as accurately as possible, taxpayers will still have full appeal rights against the eventual closure notice or any assessment or determination that may be issued … The Government does not believe that a specific

149 Tackling marketed tax avoidance - Summary of Responses, 27 March 2014 pp34-5.

See also, HC Deb 3 July 2014 c688W 150 First, when a late payment penalty is charged on an accelerated payment and,

subsequently, that accelerated payment is found to have been too high, the excess penalty plus interest is to be paid back, when the overpayment is repaid (op.cit. para 3.41-2). Second, where HMRC seeks to apply accelerated penalties to a scheme it seeks to challenge using the GAAR, the GAAR Advisory Panel will have to agree this is appropriate (op.cit. para 4.25-6)

151 op.cit. para 5.1-3. See also, “Accelerating away”, Taxation, 8 May 2014 & “Analysis: FB2014 - Follower notices and accelerated payments”, Tax Journal, 9 May 2014.

50 Tax avoidance: recent developments

provision for ‘financial extremity’ is necessary. HMRC will use its full range of existing tools in pursuing the collection of tax, including appropriately structured payment arrangements, to assist taxpayers in paying the required amounts.152

In their report on the Budget published on 9 May, the Treasury Committee argued that the Government had failed to make the case for making the new system of accelerated payments retrospective.153 In a press notice on their report the Committee said:

Retrospective tax legislation conflicts with the principles of tax policy recommended by this Committee. In our Budget 2012 Report we recommended that the Government restrict the use of retrospection to wholly exceptional circumstances. Witnesses told us that the Government was not abiding by this recommendation. Furthermore, the Red Book announced an additional retrospective taxation policy: an extension of the requirement for taxpayers to pay upfront any disputed tax associated with anti-avoidance schemes. This policy will retrospectively apply to some of the 65,000 outstanding tax avoidance cases. There may be a case for this policy but the Government has yet to explain what is wholly exceptional about these cases that justifies this retrospective measure. It should do so in response to this Report.

The then Chair of the Committee, Andrew Tyrie, added: “we have deep reservations about any extension of retrospection in the tax system. Retrospection runs counter to the Committee’s principles of tax policy. In particular, it undermines certainty. Retrospection should be considered only in wholly exceptional circumstances. The latest measure would have to be justified on those grounds. Retrospection puts policy on a slippery path to arbitrary taxation, discouraging investment and innovation and creating the scope for great unfairness.”154

The Government’s response to the Committee’s report was published two months later, and in this, the Government refuted the charge that these provisions were retrospective:

The Government does not agree that this legislation is retrospective. This legislation does not take effect on a date before its announcement or enactment, and it does not change any tax liability arising from any transaction or arrangement, whether undertaken before or after the introduction of these new rules. It puts in place a new requirement that takes effect in the future, to pay over a sum of money in dispute. Those disputes will be resolved in the same manner as before, with full appeal rights to the tribunal and courts.155

Turning back to the Finance Bill, on 17 June 2014 the Public Bill Committee scrutinising the Finance Bill debated, and approved, these provisions, with just a small number of minor, technical amendments tabled by the Government.156

152 op.cit. para 3.28-34 153 Thirteenth report of Session 2013-14, HC 1189, 9 May 2014, pp76-8 154 Treasury Committee press notice, 9 May 2014 155 Treasury Committee, Second special report of 2013-14, HC 609, 1 August 2014 p13 156 PBC (Finance Bill), Thirteenth Sitting & Fourteenth Sitting, 17 June 2014 cc 467-510.

For details see, HMT, Amendments 32 to 38 to Clauses 212 & 222 and Schedule 28 (Accelerated payments), 6 June 2014

51 Commons Library Briefing, 14 December 2017

Speaking for the Opposition Shabana Mahmood raised concerns over the relatively short time frame set for the consultation on these measures, but went on to say that, in the light of the sheer number of outstanding cases, “Opposition Members … support the principle of follower notices as a practical measure that should—hopefully—decrease the amount of time it takes to settle those matters and ensure that the currently uncollected tax is collected quickly.”157 Ms Mahmood noted two concerns about follower notices that had been raised: the fact that HMRC could rely on decisions made by a tribunal, as well as the court, in issuing a follower notice and that taxpayers could not appeal HMRC’s decision to take this action.158 She also asked if HMRC would have sufficient resources to administer the system.

In response the then Exchequer Secretary, David Gauke, acknowledged that the time allotted for consultation had been shorter than normal, “because we were keen to ensure that we could progress this matter on a Budget timetable and make it part of the Finance Bill. HMRC made every effort to ensure that anyone who wanted to make a comment was able to, and it continued to accept responses and meet with concerned parties after the consultation formally closed.”159 On the use of tribunal decisions, and the absence of a formal right of appeal, Mr Gauke said:

HMRC wins an overwhelming majority of avoidance cases at tribunal, and most taxpayers who lose accept the tribunal’s decision and do not take their case further. Therefore, in most cases the first-tier tribunal settles the matter. However, if a case is appealed further, follower notices cannot be issued until the litigation is finally settled in HMRC’s favour. Excluding first-tier cases would remove an important source of judicial decisions and might lead to taxpayers deliberately avoiding an appeal against and adverse judgment, so it could not be used to generate follower notices …

Creating a right of appeal against a notice would simply clog up the process and not deliver a saving. Taxpayers will be able to require HMRC to reconsider any notice that they receive. There will be a full right of appeal against any penalty issued and against any amendment made to the taxpayer’s return if the taxpayer does not amend it himself. HMRC will be ensuring strict governance over the issue of notices, which will have to be authorised by senior leaders.160

As Mr Gauke noted, HMRC would be empowered to charge penalties for failure to response to a follower notice:

Clause 200 allows a taxpayer to make representations about a notice within 90 days and requires HMRC to consider them. Having done so, if HMRC confirms the follower notice, the taxpayer is given a further 30 days to take corrective action … Clause 201 applies a penalty if a taxpayer is served with a follower notice, but does not take corrective action within the specified period. The penalty is charged on the amount of tax advantage

157 PBC (Finance Bill), Thirteenth Sitting, 17 June 2014 c469 158 Both of these concerns were raised by the Law Society; see, Finance (No.2) Bill

2013-14 committee stage - follower notices and accelerated payments, 3 April 2014 159 PBC (Finance Bill), Thirteenth Sitting, 17 June 2014 c483 160 op.cit. c484

52 Tax avoidance: recent developments

denied: the extra tax that becomes due, or the reduction in tax repayable, when the scheme is counteracted … [Under] clause 202 … the penalty … is set at 50% of the denied tax advantage. That is in line with the scale of penalties for inaccurate returns, which range from 30% to 100%, depending on behaviour. To encourage taxpayers to co-operate with HMRC to resolve their case, clause 203 allows the penalty due to be reduced to as little as 10% to reflect any co-operation.161

That said, taxpayers will be entitled to appeal against a penalty charged in these circumstances. Under clause 207, if a tribunal thinks that the basis of a follower notice is wrong, any penalty will be cancelled or reduced. Although this clause was agreed, unamended, by Committee, the Government tabled amendments for the Finance Bill’s Report Stage, to make clear the grounds on which a taxpayer could appeal against a penalty: a taxpayer may appeal on the grounds that the follower notice should not have been issued to him in the first place or that it was reasonable for him to continue his dispute rather than settle with HMRC on receipt of a follower notice. The amendments also provided that only a designated officer of HMRC will be allowed to issue a follower notice.162

In his comments in Committee, the Minister also addressed the question of whether HMRC had sufficient resources:

In November 2013, HMRC created a new counter-avoidance directorate to bring together all marketed avoidance work in one place. The directorate is mainly made up of departmental resources that were already working in the marketed avoidance area rather than additional resource, but about 100 of its 850 people will be funded from new money announced by the Chancellor at the Budget to deliver accelerated payments. We do not believe there will be a detrimental impact on HMRC’s other operations.163

The Committee went on to consider accelerated payment notices, and the Minister was asked about the possibility that taxpayers might be made bankrupt. Mr Gauke said, “I record the fact that HMRC has time to pay arrangements for those who are constructively engaged with it and who are looking to pay off their tax debts in a constructive way but are constrained by cash flow matters. That is a perfectly reasonable approach.” While the Minister did not propose any substantive changes to the proposals, he noted that he had “asked HMRC to ensure that there is active consultation on the published guidance, to ensure that the important issues raised are dealt with in that process.”164

Mr Gauke was asked about the extension of accelerated payments to DOTAS cases, and whether this was not penalising those taxpayers who had been cautious to make sure they were fully compliant with the law,

161 op.cit. cc477-8 162 HM Treasury, Government amendment 1-3: Right to appeal follower penalty (Clause

207), 24 June 2014. This is discussed in a little more detail below. 163 PBC, Thirteenth Sitting, 17 June 2014 c485. The Chancellor mentioned this rise in

funding in his Budget speech: HC Deb 19 March 2014 c785. 164 op.cit. c487, c488

53 Commons Library Briefing, 14 December 2017

and used DOTAS in good faith; in reply, the Minister made two observations:

Disclosure under DOTAS does not necessarily mean that someone will be affected by the accelerated payments regime. HMRC will look at the particular scheme and assess whether it is effective. There may well be circumstances in which HMRC will look at a particular scheme and say, “A DOTAS disclosure has been made, but as far as we can see this scheme is entirely consistent with the law. It is effective and there is no tax under dispute, so no accelerated payment will need to be made.” If there is no tax under dispute, there is no accelerated payment.

The other point that is worth bearing in mind is that the trend for DOTAS disclosures is a significant fall, and all the evidence suggests that that trend has been driven not by concerns about accelerated payments, because it was in place before that policy was announced, but due to the fact that not as much aggressive tax avoidance is being undertaken as a few years ago.165

On the question of retrospection, the Minister noted the nature of payments made this way:

We are clear that the legislation is not retrospective. It does not change anybody’s tax liability, but it changes who holds the tax during an avoidance dispute ... [The accelerated payment] will be treated as a payment on account of the final liability, which means that interest will stop running on the amount paid from the date that the taxpayer pays it over. This is emphatically not any form of determination of the final tax liability, which will still be subject to all existing appeal rights. If the taxpayer is ultimately successful, they will get a repayment, with interest, just like the vast majority who have to reclaim any tax they think they are owed.166

Several Members contributed to the debate. Teresa Pearce took issue with the Minister’s view on retrospection:

The definition of retrospection is to change the legal consequences of actions that were committed, or relationships that existed, before the enactment of a law, and that is exactly what this legislation does. I agree that it might not change an underlying tax liability, but it changes the consequences of actions ...

It is not only my interpretation that the legislation is retrospective, but that of the Treasury Committee. The Chartered Institute of Taxation, the Law Society and several well-respected chambers have said that they find the legislation’s retrospective element unacceptable … If the Minister and the Government are trying to change behaviour, surely they cannot change behaviour in the past. They need to change it going forward, but the retrospective element will not do anything about that. People cannot change what they have already done, but they can change what they will do in the future.167

By contrast, Charlie Elphicke argued that retrospection was about the creation of uncertainty for the taxpayer:

165 op.cit. c490 166 op.cit. cc491-2. The Minister also gave a summary of the Government amendments

to these provisions: c493. 167 op.cit. c494

54 Tax avoidance: recent developments

That is not the case with these provisions, as they apply only in a DOTAS case when a filing has been made to the Revenue. If an adviser has been making a filing, they will say, “I have had to file this with the Revenue.” If they were a competent advisor, they would say, “Keep the money to one side; don’t go out and spend it.”

The argument that we hear being made is that if a person puts £100 on red or black in a roulette tournament, it is okay for them, while the ball is still spinning, to take 50 quid of that stake and buy a round of drinks on the grounds that they might win, but that is a poorly founded argument. If someone is going to put a bet down … the stake should stay on the table. The principle that the Government are setting out is that the stake should remain on the table and in the hands of the house. In this particular case, the money should be held with the Revenue if it is making a challenge and has issued a follower notice.168

For the Opposition Shabana Mahmood argued that the Minister’s case was persuasive:

This feels much more like a situation where, to borrow a concept from another aspect of our legal system, the legitimate expectations of a taxpayer have been changed. When that happens, as it does in other aspects of our law, particularly when we discuss concepts of reasonableness in judicial reviews and other matters, if legitimate expectations of taxpayers or others are changed, that mischief—the changing of legitimate expectations—is remedied by the time-to-pay arrangements, which should assist in righting any wrongs. There is also the remedy of an interest payment on top of the tax that was in dispute if it is found that it needs to be paid back to the taxpayer. If there is any unfairness as a result of the measures, it can be remedied by those other measures.169

In his response to the debate Mr Gauke addressed the point made by Ms Pearce:

The point was made that, if this is about changing behaviour, it should only apply to arrangements people enter into after the measures come into effect. The point I would make in response is that new rules are intended to achieve two things: they change behaviour away from avoidance but have the additional objective of accelerating the resolution of the large number of existing cases and the receipt of the revenue tied up in them. We want all taxpayers in this type of dispute to be in the same predicament so that there is no reason to apply the rules differently depending on when the particular arrangements began.170

Members also raised concerns over the impact that the new regime would have on the legal service. In response to this Mr Gauke said:

On some of the practical issues involving the impact on HMRC and the tribunal … the measures are expected to prompt a range of legal challenges, including judicial review proceedings, an increase in closure applications to the tribunal and disputed enforcement activity. Flexible legal resource options are being considered to meet the expected demands of the work. That legal resource will be increased and adapted depending on the scale

168 op.cit. c496 169 op.cit. cc502-3 170 op.cit. c507

55 Commons Library Briefing, 14 December 2017

and scope of any challenges … HMRC is in discussion with the Ministry of Justice to plan for the introduction of these measures and to deal with the likely consequences.171

The Minister went on to discuss concerns over the financial burden of payments and the position of taxpayers who had made disclosures simply to be sure they were being fully compliant, before confirming a formal review of DOTAS over the summer:

In cases of genuine hardship, HMRC will consider alternative payment arrangements, as it does with any debt. The priority in cases of genuine hardship will be to get people on to a payment track so that the debt is paid as quickly as possible … Where individuals do not immediately have the cash, it may be appropriate in some instances to back up a payment arrangement with a security against assets. In cases where, for instance, individuals have taken deliberate action to put their assets out of reach of HMRC … so that they cannot pay the tax, bankruptcy action may well be appropriate, but the particular action will always depend on the precise facts and circumstances of the taxpayer …

I took one or two interventions on the issue of whether DOTAS disclosures are on the safe side. If disclosures are made but there is no additional tax, there will not be an accelerated payment. HMRC will publish a list of scheme reference numbers before Royal Assent to tell taxpayers which schemes will get a payment notice and which will not ...

DOTAS has been in place for 10 years and has been revised at various times. We believe that now is the right time to look at its hallmarks to see whether they still work properly or whether they need updating. We also want to look at how compliance can be updated. We will publish a consultation in the summer, and HMRC will … shortly publish draft guidance in consultation with professional bodies and other interested parties.172

Subsequently HMRC published its proposals to strengthen the DOTAS regime on 31 July.173

As mentioned, the Government tabled amendments to these provisions, specifically in regard to the grounds for making an appeal against follower notice penalties. These were debated and agreed without further changes at the Report stage of the Bill on 2 July.174

On this occasion the Exchequer Secretary clarified two points that he had made in Committee; first on the number of responses made to the draft provisions for follower notices, published in January:

[In Committee] I mentioned then that 22 responses had been received to the January consultation on the draft legislation. Some commentators have subsequently questioned whether the number was not in fact higher. The draft legislation on follower notices was issued in two separate documents in January, one of which was on tackling marketed tax avoidance. Although we received a total of more than 800 responses, the vast majority

171 op.cit. c508. See, “Tide of tax bill challenges to spur hiring spree for judges”,

Financial Times, 23 June 2014 172 op.cit. cc507-8, c509. The Committee proceeded to agree to this section of the Bill

without a division. 173 Strengthening the Tax Avoidance Disclosure Regimes – consultation, 31 July 2014 174 HC Deb 2 July 2014 cc961-1017

56 Tax avoidance: recent developments

related to accelerated payments, and only 22 specifically related to the draft legislation on follower notices that was published at the same time. I hope that that provides clarification.

Mr Gauke went on to discuss the potential scope of accelerated payments to previous tax years:

In Committee, I was asked whether the accelerated payments regime would “reach back to disputed tax liabilities relating to periods prior to the introduction of the DOTAS reporting?”––[Official Report, Finance Public Bill Committee, 17 June 2014; c. 507.]

I said that it would not. I want to clarify that an accelerated payment notice may not be issued to a taxpayer with a pre-DOTAS tax dispute where DOTAS—disclosure of tax avoidance schemes—is the only criterion available. Even though a scheme may have come into DOTAS after its introduction, anyone using it before DOTAS will not be subject to accelerated payment on DOTAS alone. However, accelerated payment based on a follower notice can apply to pre-DOTAS cases because the notice does not depend on the DOTAS disclosure.175

Subsequently the Minister confirmed that HMRC was ‘on course’ to publishing guidance, and details of those DOTAS schemes to be subject to accelerated payments notices.176

Both the department’s guidance, and the list of DOTAS schemes, are now published online.

4.4 Impact of the new regime When the legislation to introduce accelerated payments was agreed, there was some press coverage of the fact that several celebrities would be amongst those taxpayers who were anticipating that they would be served with a demand for this type of payment.177 In October 2014 HMRC confirmed that over 600 Accelerated Payment notices had been sent since late August, relating to over £25 million of disputed tax. In a press notice the department stated that it would be issuing 2,500 notices per month by January 2015, and that it was “on track to deliver notices to 43,000 tax avoidance scheme users, covering £7.1 billion of disputed tax, by the end of March 2016.”178

As noted above, it is a Parliamentary convention that Finance Bills do not include legislation relating to National Insurance, so that provision to extend both the system of accelerated payments, and the ‘POTAS’ regime, to NICs was included in a separate National Insurance Bill,

175 HC Deb 2 July cc965-6 176 op.cit. c986. These provisions now form part 4 (ss 199-233) of the Finance Act 2014.

See also, “Thousands of taxpayers in avoidance schemes to repay billions”, Financial Times, 15 July 2014.

177 “Thousands of taxpayers in avoidance schemes to repay billions” & , “Ingenious Media tells celebrity investors they face tax crackdown”, Financial Times, 15 July & 7 July 2014. For a technical discussion see, “Press the accelerator”, Taxation, 9 October 2014.

178 HMRC press notice, Tax avoidance demands top £250m, 23 October 2014. By 9 January 2015 3,000 notices had been issued and £99m received (Strengthening Sanctions for Tax Avoidance, January 2015 p5).

57 Commons Library Briefing, 14 December 2017

published in July.179 When the Public Bill Committee took evidence of the Bill on 21 October, Members asked witnesses about the state of play regarding accelerated payments.

Both Andrew Hubbard (from accountants Baker Tilly) and Frank Haskew (from the ICAEW) suggested it was too early to make a definitive assessment, though Mr Haskew suggested that the market for avoidance schemes “is starting to move already in relation to things such as … professional indemnity insurance.”180 Mr Haskew noted that both the ICAEW and the CIOT were worried that HMRC might not have the legal powers to return any overpayment of NICs associated with an accelerated payment. When asked, the Minister David Gauke assured the Committee this was not the case:

If the courts determine that the amount that has been paid under an accelerated payments notice, whether in respect of tax or national insurance contributions, ultimately does not need to be paid, and if the scheme in question, for example, was legal and effective, HMRC would be obliged to make that repayment. Although it is not in the Bill, I am grateful for that question and I am happy to make that statement and to make it clear that that is the view of HMRC and the Government, having looked at it very closely.181

Both the Minister, David Gauke and David Edney, policy adviser at HMRC, gave details of how the new regime was working, and the department’s resources to administer it:

Mr Gauke: The plan from HMRC has always been to start off relatively cautiously in terms of numbers and ramp it up. The first notices went out at the end of August. Something like 600 notices have been sent out, covering tax liability of up to £250 million. The notices give the parties concerned 90 days in which to settle and make the payment, so one would not expect us necessarily to see the money coming in until the end of November. I can inform the Committee that, up until now, over £25 million has been paid as a consequence of the accelerated payments project. There is clearly much more to come …

Mr Edney: We set up a dedicated helpline for people to contact us. It was noticeable that, as soon as accelerated payments were talked about and the first notices went out, the calls started coming in. They first asked, “What is this all about and am I affected?” and then minds started to concentrate and people said, “I really want to get out of this. I see now that I cannot hold on to the money any longer. What do I have to do to settle?” As well as the advisers we have in place to issue the notice, we have advisers to settle their liabilities without even receiving a notice …

We have added a little bit of resource to issue the first tranche of notices. We will build up the staffing into the new year as we build up to full capacity. As the reaction builds in, we will then look at resources on our debt management teams, for example,

179 For more details on the legislation see, Library Research paper 14/45, 21 August 2014,

and Commons Briefing paper CBP6975, 11 February 2015. 180 Public Bill Committee (National Insurance Contributions Bill), First sitting, 21 October

2014 c10 181 op.cit. c26

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and our legal teams. Rather than recruiting very large numbers up front, we are taking it in stages as the programme unfolds.182

When the Committee debated that part of the Bill relating to accelerated payments, Shabana Mahmood reiterated the Opposition’s support for these changes and their view that these arrangements did not constitute retrospective legislation. Ms Mahmood went on to ask if HMRC had sufficient resources to administer the new regime; in response, Mr Gauke said:

The Government have provided significant reinvestment of £1 billion specifically to combat revenue lost and at risk through non-compliance … [so] while most of HMRC’s lines of business are reducing in size, the number of roles in compliance is increasing … Around 100 staff have been recruited into counter-avoidance to deal with the issue of accelerated payment notices, and another 100 will be added in 2015. In addition, HMRC is deploying additional staff to handle collection work. HMRC is taking a flexible approach on additional legal staff, which will depend on the number and nature of legal challenges.

Her Majesty’s Courts and Tribunals Service is recruiting additional tribunal judges to handle the cases involving accelerated payments and follower notices and to accelerate the number of cases going through the tribunal generally. The Government have invested extra funds into HMRC’s work to tackle avoidance and evasion. That is bearing fruit, with compliance in 2013-14 bringing in £23.9 billion up substantially from where it was when we came to office.183

In January 2015 the National Audit Office published an overview of the department’s work to improve tax collection since 2010. On the question of compliance, the NAO found that HMRC had made “significant progress since the 2010 spending review in delivering its strategic objectives, successfully reducing the cost of tax collection while increasing the tax it raises from its compliance work.”184

The report also looked at HMRC’s response to concerns raised by the NAO and the Public Accounts Committee in 2012-13 over the scale of marketed avoidance schemes. Reviewing the introduction of accelerated payments & follower notices, as well as associated changes to the avoidance landscape – the GAAR, the strengthened disclosure regime, new sanctions on scheme promoters – the NAO concluded, “HMRC’s response … has been exemplary”:

HMRC’s response to our and the Committee’s recommendations on marketed tax avoidance has been exemplary. In the next parliament, the Committee may want to examine whether HMRC’s new powers to tackle marketed avoidance are working as intended. HMRC will need to demonstrate that it is reducing its backlog of 65,000 open avoidance cases. It also faces the challenge of finding ways to measure the impact of new approaches it is introducing to promote compliance and prevent tax avoidance from happening. The impact of these will be harder

182 Public Bill Committee, Second sitting, 21 October 2014 c25 183 op.cit. cc47-8 184 Increasing the effectiveness of tax collection: a stocktake of progress since 2010, 6

February 2015, HC 1029-I of 2014-15 p7

59 Commons Library Briefing, 14 December 2017

for HMRC to measure than the additional tax yield HMRC secures from its investigations.185

The most recent figures on the numbers of notices issued and payments received were given in HMRC’s 2016/17 Annual Report, published in July 2017:

Last year, as planned, we reached the end of our three-year programme of issuing Accelerated Payment Notices (APN) to users of eligible avoidance schemes. APNs are one of the most significant tools that we have to tackle avoidance by individuals and companies, removing their ability to defer payment of tax in ongoing disputes involving marketed tax avoidance schemes. Since 2014 we have issued more than 75,000 notices worth in excess of £7 billion and collecting nearly £4 billion.

During the last year we issued more than 30,000 notices, worth £2.3 billion, with total revenue generated of £1.3 billion. This included £180 million of estimated compliance yield protected by APNs, through making the use of avoidance schemes less attractive to existing and potential avoidance scheme users. …

Where a customer disagrees with an Accelerated Payment Notice, they have the right to make representations to us. Of the 75,000 notices issued we received a total of 40,000 representations. So far we have considered more than 32,000 of these representations and around 90%of the notices were upheld as valid, with more than 80% confirmed in the original amount.186

Since the introduction of this legislation there has been relatively little debate or comment on the accelerated payments regime in the House. In March 2016 Greg Mulholland MP tabled an EDM critical of APNs – though only 3 Members signed it.187 Subsequently the operation of the regime has been raised in a few PQs: two examples are reproduced below:

Asked by Mr Charles Walker : To ask Mr Chancellor of the Exchequer, what mechanisms there are for companies to appeal the terms of accelerated payment notices issued by HM Revenue and Customs; and if he will make a statement.

Answered by: Jane Ellison : The accelerated payment regime was introduced in Finance Act 2014 to change the underlying economics of tax avoidance by requiring disputed tax to be paid upfront while an avoidance scheme is being challenged. Disputed tax remains due and payable under the accelerated payment regime until such time as the dispute is settled by agreement with HM Revenue and Customs (HMRC) or the dispute is litigated and there is a judicial decision. Where an accelerated payment has been made, it is repayable if HMRC agrees, or the courts decide, that the scheme in question does produce a tax advantage under the legislation. Taxpayers can make representations to HMRC about an accelerated payment notice if they believe the conditions for issue have not been met or the amount shown is incorrect. They can also ask the courts to judicially review the issue of an accelerated payment notice.188

*

185 HC 1029-I of 2014-15 p22 186 HMRC Annual Report 2016/17, HC 18, July 2017 p24 187 EDM 1321 of 2015-16, 23 March 2016 188 PQs 59586, 59587 & 59588, 16 January 2017

60 Tax avoidance: recent developments

Asked by Grant Shapps :To ask Mr Chancellor of the Exchequer, what comparative assessment HM Revenue and Customs has made of the amount it will recover if a company goes into liquidation because of accelerated payment notice debt or if that company continues to trade.

Answered by: Mel Stride : HM Revenue and Customs (HMRC) has stringent governance arrangements in place where insolvency is considered. Each case is considered individually and, where a company is trading insolvent, HMRC must take the most appropriate action to mitigate the tax losses. Many factors are considered when deciding whether to petition against a company.

HMRC treats unpaid Accelerated Payments as any other established debt using their range of debt collection powers as necessary to recover what is owed, including insolvency powers where appropriate.

HMRC does not hold information on the amount recovered from company liquidations caused by unpaid accelerated payment notice debts. Any insolvency action in relation to unpaid accelerated payment notices is currently at an early stage.189

In July 2015 the Court of Appeal rejected a legal challenge to the APN regime.190 One part of the judgement is striking in relation to the claimants’ argument that it was unfair to apply APNs to the scheme, given they had bought into this scheme essentially in good faith, several years ago (para 126)

The claimants assert that “if they had known that participating in a business notified under DOTAS meant that monies contributed would be claimed by executive act some 10 years later at short notice and prior even to any enquiry or assessment to tax, it is highly unlikely that they would have made the investment”. This is untenable. The primary risk to the claimants was not precisely when they might have to pay the relevant tax, but whether they would have to pay it. That was a risk that must have been well understood and for which financial provision can be expected to have been made.

At the time they participated in the schemes, the claimants could not have known when HMRC’s enquiries and any FTT appeal process would end. It was possible that the appeal process could have concluded much earlier, with a consequential requirement to pay the disputed sums.

Writing on the implications of this judgement in Taxation magazine, the editor, Andrew Hubbard, argued that “clients who have received APNs or PPNs [given to partnerships] must face the fact that they will almost certainly have to pay.”191

Subsequent legal challenges have also failed.192 In November 2016 the Tribunal considered an appeal against penalties that HMRC had imposed on a taxpayer for late payment of an accelerated notice – in this case a ‘PPN’ as it was issued against a partnership. As part of the

189 PQ4787, 18 July 2017 190 Rowe, Worrall and others v CIR [2015] EWHC 2293. The judgement is online. See

also, HMRC press notice, HMRC win Accelerated Payments challenge, 31 July 2015. 191 “Not so ingenious”, Taxation, 6 August 2015 192 “The failed JR challenges to APNs: lessons learned?”, Tax Journal, 9 September

2016; “Still in the fast lane?”, Taxation, 14 July 2017.

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judgement the Tribunal noted that, “Parliament had deliberately enacted provisions that a challenge against a PPN should be made by way of judicial review. The taxpayer, having chosen not to make such an application, could therefore not argue that the invalidity of the underlying assessment was a reasonable excuse not to pay the PPNs.”193 In December 2017 the Court of Appeal handed down judgement in two joined cases involving dozens of taxpayers, and, once again, upheld HMRC’s position.194

HMRC regularly publish details of avoidance schemes which they believe are being used to unfairly avoid tax – their ‘Spotlights’ publication. In February 2016 HMRC published a notice, Misleading claims from tax avoidance scheme promoters, which observed, “promoters marketing these avoidance schemes and arrangements use a variety of terms or statements to reassure the potential user that the products they are marketing are acceptable. Such statements are often short and snappy and made without context so could be misleading”:

There are a wide variety of claims and statements made but some examples include:

• these arrangements fall outside the scope of tax avoidance

• the scheme is not disclosable to HMRC and leading Tax Counsel (QC) have agreed this

• the scheme has been disclosed and therefore you cannot be penalised

• we have been offering these schemes for years and have not been challenged

• you can receive tax-free payments that are compliant with tax law

• we have won all previous court cases in relation to these arrangements

• HMRC will write you a few letters and then give up and go away

• the arrangements are recognised by HMRC as not an avoidance scheme

• we have a successful track record of implementation

• leading Tax Counsel have advised that the arrangements are legal and work

• penalties can’t be applied as you have relied on advice of Tax Counsel

• you can earn more and mitigate tax and do so using tax efficient structures fully compliant with the law

• the product is low risk

• you’re fully insured against any defeat

• HMRC has approved the scheme - they’ve given it a reference number

193 “Got to pay: Case summary”, Taxation, 23 November 2016 194 Rowe v HMRC [2017] EWCA Civ 2105. See also, Stephen Daly, “A case note on

‘notices’”, taxatlincolnox blog, 13 December 2017

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Such claims are made without context and are usually misleading.

HMRC never approves avoidance schemes. Assertions that HMRC has never challenged schemes of a particular type, or claims that a scheme produces tax free payments that are compliant with tax law, are often simply incorrect. Saying ‘the scheme has been disclosed and therefore you can’t be penalised’ doesn’t mean that you won’t have to pay the disputed tax, interest and possibly penalties. Similarly, saying ‘leading Tax Counsel have advised that the arrangements are legal and work’ does not necessarily mean the scheme works.

Counsel may be advising the promoter on the basis of assumptions which may not turn out to be correct when the scheme is implemented. And whilst Counsel may have advised that the scheme works, their advice is only one opinion. HMRC has a strong track record on avoidance and wins around 80% of all avoidance cases taken to court.195

4.5 Subsequent proposals regarding ‘serial avoiders’ and offshore evasion

In the Autumn Statement in December 2014, the Coalition Government announced that it would consult on action to “impose additional financial costs, compliance and reporting requirements or repeat users of known avoidance schemes.”196 In January 2015 HMRC launched a consultation – Strengthening the sanctions for tax avoidance – which, as noted above, asked for views on having penalties for GAAR cases, and on measures to tackle ‘serial avoiders’: “a small group of risk takers, each of whom is repeatedly involved in tax avoidance schemes to avoid significant amounts of tax.”197

The consultation paper gave more details of what additional sanctions might be applied, while underlining that any new regime would have to be underpinned by certain safeguards:

Introducing surcharges for repeated use of schemes that fail

When a tax avoidance scheme fails, the tax return is inaccurate and penalties may be chargeable. This depends in each case on establishing that the taxpayer failed to take reasonable care. However, the law must look at each case in isolation, and cannot consider the evidence of a pattern of previous or parallel behaviour. Introducing a surcharge on the repeated or concurrent use of tax avoidance schemes that fail could help deter serial avoiders from persisting with flawed schemes year after year …

Special Measures for Serial Avoiders

Serial avoiders may be largely insulated against the personal impact of an intensive enquiry into their tax affairs by their agent or the scheme promoter. Currently, neither the threat of enquiry nor the burden of compliance are likely to carry weight with the serial avoider; or move them to cooperate and progress matters at

195 Misleading claims from tax avoidance scheme promoters, Spotlight 29, February

2016 196 Autumn Statement, Cm 8961 December 2014 para 2.158. At this time the

Government also proposed changes to make DOTAS more effective (paras 2.160-2). 197 Strengthening Sanctions for Tax Avoidance, 30 January 2015 p7

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pace; indeed, delay is a tactic frequently used to hold up settlement and payment.

Increasing the level of scrutiny and obligation on taxpayers during an enquiry could raise the stakes for the avoider and help shift their behaviour ... On entering special measures, serial avoiders could be required:

To provide certificates about their use of tax avoidance schemes to show whether or not they have used a tax avoidance scheme in a particular period, with a view to influencing their behaviour by making them formally acknowledge their involvement in tax avoidance;

To provide as a matter of course more documents and information about their tax affairs or with their tax return rather than waiting for an enquiry or information request from HMRC, with a view to making clear that serial avoidance will result in the imposition of additional obligations on an avoider;

To comply with a conduct notice or a stop notice requiring them to do, or refrain from doing, certain things, with a view to improving their tax compliance …

Publishing the names of serial avoiders

Some serial avoiders may be particularly sensitive to reputational risk. Introducing the additional prospect of publicity could alter the balance of risk for serial avoiders, and act as a deterrent to future involvement in high risk tax avoidance schemes. This sanction could be directly triggered by the imposition of a surcharge for repeated use of schemes that fail; or it could be a further consequence of failure to comply with special measures, which could themselves be triggered by imposition of a surcharge…

Safeguards

Whether in raising a surcharge, imposing special measures or naming a serial avoider there would need to be appropriate safeguards. Any new regime would need to include procedural safeguards and rights of appeal to ensure that it catches and sanctions only its intended, narrow target. The power to name would require especially careful handling, as it would be harder to demonstrate that any perceived reputational damage could be effectively undone.198

The Chancellor George Osborne presented his last Budget of the Parliament on 18 March 2015, and in the Budget report the Government confirmed that it would go ahead with the proposed changes regarding serial avoiders in a future Finance Bill:

2.203 Serial avoiders – The government will introduce legislation for tougher measures for those who persistently enter into tax avoidance schemes which fail (serial avoiders), including a special reporting requirement and a surcharge on those whose latest tax return is inaccurate as a result of a further failed avoidance scheme.

The government will also look to restrict access to reliefs for the minority who have a record of trying to abuse them through avoidance schemes that don’t work and intends to develop further measures to name those who continue to use schemes

198 op.cit. pp 8-10. Responses to this consultation were invited by 12 March 2015.

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that fail. Legislation will be introduced in due course that will widen the current scope of the Promoters of Tax Avoidance Schemes regime by bringing in promoters whose schemes regularly fail. (Future Finance Bill).199

Alongside the Budget the Coalition Government published a paper setting out the action it had taken over the Parliament to deal with avoidance and evasion, both domestically, and in response to international concerns about corporate tax avoidance, as well as bank secrecy laws and their exploitation for the purposes of evasion and money laundering.200 With regard to the domestic scene the paper confirmed the Government’s intention to introduce a system of penalty payments for GAAR cases, while noting that only “a fairly small number of cases” were expected to fall foul of the rule.201 Following the introduction of accelerated payments, consideration would be given as to “whether the principle might be appropriate for different types of cases and whether the government should extend the acceleration of tax payments to more avoidance cases.”202

In addition the paper mentioned four initiatives to tackle offshore evasion: using a non-UK jurisdiction with the objective of evading UK tax.203 This followed international efforts initiated by G20 leaders, led by the OECD, to encourage the ‘automatic exchange’ of financial information between financial institutions and tax authorities, subject to a new Common Reporting Standard.204 Following consultation over 2014,205 the Budget confirmed the introduction of enhanced civil penalties for offshore tax evasion.206 In addition the Government proposed that these civil penalties could be strengthened, possibly supplemented by other measures, including a new criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion by their agents:

3.11 The government has reached ground-breaking agreements to exchange information on financial accounts automatically every year with over 90 other countries. Building on this, it is introducing stronger sanctions for those who continue to evade tax and for those who assist them.

3.12 The Government today announces the introduction of a new strict liability offence for those who have not paid

199 Budget 2015, HC 1093, March 2015 p91. The report noted that the forthcoming

Finance Bill, to be passed before the Dissolution, would enable HMRC to issue Conduct Notices to a broader range of connected persons under the POTAS regime, and, ensure that the 3 year time limit for issuing Conduct Notices to promoters who have failed to disclose avoidance schemes to HMRC applied from the date when a failure is established (para 2.204). This was made by s119 of FA2015.

200 HM Treasury, Tackling tax evasion & avoidance, Cm9047, March 2015. The paper lists a series of measures taken from 2011 to 2015 to ‘close loopholes’ (Table 2.A).

201 Tackling tax evasion & avoidance, Cm9047, March 2015 para 3.22 202 op.cit. para 3.34 203 “This includes moving UK gains, income or assets offshore to conceal them from

HMRC; not declaring taxable income or gains that arise overseas, or taxable assets kept overseas; and using complex offshore structures to hide the beneficial ownership of assets, income or gains.” (HMRC, No safe havens: 0ur offshore evasion strategy 2013 and beyond, March 2013 p2).

204 The OECD publishes background information on this issue on its site. 205 For more background see, HMRC, No safe havens, April 2014. 206 Budget 2015, HC1093, March 2015 para 2.202. see also, HMRC, Strengthening

penalties for offshore non-compliance (TIIN), December 2014

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the tax due on offshore income. This will act as a significant deterrent to the minority of people who evade their tax and will help to stamp out offshore tax evasion. There was previous consultation on a strict liability offence in 2014 at a time when fewer countries had agreed to begin exchanging information automatically in 2017 or 2018. In light of the significant increase in the number of participating countries, there will be a further consultation before legislation is introduced which takes account of this and considers appropriate defences and thresholds.

3.13 The Government is also taking tough action against those who enable offshore tax evasion. The Government today announces new civil penalties for enablers of tax evasion and will consult on the detail of this. This will include a new collateral penalty under which enablers will pay a fine equivalent to that paid by the individual that they helped to evade tax; and public naming of those that enable tax evasion. Criminal sanctions are already available against individuals who facilitate or encourage tax evasion. The Government today announces it will create a new offence of corporate failure to prevent tax evasion or the facilitation of tax evasion, following consultation.

3.14 HMRC is already able to apply penalties of up to 200% of the tax due. Changes introduced in Finance Bill 2015 will extend the scope of these. The government today announces that there will be a further toughening of the range of penalties available to HMRC, following consultation. This will include a new penalty that would take a portion of the asset that has been hidden and increasing the scope of the power to name those who have evaded tax.207

Prior to the 2015 General Election the Institute for Fiscal Studies published an assessment of the Coalition Government’s tax policy, including its efforts to tackle tax avoidance and evasion.208 On the impact of the new GAAR the authors noted that it was still “very early days”: “to date there have been no test cases of the GAAR – not necessarily because it has no practical application, or because it is a completely effective deterrent, but because it takes time for relevant transactions to arise, come to the attention of HMRC, be investigated and come to court.” DOTAS had facilitated the practice of clamping down on avoidance schemes as they came to light, but it was hard to say what the revenue impact of these initiatives had been:

The principal weapon [to tackle avoidance] has still been to clamp down on specific avoidance schemes when they are uncovered (often through the Disclosure of Tax Avoidance Schemes, or DOTAS, provisions introduced by the previous Labour government). Every Budget and Autumn Statement has included a raft of anti-avoidance measures, most of them small individually but collectively forecast to raise billions of pounds.

There is no clear dividing line between reducing avoidance opportunities and broadening the tax base, so it is hard to

207 Tackling tax evasion & avoidance, Cm9047, March 2015 p16. Consultation on each

of these measures was launched in July 2015, and subsequently the Conservative Government confirmed it would introduce them (Autumn Statement Cm 9162, November 2015 para 3.77-80). This is discussed below.

208 Stuart Adam & Barra Roantree, The Coalition Government’s Record on Tax: IFS Briefing note BN167, March 2015

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separate out ‘anti-avoidance’ measures and quantify their intended revenue yield. It is even harder to know whether the measures in fact bring in the sums forecast.209

More generally the authors argued that even though the GAAR represented “a move beyond the traditional approach of simply dealing with each avoidance scheme as it is uncovered”, it was “still tackling the symptoms rather than the underlying cause – often a lack of clarity or consistency in the tax base”:

As the Mirrlees Review noted, ‘If activities were taxed similarly, there would be no (or, at least, much less) incentive for taxpayers to dress up one form of activity as another – and there would correspondingly be little or no revenue loss to the Exchequer if they did so.’210

If tax evasion is a function of enforcement, avoidance is a function of the tax base. Preventing tax avoidance is not an administrative exercise to be layered on top, but inextricably intertwined with the design of tax policy. Design a coherent tax policy and the problem of avoidance will be much reduced.211

209 The Coalition Government’s Record on Tax, March 2015 p27 210 Tax by Design: The Mirrlees Review, IFS 2011 p501 211 The Coalition Government’s Record on Tax, March 2015 p27

67 Commons Library Briefing, 14 December 2017

5. The Conservative Government’s approach

5.1 Budget 2015 In the Conservative Government’s first Budget after the 2015 General Election, the then Chancellor George Osborne did not announce any major change in the Government’s approach to this issue. The Budget report included a number of separate measures relating to tax planning, tax avoidance, evasion and compliance,212 and confirmed consultation on a penalty regime for GAAR, as well as measures, previously announced, regarding serial tax avoiders:

The government will publish a consultation, ahead of introducing legislation in Finance Bill 2016, for serial avoiders who persistently enter into tax avoidance schemes which are defeated. These include a special reporting requirement and a surcharge on those whose latest tax return is inaccurate as a result of a further defeated avoidance scheme, restricting access to reliefs for the minority who have a record of trying to abuse them, and developing further measures to name serial avoiders. The scope of the Promoters of Tax Avoidance Schemes regime would be widened by bringing in promoters whose schemes are regularly defeated. (Finance Bill 2016).213

Following a consultation exercise, the Government confirmed it would introduce these arrangements with effect from 6 April 2017:

Legislation will be introduced in Finance Bill 2016 to allow HMRC to send a notice when they defeat a tax avoidance scheme which puts that person on warning for 5 years. During this time, taxpayers will be required to notify HMRC each year that they have not used any further avoidance schemes, or if they have, to give full details of the schemes and the amount of the tax advantage the schemes are asserted to deliver.

For taxpayers who use further avoidance schemes while under warning which HMRC defeat, they will become liable to a penalty of 20% of the understated tax. Subsequent defeats of such schemes will result in increasing penalties to a maximum of 60%.

Taxpayers who use three schemes during a warning period which HMRC defeats will have their names and other details published by HMRC.

Taxpayers who use at least three tax avoidance schemes during the warning period which exploit reliefs in a way not intended by Parliament and which HMRC defeats will have their access to certain reliefs deferred for a period of three years. If they use no further avoidance schemes which exploit reliefs in this time which HMRC defeat, they will be able to claim reliefs in relation to the deferred period, provided they are still in time to do so.214

212 Summer Budget 2015, HC 264, July 2015 pp94-6, Table 2.1 – items 27-36. 213 Summer Budget 2015, HC 264, July 2015 para 2.174 214 Tax administration: serial avoiders special regime - tax information & impact note

(TIIN), December 2015. The Exchequer impact was estimated to be negligible.

68 Tax avoidance: recent developments

Draft legislation was published at the time, and these provisions now form s159 & schedule 18 of FA2016.215

The Government also confirmed that it would introduce a new threshold condition for the ‘promoters regime’:

Legislation will be introduced in Finance Bill 2016 to provide a new threshold condition for the POTAS regime. The July 2015 consultation proposed the detail for a new threshold condition for promoters who have marketed multiple tax avoidance schemes that are regularly defeated.

Three such defeats over an eight-year period will trigger the threshold condition and bring the scheme promoter into consideration for a Conduct Notice. For this threshold condition, a defeat is defined as: litigation finally being in HMRC’s favour; the user of the scheme reaches agreement with HMRC about their case or makes no appeal against an assessment; a GAAR counteraction has been issued; or the user of the scheme corrects their return on receipt of a Follower Notice. Where there are multiple users of a defeated scheme, a scheme will be defeated if litigation is finally found in HMRC’s favour or 75% of the scheme users agree with HMRC that the scheme does not provide the asserted tax advantage.216

Finally, in the Summer 2015 Budget the Government also stated it would consult “on new measures to increase compliance and tax transparency in relation to large business tax strategies”:

These will include the introduction of a ‘special measures’ regime to tackle businesses that persistently adopt highly aggressive behaviours including around tax planning, and a voluntary Code of Practice defining the standards HMRC expects large businesses to meet in their relationship with HMRC.217

Following consultation over the summer, in December 2015 the Government published details of how these initiatives would work; first, the ‘special measures’ regime -

The government is legislating to provide that large businesses with an ongoing history of aggressive tax planning and/or refusing to engage with HMRC may be subject to special measures.

A business in this position will be advised that they may be of risk of being put into special measures. A twelve month improvement period will then allow HMRC and the business to work together to resolve issues. At the end of the period, the business will either have improved and so not enter special measures or be notified of entry into special measures. At this stage no sanctions are triggered.

Businesses who enter special measures risk sanctions if they demonstrate further instances of the behaviours that led to their inclusions in special measures. Sanctions could include, removing access to non-statutory clearances, removing the defence of ‘reasonable care’ or potentially naming as being in special measures. Businesses enter special measures for a minimum of 2

215 No changes were made to the draft legislation: HM Treasury, Overview of tax

legislation & rates, March 2016 p24 216 HMRC, Tax administration: new threshold condition for promoters of tax avoidance

schemes – TIIN, December 2015. Again, the Exchequer impact of this change is thought to be negligible. This provisions forms s160 of FA2016.

217 Summer Budget 2015, HC 264, July 2015 para 2.176

69 Commons Library Briefing, 14 December 2017

years. Two years from entry into special measures HMRC will conduct an ‘exit review’ to decide whether the behaviours have improved and the business should exit special measures or whether an extension of special measures is required.218

- and second, the transparency strategy, which would cover 2,000 largest businesses in the UK:

The measure will introduce a legislative requirement for all large businesses to publish an annual tax strategy, in so far as it relates to UK activities, approved by the Business’s Executive Board.

The strategy will cover 4 areas:

1. the approach of the UK group to risk management and governance arrangements in relation to UK taxation

2. the attitude of the group towards tax planning (so far as affecting UK taxation)

3. the level of risk in relation to UK taxation that the group is prepared to accept

4. the approach of the group towards its dealings with HM Revenue and Customs (HMRC)

Non-publication of an identifiable tax strategy or incomplete content based on the 4 areas outlined above could lead to a financial penalty. This penalty will be subject to the usual HMRC appeals process.219

Draft legislation was published at the time, and in the 2016 Budget the Government confirmed this would be included in the Finance Bill, subject to certain revisions “to clarify the population of those entities in scope of the legislation. The legislation will be effective for accounting periods commencing on or after Royal Assent to Finance Bill 2016.”220 The Exchequer yield from these changes was estimated to be £175m in 201/18, rising consistently to £635m by 2020/21.221

These three measures were debated, and agreed, at the Committee stage of the Bill on 28 June – though the debate focused on the separate, if related issue of corporate tax avoidance, and the proposal for multinational companies (MNEs) to provide public country-by-country (CbC) reporting. Under provisions introduced in 2016 UK MNEs have to provide HMRC with information on their global activities, profits and taxes,222 and Caroline Flint tabled an amendment to require MNEs to make this information public, as part of their transparency strategy. However, Ms Flint’s amendment was unsuccessful, as the Government maintained its position that public CbC reporting should only be implemented on a multilateral basis.223

It is worth adding that, as with previous Budgets, the 2016 Budget also included several new measures to reduce avoidance, evasion and certain 218 Tax administration: large business special measures regime – TIIN, December 2015 219 Tax administration: large businesses transparency strategy – TIIN, 9 December 2015 220 Overview of Tax Legislation & Rates, March 2016 para 1.76. The provision forms

s161 & schedule 19 of FA2016. 221 Budget 2016, HC 901, March 2016 (Table 2.2 – item an). See also, HMT, Summer

Budget 2015 Policy Costings, July 2015 p35 222 HMRC, Country-by-country reporting – updated, March 2017 223 HC Deb 28 June 2016 cc157-9. For more details see, Public country-by-country

reporting, Commons Debate Pack 2017-233, 20 November 2017.

70 Tax avoidance: recent developments

‘imbalances’ in the tax system (where support disproportionately benefits certain groups or types of business structure.)224

5.2 Offshore evasion & the Panama Papers As noted above, in March 2015 the Coalition Government had proposed four initiatives to tackle offshore evasion:

• A new criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion by their agents;

• Tougher financial penalties for offshore evaders, including the possibility of a penalty based on the value of the asset on which tax was evaded as well as wider public naming of offshore evaders;

• A new penalty regime for those who enable tax evasion, based on the tax they have helped taxpayers to evade and naming of enablers;

• A new simpler criminal offence to make prosecution of offshore evaders easier.225

Consultation documents on each of these measures were published in July 2015, and in December the Government confirmed it would bring forward legislation for three of these measures in the Finance Bill 2016:

• a new criminal offence for tax evasion,

• new civil penalties for offshore tax evaders, and

• new civil penalties for those enabling offshore evasion.226

Tax information notes on each measure were published at the time.

• Tax administration: criminal offence for offshore tax evaders

• Increased civil sanctions for offshore tax evaders

• Tax administration: civil sanctions for enablers of offshore tax evasion

In turn provision for these measures was included in the Finance Bill published after the 2016 Budget, well as provision for an additional penalty for serious cases of deliberate offshore evasion, equivalent to up to 10% of the underlying asset value.227 In the 2016 Budget the Government also announced that Finance Bill 2017 would include provision for a new legal requirement to correct past offshore non-compliance within a defined period of time with new sanctions for

224 Budget 2016, HC 901, March 2016 (Item 2.1 – items 39-53). The term ‘imbalances’

seems to have been used first in the July Budget (HC264, July 2015 para 1.184). 225 Tackling tax evasion & avoidance, Cm9047, March 2015 p16 226 Autumn Statement Cm 9162, November 2015 para 3.77-80. See also, Budget 2016,

HC901, March 2016 para 2.200-2 227 HM Treasury, Overview of Tax Legislation & Rates, March 2016 para 1.77. The

provisions now form ss162-67 of FA2017. See also, “The door is closing”, Taxation, 16 June 2016.

71 Commons Library Briefing, 14 December 2017

those who failed to do so.228 In the latter case, a consultation exercise on a ‘requirement to correct’ was launched in the summer.229

In the case of a criminal offence for corporates, stakeholders and respondents had been “broadly understanding of the need for greater corporate responsibility in relation to the acts carried out by those who represent the corporation”, though there were concerns that there might be practical difficulties in prosecution. Given this response, the Government proposed that it would publish draft legislation and draft guidance in early 2016 for further consultation before proceeding.230

The then Prime Minister David Cameron reiterated the Government’s plans to introduce this criminal offence, in a statement on 11 April 2016.231 This followed the publication a few days before of the ‘Panama papers’ – a leak of financial records from Mossack Fonseca, a law firm that had provided advice on establishing offshore companies in tax havens to a wide variety of politicians, celebrities, and other wealthy individuals.232 Mr Cameron announced a joint taskforce would be established to investigate potential cases of evasion, led by HMRC and the National Crime Agency233 – and gave details of ongoing efforts to improve the financial information provided by the Crown Dependencies and Overseas Territories to the revenue authorities. Part of Mr Cameron’s statement to the House is reproduced below:

As the revelations in the Panama papers have made clear, we need to go even further. So we are taking three additional measures, to make it harder for people to hide the proceeds of corruption offshore, to make sure that those who smooth the way can no longer get away with it and to investigate wrongdoing.

First, let me deal with our Crown dependencies and overseas territories that function as financial centres. They have already agreed to exchange taxpayer financial account information automatically, and will begin doing so from this September …

Today I can tell the House that we have now agreed that they will provide UK law enforcement and tax agencies with full access to information on the beneficial ownership of companies. We have finalised arrangements with all of them except for Anguilla and Guernsey, both of which we believe will follow in the coming days and months. For the first time, UK police and law enforcement agencies will be able to see exactly who really owns and controls every company incorporated in those territories …

Next month we will seek to go further still, using our anti-corruption summit to encourage consensus not just on

228 Budget 2016, HC 901, March 2016 para 2.200-3 229 HMRC press notice, Tough new sanctions announced for offshore tax evaders, 24

August 2016; see also, “UK plans tougher penalties for offshore tax evaders”, Financial Times, 24 August 2016.

230 Tackling offshore tax evasion: a new corporate criminal offence of failure to prevent the facilitation of tax evasion - Summary of Responses, December 2015 pp7-8, p36

231 No.10 Downing Street press notice, PM: Companies to be liable for employees who facilitate tax cheating, 11 April 2016

232 “What are the Panama Papers? A guide to history's biggest data leak”, Guardian, 5 April 2016

233 HMT press notice, UK launches cross-government taskforce on the ‘Panama Papers’, 10 April 2016

72 Tax avoidance: recent developments

exchanging information, but on publishing such information and putting it into the public domain, as we are doing in the UK…

Next, we will take another major step forward in dealing with those who facilitate corruption. Under current legislation it is difficult to prosecute a company that assists with tax evasion, but we are going to change that. We will legislate this year for a new criminal offence to apply to corporations that fail to prevent their representatives from criminally facilitating tax evasion.

Finally, we are providing initial new funding of up to £10 million for a new cross-agency taskforce to swiftly analyse all the information that has been made available from Panama, and to take rapid action. That taskforce will include analysts, compliance specialists, and investigators from across HMRC, the National Crime Agency, the Serious Fraud Office, and the Financial Conduct Authority.234

With regard to the new corporate offence, in April HM Revenue & Customs published draft legislation and draft guidance for consultation.235 The paper set out the policy objectives of the new offence as follows:

1.3 The new corporate offence aims to overcome the difficulties in attributing criminal liability to corporations for the criminal acts of those who act on their behalf. Whilst this consultation refers to the application of the new offence to “corporations”, the draft legislation refers to a “relevant body” to encompass the broad range of legal persons to which the new offence will apply.236

1.4 Attributing criminal liability to a corporation normally requires prosecutors to show that the most senior members of the corporation were involved in and aware of the illegal activity, typically those at the Board of Directors level. This has a number of impacts:

1. In large multinational organisations decision making is often decentralised and may be taken at a level lower than that of the Board of Directors, with the effect that the corporation can be shielded from criminal liability. This also makes it harder to hold such organisations to account compared to a smaller organisation where decision making is centralised.

2. The existing law can act as an incentive for the most senior members of a corporation to turn a blind eye to the criminal acts of its representatives in order to shield the corporation from criminal liability.

3. The existing law can act as a disincentive for internal reporting of suspected illegal activity to the most senior members of the corporation.

1.5 The cumulative effect is an environment that does not foster corporate monitoring and self-reporting of criminal activity. The criminal law currently renders corporations that refrain from implementing good corporate governance and strong reporting procedures hard to prosecute, and offers no incentive to invest in

234 HC Deb 11 April 2016 cc23-26 235 Tackling tax evasion: a new corporate offence of failure to prevent the criminal

facilitation of tax evasion, April 2016 236 “Relevant body” is defined within section 1(2) of the new draft clauses.

73 Commons Library Briefing, 14 December 2017

such procedures. It is those corporations that deliberately turn a blind eye to wrongdoing and preserve their ignorance of criminality within their organisation that the current criminal law most advantages.237

Subsequently the Government introduced legislation, as part of the Criminal Finances Act 2017, to establish a new statutory offence to hold corporations and partnerships criminally liable when they fail to prevent their employees, agents, or others who provide services on their behalf from criminally facilitating tax evasion. These new offences took effect from 30 September this year;238 further details are in two Library papers, the first prepared for the Second Reading of the Criminal Finances Bill in October 2016 (CBP7739), the second summarising the Committee stage of the Bill (CBP7825).

With regard to beneficial ownership, the Government had introduced provisions for this country as part of the Small Business, Enterprise & Employment Act 2015.239 In April 2014 the Prime Minister wrote to the Crown Dependencies and Overseas Territories to encourage them to follow the UK’s example. The speed with which individual territories responded to this appeal has often been raised in the House – though, as noted by the Foreign Office Minister, James Duddridge, in February, “this is a matter of direction, rather than an ultimate destination.” The Minister said that he wished to see “significant progress” ahead of the anti-corruption summit in May.240

On 14 April 2016 the Chancellor announced that the UK had agreed with Germany, France, Italy and Spain for the automatic exchange of information of data on company beneficial ownership between tax and law enforcement agencies.241 The five participants also made a commitment to establish new registers of trusts.242

Subsequently, just before the anti-corruption summit, the Government announced that the UK had completed a series of bilateral agreements with the Crown dependencies and overseas territories on sharing beneficial ownership information. Details are collated on Gov.uk, but, as underlined in a written answer, generally this information would be shared with the relevant legal and tax authorities only:

Jonathan Ashworth : To ask the Secretary of State for Foreign and Commonwealth Affairs, what plans the Government has to force Overseas Territories and Crown Dependencies to establish public central registers of beneficial ownership.

237 Tackling tax evasion: a new corporate offence of failure to prevent the criminal

facilitation of tax evasion, April 2016 pp6-7. The consultation document gives a case study of how the offence would work “to help inform stakeholder feedback” (see para 3.6, pp24-26).

238 HMRC press notice, 30 September 2017 239 For more details see, Small Business, Enterprise and Employment Bill, Commons

Briefing paper RP14-39, 14 July 2014. 240 HC Deb 23 February 2016 cc145-6. The Prime Minister had first announced this

summit in a speech in Singapore last year (No.10 Downing Street, 28 July 2015). 241 HM Treasury press notice, UK leads European calls for G20 action on beneficial

ownership, 14 April 2016 242 HM Treasury, G5 letter to G20 counterparts regarding action on beneficial

ownership, 14 April 2016. Several countries joined this initiative some days later: HMT press notice, Tax transparency progress hailed by Chancellor, 22 April 2016

74 Tax avoidance: recent developments

Answered by: Sir Alan Duncan : While the Overseas Territories (OTs) and Crown Dependencies (CDs) are separate jurisdictions, and are responsible for their own fiscal matters, we are working closely with them on their role on company transparency. Our priority has been for them to establish a central register of beneficial ownership information (or a similarly effective system) where they do not already have one, and for UK law enforcement and tax authorities to have full and automatic access to that information.

Bilateral arrangements to this effect have now been concluded with all the relevant OTs and with the CDs, and these will enter into effect by June 2017. The registers will, with one exception, not be public, but these measures will place our Crown Dependencies and Overseas Territories well ahead of other similar jurisdictions and represent a significant step forward in our ability to counter criminal activity.243

Two Library papers give more details on the anti-corruption summit, which was held on 12 May, and on beneficial ownership.244

The question of requiring the Crown Dependencies and Overseas Territories to establish public registers of beneficial ownership has continued to be debated – particularly during the proceedings of the Criminal Finances Bill .245 As a compromise at the Report stage of the Bill in the Lords in April 2017, the Government introduced a new provision to require Ministers to report to the House on the effectiveness of the arrangements for the exchange of beneficial ownership information with these territories.246 Over this period the Government has reiterated that should public registers become the global standard, “we would expect the Crown Dependencies to follow suit.”247 In a short Lords debate on the Paradise Papers on 14 December DIFD Minister Lord Bates said, “we already have central registers in four of those authorities, including the Cayman Islands, Bermuda and Gibraltar. Montserrat and Anguilla will have registers by April of next year. The Turks and Caicos Islands have been particularly affected by the hurricane, so they have been given a little extra time, but we are very clear that action needs to be taken.”248

Of related interest, on 5 April 2017 the Government launched a call for evidence, setting out proposals for a new beneficial ownership register of overseas companies that own UK property or participate in UK government procurement.249

Finally, with regard to the new task-force, in a press notice following the announcement the CIOT’s Tax Policy Director, John Cullianane, said, “This is a sensible, joined-up approach from the Government. There is a

243 PQ43422, 2 August 2016 244 The international anti-corruption summit in May 2016, CBP7580, 20 May 2016;

Shining a light on beneficial ownership: what's happening in the UK and elsewhere?, CBP7616, 17 June 2016.

245 See, Criminal Finances Bill: Committee Stage Report, Commons Briefing paper CBP7825, 16 February 2017.

246 HL Deb 25 April 2017 cc1309-35. This now forms s9 of the Criminal Finances Act 2017.

247 PQ68007, 21 March 2017. See also, PQ112793, 20 November 2017. 248 HL Deb 14 December 2017 c1664 249 HLWS592, 5 April 2017. Details are published on Gov.uk.

75 Commons Library Briefing, 14 December 2017

huge amount of data to work through, and this is an extremely complex area, with a number of different criminal offences in scope, with different expiry periods and burdens of proof. So it makes sense to bring together specialists from HMRC, the National Crime Agency and elsewhere in a dedicated, focused taskforce.”250

In a debate on tax avoidance just after Mr Cameron’s statement to the House, Treasury Minister David Gauke said the following:

The taskforce will report to my right hon. Friends the Chancellor of the Exchequer and the Home Secretary on the strategy for taking action, and we will update Parliament later this year. I stress that the taskforce will have total operational independence. If it finds people to prosecute, it will prosecute them. If it finds information about illegality, it can act on it. In addition, the independent FCA has written to financial firms asking them to declare their links to Mossack Fonseca. If the FCA were to find any evidence that firms have been breaking the rules, it, too, has strong powers to take punitive action.251

In June 2016 Edward Troup, HMRC Permanent Secretary, gave evidence to the Treasury Select Committee, and on this occasion Wes Streeting asked Mr Troup about the setup of the task force, and its progress to date. In response, Mr Troup made a couple of points:

Although I would not understate the importance of this, I would not suggest that somehow [the leak] has given us information that we had not had before; we were already following up on 700 leads that, in some way, were linked to Panama before this dataset was published. The task force … currently has about 100 staff and, of those, around 70 are HMRC staff working on this project …

We are not suddenly going to produce thousands of prosecutions that we would not otherwise have done ... the ICIJ, which actually holds the dataset—because the BBC and The Guardian have just had bits of information from the ICIJ—have a stated policy of not releasing information to government agencies. Although we have asked them for it, we do not have the dataset from the ICIJ, so I have to be a bit careful... There is progress. There are people on the ground from the task force in Panama. The Financial Conduct Authority is analysing the returns from 64 companies … with contacts with Mossack Fonseca. I am not going to either give an update on progress or say exactly what we expect and when, because it depends on the outcome of that work.252

The Chancellor Philip Hammond provided an update to the House on the work of the taskforce on 8 November 2016, in a detailed written statement;253 this is reproduced in full over the following two pages.

250 CIOT press notice, 11 April 2016 251 HC Deb 13 April 2016 c374. See also, PQ33514, 18 April 2016. On the impact for

individuals with offshore accounts see, “Stormy skies”, Taxation, 18 August 2016. 252 Treasury Committee, Oral evidence: HMRC Executive Chair and Chief Executive, HC

232, 8 June 2016 Qs17-18 253 These details were also set out in a press notice published at the time. See also,

PQ60460, 21 January 2017.

76 Tax avoidance: recent developments

Panama Papers Taskforce

Written statement HCWS247, 8 November 2016

In his statement to the House on 11 April 2016, the former Prime Minister David Cameron announced the creation of a cross-agency taskforce to analyse all the information that had been made available from the International Consortium of Investigative Journalists (ICIJ)’s Panama papers data leak. My right hon. Friend the Home Secretary and I now wish to update the House on the work of the taskforce.

In its short existence, the taskforce has added greatly to the UK’s understanding of the evermore complex and contrived structures that are being developed to mask offshore tax evasion and economic crime. This intelligence will ensure that the UK remains uniquely placed to contribute to the international effort to uncover, and take action, on wrongdoing, regardless of how deeply hidden the arrangements are, as well as identify those jurisdictions where regulatory oversight requires improvement.

We can today report that the taskforce has:

- opened civil and criminal investigations into 22 individuals for suspected tax evasion

- led the international acquisition of high-quality, significant and credible data on offshore activity in Panama—ensuring the important work of the taskforce was not delayed by the ICIJ’s refusal to release all of the information that it holds to any tax authority or law enforcement agency

- identified a number of leads relevant to a major insider-trading operation led by the Financial Conduct Authority and supported by the National Crime Agency

- identified nine potential professional enablers of economic crime—all of whom have links with known criminals

- placed 43 high net worth individuals under special review while their links to Panama are further investigated

- identified two new UK properties and a number of companies relevant to a National Crime Agency financial sanctions enquiry

- established links to eight active Serious Fraud Office investigations

- identified 26 offshore companies whose beneficial ownership of UK property was previously concealed, and whose financial activity has been identified to the National Crime Agency as potentially suspicious

- contacted 64 firms to determine their links with Mossack Fonseca to establish potential further avenues for investigation by the taskforce

- seen individuals coming forward to settle their affairs in advance of taskforce partners taking action.

The taskforce’s respective partners will engage the relevant prosecuting authorities to bring any identified wrongdoing before the courts.

The Government have also invested to develop their expertise in data and intelligence exploitation. This has ensured that Departments and agencies are well placed to forensically analyse massive-scale data of this kind, which are becoming ever-more frequently available.

The taskforce has established a Joint Financial Analysis Centre (JFAC). Using the data and intelligence gathered from across the taskforce, the JFAC has developed cutting-edge software tools and techniques, ensuring the taskforce has access to the very best information from which to work.

The proactive acquisition of data, alongside the establishment of the JFAC, has enabled the taskforce to identify a number of areas for further investigation across the full range of tax and economic crime, as well as links to organised crime, which will be the focus of its work over the coming months.

77 Commons Library Briefing, 14 December 2017

An update was given in answer to a PQ in October this year:

Asked by Kelvin Hopkins : To ask Mr Chancellor of the Exchequer, what progress his Department has made in its inquiry into the Panama Papers.

Answered by: Mel Stride : Since the last update to Parliament in November 2016, HMRC has tripled the number of criminal and civil investigations linked to the Panama papers.

To date, the work of the Panama Papers Taskforce has led to civil and criminal investigations into 66 individuals for suspected tax evasion, including high net worth individuals. As part of this HMRC has made four arrests; and carried out six interviews under caution. Taskforce partners have made three arrests in relation to an organised crime group suspected of a £125m conspiracy to defraud pension investors, tax evasion and associated money laundering. They have also identified leads relevant to a major insider trading operation, in relation to which a number of individuals have been arrested and are on bail pending further activity.

UK law enforcement continues to interrogate and exploit Panama Papers related data, identifying previously unknown individuals, companies and properties, making links between them and providing intelligence and investigative opportunities.

Taskforce members are present in Panama, using established relationships with the Panamanian authorities, and working with diplomatic colleagues, to offer support to analyse all the available data. Taskforce members have also worked with international partners as part of the Joint International Tax Shelter Information Centre to exchange information and intelligence as part of the wider international effort.

More generally, the Government have introduced tough new powers, increased penalties and game-changing measures to tackle offshore and onshore tax evasion. In the summer 2015 Budget, the Government gave HMRC an additional £800 million to invest in compliance and tax evasion work. This is expected to recover £7.2 billion in tax by the end of 2020-21. This includes tripling the number of criminal investigations that it undertakes into serious and complex tax crime, focusing particularly on wealthy individuals and companies. The aim is to increase prosecutions in this area to 100 a year, by the end of this Parliament.

The Government have also been pivotal in increasing global financial transparency in more than 100 countries, including British overseas territories and crown dependencies, by automatically sharing offshore account data. This additional data will help identify and pursue the tiny minority of tax evaders still hiding their money offshore.

The Government aim to make the UK a more hostile place for those seeking to move, hide or use the proceeds of crime or corruption. In October 2015, the Government published the national risk assessment for money laundering and terrorist financing to better understand the risks and vulnerabilities for the UK. The action plan, published in April 2016, and the Criminal Finances Bill, introduced to Parliament in September, will significantly improve our capabilities to tackle money laundering and recover the proceeds of crime, including proceeds of corruption.

The London anti-corruption summit earlier this year brought more than 40 countries together and resulted in a commitment to more than 600 actions. Since then, the UK has made real progress on its own commitments —our public register of beneficial ownership information is now live, the first G20 country to do so; and the National Crime Agency is working to get the new international anti-corruption co-ordination centre operational by next April.

78 Tax avoidance: recent developments

The systems used to launder money and evade tax through offshore structures are complex and highly sophisticated. The Joint Financial Analysis Centre and HMRC’s expert analysts are using leading-edge technology to unpick these structures and trace them back to individuals. This work is painstaking and forensic and there are no easy shortcuts.

HMRC is not a prosecuting authority. Its focus is on building the strongest possible cases in order to secure convictions, and it expects to refer cases to the prosecuting authorities from autumn 2017 onwards.254

5.3 Spring Budget 2017 In the 2016 Budget the Government announced that it would consult on a number of initiatives to mitigate the scale of avoidance and evasion, and launched four consultation exercises over the summer covering tax avoidance sanctions and deterrents; the DOTAS regime as it applies to indirect taxes; the penalty regime dealing with offshore evasion; and the penalty regime dealing with VAT fraud.255

Spring Budget 2017 confirmed that provisions would be included in the Finance Bill 2017 in relation to each of these initiatives, as well as amendments to the ‘POTAS’ rules (the 2014 legislation affecting scheme promoters identified by HMRC as being especially aggressive and unco-operative).256

Overall the Exchequer impact of these measures is not particularly large,257 and there has been much less debate over their introduction compared with earlier initiatives, although the Government’s proposals to impose penalties on those ‘enabling’ avoidance, as initially drafted, were strongly criticised by the tax profession, leading to some important modifications.

Strengthening tax avoidance sanctions and deterrents In the 2016 Budget the Government announced several further initiatives to tackle marketed tax avoidance, stating it would “consider the case for clarifying what constitutes reasonable care in avoidance penalty cases”, and “consider options to address the issue of those who “enable” tax avoidance schemes.”258 On 17 August HMRC launched its consultation; responses were invited by 12 October.

On the first issue, the consultation document explained HMRC has faced considerable difficulties to establish a failure to take reasonable care involving complex avoidance arrangements: first, because of the nature of the advice that taxpayers will have relied upon, when deciding to invest in an avoidance scheme that has proved faulty …

254 PQ105360, 12 October 2017; see also, PQ118090, 12 December 2017 255 Budget 2016, HC 901, March 2016, para 2.145 (VAT fraud), para 2.203

(requirement to correct), and para 2.204 (marketed tax avoidance) 256 Overview of Tax Legislation & Rates, March 2017 para 1.38-1.42 For an overview of

the issue at this time see, Chartered Institute of Taxation, The state of play on tax evasion and avoidance, 2 March 2017.

257 Spring Budget 2017, HC 1025, March 2017 (Table 2.1-item 22; Table 2.2 – item p). 258 Budget 2016, HC 901, March 2016, para 2.204

79 Commons Library Briefing, 14 December 2017

Many tax avoiders argue that they have taken reasonable care and that their tax return was made on a reasonably arguable view of the law as it applied to the transactions they entered into. They contend this is based on what they were told by the person who promoted the avoidance, by an Independent Financial Adviser, personal tax accountant, or by any other person in the supply or facilitation chain, i.e. by an enabler of the avoidance arrangements they used …

To support this they often rely on marketing or other material provided by those marketing it, or generic, plausible-sounding, statements from an “eminent QC”, which they have also been given by those in the supply chain, endorsing the arrangements and their effectiveness.

In the worst examples, advice offered to users is very limited in quality, scope and relevance. Generic marketing material is sometimes presented as financial or tax advice, when in fact it has not been written or considered by anyone with the requisite knowledge or experience.259

… and second, because the burden of proof rests with HMRC:

This means there can be little incentive for a tax avoider to co-operate and they may frequently try to frustrate HMRC investigations by withholding basic information about the arrangements. They may need to seek this information from the promoter who may also be disinclined to cooperate.

When contesting that they have taken reasonable care, they might be slow to produce supporting evidence, or submit incomplete information. This can make it difficult to identify whether a penalty is appropriate. These tactics can lead to drawn out and more costly investigations, prolonging the resolution of avoidance disputes for all parties.260

In turn the consultation proposed a number of tests to determine whether a taxpayer had, or had not, taken reasonable care, putting the burden of proof on the taxpayer – while the imposition of a penalty would be subject to certain existing safeguards regarding penalties.

Turning to ‘enablers’, the consultation document explained that the term “encompasses more than those who design, promote and market avoidance. It includes anyone in the supply chain who benefits from an end user implementing tax avoidance arrangements and without whom the arrangements as designed could not be implemented.”261 The main driver to enablers actively encouraging taxpayers to invest in dubious schemes has been that they “do not feel affected by the suite of sanctions and deterrents designed to influence avoider behaviour”:

Indeed, some judge that the business and reputational risks associated with HMRC defeating avoidance arrangements they have helped enable are outweighed by the financial rewards to them. There can be few downsides to their continued involvement

259 Strengthening tax avoidance sanctions and deterrents: discussion document, August

2016 para 3.9-11 260 op.cit. para 3.14-5 261 Strengthening tax avoidance sanctions and deterrents: discussion document, August

2016 para 2.7

80 Tax avoidance: recent developments

with such arrangements, notwithstanding the hardship which may be faced by their clients.262

As a solution to this problem, the consultation proposed a new penalty to be paid by anyone who had enabled tax avoidance that HMRC was successful in defeating. “It should penalise everyone in the supply chair who has enabled avoidance arrangements which are defeated.” As noted briefly above, Budget 2016 included the introduction of new civil penalties for those enabling offshore evasion, and the consultation proposed drawing on the criteria employed in this case:

The 2015 consultation “Tackling offshore tax evasion: Civil sanctions for enablers of offshore evasion” outlined a number of ways in which an individual or business might enable someone to evade tax through the use of offshore structures. They include:

• Acting as a “middleman”– arranging access and providing introductions to others who may provide services relevant to evasion

• Providing planning and bespoke advice on the jurisdictions, investments and structures that will enable the taxpayer to hide their money and any income, profit or gains

• Delivery of infrastructure – including setting up companies, trusts and other vehicles that are used to hide beneficial ownership; opening bank accounts; providing legal services and documentation which underpin the structures used in the evasion such as notary services and powers of attorney

• Maintenance of infrastructure – providing professional trustee or company director services including nominee services; providing virtual offices, IT structures, legal services and documentation which obscures the true nature of the arrangements such as audit certificates

• Financial assistance – helping the evader to move their money or assets out of the UK, and/or keep it hidden by providing ongoing banking services and platforms; providing client accounts and escrow services; moving money through financial instruments, currency conversions etc.

• Non-reporting – not fulfilling their reporting, regulatory or legal obligations, which in itself helps to hide the activities of the evader from HMRC

Many of these descriptions apply equally to tax avoidance.

With this in mind, we propose developing a definition of enabler based on the broad criteria used for the offshore evasion measure but specifically tailored to the avoidance supply chain and ensuring that appropriate safeguards are included to exclude those who are unwittingly party to enabling the avoidance in question.263

Initial responses from the tax profession expressed considerable concern about the potential scope of the new penalties for tax enablers, though

262 op.cit. para 2.10. The consultation document provides two case studies to illustrate

the problem (see p9). 263 op.cit. para 2.15, para 2.12-4

81 Commons Library Briefing, 14 December 2017

tax justice campaigners welcomed the proposals.264 John Cullinane, tax policy director at the Chartered Institute of Taxation argued, “it is far from clear that a definition drafted for ‘enabling’ a criminal offence will be appropriate for defining an activity which, while undesirable in the eyes of most people, is legal, provided all appropriate disclosures are made to the tax authorities”:

“We are concerned about a scenario where a taxpayer goes to their tax adviser for advice on risks attached to participating in a scheme, receives appropriate advice setting out these risks and the likelihood of the scheme being defeated, but decides to join the scheme despite this. It would be extremely harsh to penalise a tax adviser in this scenario where all the tax adviser has done is advise the taxpayer on the law as it stands.

“It is important to be aware that court cases on tax matters are not only about avoidance. Often there are simply disagreements between HMRC and taxpayers about how the rules operate and the courts are asked to adjudicate. Losing a case of this kind in the courts should not be seen as tax avoidance by the taxpayer or as enabling avoidance by their advisers.”265

An editorial in the Financial Times argued, “taking the battle to the supply side of the tax avoidance industry is sensible” though “the Government should take care to ensure that it does not unreasonably hit defensible tax planning”:

Tax rules are not ultimately set in aspic. Avoidance is generally defined as creating a tax break that Parliament never intended. Yet what legislators mean at a particular time can change as circumstances evolve.266

Writing in the Tax Journal, Peter Vaines, a member of Field Court Tax Chambers, argued that “it is simply unacceptable, in a civilized society, for a government department to penalise professional advisers for advising on the law”:

[HMRC] has a genuine problem which deserves to be addressed, but it is important not to get carried away. Indeed, HMRC might usefully reflect on whether it should be subject to the same penalties if it was unsuccessful in a challenge to a claim by a taxpayer to a tax relief or deduction – and if not, why not.267

Writing in Taxation, Fiona Fernie, partner at Pinsent Masons, argued that the proposed definition of defeated tax avoidance “is incredibly wide-ranging and could end up capturing conventionally accepted tax planning.”268 In their response to the consultation, the Tax Law Review Committee argued, “the proposals, if adopted in anything approximating their current form, carry a real risk of a wholesale

264 “HMRC gets ‘nasty’ in tax clampdown”, Financial Times, 18 August 2016. See also,

“The proposals targeting tax avoidance enablers”, Tax Journal, 2 September 2016. 265 CIOT press release, ‘Enabling’ tax avoidance – legislation must draw distinction

between promoting avoidance and advising on the law, 17 August 2016 266 “Editorial: May flexes her muscles over tax avoidance”, Financial Times, 18 August

2016 267 “Comment: Deterring tax avoidance”, Tax Journal, 9 September 2016 268 “Stronger sanctions”, Taxation, 1 September 2016. See also, CIOT press notice, Tax

experts call for new penalties to target deliberate promotion of avoidance rather than commercial advice, 12 October 2016.

82 Tax avoidance: recent developments

reduction in the numbers of onshore tax professionals who presently provide responsible and accurate professional advice to taxpayers”:

The Committee does not doubt that popular sentiment has expressed considerable objection to many of the tax avoidance arrangements indulged in by the “persistent minority”. It recalls, however, that a swathe of measures have been enacted in recent years designed to identify, discourage, shame and penalise tax avoiders and those who promote and market tax avoidance arrangements. These measures are not all fully operational yet, and there has been no sensible opportunity to assess their longer term impact on the tax avoidance industry, in particular the type of avoidance indulged in by “the persistent minority” supposedly targeted by these proposals.

The need for further measures is therefore untested and unproven. The current measures in particular are unjustified by any evidence of an on-going widespread problem necessitating far reaching, untargeted and potentially damaging measures such as those currently proposed.

In particular, the Consultative Document fails to consider and identify adequately (or indeed at all) the type of behaviour and the nature of the avoidance in which “the persistent minority” engage, which is the supposed target of the proposal. It therefore fails to distinguish “the persistent minority” from the vast majority of responsible tax professionals without whom the tax system, commercial business activity and the organisation of individual financial affairs could not function satisfactorily. In effect, all are inappropriately tarred with the same brush.

We do not imagine that the issues to which we draw attention in this submission are intended by government or HMRC. In the Committee’s view, however, they would be an inevitable outcome of the proposal if enacted in its current form. In short, the scope of the proposal and the targeting of the issues created by “the persistent minority” require a more considered, careful and targeted approach than is evidenced by the Consultative Document. 269

Writing in his blog barrister Jolyon Maugham argued that the action of enablers represented a “very real” problem, and the consultation set out “very real solutions” though “they may well go too far.” His description of the incentives for the unscrupulous enabler is worth reproducing:

The real issue is this. A tax advisor gets his fee for telling you that you can declare 10 rather than 100. He’s in the money from the start. And if you should happen to sue him later, he might have wound himself up, or he might shelter behind the advice given by a barrister, or he might point to the small print in the scheme documentation telling you that (despite the fact he’s charging you a fee) you must take your own tax advice.

269 Strengthening Tax Avoidance Sanctions and Deterrents: a discussion document -

Response to Consultation, October 2016 pp1-2. The Committee was established by the IFS in 1994, and, in its words, “represent a broad cross-section of informed opinion from industry and commerce, the judiciary, academia, the professions and political and public life.” It is chaired by Malcolm Gammie CBE, QC.

83 Commons Library Briefing, 14 December 2017

So he gets handsome reward and very often without any personal accountability for the consequences. This state of affairs can encourage abysmal behaviour by highly paid professionals.270

In December the Government confirmed it would proceed with this reform, but with substantive modifications, publishing draft legislation and an impact assessment – which gave a short summary of both measures:

Legislation will be introduced in Finance Bill 2017 to provide for a penalty on those who enable tax avoidance which is later defeated. Key elements of the regime will:

• define who is an ‘enabler’ to draw the distinction between those who design, market or otherwise facilitate avoidance arrangements implemented from those who solely advise, report or otherwise provide opinion on such arrangements and whose advice does not result in any amendment to the arrangements or any resulting arrangements

• ensure that those who are brought within the meaning of enabler through unwittingly becoming involved in the arrangements are excluded from that definition

• describe the types of arrangements which, if defeated, bring those who enabled those arrangements within scope for penalties

• describe how the amount of any penalty is calculated and assessed and provide a right of appeal against that assessment

Legislation will also be introduced in Finance Bill 2017 to clarify what constitutes the taking of reasonable care in relation to the application of the existing penalty regime in Schedule 24 to FA2007, in relation to inaccuracies arising in a person’s tax return from the defeat of tax avoidance arrangements they have entered into.

The new legislation will change the regime to presume that a person has been careless unless they can prove they have taken reasonable care and describe circumstances and events which are explicitly stated not to represent taking reasonable care in cases of defeated avoidance.

Examples of such circumstances and events include (but are not limited to):

• advice addressed to a third party or without reference to the taxpayer’s specific circumstances and use of the scheme

• advice commissioned or funded by a party with a direct financial interest in selling the scheme or not provided by a disinterested party

• material produced by parties without the relevant tax or legal expertise/experience to advise on complicated tax avoidance arrangements, typically this would be the sort of material used to market the arrangements and would not amount to advice setting out the legal options necessary for a potential user to assess the efficacy of the scheme or the risks involved.271

270 “Tax avoidance penalties”, Waiting for Godot blog, 17 August 2016 271 Strengthening sanctions and deterrents for tax avoidance; TIIN, 5 December 2016

84 Tax avoidance: recent developments

In its summary of the responses it had received, HMRC noted, there had been “strong support for the [proposal for penalties on enablers] from some … but there were also strongly expressed concerns from others that, if inappropriately targeted, the measure could inhibit genuine commercial arrangements and impartial advice.”272 In the light of this the Government announced that it would amend its approach to achieve “the original aim of tackling the enablers of tax avoidance schemes while the vast majority of professionals providing advice to their clients on genuine commercial arrangements have nothing to fear”:

While there was general agreement that the proposed description of enablers and all relevant classes or groups of persons were captured, there was some concern that there should be a clear distinction in applying any new sanction between tax planning, tax avoidance and tax evasion.

There was also concern that the proposed safeguards would not go far enough. This was particularly pertinent to those who are acting within their professional capacity (and already subject to other professional conduct regulations) and merely giving ‘second opinion’ advice, or those whose advice/service may unwittingly be caught up with wider avoidance arrangements. A number of respondents commented that the rules would not capture those who could easily re-establish their business/services offshore and so would not capture the “persistent minority” the measure is targeted at ...

Government response The government noted the views of everyone who responded. The measure will cover all those in the avoidance supply chain. The regime will describe those who enable avoidance and distinguish them from those who simply provide second opinion advice to clients on arrangements designed or enabled by others. The government also recognises that the definition of an enabler needs to be well-targeted to ensure those who are unwittingly within the meaning of enabler, or whose advice about arrangements included a clear recommendation that they should not be proceeded with, are excluded and will provide for this in the draft legislation.

The consultation suggested bringing an enabler within scope for a penalty when the tax avoidance they had enabled had been defeated, and not to link an enabler’s penalty with the final penalty position of the user. Most respondents considered the scope was appropriate in relation to aggressive avoidance, but felt there was not enough emphasis to distinguish evasion from avoidance. Responses also suggested more clarity was needed in relation to key terms, particularly “defeated arrangements”, and the type of activities that would place a person firmly within scope as an enabler of tax avoidance. Some respondents held strong views that the enabler ought only to face a penalty in circumstances when the scheme user would also do so. Many of those responding also sought clarity regarding when the policy would apply from.

Government response The government noted these views. The rules will be prospective. They will apply to actions taken by the enabler on or after Royal Assent to Finance Bill 2017, so that a

272 Strengthening Tax Avoidance Sanctions and Deterrents - Summary of responses, 5

December 2016 para 1.7-8

85 Commons Library Briefing, 14 December 2017

person enabling avoidance will be fully aware that they are in scope of a penalty. The draft legislation will set out the arrangements which, if defeated, bring an enabler within scope for a penalty.

The government does not consider that an enabler should face a penalty in relation to defeated avoidance only where the user does so. The conditions for a penalty to apply to the user are, necessarily, different from those for enablers. It may well be that a user, having been able to show that they had taken reasonable care in making their tax return, or being subject to one of the other safeguards in that regime, would not face a penalty, but where it may be appropriate for an enabler to face a penalty by reference to their actions as an enabler of those defeated arrangements.273

The proposed changes to the ‘enablers’ regime were welcomed by stakeholders. In a press notice CIOT tax policy director John Cullinane gave his reaction:

“It is pleasing to see that after a wide ranging consultation with the CIOT and other stakeholders, the government has taken on board our concerns and recognises that the vast majority of tax professionals providing advice on commercial arrangements are in no sense ‘enabling tax avoidance’ but are simply helping their clients to understand as well as comply with their tax obligations.

“It is crucial that they can continue to do so without being exposed to this new penalty.

“The moves outlined in today’s draft legislation present a measured and balanced approach towards tackling those who enable tax avoidance while ensuring that the interests of the overwhelming majority of agents who provide genuine professional advice to their clients are protected.

“By defining ‘abusive tax arrangements’ around the principles of the General Anti-Abuse Rule (GAAR) – which asks whether entering into or carrying out the tax arrangements could have been a reasonable course of action – the proposals are better focussed on the small minority of advisers who profit from devising, marketing and facilitating aggressive tax avoidance schemes.274

Writing in the Tax Journal on the draft provisions, Richard Woolich and Geoffrey Tack, both at DLA Piper, concluded, “it is clear that the Government has listened and advisers are now much less likely to fall foul of these rules, giving bona fide advice”:

The government was clearly impressed by the extent of responses and has published a lengthy list of respondents. There are some impressive names in the list, from well-known law firms and accountancy practices to the Law Society and the Bar Council.

One suspects that, with respondents of such calibre, the government was really made to think about the pending penalty regime against enablers and has listened to the comments about its original proposals in the consultation exercise. This process may be a lesson for future opposition to unwelcome proposed

273 op.cit. para 1.11, paras 2.3-7/ 274 CIOT press release, Professional Body welcomes increased focus of government

action on ‘enablers’ of tax avoidance, 5 December 2016. See also, “Tax avoiders remain in HMRC’s line of fire”, Financial Times, 10 December 2016.

86 Tax avoidance: recent developments

legislation. Yet, essentially, the government will persevere with its crackdown on the production and selling of abusive tax avoidance schemes and target in the Finance Bill 2017 those who make profit from giving aggressive tax advice which is shown to be wrong.275

In the 2017 Budget the Government confirmed it would introduce both measures, with certain amendments to the legislation as drafted:

Following consultation, the enablers legislation has been revised to provide further detail of when and how the General Anti Abuse Rule (GAAR) Advisory Panel will consider enabler cases. Further changes have been made to apply the enablers regime to arrangements that seek to avoid NICs, to make consequential changes to the Promoters of Tax Avoidance Scheme legislation and to provide further detail regarding when enablers will be named. Minor amendments have also been made to further improve the clarity and targeting of both the legislation for enablers and reasonable care.

The changes relating to reasonable care come into effect at Royal Assent and apply to inaccuracies in documents relating to tax periods which begin on or after 6 April 2017. The penalty for enablers will apply prospectively to enabling activity after Royal Assent.276

It is estimated that these changes will raise £50m in 2018/19, falling to £15-£20m a year in later years.277

‘DOTAS’: indirect taxes – reform and extension of scope Budget 2016 announced it would “consult during the summer on updating the VAT Disclosure of Schemes Regime (VADR), including by extending coverage to other indirect taxes and by alignment with the Disclosure of Tax Avoidance Schemes regime.”278 HMRC launched a consultation the following month; as this explained, it was HMRC’s view that the disclosure regime as it applied to VAT was “no longer fulfilling its policy intentions”:

VADR has been an important component of HMRC’s fight against VAT avoidance, allowing HMRC to identify avoidance patterns and risks at an early stage and plan their responses accordingly. A large number of disclosures were made in the early years of the regime, but, unlike DOTAS, VADR has not been significantly updated since it was introduced. The number of disclosures has declined, the regime has not kept pace with changes in the VAT avoidance landscape and it is no longer fulfilling its policy intentions. It is important that it is reviewed to make sure it operates effectively to protect the Exchequer and to discourage the avoidance of VAT.

VADR currently requires disclosure to be made by those who use an avoidance scheme. This is in contrast to DOTAS where, for the most part, it is promoters of tax avoidance schemes who are required to disclose them to HMRC. Those promoters then have

275 “Finance Bill 2017: Enablers of defeated avoidance schemes and penalties”, Tax

Journal, 19 January 2017. See also, “Turning up the heat”, Accountancy, April 2017 276 HMT, Overview of Tax Legislation & Rates, March 2017 para 1.41 277 Spring Budget 2017, HC 1025, March 2017 (Table 2.1-item 22). 278 Budget 2016, HC 901, March 2016, para 2.145

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ongoing obligations to provide information to both users of their schemes and to HMRC. And users have to include details of disclosed schemes in their tax returns.279

In December HMRC published a summary of responses it had received. In general there was support for the principle for reforming VADR:

While there was general agreement from respondents with the proposed changes to VADR, a small number of respondents considered that the government had not made a sufficiently strong case for change. One was concerned that the proposed revisions would increase administrative burdens rather than decrease them. Only one respondent suggested an alternative approach, to simply require earlier disclosure under the existing structure.

Government response The government is grateful for the views expressed but does not accept that the proposed revised structure for VADR would result in any significant increase in burdens for customers. In principle, the change should reduce burdens as the focus for compliance shifts from all taxpayers to a much smaller number of promoters. However, the government will continue to ensure any administrative load is proportionate when drafting the regulations. …

Respondents … agreed that the DOTAS rules on who is a promoter and when a scheme user has to disclose an avoidance scheme provided a suitable model to apply in VADR. One respondent suggested that, due to the nature of VAT avoidance, most schemes do not involve a promoter and so the relevance of the question is moot. Some respondents stated that due to the often very short timescales in VAT between an intermediary being consulted about arrangements and the relevant transactions taking place, the time allowed for promoters to notify HMRC about notifiable proposals or arrangements should be longer than provided for under DOTAS.

Government response The government is grateful for these views and considers the DOTAS rules on who is a promoter and when a scheme user has to disclose an avoidance scheme can be appropriately applied to VADR.280

Respondents were less convinced of the need to extend VADR to other indirect taxes, though the Government took the view that this was an important measure to improve HMRC’s assessment of the scale of avoidance across the tax system:

Views were mixed about whether the scope of VADR should be extended to include other indirect taxes. A narrow majority were in favour or could see no reason to object to the proposal, but others considered such a move would impose unnecessary burdens on taxpayers for little discernible benefit to HMRC.

Government response It is currently difficult for HMRC to form a clear view of the risks of avoidance in these taxes and the government therefore believes it is important that they be brought within the scope of VADR. There will be no extra burden on those who do not use reportable tax arrangements and so the

279 Strengthening the Tax Avoidance Disclosure Regimes for Indirect Taxes and

Inheritance Tax, April 2016 para 1.8-9 280 Strengthening the Tax Avoidance Disclosure Regimes for Indirect Taxes and

Inheritance Tax: Summary of responses, 5 December 2016 para 2.2-6

88 Tax avoidance: recent developments

government does not believe this extension would be disproportionate.281

At this time HMRC published draft legislation and an impact assessment of reforming VADR; the latter explained how the disclosure regime would be reformed:

This measure replaces the VAT regime for disclosure of avoidance, which currently only covers VAT. It moves the responsibility for disclosing VAT avoidance schemes to HM Revenue and Customs (HMRC) from scheme users to scheme promoters.

It also widens the scope of the disclosure regime to include all indirect taxes.

The measure will require promoters of indirect tax avoidance schemes to provide details of schemes at the earliest of: the date the promoter first makes a firm approach to another person about the proposed scheme; the date the proposals are first made available for implementation by another; or the date the promoter first becomes aware of any transaction which forms part of the scheme. In some circumstances where arrangements or proposed arrangements are substantially the same as arrangements already notified to HMRC, the promoter will not be required to make a further disclosure.

If a person uses a tax avoidance scheme the promoter of which does not belong in the UK, or there is no promoter of the scheme, the user of the scheme will be required to disclose it to HMRC.

When a promoter notifies HMRC of details of a scheme, HMRC will issue a reference number and the promoter must notify their clients of this number. The promoter must provide HMRC with certain details about these clients; those details will be contained in Regulations. The client will be required to notify HMRC of their use of a scheme, and the scheme number.282

It is not anticipated that this measure will have an Exchequer impact.

In the 2017 Budget the Government confirmed it would proceed with these changes, to take effect from 1 September 2017. “Details of the tests to apply to arrangements to determine if they should be disclosed to HMRC will be contained in regulations.”283

Offshore evasion: requirement to correct In the 2016 Budget the Government announced that as part of the Finance Bill 2017 it would “introduce a new legal requirement to correct past offshore non-compliance within a defined period of time with new sanctions for those who fail to do so.”284 HMRC published a consultation document in August which set out the rationale for this measure:

The introduction of a new requirement to correct (RTC) and tougher penalties for a failure to correct (FTC) aims to send a strong message that there is a step change in HMRC’s approach to offshore tax compliance. The measure will introduce an obligation for taxpayers to put past affairs in order and strongly

281 op.cit. para 3.2-3 282 Strengthening the Indirect Tax Avoidance Disclosure Regime: TIIN, 5 December 2016 283 HMT, Overview of Tax Legislation & Rates, March 2017 para 1.38 284 Budget 2016, HC 901, March 2016, para 2.203

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penalise those who do not meet this obligation. In doing so, the measure will drive taxpayers with offshore interests to review their affairs to either:

• assure themselves that their offshore interests have been treated correctly for tax purposes, or

• to identify the incorrect tax treatment and put it right by notifying HMRC to ensure the appropriate tax, interest and penalties can be charged.

We believe the RTC proposal and increased sanctions for failing to correct set out in this document will provide a strong incentive for taxpayers to review their offshore affairs and come forward to put them in order before HMRC receives the full Common Reporting Standard (CRS) data.285

Those who do not put their affairs in order will face the tougher failure to correct sanctions for any existing non-compliance and could also face … significantly tougher sanctions … for any offences in subsequent years. The RTC period will end on 30 September 2018 by which point HMRC will be receiving CRS data from all those committed, which will allow it to identify and pursue those who have not come forward to regularise their affairs.

HMRC has provided a number of opportunities for taxpayers to disclose offshore issues in the past. These were appropriate for periods when HMRC had relatively little data on UK taxpayers’ offshore interests and they were successful with over 59,000 people putting their affairs in order. These activities and other offshore work have raised over £2.9bn. In the future HMRC will receive significantly more data and any taxpayers who have not taken advantage of previous opportunities to disclose and do not comply with the new RTC should face much stiffer penalties. The RTC will introduce much tougher penalties and will also provide a strong legal underpinning to drive taxpayers to regularise their offshore affairs.286

In December the Government published details of the responses it had received; there had been broad support for this initiative, though many stakeholders had “commented on the need for a significant communications campaign to ensure all taxpayers are aware of the requirement”:

Stakeholders and respondents broadly supported the initiative, its scope and definition and many said they would like to see a single and simplified set of sanctions for tackling offshore tax evasion. Many stakeholders commented on the need for a significant communications campaign to ensure all taxpayers are aware of the requirement, particularly those where any non-compliance has not been deliberate. This is seen as an important part of encouraging taxpayers to come forward where they may not associate their activities with evasion ...

285 [As noted, the CRS is an agreement between over 100 countries for the automatic

exchange of taxpayer information. As the consultation paper noted, these exchanges will start in 2017 for 54 early adopters, with all other participant countries exchanging by 2018.]

286 Tackling offshore tax evasion: a requirement to correct, August 2016 para 3.1-3. See also, HMRC press notice, Tough new sanctions announced for offshore tax evaders, 24 August 2016

90 Tax avoidance: recent developments

Many respondents welcomed a failure to correct penalty model that simplifies the currently complex application of offshore penalties. However many respondents wanted to ensure sanctions retain some flexibility with recognition of taxpayer behaviour and co-operation. Some respondents commented on the need for any toughened sanctions to retain sufficient incentive for taxpayers to come forward and disclose …

Government response … The government is determined to ensure the toughest sanctions are there for those that evade taxes, whilst providing a period for taxpayers to review their offshore interests and come forward to clear up any past issues and therefore avoid the possibility of the heavier penalties.

The requirement will also include reasonable excuse provisions that ensure that, where the taxpayer has good reason for not having corrected, they will not face the new higher penalty. We are aiming to provide a clear and unambiguous message that acting early is vital and believe the proposed structure of the RTC and associated sanctions do that. The incentives to come forward and correct are clear.

A number of respondents also raised the issue of the incentive for taxpayers to come forward following the requirement to correct period, stating that the failure to correct penalty would not provide any incentive to disclosure if a taxpayer had not corrected during the window. However the penalty range proposed provides this incentive.

If taxpayers come forward after the correction period, the starting point for the penalty would be 200%, but disclosure and cooperation mean it could be halved to a minimum penalty of 100% of the tax that has not been corrected. The government will also ensure that the criteria for reducing the penalty from 200% will take account of whether the person comes forward voluntarily and the seriousness of the offence. A potential reduction in penalties from a maximum of 200% to 100% is a significant incentive.287

The Government published draft legislation and an impact assessment of this new legal requirement, which explained how this provision would work in practice:

Taxpayers within scope of the RTC will be those who have not declared the right amount of UK tax in respect of offshore interests on or before 5 April 2017. These will be taxpayers who have done one of the following in respect of offshore tax:

• failed to notify chargeability

• failed to make and deliver a return

• delivered an inaccurate document (for example, a return) to HMRC

In addition the failure must relate to Income Tax, Inheritance Tax or Capital Gains Tax and not have been corrected on or before 5 April 2017.

Taxpayers within scope of the RTC are required to correct that position on or before 30 September 2018 by providing the appropriate information to HMRC. For example, a taxpayer who delivered an inaccurate return to HMRC by omitting a source of

287 Tackling offshore tax evasion: Requirement to Correct - Summary of Responses, 5

December 2016 para 2.3-11

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offshore income will be required to provide sufficient information to HMRC to allow that inaccuracy to be corrected by HMRC assessing the under-declared tax.

Where a taxpayer fails to correct the offshore tax non-compliance on or before 30 September 2018 the legislation will introduce a new sanctions for that failure. The new sanctions:

• are a tax geared penalty of between 100% and 200% of the tax not corrected - penalties will be reduced within this range to reflect the taxpayer’s cooperation with HMRC, including whether they came forward unprompted to tell HMRC of their failure

• are an asset based penalty of up to 10% of the value of the relevant asset would apply in the most serious cases, and involved over £25,000 in any tax year

• will have the ability for HMRC to name those who have failed to correct in the most serious cases, and where over £25,000 tax per investigation is involved

• will adopt the enhanced penalty for asset moves of 50% of the amount of the standard penalty, which would apply if HMRC could show that assets or funds had been moved to attempt to avoid the requirement to correct

• will have no penalty where the taxpayer has a reasonable excuse for failing to correct the position. HMRC will also have the option of, exceptionally, charging the existing penalties instead if that is appropriate.288

HMRC’s impact assessment also noted that taxpayers affected by the RTC were likely to be of above average wealth, though “there is no data to identify the size of this group.”

In the 2017 Budget the Government confirmed that it would introduce this measure, subject to certain amendments to the legislation as originally drafted:

This new “requirement to correct” is expected to come into force when the Finance Bill 2017 receives Royal Assent and will apply to all taxpayers with offshore interests who have not complied with their UK tax obligations as at 5 April 2017 … The draft legislation will be revised to ensure the reasonable excuse provision does not apply where advice is received from an adviser who is not independent. This reflects the government's response on this point in [its response to the consultation] published on 5 December 2016.289

It is estimated this measure will raise £10m in 2017/18, rising to £70m by 2021/22.290

VAT: penalty charges in fraud cases In the Budget 2016 the Government announced it would consult on a new penalty for participating in VAT fraud, and subject to this

288 Tackling offshore tax evasion: requirement to correct: TIIN, 5 December 2016. See

also, HMRC press notice, New Year brings in new penalties for enablers of offshore tax evasion, 1 January 2017.

289 HMT, Overview of Tax Legislation & Rates, March 2017 para 1.42 290 Autumn Statement, Cm 9362, November 2016 para 4.53, Table 2.1 – item 28

92 Tax avoidance: recent developments

consultation “the intention is to legislate in Finance Bill 2017.”291 HMRC’s consultation document was published in September; as this explained, at present, when issuing a penalty for a business’ failure to properly account for VAT, HMRC has to decide if the business’ failure is ‘deliberate’ or ‘careless’, a factor that does not apply when charging penalties for serious VAT fraud:

The knowledge principle and Schedule 24 penalties It is settled case law292 that businesses are denied the right to reclaim VAT as input tax when they know or should have known that their transactions are connected with VAT fraud. Such businesses are regarded in law as participants in the fraud. This approach is often referred to as the knowledge principle … HMRC applies this principle successfully to tackle MTIC (Missing Trader Intra-Community) fraud and to a lesser extent other VAT frauds.

When applying the knowledge principle to individual cases, it is difficult for HMRC to separate evidence of ‘knowledge’ from evidence that the business ‘should have known’ of a connection with VAT fraud. So in most instances we issue a decision covering both eventualities.

However the relevant civil penalties legislation (Schedule 24 of FA2007) operates on a different basis. This requires HMRC to decide, when issuing the penalty, whether the business’s non-compliance is “deliberate” or “careless”. This determines the level of the penalty. HMRC cannot choose a combined careless and deliberate penalty: we must choose one or the other.

This misalignment between these regimes causes practical difficulties. A ’deliberate’ penalty implies we think the customer has actual knowledge, whilst a ‘careless’ penalty implies we think the customer ‘should have known’ of the connection with fraud.

Having to make this distinction in behaviour in order to issue a penalty affects HMRC’s ability to defend the underlying decision on the primary fraud issue against any appeal.293

This misalignment has created practical difficulties for HMRC in tackling VAT fraud:

HMRC’s current approach – delay issuing the penalty

To address this, our current practice is to wait until after the VAT case has been finalised, including any litigation, before issuing the Schedule 24 penalty. This approach causes two problems:

• Firstly, it opens up the opportunity of a second round of litigation, this time against the penalty. Any challenge to the behavioural aspect of the penalty is effectively a relitigation of the findings in the underlying VAT appeal. This adds to the costs for HMRC, appellants and the courts. ‘Knowledge principle’ cases are already costly in time and money due to the volume of evidence required.

• Secondly, the delay in issuing the penalty increases the risk that, by the time the penalty is issued, it will be ineffective.

291 Budget 2016, HC 901, March 2016, para 2.145 292 see Axel Kittel v Belgian State v Recolta Recycling SPRL (cases C-439/04 and

C-440/04) 293 Penalty for participating in VAT fraud, September 2016 para 2.5-10

93 Commons Library Briefing, 14 December 2017

This is because the monies to pay the penalty may have been dispersed by those involved in the fraud.

Penalty for participating in VAT fraud

To address the issue we are proposing a new penalty that aligns with the knowledge principle. The key design features are a penalty that:

• can be issued at the same time as the knowledge principle decision in the underlying VAT fraud case; and

• does not rely on the distinction between whether a business or individual knew or should have known of the connection with VAT fraud.294

In its summary of responses to the consultation, published in December, HMRC stated that, “a majority of respondents were in favour of introducing a penalty for participating in VAT fraud at a ratio of around three to one” though “there were different views about the design options with no clear preference.” Further to this,

Most respondents favoured applying the new penalty to company officers whose companies participated in VAT fraud, although some wished to restrict this application to circumstances where the company officer could reasonably be held culpable. Others wished to restrict the application of the penalty to company officers to cases where they had actual knowledge of fraud. Most respondents favoured naming businesses that knew or should have known that their transactions were connected with VAT fraud.295

In the light of these responses, the Government announced it would introduce this new penalty:

Having carefully considered the responses to this consultation, the government has decided to proceed with the introduction of a penalty for participating in VAT fraud. It considers that there is a strong case for having a new penalty aligned with the knowledge principle. This will help streamline cases and strengthen HMRC’s ability to tackle serious VAT fraud. The government also recognises the deterrent benefits of a strengthened penalty regime in this area.

The government recognises the concerns about the application of the penalty to cases where participants “should have known” that the transactions were connected with fraud. This concept is quite narrowly defined in case law. Some of the respondents, perhaps understandably, were unaware of the scope of the current knowledge principle and how this term has been defined by the courts. HMRC will be applying the penalty in the context of the existing case law and want to reassure respondents that the new penalty cannot apply to cases where businesses could not have known that their transactions were connected with fraud.

A few respondents suggested, as an alternative, that the existing error penalty regime could be run in the alternative (i.e. deliberate or careless) as a way of solving the misalignment with the knowledge principle. HMRC looked into this but came to the conclusion that it is not a practical policy solution or legally

294 op.cit. para 2.11-12 295 Penalty for participating in VAT fraud: summary of responses, 5 December 2016

para 2.1-3

94 Tax avoidance: recent developments

possible. It would not solve the current problem of misalignment between the two regimes. HMRC would still be required to state its preferred case for the error penalty, either at the point of issuing the penalty (in order to notify the business of the rate of the penalty), or alternatively once the case reached court (as the appellant would need to know the case they had to answer).296

As with the other tax avoidance and evasion initiatives announced in Budget 2016, draft legislation and an impact assessment of this measure was published at the time; the latter stated that this change is expected to have a negligible impact on the Exchequer.297

In Spring Budget 2017 the Government confirmed it would proceed with this measure: “following consultation on the draft legislation some minor changes have been made to improve the clarity of the measure and also to limit the naming of a company officer to instances where the amount of tax due exceeds £25,000. The new penalty will take effect once the Finance Bill receives Royal Assent.”298

Promoters of Tax Avoidance Schemes (POTAS) Finally, in Spring Budget 2017 the Government announced it would introduce legislation to “ensure that promoters of tax avoidance schemes cannot circumvent the POTAS regime by re-organising their business by either sharing control of a promoting business, or putting a person or persons between themselves and the promoting business. This will ensure that HMRC can apply the POTAS regime as intended.”299 Further details are given in a tax information & impact note, which states this measure is not expected to have additional Exchequer impact.300

Finance Bill 2017 Following the Prime Minister's announcement, on 18 April, of the Government's intention to call a General Election on 8 June, the House completed all of the remaining stages of the Bill in the Commons on Tuesday 25 April. With cross-party support the Government removed a series of clauses from the Bill, with the intention of legislating for these at the start of the new Parliament. On this occasion Treasury Minister Jane Ellison said the following:

The Bill is progressing on the basis of consensus and therefore, at the request of the Opposition, we are not proceeding with a number of clauses. However, there has been no policy change. These provisions will make a significant contribution to the public finances, and the Government will legislate for the remaining provisions at the earliest opportunity, at the start of the new Parliament.301

296 op.cit. para 3.2-4 297 VAT: penalty for participating in VAT fraud: TIIN, 5 December 2016 298 HMT, Overview of Tax Legislation & Rates, March 2017 para 1.39 299 Spring Budget 2017, HC 1025, March 2017 para 3.43 300 Promoters of Tax Avoidance Schemes: associated and successor entities rules: TIIN, 8

March 2017. Budget 2013 estimated the POTAS regime would raise about £35m a year (HC 1033, March 2013 p65, Table 2.1 – item 54).

301 HC Deb 25 April 2017 c1013

95 Commons Library Briefing, 14 December 2017

As part of this measure, all of the clauses in the Bill relating to the five avoidance and evasion initiatives discussed above were removed from the Bill, except the provision making amendments to the existing POTAS legislation for associated and successor entities rules.302 On 13 July the Government confirmed, in a written statement, that a Finance Bill would be introduced to this effect “as soon as possible after the summer recess.”303 In turn this second Finance Bill was introduced on 6 September, including these clauses, which were agreed without amendment.304

5.4 The Paradise Papers & Autumn Budget 2017

On 5 November the International Consortium of Investigative Journalists started to publish details and commentary on material it had obtained from two offshore service providers and 19 tax havens' company registries, which it called the ‘Paradise Papers’. In turn details of the financial holdings of both wealthy individuals and multinational enterprises from this leak were reported by the BBC, the Guardian, and other media organisations, reiterating public concerns as to the scale of tax avoidance and evasion, particularly by high net-worth individuals, and the actions of offshore jurisdictions to facilitate these activities.

In evidence to the Public Accounts Committee on 6 November, Jon Thompson (HMRC’s chief executive) noted that the ‘Paradise Papers’ cache was “different from the Panama papers in 2016, which were published on a website in an unstructured way and you could inquire through those papers. In this particular situation, the papers have not been made publicly available; they are only available to those within the International Consortium of Investigative Journalists.”305 He explained that HMRC had requested information on the material held by the ICIJ but without receiving a response – a point also made by the Financial Secretary Mel Stride a few days later.306 In answer to a written question at this time the Minister said the following:

HMRC does not have power to acquire journalistic material held overseas and, therefore, is unable to obtain the information held by the ICIJ known as the Paradise Papers. However, HMRC has requested access to the material that has been provided by the International Consortium of Investigative Journalists to the BBC and The Guardian. HMRC has also encouraged these organisations to pass on any information that points to wrongdoing and are prepared to look at every allegation in full.307

302 Committee of the Whole House proceedings, 25 April 2017. See, Chartered Institute

of Taxation press notice, Tax advisers welcome sensible, pragmatic approach to Finance Bill, 25 April 2017. This provision forms s24 of the Finance Act 2017.

303 Finance Bill: Written Statement, HCWS47, 13 July 2017 304 Public Bill Committee, Fifth Sitting, 24 October 2017 cc140-4. These provisions now

form ss 64-68 of Finance (No.2) Act 2017. See also, CIOT press notice, Major new tax penalties in force, 17 November 2017.

305 Oral evidence: 2016-17 HMRC Standard Report, HC 456, 6 November 2017 Q6 306 HC Deb 14 November 2017 cc168-9 307 PQ113170, 20 November 2017

96 Tax avoidance: recent developments

Turning back to his evidence session with the PAC, Mr Thompson said a little on HMRC’s response to the Paradise Papers publication:

Q17 Chair: In terms of your legal powers, how quickly could you secure any of that data? Give us a range if you cannot give an exact timetable.

Jon Thompson: The tax treaties and exchange of information agreements that we have with all Crown dependencies—the overseas treaties—allow us to inquire about specific taxpayers. At this point, we are trying to work off what is in the public domain and then work from that in terms of making specific inquiries. That is not the same as saying that there is a bulk set of data that is apparently available. Obviously we would like that, but we have to do it by individual allegation, taxpayer by taxpayer, in order to get that information.

Q18 Chair: And you are prepared to look at every allegation in full.

Jon Thompson: We certainly are. In the same way we did with Panama, we will look at every case of tax evasion very seriously. We have secured significant revenues from those trying to hide overseas—more than £2.8 billion over the last few years ...

Q19 Chair: With the Panama papers, we were frustrated—I suspect you were, too—about how long it took to dig through that information. How quickly could we see results if you had all that information on the Paradise papers?

Jon Thompson: I think it depends on whether we conclude early on that the acts are civil or criminal. With criminal acts, it takes quite a bit longer to prepare a case. The Panama papers were published on 4 April 2016. There are currently 66 criminal or civil investigations; four people have been arrested and a further six have been interviewed under caution. Those cases continue to be live. We would expect an additional tax yield of £100 million from the Panama papers. That gives you some sense of how long quite complicated tax cases take to bring to some sort of fruition.

Q20 Chair: That is quite encouraging news, because when we have asked about the Panama papers before, we have got very little information. Are you better prepared now for dealing with these papers than HMRC was when the Panama papers were leaked?

Jon Thompson: I would say that we are, in one significant respect: over the last 18 months or so we have significantly improved the way in which we can ingest data from other sources. There is now a director-led speciality function within our customer compliance group: the director of risk and intelligence services. We have created a dedicated function that can ingest data from as many sources as we can get them and put that data together around individual taxpayers, so that our interventions are risk-based.308

Mr Thompson and his colleague Jim Harra (Director General, Customer Strategy and Tax Design), also acknowledged that HMRC had only been able to obtain access to the Panama Papers by making a payment for this information:

308 op.cit., Qs 17-20

97 Commons Library Briefing, 14 December 2017

Q47 Chair: May I just ask, with the Panama papers, did you have to make any payment to receive any information, or was it passed over to you freely?

Jon Thompson: It was not passed to us freely.

Q48 Chair: You had to pay a fee?

Jon Thompson: We obtained it. I need to be careful about what the law limits me to say. We obtained it, but not from the ICIJ.

Jim Harra: It was part of an international effort to obtain that data.309

The publication of this material was debated, briefly, the same day, in response to an Urgent Question tabled by the Shadow Chancellor, John McDonnell,310 and then a few days later, following a successful application by Dame Margaret Hodge for an emergency debate on the issue.311 On this occasion Dame Margaret highlighted three specific areas where, in her view, the Government had failed to take effective action: in penalising tax advisers, in requiring overseas territories to publicise beneficial ownership, and in resourcing HMRC:

The Treasury, and other Ministers and Departments, listen only to a very small and exclusive group of tax professionals when making decisions on tax policy … Curtailing the influence of tax professionals on tax policy is essential, and making the advisers accountable for the schemes that they invent and market is central to the campaign to destroy tax avoidance. The measures in the Finance Act 2017 represent one small step in the right direction of holding advisers to account, but the small print suggests that very few, if any, will be caught by the legislation. The definitions are too narrow, and the penalties too weak …

We should lead by example. We should demonstrate that transparency can and does change behaviour. We should compel our overseas territories and Crown dependencies to publish public registers. In the past, a Conservative Government used their powers to outlaw capital punishment in our Crown dependencies and overseas territories, and a Labour Government used the same powers to outlaw discrimination against gay people. Today we should work together to outlaw the secrecy of those jurisdictions, which leads to such massive tax injustices …

We can and should properly resource HMRC now so that it has the capability to pursue all who seek to avoid paying tax, not just the small businesses who form an easy target that can be hounded with little effort. Every £1 invested in HMRC enforcement yields £97 in additional tax revenues. It is a complete no-brainer that we should be strengthening HMRC and reversing some of the cuts.312

In his response the Financial Secretary made some comments on each of these matters:

We have brought in 75 measures since 2010 to clamp down on these practices. A further 35 will come in from 2015, raising £18.5 billion by 2020-21. One of the problems is that we have

309 Op.cit. Qs 47-48 310 HC Deb 6 November 2017 c1195-1208 311 HC Deb 13 November 2017 cc55-6. This procedure is established under the rules of

Standing Order No.24; details are on the Parliament site. 312 HC Deb 14 November 2017 cc163-4

98 Tax avoidance: recent developments

been so active in bringing in so many measures that, unfortunately, not all of them have been noticed. In last week’s debate, the right hon. Member for Barking raised the issue of taking action against those who promote tax avoidance schemes … She only to look at the Finance Bill … in which she will find measures to deal with precisely what she was urging us to take action on last week …

We all agree that we need to look closely at what is happening in the international sphere. On that, this Government have a record of which we can be proud. Through the OECD, we have been in the vanguard of the base erosion and profit shifting project. We have worked closely with the Crown dependencies and overseas territories.

We have brought in a diverted profits tax, which will raise £1.3 billion by 2019, and common reporting standards to ensure that information is exchanged in relation to around 100 countries. We have introduced a directory of beneficial ownership that is accessible by HMRC, the authority that needs to have that information. All this has happened in the last couple of years, and it is a game changer. Many of the issues arising from the Paradise papers go back very many years, but these measures are in place right now …

Some £1.8 billion of additional money has been invested in HMRC since 2010, of which £800 million will relate to the period after 2015, bringing in £7.2 billion by 2020-21. We will also be trebling the number of investigations of the wealthy to ensure they are paying their appropriate level of tax, as a direct consequence of all that additional investment.313

Writing on the Paradise Papers in Taxation, Fiona Fernie (Blick Rothenberg) argued that the most recent statutory provisions represented a change in approach by HMRC, from using ‘carrots’, to encourage individuals to voluntarily disclose irregularities, to “new tools and ‘sticks’ in the form of increasingly punitive measures … against those evading (or serially avoiding) UK tax.”314

On this theme the IFS’ Tax Law Review Committee published a review of the recent changes made to HMRC powers, in which it raised concerns as to the effectiveness of the safeguards provided for taxpayers.315 The report paid particular attention to two issues: HMRC’s practice in issuing accelerated payment notices (APNs) …

In the case of the APNs, the position is ameliorated by the fact that the taxpayer can recover all the money paid (plus interest) if successful in appealing the substantive tax issue. Although no safeguards were introduced in the APN legislation to limit the application of the powers where bankruptcy of the taxpayer would result, the courts have imposed such a restriction. With this restriction in place, the APNs generally lead to a process and cash-flow change so that taxpayers must expect to pay disputed tax at an early stage of a tax dispute, rather than after the matter has been litigated, but the APNs do not by themselves deter taxpayers

313 HC Deb 14 November 2017 c167, c168, cc165-6 314 “Paradise lost”, Taxation, 16 November 2017 315 IFS press notice, The implications of recent additions to HMRC powers and the

shifting balance in the relationship with taxpayers, 20 November 2017. See also, “Fears raised over expansion of powers for the taxman”, Financial Times, 13 December 2017

99 Commons Library Briefing, 14 December 2017

from disputing HMRC’s assessment of a tax liability. If the taxpayer served with an APN is successful in disputing the underlying tax, they get the tax paid back with interest. However, taxpayers can be, and indeed have been, served with APNs where HMRC has incorrectly applied the APN rules. The taxpayer must then seek to persuade HMRC that an error has occurred or incur the cost and procedural demands of seeking judicial review because there is no right of appeal to the tribunal against HMRC’s procedural error.

… and the penalties that HMRC may charge in relation to both follower notices (FN) and the application of the General Ant-Abuse Rule:

A potentially more serious problem arises with the FN penalty and GAAR penalty provisions (the ‘Penalty Powers’). They make the financial risks of appeal so great that even taxpayers with strong cases may not be prepared to risk going to court. Those powers, which have been introduced expressly to encourage taxpayers to settle disputes with HMRC on the meaning and application of tax law – in other words, to deter taxpayers from seeking an independent review by the tribunals and courts as to the meaning and application of tax law – have significantly increased the financial risks to taxpayers of continuing to dispute with HMRC the tax due in their cases.

The taxpayer does not just pay over the disputed tax but faces the imposition of a 50 per cent or 60 per cent penalty if they continue to dispute the matter and lose in the courts. Concern has been expressed by others, and is shared by this paper, that the Penalty Powers have effectively given HMRC quasi-judicial powers to determine what tax law means and how it applies in particular cases. The financial risks to taxpayers of seeking independent adjudication of their cases through the tribunals and courts are so high when some of the Penalty Powers are exercised that few taxpayers will wish to dispute the tax claimed by HMRC, even when they have a strong case deserving judicial consideration. In that situation, taxpayers are effectively denied access to justice.316

The Chancellor presented the Government’s first Autumn Budget on 22 November, and although tax avoidance was not a major theme to the speech, nor in press coverage of the Budget, as with earlier years the Budget report set out a list of individual measures to mitigate both avoidance and evasion.317 The report also gave details of an increase in HMRC’s budget:

3.88 The government is investing a further £155 million in additional resources and new technology for HMRC.

This investment is forecast to help bring in £2.3 billion of additional tax revenues by allowing HMRC to:

• transform their approach to tackling the hidden economy through new technology

• further tackle those who are engaging in marketed tax avoidance schemes

316 Tracey Bowler, The implications of recent additions to HMRC powers and the

shifting balance in the relationship with taxpayers, TLRC Discussion Paper No.13, November 2017 pp7-8. See also, Stephen Daly, “TLRC discussion paper”, taxatlinconox blog, 14 December 2017

317 Autumn Budget 2017, HC 57, November 2017 para 3.65-77. See also, HM Treasury, Overview of Tax Legislation & Rates, November 2017 para 1.43

100 Tax avoidance: recent developments

• enhance efforts to tackle the enablers of tax fraud and hold intermediaries accountable for the services they provide using the Corporate Criminal Offence

• increase their ability to tackle non-compliance among mid-size businesses and wealthy individuals

• recover greater amounts of tax debt including through a new taskforce to specifically tackle tax debts more than 9 months old.318

In its discussion of the policy costings for the Budget, the Office for Budget Responsibility highlighted the difficulty of estimating the Exchequer impact of this package of measures:

HMRC operational measures

A.8 The Government has announced a package of measures designed to generate additional revenue from HMRC compliance activity. The various components were combined into the single line of the scorecard: ‘Avoidance and Evasion: additional compliance resource’ (Table 2.1 – item 39).

As we have previously set out, the costing of these type of measures is often subject to a high degree of uncertainty. While we only certify measures that we judge to be reasonable and central, efforts to tackle avoidance and evasion have not always brought in the expected yield.319

The measures often target a subset of individuals or companies that are already actively changing their behaviour to avoid or evade tax. As a result there is typically a high degree of behavioural uncertainty. Similarly, since the measures are directed at uncollected tax, there is usually less reliable data available to inform the costing. And there are often uncertainties relating to the timely delivery of operational changes, especially when they rely on new IT systems …

A.9 Scrutinising this package of measures brought about some further challenges. The approach HMRC takes to measuring compliance yield does not map directly onto the National Accounts receipts definitions used in the Government’s fiscal targets and that we therefore forecast. This makes it difficult to distinguish what is relevant to our forecast with any precision. Another challenge was determining whether the yield from this package would be additional to that already captured in previously announced measures. In particular the large July 2015 package of HMRC measures has yet to become fully effective, so we needed to assure ourselves that the yield in our baseline forecast in respect of previous measures was not being factored into these new measures too.

A.10 To overcome some of these challenges we looked at HMRC’s past compliance performance. For example, we considered the progression of HMRC’s estimates of the tax gaps for the different taxes, groups of taxpayers and activities targeted by this package. This allowed us to consider top-down whether the expected yield from different elements of the package was reasonable relative to the types of activity the Government each seeks to tackle. We also looked at the returns to investment for the July 2015 package of measures and how they compared to

318 op.cit. para 3.88, p29 (Table 2.1 – item 39) 319 See for example Chapter 5 in our 2017 Fiscal risks report and Johal, Evaluation of

HMRC anti-avoidance and operational measures, OBR Working Paper No.11.

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the current package. For most, we expected to see diminishing returns from additional investment and challenged those costings where that had not been assumed. We required each costing to show that appropriate contingencies were in place for delays in recruitment and for training lags. Where staff were being redeployed from elsewhere within HMRC we asked for an appropriate opportunity cost to be incorporated.

A.11 We assign this package of measures a ‘very high’ uncertainty rating, with each of data, behaviour and modelling also classed as ‘high’ or ‘very high’. For some elements, such as those targeting the hidden economy or criminals, the level of uncertainty is very high. We will continue to evaluate the performance of these and previous anti-avoidance and evasion measures on a regular basis. This Budget has continued the recent pattern whereby the yield from revenue-raising measures is concentrated in these more uncertain areas while the cost of the tax giveaways is far more certain.320

As part of its inquiry on the Autumn Budget the Treasury Committee took evidence from the main professional bodies on 5 December, and on this occasion Alister Jack asked about the impact that the debate on avoidance and evasion had had on the profession:

Q249 Mr Jack: … I want to go on to the Panama Papers and Paradise Papers and all that … Do you think the public perception is that those structures are tax avoidance or even tax evasion? … Has that made practitioners more cautious about the way they offer advice?

Ray McCann: [Deputy President, Chartered Institute of Taxation] It is undoubtedly the case that practitioners today are warier of falling foul of both new tax rules and HMRC … Allied to that, the professional bodies have, in the past two years, taken quite considerable steps in ramping up our professional standards…

Specifically on the Paradise Papers, we have to recognise that many of those structures have been around for decades, certainly years, and they will quite often predate a lot of the upsurge in public disapproval of offshore tax planning structures. Whether they can be changed, altered or some of them are even impacted by some of the changes that Government are bringing forward remains to be seen, because many of them will no doubt say that they have put in place a compliant structure that complies with every rule in every jurisdiction that is going …

Frank Haskew [Head of Tax Faculty, Institute of Chartered Accountants in England and Wales] Amplifying what Ray said, our professional conduct in relation to taxation [PCRT] that Ray mentioned is signed up to by seven professional bodies …

The Government, in the Finance Act that was passed last month—the Finance (No.2) Act—included some provisions to have penalties on what is described as enablers of tax avoidance. We now have measures there on the statute book whereby, if advice to a client is outside the parameters of the general anti-abuse rule, the advisers can also be subject to a penalty. This pincer movement is coming in on advisers from a number of directions…

We also need to remember the tax advice market in the UK. HMRC estimates that about 30% of tax advisers are not affiliated

320 Economic & Fiscal Outlook, Cm 9530, November 2017 pp230-1

102 Tax avoidance: recent developments

to a professional body. There are overseas advisers as well. The UK tax market is quite fragmented. With our PCRT and the enablers, we have stepped up to the plate, and HMRC has introduced rules that should have an impact on the way advisers go about giving their business to clients.

Subsequently Rushanara Ali asked about HMRC’s estimates for compliance yields and the extent to which these figures were driven by government action or a change in public attitudes.

Q264 Rushanara Ali: … The Chancellor said that the Government had collected £160 billion in additional tax revenue through the crackdown on evasion. To what extent would you assign that to government policy ... To what extent is it public pressure, media pressure or the moral imperative? Could it be a bit of both?

Frank Haskew: That is a difficult question. It probably is a bit of all of that … I would mention here that HMRC published only last month its most recent tax gap figures. However much some commentators question the basis of some of the calculations, we have to accept that up to an extent this is evolving. The UK’s methodology is, at the moment, as good as it gets. Clearly, more can be done … but it shows that the UK’s trajectory in terms of the tax gap has been coming down. …

We have had a huge amount of anti-avoidance and anti-evasion legislation over the past five years ... We have had more resources invested into HMRC. We saw that in the latest Red Book … We have seen public pressure and public concerns. We have seen reputation concerns. We have had our own PCRT, which we have revised. Coming to it from a lot of different directions, the climate has changed remarkably.321

321 Budget Autumn 2017: Oral Evidence, HC 600, 5 December 2017 Qs249, 264

BRIEFING PAPER Number 7948 14 December 2017

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