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«Subject of this Following consultation in early 2015, a further consultation on measures consultation: for serial avoiders, serial promoters, and how ...»

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Strengthening Sanctions

for Tax Avoidance - A

Consultation on Detailed


Consultation document

Publication date: 22 July 2015

Closing date for comments: 14 October 2015

Subject of this Following consultation in early 2015, a further consultation on measures

consultation: for serial avoiders, serial promoters, and how to introduce specific

penalties where the General Anti-Abuse Rule (GAAR) applies, which

takes into account responses to the earlier consultation.

Scope of this This consultation builds on the responses to the earlier consultation. It consultation: details proposals on how each of the measures would work and asks for comments on those details.

For serial avoiders, this detail includes how the regime should be structured and what the entry criteria should be; what extra reporting requirements should apply to serial avoiders; how a surcharge might work; restricting access to certain reliefs; and when it would be appropriate to name the most persistent serial avoiders.

For the GAAR Penalty, this detail includes the circumstances in which a penalty will be charged; the penalty rate chargeable; and safeguards to ensure proportionality. The consultation also sets out some further areas for consideration under the GAAR.

For Promoters of Tax Avoidance Schemes, this detail includes the new threshold criteria definitions, including the number of schemes to be considered over a specified period of time.

Who should We would like to hear from businesses, individuals, tax advisers, read this: professional bodies and any other interested parties.

Duration: The consultation will run for twelve weeks from 22 July to 14 October 2015.

Lead official: Ellen Roberts, Counter-Avoidance Directorate, HMRC How to respond Written responses should be submitted by 14 October either by email to or enquire about this Ca.consultation@hmrc.gsi.gov.uk


Or by post to Ellen Roberts, HM Revenue & Customs, Counter Avoidance, 3C/03, 100 Parliament Street, London, SW1A 2BQ Additional ways HMRC welcomes meetings with interested parties to discuss these to be involved: proposals. Please contact us at the email address shown above.

After the A response document will be published later in the year.


Getting to At the 2015 Budget, the Government confirmed its intention to introduce this stage: a surcharge and special reporting requirements for serial avoiders and to consider further measures such as restricting access to certain reliefs. The

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Previous A prior consultation ran from 30 January to 12 March 2015. The Government’s response to that consultation is included at Annex B. The


responses to that consultation have been used to inform the proposals included in this consultation.


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Annex B Response to Strengthening Sanctions for Tax Avoidance 34 On request this document can be produced in Welsh and alternate formats including large print, audio and Braille formats

1. Introduction The Government is committed to ensuring there is an effective range of deterrents to those who engage in tax avoidance arrangements. These tools need to be effective in clamping down on the appetite for and supply of avoidance schemes. Effective outcomes should not only eliminate any benefits from engaging in avoidance but also ensure an appropriate downside for those who engage in it.

In the Budget of March this year, the Government announced that it would legislate to introduce a surcharge and new reporting requirement for serial avoiders. It also announced further work on proposals to restrict access to certain reliefs and to provide for the naming of serial avoiders.

The consultation Strengthening Sanctions for Tax Avoidance published in January of this year asked for views on some high-level proposals to change the behaviour of the most persistent tax avoiders who continue to attempt to circumvent making their fair contribution to society. It covered appropriate principles for introducing sanctions for serial avoiders, as well as penalties for those who engage in abusive tax avoidance that is caught by the General Anti-Abuse Rule (GAAR). This consultation builds on the principles established in this earlier consultation, outlining the detail of these measures to ensure that these changes are appropriately designed.

This consultation also considers further additional measures that are needed to strengthen the impact of the GAAR in tackling marketed avoidance schemes.

Strengthening Sanctions for Tax Avoidance included a proposal to introduce a new threshold condition to ensure that promoters would automatically fall within the scope of the Promoters of Tax Avoidance Scheme (POTAS) rules if a significant proportion of schemes they promoted are found to fail. The March Budget 2015 announced that a new POTAS threshold condition would be introduced to enable HMRC to consider whether a conduct notice should be issued in these circumstances. This consultation outlines the proposed new threshold criteria.

2. How the Serial Avoiders’ Regime Would Work The primary objective of these proposals for serial avoiders is to change the behaviour of those who repeatedly engage in tax avoidance and to discourage them from using avoidance schemes in the future. This chapter provides details on what a regime for serial avoiders would look like and the conditions for entering the regime. Chapter 3 then asks for views on how terms such as ‘avoidance scheme’ and ‘defeated by HMRC’ should be defined for this regime.

The Warning Period

The proposal is that the first defeat of an avoidance scheme should trigger a “warning period”. The taxpayer would be issued with a warning notice which advised that certain additional consequences of entering into further avoidance schemes would apply for a period of, say, 5 years. This period should be long enough to give the avoider a real incentive to change their behaviour.

The warning notice would require the individual to certify annually whether they had entered into any avoidance scheme. This would apply throughout the whole 5-year period. If the avoider stayed out of avoidance for the warning period, the period would come to an end and any additional consequences would be avoided.

If the taxpayer did enter into further avoidance schemes during the warning period, they would be required to provide further information in the form of details of any schemes entered into and the reasons why they considered the schemes worked.

Any schemes entered into during the warning period that were defeated would be subject to a sanction at the point of defeat. This would apply whether the scheme was defeated within or after the warning period. Any defeat during an initial warning period would extend that warning period from the date of the fresh defeat. A defeat after the end of the warning period would trigger a new warning period for 5 years from the date of that defeat. Any further defeat during an initial warning period would further extend that warning period for 5 years from the date of this fresh defeat.

If the individual used avoidance schemes during the warning period, they would risk being named as a serial avoider. We propose that they would be named if three or more schemes entered into during the warning period were defeated. This would apply whether this was an initial or extended warning period.

A serial avoider warning notice would not in itself create any liability to tax or a penalty and therefore it would not be appropriate to allow appeals against a notice. However, all of the normal appeal rights against assessments and amendments to returns would be unaffected by this measure.

The following diagram provides an overview of how the regime would operate. Further detail is provided in the next chapter. Chapter 3 also outlines further detail on proposals to restrict access to reliefs where the individual seeks to avoid tax by repeatedly misusing reliefs. We propose that this restriction would be triggered by the defeat of three avoidance schemes that sought a tax advantage through the use of a relief and that were entered into during the warning period. This would apply whether this was an initial or extended warning period.

Q1. Do you agree with a regime based on this model? If not, please outline the reasons for your view.

Q2. What do you consider would be a suitable length for a warning period?

3. Sanctions and Definitions Additional reporting requirements Serial avoiders represent a significant tax risk. Once issued with a warning notice, an avoider would be required to certify annually to HMRC that they have not used avoidance schemes, or, if they have used one or more avoidance schemes, to provide details of the schemes and why they believe the schemes work. This would emphasise to the taxpayer the possible consequences of employing tax avoidance arrangements. It would also provide HMRC with more information to make an accurate assessment of tax risk and of the taxpayer’s compliance with the warning notice.

Q3. Would requiring serial avoiders to certify annually that they have not employed avoidance schemes, or to provide details of those they have used help discourage further avoidance?

The surcharge The purpose of penalties and surcharges is to encourage people to comply with their obligations and to encourage compliant and co-operative behaviour. It is also to reassure those who do comply with their obligations that they will not be disadvantaged by those who do not.

Serial avoiders are taxpayers who engage in a sustained course of conduct that makes their tax affairs especially high risk. This marks them out for different treatment and requires HMRC to devote significant additional resource to tackling their behaviour and to uncover their true tax liability. Some avoiders make use of multiple tax avoidance schemes (either concurrently or repeatedly) as a tactic to obstruct the establishment of the true tax liability.

When a tax avoidance scheme is defeated, the tax returns, claims or other documents are inaccurate and penalties may be chargeable. For inaccurate documents, this depends in each case on establishing that the taxpayer failed to take reasonable care.

However, existing law must look at each case in isolation, and cannot easily consider the evidence of a pattern of previous or parallel behaviour.

Introducing a surcharge based solely on objective criteria such as the repeated or concurrent use of tax avoidance schemes that are defeated would help deter serial avoiders from persisting with flawed schemes year after year. In all cases, taxpayers would already be on notice that a further defeated scheme which results in understated tax would lead to a surcharge and so would previously have had both opportunity and incentive to change their behaviour.

The publication “HMRC Penalties: a discussion document” published on 2 February 2015 set out the five principles that we consider should underpin our penalty regimes.

The penalty principles  The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance.

Penalties are not to be applied with the objective of raising revenues

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 Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant  Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner  Customers should see a consistent and standardised approach.

Variations will be those necessary to take into account customer behaviours and particular taxes.

We believe the surcharge should meet these five principles.

There are two possible approaches to setting a suitable level of surcharge for serial


 A simple low level of charge, similar to current late-payment penalties. This approach would have the advantage of being simple and easy to engage with for both HMRC and taxpayers.

 A higher surcharge rate similar to that applied with Follower Notices, with the possibility for reductions in the rate to reflect co-operation or disclosure by the taxpayer during the tax enquiry. This approach would provide stronger incentives to change behaviour and to settle matters promptly, but would be more complex.

In either model, a serial avoider who during a period of warning continues to submit multiple returns that use avoidance schemes which HMRC defeats should face increasing rates of surcharge. This would be the case whenever the scheme is defeated, whether within or outside the warning period. This would underline the seriousness of the avoider’s repeated use of schemes and increase the downside of continued avoidance.

Q4. Which of these approaches would best meet the five penalty principles?

Q5. If you believe the surcharge should be set at a high level, what should the taxpayer have to do to earn any reduction in the surcharge?

Q6. What other key features should form part of the surcharge to ensure it meets the five principles?

Appeals, reasonable excuse and reasonable care As a financial sanction, there should be a right of appeal to a Tribunal against a surcharge.

However, tax avoiders sometimes look to exploit relevant safeguards in other parts of the tax system inappropriately. For example, taxpayers sometimes claim that they have received advice that the avoidance scheme works. In some circumstances the advice relied on is a general statement made to a scheme promoter that a scheme achieves its aim. This often pre-dates the taxpayer’s involvement, and can take no account of their individual circumstances. In HMRC’s opinion, an avoider cannot automatically be said to have a defence against a penalty or surcharge just because this sort of advice exists and has been followed indirectly.

To increase the behavioural impact of the proposed surcharge, we propose that the defence of reasonable excuse in an appeal against a surcharge should specifically exclude cases where the taxpayer has relied on advice that was given to a third party or that was not made by reference to his or her particular circumstances.

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