Schedule 16 of Finance (No.2) Act 2017 introduces new penalties for enablers of defeated tax arrangements (the ‘penalties for enablers’ rules).
These new penalties allow HMRC to tackle all aspects of the marketing and supply of avoidance schemes. They build upon the rules targeting promoters of tax avoidance schemes (POTAS) introduced by Finance Act 2014, but have a much wider scope, extending beyond those who promote tax avoidance schemes to those involved at any step in their development, design, management or implementation.
HMRC have released draft guidance on the penalties for enablers rules which can be found here.
This article presents a short summary of the new rules and their scope. It is not intended to act as detailed guidance, but merely as an introduction to the subject and should not be relied upon by ATT members or others as the basis for action or not taking action.
The penalties for enablers rules contain a number of key definitions, which are highlighted in italics below.
When do the penalties for enabler rules apply?
Under the new rules:
- where a person has entered into abusive tax arrangements
- which are subsequently defeated
- a penalty is payable by each person who enabled those arrangements.
As at the date of writing the taxes covered by the new rules are:
- Income tax
- Corporation tax
- Capital gains tax
- National Insurance Contributions (NICs)
- Inheritance tax
- Annual Tax on Enveloped Dwellings (ATED)
- Stamp Duty Land Tax (SDLT)
- Petroleum revenue tax
- Diverted profits tax
- Apprenticeship levy
What are abusive tax arrangements?
For these purposes, arrangements are tax arrangements if, having regard to all the circumstances, it would be reasonable to conclude that their main purpose, or one of their main purposes, was to obtain a tax advantage.
The definition of when tax arrangements are abusive is based upon the double reasonableness test in the General Anti-Abuse Rule (GAAR). That is, tax arrangements will be abusive if, having regard to all the circumstances, the entering into or carrying out of them cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions.
This similarity to the GAAR test is entirely intentional – as discussed further below an opinion of the GAAR panel is required before a penalty can be issued by HMRC.
The circumstances which must be taken into account when considering whether arrangements are abusive include:
- Whether the substantive results, or intended substantive results are consistent with the principles on which the relevant tax provisions are based, and their policy objectives.
- Whether there are contrived or abnormal steps involved.
- Whether the arrangements are intended to exploit any shortcomings or loopholes in the relevant tax provisions.
Indicators that tax arrangements may be abusive include:
- They result in income, profits or gains which are significantly less for tax purposes than economic purposes.
- They result in deductions or losses which are significantly greater for tax purposes than economic purposes.
- They result in a claim for repayment or crediting of tax that has not been, and is unlikely to be, paid.
The fact that the arrangements accorded with an established practice which, at the time the arrangements were entered into, was accepted by HMRC is an indicator that arrangements are not abusive.
More information on the operation of the double reasonableness test and examples of what may, and may not constitute abusive tax arrangements can be found in HMRC’s GAAR guidance.
When are arrangements defeated?
For these purposes arrangements are defeated if either:
- The tax advantage originally claimed in a return or other document has been counteracted, or
- HMRC have made an assessment that counteracts the expected tax advantage from the arrangements.
A tax advantage is counteracted where adjustments are made to the taxpayer’s position, either by HMRC or the taxpayer, to eliminate or reduce a tax advantage.
In both cases, the counteraction must be final, meaning the position can no longer be varied, either on appeal or otherwise. In the case of a HMRC assessment, this can include where a contract settlement has been entered into.
Where a proposal for the same arrangements has been implemented more than once (e.g. by multiple taxpayers), HMRC cannot assess a penalty until they reasonably believe that more than 50% of the users of those related arrangements have been defeated.
Who is an enabler?
An enabler is any person who, in the course of their business, enables the abusive tax arrangements that are defeated. This can include individuals, companies or partnerships.
The requirement for an enabler to be acting in the course of their business means that individual employees cannot be enablers. Instead the firm or company employing them will be the ones in scope of the penalty.
The legislation defines enablers by reference to five distinct categories:
1. Designers of arrangements
A person is a designer of arrangements if, in the course of their business, they are to any extent responsible for the design of the arrangements, or a proposal which was implemented by them.
This can include providing advice or an opinion that is taken into account in the design of the arrangements or proposal.
However, a person providing advice will only be deemed to be a designer if:
- That advice, or any part of it, suggests arrangements or alterations which it is reasonable to assume are made with a view to giving rise to a tax advantage, and
- The person knew, or could reasonably be expected to have known, that the advice was likely to be used to design an abusive tax arrangement.
For these purposes advice will not be taken to suggest anything if it is merely put forward for consideration but the advice can reasonably be read as recommending against that approach.
For example, the following would not be held to be a designer:
- An adviser who merely gives a client a second opinion on abusive arrangements, without suggesting any alterations.
- An adviser giving a second opinion who does suggest changes for consideration, but highlights the risks associated with those changes in such a way that the advice as a whole cannot be read as recommending them.
- An audit firm that merely confirms whether accounting entries associated with the arrangements are correct.
2. Managers of arrangements
A person is a manager of arrangements if:
- In the course of their business they are responsible for the organisation or management of the arrangements, and
- When doing so they knew, or could reasonably be expected to have known, that the arrangements were abusive tax arrangements.
This could include ensuring the required paperwork is in place to implement the arrangements, or facilitating transactions which form part of them. It would not normally include merely performing statutory functions such as preparing board minutes, Companies House filings, audit etc. provided that is all that is done.
The legislation also provides for an exemption where an adviser is merely helping a taxpayer withdraw from abusive tax arrangements in a way which does not seek to obtain a tax advantage. In those circumstances the person assisting the taxpayer will not be a manager of arrangements.
3. Marketers of arrangements
A person is a marketer of arrangements if, in the course of their business, they either:
- Propose the arrangements to the taxpayer, or
- Communicate information to the taxpayer, or another person, about a proposal for the arrangements with a view to the taxpayer entering into them.
This will catch both those actively marketing tax avoidance arrangements, as well as those who refer clients to them.
4. Enabling participants of arrangement
A person is an enabling participant if:
- They enter into the arrangements, or a transaction forming part of them, and
- Those arrangements could not have been expected to result in a tax advantage without their involvement (or the involvement of another person in the same capacity), and
- At the time they enter into the arrangements or transaction, they knew, or could reasonably be expected to have known, that they were abusive.
HMRC’s guidance gives an example of an enabling participant as being a company set up to employ contractors or freelancers as part of a tax avoidance scheme involving the advance of money in the form of loans rather than salary.
5. Financial enablers
A person is a financial enabler if:
- They provide a financial product in the course of their business directly or indirectly to the taxpayer or an enabling participant (as defined above), and
- Where it is reasonable to assume that the purpose of obtaining the financial product was to participate in the arrangements, and
- At the time the financial product was provided, they knew or could reasonably be expected to have known, that the purpose of obtaining it was to participate in abusive tax arrangements.
For these purposes providing a financial product includes:
- Advancing loans
- Issuing or transferring shares
- Entering into derivative contracts, repos, stock lending contracts or alternative finance arrangements.
An example of a financial enabler would include a bank providing a loan that they know the borrower will use to enter into a contrived tax avoidance scheme.
The following cannot be regarded as enablers even if they fall into one of the categories set out in the legislation:
- The taxpayer (ie the person who has entered into an abusive tax arrangement.
- If that taxpayer is a company, any other company in the same group (broadly where one company is a 75% subsidiary of the other, or both are 75% subsidiaries of the same person).
Interaction with PCRT
The Professional Conduct in Relation to Taxation (PCRT) is produced by seven leading professional bodies (including the ATT) and sets out the fundamental principles and behaviour expected of members working in tax.
The latest version of the PCRT, which was published in November 2016 and took effect from 1 March 2017, can be found here. Of particular relevance to the penalties for enablers’ legislation, paragraph 2.29 includes the requirement that:
“Members must not create, encourage or promote tax planning arrangements or structures that i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.”
HMRC’s draft guidance notes that, although the penalties for enablers’ legislation does not specifically exempt a person who acts in accordance with PCRT, it is unlikely that such a person would come within its scope.
When HMRC can raise a penalty – the role of GAAR Advisory Panel
Before HMRC can assess a penalty under the penalties for enablers’ rules they must obtain and consider an opinion from the GAAR Advisory Panel.
This can be either:
- A final decision notice previously issued by the GAAR Advisory Panel in respect of the arrangements (or equivalent arrangements), or
- An opinion issued by the GAAR Advisory Panel in respect of the arrangements (or equivalent arrangements) following a referral from HMRC on the grounds that they suspect the penalties for enablers’ rules may apply.
For these purposes, arrangements are equivalent to each other if they are substantially the same having regard to their results or intended results, means of achieving those results and abusive characteristics.
HMRC must notify a suspected enabler at several stages in the process and give them the chance to make representations or appeal, including:
- Where they are considering making a referral to the GAAR Advisory Panel in respect of arrangements.
- When a decision to make a referral has been made, and when a referral is actually made.
- Where they believe arrangements are equivalent to those on which the GAAR Advisory Panel has issued a final decision notice.
Suspected enablers have the right to make representations to the GAAR Advisory Panel, and can also appeal against a decision of HMRC to assess a penalty, or the amount of such a penalty.
The penalties for enablers’ legislation allows HMRC to use its existing information and inspection powers under Schedule 36 Finance Act 2008 to check a person’s liability in respect of a penalty.
How is the penalty calculated?
If, after considering the relevant GAAR panel opinion, HMRC conclude the penalties for enablers rules apply, they can levy penalties on any person who is an enabler of the arrangements.
The amount of the penalty is the total amount or value of all the consideration received or receivable by the enabler in relation to their enabling activity.
Consideration for these purposes:
- Is equal to the gross consideration received or receivable, with no deduction for costs and no account taken of the tax rate payable by the enabler.
- Excludes any VAT charged by the enabler.
- Includes any amounts paid or payable to another person in respect of the enabler’s activities.
- Is to be apportioned on a just and reasonable basis where it is attributable to two or more transactions.
The amount of any penalty can be reduced where penalties are also incurred under any other provision in respect of the same behaviour, and no penalty will be charged if the person has already been convicted of an offence for the same conduct.
HMRC may, at their discretion, reduce a penalty but their draft guidance indicates that this would only be in exceptional circumstances.
HMRC may also name and shame a person receiving a penalty where that penalty is final and either:
- They have incurred 50 or more such penalties in respect of arrangements entered into in the same 12 month period, or
- The amount of such penalties exceeds £25,000
When do the new rules apply from?
The new rules apply to arrangements entered into, and enabling actions taken, on or after 16 November 2017 (the day the Finance (No.2) Act received Royal Assent).
Where to look for further information
HMRC have published draft guidance for consultation which can be found here.
More information on the operation of the double reasonableness test and when tax arrangements are considered abusive can be found in HMRC’s GAAR guidance.