General Principles of Tax Avoidance

HMRC-1

STOP PRESS: Finance Act 2021 (FA 2021) contains a number of measures, taking effect from Royal Assent on 10 June 2021, to take further action against those who promote and market tax avoidance schemes. These include strengthening information powers for HMRC’s existing regime to tackle enablers of tax avoidance schemes,  enabling HMRC to act promptly where promoters fail to disclose their avoidance schemes, allowing HMRC to stop promoters from marketing and selling avoidance schemes earlier, making further technical amendments to the POTAS regime and making additional changes to the General Anti-Abuse Rule (GAAR). On 23 March 2021, the government published draft guidance to be read alongside the legislation. For more information, see News Analysis: Spring Budget 2021—Private Client analysis—Tackling promoters of tax avoidance and for more information on the draft clauses that were published in July 2020, see News Analysis: Draft Finance Bill 2020–21—Private Client analysis—Promoters and enablers of tax avoidance schemes.

References:

Finance Act 2021, ss 121–124 and Sch 30, 31 and 32

Tackling promoters of tax avoidance draft guidance

Following a consultation which ran from 16 December 2020 to 27 January 2021, FA 2021 also contains measures, again taking effect from Royal Assent, to reduce the penalties that may be charged to people receiving follower notices as a result of using tax avoidance schemes, from 50% to 30% of the tax under dispute. A further penalty of 20% will be charged if the tribunal decides that the recipient of a follower notice continued their litigation against HMRC’s decision on an unreasonable basis. For more information, see News Analysis: Spring Budget 2021—Private Client analysis—Reduction in follower notice penalties. See also Practice Note: Tax—Finance Act 2021—progress through Parliament [Archived].

References:

Finance Act 2021, s 119 and Sch 28

Consultation: Follower Notices and penalties

STOP PRESS: On 23 March 2021, the government published a consultation on clamping down on promoters of tax avoidance, which sets out a package of additional measures that could be used to further restrict the activities of promoters and enablers of tax avoidance schemes. The consultation closed on 1 June 2021. For more information, see News Analysis: Tax consultation day—23 March 2021—Private Client analysis—Clamping down on promoters of tax avoidance.

References:

Consultation: Clamping down on promoters of tax avoidance

Since the turn of this century, successive governments have been seeking to clamp down on perceived tax avoidance by wealthy individuals by way of stricter anti-avoidance rules with wider scope as to what constitutes tax avoidance, increased powers for HMRC and harsher penalties.

Historically, offshore arrangements have been widely used by UK resident and domiciled individuals as well as UK resident non-domiciliaries to avoid UK taxation. The government’s stance on offshore tax planning has hardened significantly over the years, and to limit the scope for tax planning, a series of anti-avoidance measures have been introduced. Initially, such measures were mainly aimed at UK domiciled individuals but since 2008, non-domiciliaries have increasingly been targeted by measures sought to restrict the benefits achieved through the remittance basis of taxation.

A number of professional bodies (including STEP) have collaborated to develop and publish the Professional Conduct in Relation to Taxation (PCRT) which sets out the principles and standards of behaviour expected of members undertaking tax work. The latest version is effective from 1 March 2019 and can be viewed here. Compliance with PCRT is mandatory and failure to do so may result in disciplinary action.

This subtopic summarises the general domestic principles relating to anti-avoidance and tax evasion and covers developments in this area. For further information on principles relating to offshore tax evasion and international anti-avoidance rules, see the Anti-avoidance (and international private client) and Offshore tax evasion (and private client) subtopics.

The Ramsay principle

The Ramsay principle (or Ramsay doctrine) refers to an approach to statutory interpretation that has been developed by the courts in cases involving tax avoidance. It began with the landmark decision by the House of Lords in WT Ramsay [1981] STC 174 in 1981.

The Ramsay principle can be summarised as:

  • look at the law—what did Parliament intend when it chose those words?
  • look at the facts—should an individual transaction be considered as part of a wider context?
  • in light of the first two steps, how does the law apply to these facts?

There is a large body of case law dealing with the Ramsay principle. For a general introduction to the subject, see: Ramsay as a guide to statutory construction.

Disclosure of tax avoidance schemes

The disclosure of tax avoidance schemes (DOTAS) rules, and the DASVOIT rules for VAT and other indirect taxes, oblige scheme promoters, taxpayers or their advisers to inform HMRC about certain arrangements for avoiding tax. There are DOTAS rules relating to income tax, capital gains tax, corporation tax, inheritance tax (IHT), national insurance contributions (NICs), stamp duty land tax and the annual tax on enveloped dwellings.

The DOTAS rules have applied to certain IHT arrangements since 6 April 2011 and a further extension of the IHT hallmarks took effect from 1 April 2018.

Making a disclosure has no bearing on whether the arrangements have their intended tax outcome. This means, for instance, that if a scheme is legally effective (from the taxpayer’s point of view), HMRC will have to legislate to stop it. There is no obligation on HMRC to comment on the effectiveness of a disclosed scheme.

The intention of the DOTAS and DASVOIT rules is to enable HMRC to find out about a tax avoidance scheme as early as possible. Otherwise, HMRC would only find out about the scheme on the submission of a tax return, which could be many months later, and sometimes not even then. Once a scheme has been disclosed, HMRC has the option to move swiftly to close it down. The accelerated payment rules have given the DOTAS rules another function, namely that once a scheme has been disclosed, HMRC can require payment of the disputed tax up-front.

Another related benefit of the DOTAS and DASVOIT rules for HMRC is to provide information on how widely a particular scheme is being used.

The rules are widely drafted and can catch tax-motivated arrangements that the parties and their advisers might not regard as schemes.

For further information on the DOTAS and DASVOIT rules, see the Disclosure of tax avoidance schemes subtopic.

Promoters of tax avoidance schemes

In addition to the DOTAS rules, the Finance Act 2014 (FA 2014) contains rules relating to promoters of tax avoidance schemes (POTAS).

Under these rules, promoters who trigger certain threshold conditions can be served with a conduct notice. If they do not comply with the terms of the notice, they can (subject to the approval of the First-tier Tax Tribunal (FTT)) be issued with a further, monitoring notice. Monitored promoters can be named and shamed by having their names published by HMRC, and must provide HMRC with certain information. Clients and intermediaries of monitored promoters may also have to provide information to HMRC.

For more details, see Practice Note: Promoters of tax avoidance schemes.

Penalties for enablers of tax avoidance schemes

Rules contained in Finance (No 2) Act 2017 provide that when a person (the taxpayer) has entered into abusive tax arrangements and has incurred a defeat in respect of the arrangements, a penalty is payable by each person who enabled those arrangements. A number of key concepts in the rules are borrowed from the general anti-abuse rule (GAAR), and the operation of the rules also depend on the GAAR to the extent that an assessment for a penalty cannot be made without a GAAR final decision notice or opinion of the GAAR Advisory Panel having been obtained.

An enabler can be a designer, marketer, manager, enabling participant or financial enabler of the arrangements. The sanctions an enabler faces are a civil penalty and publication of their personal details. For further guidance on the penalties, see Practice Note: Penalties for enablers of defeated tax avoidance schemes.

Disclosable cross-border tax arrangements — DAC 6

The UK’s disclosable arrangements rules implemented Council Directive (EU) 2018/822, also known as DAC 6. The rules, as originally enacted, obliged intermediaries (broadly, advisers), and in some cases taxpayers, to report information to HMRC about cross-border arrangements that contain certain hallmarks. Cross-border means concerning more than one EU Member State, or a Member State and a third (non-EU) country. For these purposes, the UK is treated as a Member State during the transition period and as a third country following IP completion day.

The scope of the UK’s disclosable arrangements rules was significantly reduced with effect from IP completion day (11 pm on 31 December 2020). HMRC intends to repeal the remaining disclosable arrangements rules entirely and replace them with new legislation specifically to implement the OECD Mandatory Disclosure Rules (MDR). The government will consult on this during 2021.

For more information, see Practice Note: Disclosable cross-border tax arrangements—DAC 6 and News Analysis: Spring Budget 2021—Private Client analysis—Consultation on OECD Mandatory Disclosure Rules.

Follower and accelerated payment notices

Follower notices (FNs) and accelerated payment notices (APNs) are tools designed to help HMRC collect the tax in dispute at the outset of the dispute process and to push taxpayers to concede to HMRC’s view of the tax arrangements entered into by the taxpayer following an HMRC victory in another unrelated person’s litigation involving similar tax arrangements. These notices, which were introduced on 17 July 2014 by FA 2014, change the economics of tax litigation in favour of HMRC. For the key points to note about follower notices and APNs, see: Quick guide to follower notices and accelerated payment notices—checklist.

What are follower notices?

HMRC can (provided four conditions are met) give follower notices to taxpayers who have used an avoidance scheme that has been shown in another taxpayer’s litigation to fail. The notice is designed to counteract the tax advantage by incentivising the recipient of the follower notice to concede to HMRC’s view and to take any necessary corrective action, such as amending a return or a claim, or to drop its appeal in accordance with the earlier ruling. Failure to take corrective action within the required time gives rise to a penalty.

For further information, see Practice Note: Follower notices.

What are APNs?

HMRC can (provided three conditions are met) give an APN to a taxpayer to require payment of the tax in dispute before that taxpayer’s case (and therefore before the final amount of tax due) has been decided and/or, since 26 March 2015, where the denied advantage specified in an APN includes all or part of a surrenderable loss, to prevent or render ineffective the purported surrender of that loss by way of group relief, even if the surrender was made before 26 March 2015. This differs from the normal rule in direct tax disputes that the tax does not need to be paid until (at least) the matter is resolved by the FTT. Penalties apply to taxpayers that fail to pay the amount specified in the APN within the required time.

For further information, see Practice Note: Accelerated payment notices.

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