Opinion Former Article

Major new tax penalties now in force

The Chartered Institute of Taxation (CIOT) has highlighted that two significant new penalties for tax non-compliance have come into effect following Royal Assent to Finance (No. 2) Act 2017.1

The first of these is a substantial penalty for ‘enablers of defeated tax avoidance’2 which comes into effect in relation to enabling actions carried out on or after the date of Royal Assent and tax arrangements entered into on or after that date.

The second is a penalty for ‘failing to correct relevant offshore tax non-compliance’3 which applies to failures to correct inaccuracies and omissions existing at the end of the tax year 2016/17 within the period from 6 April 2017 to 30 September 2018.

Penalty for enablers of avoidance

The enablers’ penalty is the latest in a series of measures to tackle, in particular, marketed tax avoidance. The penalty applies to anyone who enables the use of tax avoidance arrangements that HMRC later defeat either in a court or tribunal, or by agreement between the parties that the arrangements do not work, and focuses on abusive schemes. It targets individuals and entities that make a profit from enabling abusive tax arrangements by imposing a fixed 100 per cent fee-based penalty on everyone in the supply chain.4

Chris Davidson, Chair of the CIOT’s Management of Taxes Sub-committee, said:

“The enabling penalty is a significant provision to support HMRC’s continued offensive against tax avoidance. Setting the penalty at the level of the enabler’s fee should act as a very strong deterrent to anyone considering enabling abusive tax avoidance schemes in the future.

“By focussing on abusive tax arrangements, the measure will help tackle those who enable tax avoidance while ensuring that the ability of the overwhelming majority of tax practitioners to provide genuine professional advice to their clients is protected.

“It is reassuring that HMRC have said that provided advisers act wholly within the spirit of the new Professional Conduct in Relation to Taxation (PCRT)4 standard for tax planning, the Government would not expect that they would normally be affected by the new penalty. It is nonetheless advisable that tax practitioners familiarise themselves with the scope of the enabling penalty before providing advice to a client on a tax arrangement that is potentially within the General Anti-Abuse Rule (GAAR), including one designed by others, in order to minimise any risk of exposing themselves to an enabling penalty.”

Failure to correct

The failure to correct penalty is also a very significant new penalty, reflecting HMRC’s tougher approach to offshore non-compliance. Failure to carry out the necessary corrections, which could go back many years, by 30 September 2018 will render the taxpayer liable to the penalty which starts at 200 per cent of the offshore potential lost revenue (PLR),5 and which may not be reduced below 100 per cent of the offshore PLR. Furthermore, the penalty does not take into account the seriousness of the cause of the original error or omission, thus treating technical errors and cases where reasonable care was taken when a return was submitted in the same way as those where a person deliberately omitted income or gains. In addition, the legislation restricts the availability of a reasonable excuse defence to a taxpayer where ‘disqualified advice’6 has been taken.

Commenting on the failure to correct penalty, Chris Davidson said:

“The Government are right to continue to clamp down on offshore tax evasion.

“This measure requires taxpayers to correct their tax affairs without specific prompting from HMRC, so there needs to be effective communication of the proposals to ensure affected taxpayers are aware of them. There are still taxpayers who have not put their offshore affairs in order not necessarily because they are deliberately trying to evade or not comply with their responsibilities, but because, for example, they may not have reviewed their tax affairs recently and do not realise that they are no longer compliant – they simply do not identify themselves as ‘tax evaders’. These people need to take advice as soon as possible to ensure they are not exposed to a failure to correct penalty.

“The legislation and case law relating to offshore matters such as that relating to domicile, residence and remittances, is extremely complicated and varies frequently. In our view, the ‘disqualified advice’ restriction risks unfairly penalising taxpayers who took proper advice in the past from reputable advisers and who consider that they have acted responsibly by taking advice on their tax affairs.  These taxpayers need to seek refreshed advice as soon as possible but it is not apparent how they will be expected to identify that advice they have received in the past, or indeed are seeking now, would be classified as ‘disqualified advice’.

“The recent ‘Paradise Papers’ leak has exposed the world of offshore tax to renewed scrutiny. Offshore financial centres play a legitimate role in international finance. But clearly they can also be abused. As well as domestic UK measures such as this one, international initiatives such as the Common Reporting Standard (an information sharing agreement) should make it easier for tax authorities to identify abusive behaviour – both evasion and avoidance, as well as attempts to hide the proceeds of crime – and act against it.”

Notes for editors

1.       Royal Assent to the Finance (No 2)  Act 2017 was given on 16 November 2017 . Royal Assent is the final stage of an Act’s passage into law, following its passage through both Houses of Parliament.

2.       The penalty for enablers of defeated tax avoidance is in Schedule 16 to the Act.

3.       The requirement to correct certain offshore tax non-compliance and penalty for failure to correct is in Schedule 18 to the Act.

4.       It is closely based on the wording of the General Anti-Abuse Rule (GAAR) which was introduced in FA 2013. External scrutiny will be provided by the GAAR Advisory Panel. The legislation itself does not specifically protect an adviser who acts within Professional Conduct in Relation to Taxation (PCRT), but HMRC’s guidance is expected to state that such a person is unlikely to come within the scope of the enablers’ penalty.

The revised Professional Conduct in Relation to Taxation (PCRT) was published by the seven leading tax and accountancy bodies, including CIOT, on 1 November 2016 and took effect from 1 March 2017. This sets out, for the first time, 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”.

5.       Potential Lost Revenue is defined in Schedule 18 paragraph 15(2) and is broadly the additional tax due as a result of correcting the relevant error or omission.

6.       Schedule 18 paragraph 23(2) states that ‘reliance on advice is to be taken automatically not to be a reasonable excuse if it is disqualified under sub-paragraph 3’.

7.       The Chartered Institute of Taxation (CIOT)

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk (Out of hours contact: George Crozier, 07740 477 374)

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