HMRC consults on draft guidance on enabler rules for tax advisers
HMRC is consulting on draft guidance covering new legislation on enablers of defeated tax avoidance schemes which will be introduced once Finance Bill (No.2) 2017 receives Royal Assent, and which could see accountants and lawyers liable for penalties as a result of providing contentious advice in this area
20 Oct 2017
The legislation will introduce a penalty for any person who enables the use of abusive tax arrangements, which are later defeated. The guidance explains the key concepts behind the rules and explains to whom the legislation is intended to apply, and how.
An enabler is any person who is responsible, to any extent, for the design, marketing or otherwise facilitating another person to enter into abusive tax arrangements. When such arrangements are defeated in court or at the tribunal, or are otherwise counteracted, each person who enabled those arrangements may be liable to a penalty.
The penalty for each enabler is equal to the amount of consideration either received or receivable by them for enabling those arrangements.
No penalty can be charged unless HMRC has obtained an opinion of the GAAR advisory panel in relation to the tax arrangements or equivalent arrangements. Any penalty HMRC charges is appealable.
The enablers legislation only applies to a person if they enable abusive tax arrangements that are entered into on or after the date of royal assent to the Finance (No.2) Act 2017. The enabling activity must also have been undertaken on or after this date; it is not retrospective.
There is a special provision to determine when penalties can be assessed if the same proposal for tax arrangements (typically an avoidance scheme) has been implemented more than once. For example, where more than one user has implemented tax arrangements that are substantially the same as each other. In these circumstances HMRC may not normally assess a penalty on any of the enablers of those arrangements, following the defeat of the relevant arrangements, until HMRC is satisfied that more than 50% of known users of that proposal for arrangements have been defeated.
The guidance makes clear that the legislation applies to someone who is one or more of the following: a designer of arrangements; a manager of arrangements; marketed the arrangements; an enabling participant in the arrangements; or who is a financial enabler in relation to the arrangements.
A key requirement of each of the descriptions of enabler activities is that for a person to be an enabler, the activity must be performed in the course of a business carried on by that person. This means that an employee of a business is excluded from being an enabler in relation to activities that have been performed, as they have been performed as part of that employment, and not in the course of a business carried on by them.
The enabler would be the employing business in this case as the employee is acting on behalf of the employer, who is the person carrying on the business and benefits from the income generated. In the case of a partnership which is the person (or body of persons) carrying on the business, it is the partnership that will be the enabler.
The guidance contains a large number of specific examples of circumstances in which accountants or lawyers might be involved in setting up tax avoidance schemes which are subsequently defeated, and considers the factors which determine whether or not professional participants would be viewed as enablers.
For example, a company decides to implement a tax avoidance scheme. Its tax advisors set out the steps of the transactions, including the anticipated accounting entries required for the arrangements to work. The company approaches its auditors, a firm independent of the tax advisers, in advance of implementing the arrangements to confirm whether those proposed entries are technically correct.
Given the facts and substance of the transaction, the audit firm confirms that the entries are correct and does not foresee issues in the future audit of those entries.
In this instance, the guidance states that the audit firm is not an enabler as they have done no more than provide an opinion on arrangements designed by others.
Equally, if the audit firm disagreed with the technical analysis and went on to explain that accounting standards require the transactions to be accounted for differently, setting out the particular aspect of the arrangements, and the specific accounting requirement which caused them to reach their conclusion, the firm is not an enabler because, again, they have done no more than provide an opinion on arrangements designed by others.
If however the audit firm went beyond this and provided advice to the extent that changing certain aspects of the overall arrangements would enable the company to secure a specific accounting treatment, while also not changing the overall efficacy of what they appear to be trying to achieve, the audit firm could bring itself within scope for a penalty as a designer.
The guidance makes the point they are now acting beyond their auditor capacity, doing more than forming an independent view on the financial statements, and providing advice that is relevant advice, because it suggests arrangements or an alteration of proposed arrangements. It will then be a question of fact whether the knowledge condition is also met, but it seems likely that it would be.
The guidance states that a penalty is payable by each person who is an enabler of the abusive tax arrangements that have been defeated. The amount of the penalty in each case is the total amount, or value, of all the relevant consideration, which has either been received by the enabler or is receivable by them.
It explains the penalty regime in detail, including circumstances where a company is involved (as is the case in recent employee benefit trust tax avoidance schemes) and where a scheme has been devised by one promoter and then marked by several financial adviser to differing groups of taxpayers, some of whom may have subsequently conceded the scheme is abusive while others have not.
The consultation on the guidance is open until 30 November 2017. HMRC will publish final guidance on enablers of tax avoidance schemes once the legislation has royal assent.
Report by Pat Sweet