The government is strengthening HMRC powers as part of a raft of measures to clamp down on promoters of tax avoidance, with plans to be able to strike off directors for tax avoidance with the threat of two-year prison sentences
Proposals include ensuring HMRC can protect their position by securing or freezing a promoter’s assets so that the penalties they are liable for are paid, tackling offshore promoters and the UK entities that support them, closing down companies that promote avoidance schemes and disqualifying their directors, and supporting taxpayers to identify and exit avoidance schemes.
The government is proposing a new power to enable HMRC to present winding-up petitions to court and a new ground for director disqualification related to tax avoidance on the basis of their involvement in the promotion and enabling of tax avoidance where they have made decisions which constitute significant breaches of the anti-avoidance legislation. Bans of up to 15 years could be issued for the most egregious abuses of existing laws.
The consultation is also seeking views on whether to publish the names of promoters to increase public awareness and act as a deterrent.
The changes being introduced in Finance Bill 2021 would, if enacted, enable HMRC to move to penalise those who promote tax avoidance and fail to comply with their obligations sooner than is possible under the existing powers.
HMRC would also have the power to ring-fence assets to ensure that penalties are paid. The government is proposing two alternative ways of ring-fencing the promoter’s assets, either through an upfront security payment; or a freezing order.
Under the proposals for a freezing order, assets would be ring-fenced while any penalty hearing and subsequent appeal took place and ensuring that sufficient assets to pay the penalty would not be accessible to the promoter.
The government proposes that non-payment of a security or any breach of a freezing order or security would be a contempt of court, punishable in line with current similar legislation, with a fine, up to two years’ imprisonment or seizure of assets.
The measures proposed in this consultation document are targeted at the hard core of promoters that remain in the market, primarily operating online, and they aim to:
- clamp down on promoters who hide their assets to avoid paying penalties;
- tackle offshore promoters through the UK entities that support them by imposing a new penalty on the onshore entities who are associated with, and who facilitate, the activities of an offshore promoter;
- give HMRC the power to ask a court to close down a company involved in promoting or enabling tax avoidance where it can be shown that they are not operating in the public interest, and disqualifying the directors at the earliest point possible; and
- support taxpayers to identify and exit avoidance earlier by providing more information on the products offered or sold to them by promoters, so they can make informed decisions.
These proposals would give HMRC the ability to intervene earlier than they can now to disrupt promoters’ activities, ring-fence assets to protect HMRC’s ability to collect penalties and apply strong sanctions for promoting or enabling tax avoidance.
As more promoters to tax avoidance base themselves offshore, this makes it even more difficult for HMRC to stamp out the abuse, especially where UK based agents are used to act as a go-between with clients.
The government wants to deter UK based entities from acting on behalf of offshore promoters and make it more difficult for these promoters to sell their schemes in the UK. The government proposes creating a liability on the promoter’s UK associates, to penalise them for assisting the offshore promoter’s activities.
The penalty would reflect an amount up to the total fees earned by all those involved in the development and sale of a particular tax avoidance scheme, not just the fees earned by the UK entity.
For example, if the offshore promoter received fees of £50,000, the designer received £25,000, the marketer received £10,000 and the manager of the arrangements also received £10,000, the value of the additional penalty would be an amount up to £95,000.
In all cases, the UK entity would have the right to appeal against HMRC’s decision to charge the additional penalty and to appeal against its value. The right to appeal would be to a tribunal or a court.
Kate Ison, partner and tax specialist at global law firm Bryan Cave Leighton Paisner said: ‘The new powers mark a new and hardened approach by the government and could have far-reaching consequences. Despite the government’s previous concerted efforts to disrupt the tax avoidance supply chain, a minority of promoters have remained in the industry.
‘Today’s proposals go further than any previous measures and, if enacted, would directly strike the core of a promoter’s finances, at best, and entire business at worst. We expect it will have a deterrent effect on some promoters and will cut off the so-called tax avoidance supply chain where promoters are wound up.
‘As regards the proposal to disqualify directors who are involved in significant breaches of anti-avoidance legislation, while it is important to ensure that individuals who are knowingly promoting aggressie avoidance cannot simply re-appear as a director of a newly established promoter or enabling company, care will need to be taken to ensure that appropriate safeguards are included to protect innocent directors who may be unknowingly involved or unaware of the breaches.’
The consultation closes for comment on 1 June 2021.