New weapons to fight tax non-compliance

A raft of new measures to be introduced over the next couple of years will give HM Revenue & Customs (HMRC) a significant number of extra weapons in their war against tax evasion and avoidance.  Coupled with the new powers is a £750m investment in HMRC intended to raise £7.2bn in extra tax.  Of this, £60m (by 2020/21) will be specifically targeted at ‘serious and complex tax crime particularly focusing on wealthy individuals and corporates’.
 
For individuals trying to evade UK tax by hiding assets offshore, the landscape is becoming increasingly hostile.  Automatic exchange of information between tax authorities will soon give HMRC access to an unprecedented amount of information about UK residents with offshore accounts, covering most overseas jurisdictions, including many considered to be tax havens.  To publicise the new measures financial institutions, tax advisers and other professionals will be obliged to notify their customers that information about their account will be provided to tax authorities, the penalties for tax evasion that might result if they do not declare their assets and the opportunities for disclosure. 
 
Those who still do not come forward voluntarily and whose undeclared assets are located overseas could face a new strict liability offence where HMRC would not need to prove intention to evade tax.  The maximum penalty could be up to six months imprisonment and much higher financial penalties, including, in exceptional cases, a possible penalty of the whole value of any asset hidden offshore. 
 
Criminal investigations are notoriously expensive and resource intensive, the £750m added investment in HMRC should give the department the funds it needs to mount more prosecutions.  The previous focus in relation to offshore evasion was very much on getting the cash in.  However, public opinion and attitudes to tax evasion and avoidance now mean it is no longer seen as acceptable for HMRC to be coming down hard on benefit cheats but letting off the wealthier tax evaders who can afford to use offshore accounts.  This new offence coupled with the early ending (at the end of 2015) of the Liechtenstein Disclosure Facility (LDF), with its guarantee of immunity from prosecution, means that we are likely to see a rise in prosecutions, although in terms of recovering funds for the Exchequer, the previous processes involving more use of 'carrot 'than 'stick' have generally proved more effective over a period of more than 90 years.
 
HMRC is also seeking an additional power to find out more about the hidden economy.  Under the proposals electronic payment providers and business intermediaries will have to give increased information to HMRC to enable it to trace businesses which are not registered for tax and individuals who are not declaring sources of income. 
 
Aimed at those who have the funds but refuse to pay what is due, the direct recovery of debts provisions will enable HMRC to recover unpaid tax directly from a taxpayer's bank account.  These proposals were very controversial when first proposed, but are now being introduced this autumn with significant safeguards, particularly for vulnerable taxpayers.
 
In a measure designed to prevent banks and professional services firms from turning a blind eye to the activities of their employees and business associates, it is proposed that businesses could become liable for a Bribery Act style criminal offence if their employees or other agents facilitate the tax evasion of others.  This could catch out any business – not just banks, trust companies and the like – potentially exposing them to a criminal record as a result of the actions of a 'rogue' employee if they do not have training and policies and procedures in place designed to prevent their employees or intermediaries they use from helping customers to evade tax.  Businesses whose employees or other agents enable tax evasion by others could also be hit with stiff new fines, calculated by reference to the amount of tax evaded.  The new offence is aimed particularly at offshore activities but looks as if it will be wide enough to catch UK based actions.  In fact in relation to UK activities, it also applies if customers are helped to evade foreign tax, and not just UK tax. 
 
Part of the government's plan is to deter people from entering into what it perceives to be tax avoidance schemes.  It therefore proposes a new regime, whereby regular users of 'failed' tax avoidance schemes could be classified (and possibly publicly named) as 'serial avoiders'.  This would expose 'serial avoiders' to greater financial penalties and require them to provide additional information to HMRC.  They could also potentially be barred from accessing certain reliefs.  This change is indicative of the blurring of the line in government policy between tax avoidance and tax evasion.  Tax avoidance is not illegal, yet for the first time those who are perceived to have used schemes which do not achieve their intended purpose could be 'named and shamed' alongside those who have hidden assets and deliberately evaded tax.  Since throwing in the towel and paying the tax HMRC claims is due can be an indicator of a scheme that has failed, this measure could have the perverse effect of encouraging scheme users to carry on with the fight. 
 
The changes proposed to the Promoters of Tax Avoidance Schemes (POTAS) regime are another example of the change in attitude to tax avoidance.  The scheme was introduced in 2014 and was designed to change the behaviour of a small hard core of promoters of tax avoidance schemes.  Under the scheme certain behaviours (such as trying to keep schemes secret from HMRC) constitute 'threshold conditions' which can trigger the issue of a conduct notice, imposing conditions on the promoter.  If these conditions are breached a monitoring notice can be issued, imposing more stringent conditions such as being named by HMRC and having to give clients a reference number to go on their tax returns.  A new threshold condition is being introduced for promoters who have marketed multiple tax avoidance schemes that have been 'defeated'.  An important aspect of this will be how you define whether a scheme has been defeated; particularly if it is sold to a number of clients and some decide to settle with HMRC and some to fight on.  There is a risk that bringing the devising of 'failed' avoidance schemes into the POTAS thresholds in this way could make scheme promoters redouble their efforts to ensure that scheme users fight HMRC challenges to the bitter end to try to ensure a scheme is not seen as having failed.
 
Although a general anti-abuse rule (GAAR) was introduced with effect from July 2013, it is thought that no tax scheme has yet been counteracted by the GAAR.  Notwithstanding this, the government is keen to use as a deterrent a specific financial penalty for entering into a scheme which is counteracted by the GAAR.  The penalty proposed is 60% of the tax counteracted by the regime.  This would be in addition to any other penalty, subject to a maximum aggregate penalty of 100% of the tax (with a higher limit for offshore avoidance).
 
It is intended that many of these new provisions will come into force next year.  However, some proposals, such as the new corporate offence of failing to prevent the facilitation of tax evasion are at an early stage and so 2017 looks to be a more realistic timescale for their introduction. 
 
As can be seen from the sheer number of new powers proposed to counteract tax avoidance and evasion, the climate will be very different going forward both for those who engage in illegal tax evasion but also for those who continue to promote or use tax avoidance schemes, which turn out to be unsuccessful.  In particular, anybody who has funds held offshore or who has undertaken tax planning other than of the most 'vanilla' nature needs to take urgent advice or they could potentially face significant penalties or worse. 
 
James Bullock is Head of the Risk Advisory Services Group at Pinsent Masons LLP.  He is one of the UK's leading tax practitioners and has been recognised as such in the leading legal directories.  James has extensive experience of advising large corporates and high net worth individuals on large and complex disputes with HMRC, including handling tax litigation at all levels from the Tax Tribunal to the Supreme Court and Court of Justice of the European Union.  James also advises in relation to the powers of HMRC and the application of those powers in enquiries and investigations.  

James can be contacted on +44 (0)207 054 2726 or by email at james.bullock@pinsentmasons.com