Onshore tax evasion and avoidance: compliance and penalties - part 2
More tax is lost to onshore evasion or non-compliance than to offshore evasion and avoidance, and HMRC is armed with a raft of tools to curb the practice. In the second of a two part series, Jason Collins, a member of the CIOT’s management of taxes sub-committee and partner at Pinsent Mason, reviews government strategy and changes to the rules
8 Mar 2017
As with offshore evasion, HMRC has adopted a two-pronged strategy to counteract domestic tax evasion. This involves a combination of 'encouraging' recalcitrant individuals to come forward and increasing HMRC's powers to obtain information from third parties who may provide the key to finding those who are non-compliant.
Recent 'encouragement' initiatives involve HMRC targeting areas where they believe there may be non-compliance.
In the past HMRC has focused on specific industries, eg, plumbers, solicitors and doctors, but over the last year it has launched campaigns targeting specific types of income that may be relevant to the population more generally, such as buy-to-let rental income and income from second occupations.
These initiatives enable a voluntary disclosure to be made of previously undeclared income and generally offer reduced penalties, compared to the position if it is HMRC that discovers the non-declared income.
A more controversial aspect of the strategy to encourage non-compliant people to come forward voluntarily has been the use of 'nudge' letters.
These letters to taxpayers reminding them of their obligations are sometimes not copied to agents, such as one that was sent out just before Christmas to those who had declared interest income on their 2014-5 tax return asking them to check the figures returned.
It was not clear from the contents of this standard letter whether it had been sent randomly or to specific individuals as a result of HMRC receiving different information from banks and building societies about the interest paid.
Anecdotal evidence from tax advisers suggests that the letter worried some individuals who had, in fact, complied with their obligations.
Increased HMRC powers
In relation to the second prong of the strategy, there were three consultations last year on additional powers to clamp down on the hidden economy.
One consultation proposed extending HMRC's data gathering powers to enable it to collect data from money services businesses (for instance businesses that provide money transmission, cheque cashing or currency exchange services).
As part of the Fintech (financial technology) revolution, more and more people are buying bank services outside the traditional bank supply lines and HMRC has had to respond to try to ensure that the 'shadow banking' sector cannot easily be used to hide sources of income or wealth.
Another consultation proposed making access to public sector licenses such as licences for private hire vehicles, environmental health, planning and property letting conditional on registering for tax. As an alternative the government is considering measures which will effectively give financial services companies an indirect role in policing the hidden economy, by making access to business services such as insurance and bank accounts conditional on proving that you are registered for tax.
The third consultation document proposed tougher sanctions for those involved in the hidden economy, including higher penalties for those who repeatedly fail to notify chargeability, additional tracking and enhanced monitoring of taxpayers with a history of non-compliance, and strengthening the penalty regime where an immigration offence is also committed.
In this high-technology age, HMRC has invested heavily to keep up. It has spent a very large sum of money on a database, called 'Connect'. All information is fed into this data trove and reviewed in order to inform HMRC's deployment of resource to meet onshore and offshore risks, as well as identifying specific instances of non-compliance.
The flip side is that as the country moves away from using cash, the traditional channels for the hidden economy are closing. Tax evasion is as old as the hills, but one wonders whether it has met its match.
A crackdown on tax evasion is probably only just ahead of a crackdown on avoidance in the political popularity stakes. In the eyes of HMRC, aggressive avoidance is no more acceptable than evasion and shares the feature that (because of their overwhelming success rate in challenging avoidance) tax is legally due but unpaid. This perspective has justified a barrage of measures in recent years.
Penalties for enablers of avoidance
The most contentious measure is the suggested imposition of penalties on the 'supply chain' in avoidance – not just the designers and promoters, but those who provide advice and who sell the arrangements to others.
A first consultation drew gasps from among the tax industry as it suggested penalties would be applied to any bank or adviser whose client was successfully challenged under, among other things, a targeted anti-avoidance rule. The penalty would be up to 100% cent of the tax due from the client.
Thankfully, HMRC listened to stakeholders' concerns about the breadth of the proposals and the draft legislation for inclusion in Finance Bill 2017 provides that the measure will only apply to 'abusive arrangements'.
This uses the 'double reasonableness' test used for the general anti-abuse rule (GAAR) – arrangements which cannot reasonably be regarded as a reasonable course of action having regard to all the circumstances. The penalty will be capped at the fee received by the adviser/intermediary. It is proposed that the new rules will apply to activity taking place after Royal Assent is given to the 2017 Finance Bill.
Serial tax avoiders
A new 'serial tax avoiders' regime has been in force since 15 September 2016. It applies where a tax avoidance scheme is 'defeated' (either by the decision of a tribunal or court or by settlement with HMRC).
Anyone who has participated in a scheme on or after 15 September 2016 can be issued with a warning notice which lasts for five years and imposes an annual obligation to notify HMRC of further schemes used, with enhanced penalties, possible 'naming and shaming' and restriction of access to tax reliefs if any schemes used within the period are defeated.
A warning notice can be issued to those who entered into schemes before 15 September 2016 which are defeated on or after 6 April 2017, but then only the annual notification requirements apply and not the other sanctions.
Tied in with international measures and the fight against tax evasion and avoidance we have also seen a number of measures to increase transparency.
These include the requirement since April 2016 for certain UK companies and LLPs to formally identify and keep a register of 'persons with significant control' over them and to provide this information to Companies House at least annually.
There are also proposals for a register of people controlling non-UK companies owning UK real estate as well as a register of settlors and beneficiaries of trusts which generate UK tax consequences. Further details are expected this year.
Large businesses will also be required to publish their tax strategy online. This will include details of their attitude to tax planning and their appetite for risk. Country-by-Country Reporting, under which large companies have to formally break down where they make profits and where they pay tax, will also go live in 2017.
Clause 95 of the Finance Bill 2017 provides for a new penalty which will apply to anyone found to have claimed input tax on a transaction which they 'knew or should have known' was connected with a VAT fraud (the input tax claim thus being bad in law).
HMRC say that the current VAT penalty regime (which identifies careless or deliberate errors) requires HMRC to specify whether they are alleging one or the other of actual and constructive knowledge for the purposes of the penalty, whereas they do not need to make this distinction for the legal test in respect of the tax itself.
Under this new fixed 30% penalty, liability is engaged irrespective of the type of knowledge. The penalty cannot be reduced for co-operation with HMRC and company officers can be personally liable.
Tax avoidance disclosure regimes for indirect taxes and inheritance tax
The Government will revise the VAT avoidance disclosure regime (VADR) and widen it to cover other indirect taxes from September 2017.
Among the proposals is to move the principal obligation to report schemes from VAT-registered businesses to scheme promoters and align the penalties for non-compliance with VADR obligations with those chargeable under DOTAS.
The government insists that it will reduce burdens as the focus for compliance shifts from all taxpayers to a much smaller number of promoters. HMRC plans to introduce a wider disclosure mechanism applicable to all IHT arrangements that are contrived or abnormal, or which contain contrived or abnormal steps. More details are to be included in the regulations.
Although the pace of change has already been very rapid, a significant number of the measures outlined above are due to take effect in 2017. This will give HMRC considerably more fire power in its battle against tax evasion and avoidance. Tax advisers need to be aware of the impact these changes could have on their clients and of the increasing number of measures which could catch the unwitting tax adviser.
About the author
Jason Collins is a partner at Pinsent Masons LLP and member of the Chartered Institute of Taxation’s (CIOT) management of taxes sub-committee.
This blog was first published on www.tax.org.uk on 2 March 2017. http://www.tax.org.uk/media-centre/blog/media-and-politics/state-play-tax-evasion-and-avoidance-0