Ten things you need to know about tax avoidance

The campaign believes that tax avoidance, like sin, is a bad thing, but what constitutes either? The following points, despite blandishments from colleagues, restricts itself to ten thoughts about the former.

1. What is tax avoidance?
Tax evasion is criminal.
Tax avoidance is immoral.
Tax planning is sensible. Disagreements on statement
two are likely to involve
different definitions.

2. General Anti-Abuse Rule (GAAR)
The recent introduction of a general anti-avoidance rule
into UK legislation has had distinguished advocates both
for and against. The driver was a sense that the courts were having difficulties identifying where planning became avoidance. The GAAR architects discovered a similar problem: the second ‘A’ in GAAR stands for ‘abuse’ rather than ‘avoidance’ due to the problems of defining this concept. Abusive planning, by definition, is unacceptable. Have we simply moved the debate on ‘avoidance’ to one on ‘abuse’?

3. Disclosure of tax avoidance schemes (DOTAS)
In fact, we have a broad knowledge of how HMRC see ‘avoidance’ via the DOTAS regime. The promoters of certain schemes, or advisers who use them, must register them with HMRC, and the registration number must appear on the tax return. Often enquiries will be made and such enquiries may result in litigation.

4. Follower notices (FNs)
Under new legislation, HMRC can issue an FN where it has won a court case and it believes the victory is relevant to other cases in dispute. On receipt of an FN, the taxpayer is required to withdraw any appeal and pay the consequent tax liability. If he does not do so, there are financial penalties.

Where a taxpayer fights on and wins his case before the courts, he has no automatic right to repayment of the penalty imposed by HMRC due to his refusal to withdraw the appeal.

5. Advanced payment notices (APNs)
Previously, where the taxpayer and HMRC disagreed about whether a particular piece of tax planning worked, tax was only due when agreement was reached or the disagreement
was resolved at court.

Under new legislation, where there is a GAAR notice, a relevant DOTAS, or an FN, HMRC can issue an APN. This requires the tax in dispute to be paid up front. If the taxpayer subsequently wins the argument, it will be paid back. However, for some taxpayers, the immediate requirement to pay will be financially embarrassing. Some bankruptcies are expected.

6. Self-assessment and onus of proof
Under the self-assessment regime, introduced in the 1990s, the taxpayer self-assesses. There is an obligation to get it right: if the self-assessment is not accurate, HMRC will consider whether the ‘wrong’ answer is down to carelessness or worse. If the taxpayer cannot show innocent error, financial penalties will be imposed. Many advisers view this as a ‘guilty until proven innocent’ approach.

7. Penalties and behaviour
To reflect this new approach, new legislation was introduced in 2007 moving the trigger for penalties from the taxpayer being guilty of negligence or fraud to where an incorrect self-assessment could be attributed to careless or deliberate behaviour.

8. Increase in transparency
A particular concern of HMRC is whether taxpayers hold undeclared assets, for example outside the UK. For over a decade they have been seeking more information, usually from financial institutions, and creating more draconian penalties where a loss of tax has been identified.

Since 2009 HMRC have signed a number of agreements with states to exchange information. In Berlin in October 2014, over 50 states signed up to automatic exchange of information. By 2018 that number is expected to increase to over 80. Information will include names, account details, and changing valuations. Sophisticated IT systems are being developed to capture and analyse the mass of data this will generate.

9. No safe havens

Alongside the move to increasing transparency, HMRC are ramping up the civil and criminal consequences of offshore    non-compliance. This includes a proposed ‘strict liability’ criminal offence. Where there has been an understatement of tax due to offshore assets, the default position will be a criminal conviction. There is no obligation on HMRC to establish intent.

10. Disclosures and health checks

Whether the non-compliance is offshore or onshore, there are currently disclosure facilities offering incentives to make a voluntary disclosure. These are being restricted, and some will disappear from 2016 onwards.  In the risk-reward computation of how much time you should spend on ensuring your tax is right, the greater consequences of getting it wrong may lead some to want a health check, from a specialist, to ensure they have it right.  SJ

Andrew Watters is a director at Thomas Eggar