In the wake of the Autumn Budget and the Spring Statement, the Government has redoubled its commitment to closing the tax gap.

This includes consulting on robust civil and criminal sanctions, not simply against those who enter into tax avoidance arrangements, but promoters, advisers and other intermediaries who are involved in the “supply chain” of such arrangements. 

Promoters of tax avoidance

The Government has published a consultation on new measures to enhance HMRC’s powers and sanctions against promoters of marketed tax avoidance. 

The provisions are focused on a small group - 20 to 30 promoter organisations - but HMRC estimate they are responsible for £0.5bn of the tax gap. HMRC are proposing a suite of measures:

1. enhancing the Disclosure of Tax Avoidance Schemes (DOTAS) regime, with proposals for criminal sanctions for failure to disclose under DOTAS and updates to the civil penalty regime; 
2. introducing a Universal Stop Notice that would allow HMRC to specify a scheme and prevent all persons from promoting or enabling that or any similar scheme under threat of criminal sanctions; 
3. Promoter Action Notices that would require businesses to stop providing products or services to promoters;
4. additional powers to compel information from promoters or suspected promoters or parties connected with the promotion of schemes, with strong sanctions for non-compliance; and
5. sanctions aimed at a small number of legal professionals who design or contribute to the promotion of avoidance schemes. 

There is sympathy for the Government taking steps to clamp down on artificial and mass marketed tax avoidance schemes, but these proposals also target those who interact with promoters and not just legal advisers, but banks, employment agencies, insurers and even advertisers. Given the targeted population (some 20 - 30 promoters), it will be important for these measures to remain proportionate.

Tackling tax advisers facilitating non-compliance 

The Government is also seeking views on enhanced powers against tax advisers who “facilitate non-compliance”. 

These measures are intended to complement a new system under which those who interact with HMRC on behalf of a client will need to register with HMRC.

Proposals include greater powers for HMRC to gather information from tax advisers and a streamlined system to exercise these powers. As with the usual theme of deterrence, the proposed reform to the financial penalties system would shift from a fixed range to a penalty calculation which is linked to the potential loss of tax revenue caused. 

The rules are intended to target a small minority of advisers who provide advice that is inadequate (and persistently so) but there is a risk of overreach and it is not clear from the proposals how the rules will be limited.

Behavioural penalty reform 

The Government is also consulting on options to improve HMRC’s inaccuracy and failure to notify penalties. 

Targeting both the inaccuracies in returns and documents submitted to HMRC and taxpayers’ failures to notify, the new system will aim to incentivise taxpayers to “get things right first time” and is intended to strike a balance between fairness for genuine mistakes and deterrence of deliberate non-compliance. 

While the consultation considers reworking the current system, it also suggests a replacement that could expand the scope of penalties by relying on a simpler distinction between “misdeclaration” and “civil evasion”. “Misdeclaration” would address most non-compliance, even if it were innocent.  “Civil evasion” would cover conscious attempts to avoid tax, but it is not clear that it would necessarily involve dishonesty. 

The consultation also raises the prospects of (potentially extreme) non-financial penalties.  Although no specific details were provided, the references to measures used by other bodies such as referrals for disqualification from driving and orders to cancel a person’s passport indicates the breadth of sanctions that HMRC have in mind for the most serious cases.

This article was co-authored by Trainee Solicitor, Milly Cheng.