Tax experts call for new penalties to target deliberate promotion of avoidance rather than commercial advice

Tax experts are warning that government proposals to penalise ‘enablers’ of tax avoidance schemes are too widely drawn and could result in some taxpayers and businesses being unable to get expert advice on complicated and often unclear areas.

The Chartered Institute of Taxation (CIOT) is concerned that this could impact on, among other matters, investment into the UK. The CIOT said the penalties should be better targeted at those who deliberately seek to profit from tax avoidance.

HMRC is proposing a significant new penalty for those who ‘enable’ tax avoidance and profit from doing so,1 and also a change to the existing penalty legislation which applies to those who use avoidance which is exposed and defeated by the tax authority. The CIOT fears the proposals and definition of enablers is so widely drawn that it will catch many ordinary business services – for example company formation agents, just because some avoidance schemes rely on setting up companies.

It could also penalise advisers who give perfectly reasonable and legitimate advice to clients, including on inward investment into the UK.  Many reputable advisers may be deterred from advising on complex matters on the grounds they may be seen as ‘enabling avoidance’ and this would severely tarnish their reputation, irrespective of penalties.

Assuming the proposal is properly targeted, the penalties need to be large enough to deter the behaviour the Government is seeking to stop, but should not topple over into retribution; in a democratic society, sanctions need to be proportionate and measured, otherwise the legal system itself can be brought into disrepute.

The CIOT has welcomed HMRC’s broad consultation on the changes and has set out its views in its response to the Government’s ‘Strengthening Tax Avoidance Sanctions and Deterrents’ discussion paper.

John Cullinane, CIOT’s Tax Policy Director, said:

“The Government needs to be careful that in its effort to wipe out avoidance schemes it does not prevent taxpayers from getting access to honest, impartial advice on the law.

“If the Government wants to incentivise good behaviour and penalise bad, as we think it should, the proposals should target the deliberate behaviour of the small persistent minority who devise and market avoidance schemes. It should not interfere with the right of taxpayers to obtain full and rounded advice on complex and often unclear areas of law.

“It could be calamitous for businesses and other taxpayers if tax advisers (or their insurers) feel too anxious about the new sanctions to help them sensibly plan their tax affairs within the law and avoid these taxpayers laying themselves open to large, unintended tax bills.

“It is vital to our economy that the proposals are properly focussed, otherwise they risk making the UK a much less attractive place for commercial transactions. If the proposals catch the services needed by inward investors – as well as existing taxpayers – ranging from company incorporation to advice on highly complex legislation, this would be a real deterrent to investing in the UK. Given that the UK is the European base for many investments, this would be very damaging to the UK economy.

“We recognise that there are limited financial penalties at present for those who devise and actively market tax avoidance schemes but the tax-geared penalty being proposed is draconian.  It should be related to the fees or commission received by the enabler. Anything else would be disproportionate.”

The Institute has recommended in its response2 that the term ‘enabler’ should be defined in terms of those who devise and play an active role in the promotion of tax avoidance schemes by requiring a stronger and more positive link between the financial benefits sought and the tax avoidance.  The tax experts suggest that there should be a defence for professional advisers who are members of a regulated body or a body with professional rules that address the issue of tax avoidance.

The Institute has also recommended to the Government that any final proposal should apply to enabling that takes place only after the date that it comes into force.

John Cullinane said:

“We look forward to continuing to work with HMRC to produce a workable outcome.”

Notes for editors

1.       The consultation document (paragraph 2.15 onwards) is seeking views on an appropriate model for a penalty on those who enable tax avoidance.  One approach suggested could be to base the penalty on the financial or other benefit enjoyed by the enabler.  Another approach would be to base a penalty on the amount of tax understated by the user of the tax avoidance arrangements as a result of the avoidance being defeated.  The Government is not proposing to link the new avoidance enabler penalty to a penalty being charged on the user of the avoidance scheme which is defeated.

2.       The CIOT’s response to the Strengthening tax avoidance sanctions and deterrents discussion paper can be seen here.

3.       The Chartered Institute of Taxation (CIOT)

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 17,600 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

Contact: Hamant Verma, External Relations Officer, 0207 340 2702 (Out of hours contact: George Crozier, 07740 477 374)