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Govt defines “high-risk” tax avoidance and predicts £240m windfall

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Advisers offering tax planning products from “high risk” firms face huge fines if they fail to comply with new disclosure rules.

In a Treasury consultation published this week, the Government proposes identifying “high-risk” promoters of tax avoidance schemes and fining those who do not comply with new transparency rules up to £1m as a penalty and a further £10,000 a day for continued non-compliance. The rules would require the firm to respond to specific as well as ongoing information requests. HMRC is also working with the FCA to see how its regulations, including new misleading promotion powers, could be used to control “high-risk” promoters.

The Treasury estimates 20 firms could currently be categorised as “high-risk”. It expects the new regime to bring in £110m in fines against firms and £130m in tax revenues and penalties against individuals over the next five years.

The consultation sets out a two-pronged approach for judging whether a firm is a “high-risk” promoter of tax avoidance schemes. The business will be judged against objective criteria in its dealings with HMRC and the regulators, such as whether HMRC has used its information gathering powers against the firm in the past.

The second strand of the test will look at whether “all or substantially all” of the promoter’s business revolves around products “whose sole or main aim” is to save on tax bills.

Skandia head of wealth planning Colin Jelley says: “It is difficult to draw a line around tax avoidance. Judges have said some arrangements are okay because they utilise an arrangement specifically put forward by Parliament. Some arrangements are well known to HMRC. Problems could arise where someone has done an analysis of the law and found a way of reducing tax without corresponding economic benefit.”

A Treasury spokeswoman says: “We must recognise there is a difference between normal, sensible tax planning which involves making use of reliefs for the purpose they were intended and behaviour which aims to exploit tax law in a way that delivers an unfair result.”

Facts and Figures managing director Simon Webster says: “Tax avoidance is either legal or it is not. What we are now seeing is the introduction of a morality clause and that cannot be right.”

What makes a promoter “high risk”?

Objective criteria:

  • HMRC has used an information power in relation to that promoter or their products 
  • The promoter has failed to notify a scheme under Disclosure on Tax Avoidance Schemes, whether or not there has been a penalty for the failure
  • The promoter has designed, sold or implemented an avoidance scheme that is caught, or appears to be caught, by the GAAR, or that fails due to the Halifax abuse of law principle 
  • The promoter has breached a voluntary undertaking with HMRC 
  • The promoter is offshore in, for example, a UK overseas territory or a crown dependency, but has users that are subject to tax in the UK 
  • The promoter has been subject to a relevant fine or disciplinary action by a regulatory authority.

Other factors include:

  • All or substantially all of the promoter’s business consists of designing, marketing or implementing products whose sole or main purpose appears to be the provision of a tax saving to the user 
  • The products appear to have a limited probability of working because they take an optimistic and unrealistic view of the law or are poorly implemented 
  • The success of the product relies on non-co-operation with HMRC, concealment or mis-description 
  • The economic benefit of the product appears not to be commensurate with the risk 
  • The product results in an amount of income, profit or gains for tax purposes that is significantly less than the amount for economic purposes 
  • The promoter either explicitly or implicitly requires the user of the product to keep details of the product confidential from their other advisers or from HMRC 
  • The promoter uses a network of intermediaries to sell its product

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