‘High-risk’ tax avoidance defined
Advisers face enormous fines if they fail to comply with new disclosure rules by offering tax planning products from ‘high risk’ firms.
Those who do not comply with new transparency rules may be fined up to £1 million in penalties, and a further £10,000 a day for continued non-compliance, according to a Treasuryconsultation published the week of 12 August 2013. The Government wants to identify ‘high-risk’ promoters of tax avoidance schemes and require firms to respond to specific and 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.
At present, the Treasury estimates 20 firms could be classed as ‘high-risk’. Over the next five years, it anticipates reaping £110 million from these firms and a further £130 million from tax revenues and penalties imposed on individuals.
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, for example 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 is based on products “whose sole or main aim” is to save on tax bills.
The objective criteria proposed for deciding what makes a promoter ‘high risk’ is:
- HMRC has used an information power in relation to that promoter or its products.
- The promoter has failed to notify a scheme under Disclosure on Tax Avoidance Schemes (DOTAS), 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 general anti-avoidance rule, 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 possible 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 low chance of working because they take an optimistic and unrealistic view of the law or are poorly implemented.
OTS wants shake-up of employee benefits tax
The system for reporting and taxing employee benefits is likely to get a comprehensive overhaul in the wake of an interim report from the Office of Tax Simplification (OTS), which contains nearly 50 proposed reforms.
The report (8 August 2013) suggests ‘payrolling’ benefits, so tax is paid as the benefits are awarded, instead of through an end-of-year tax return. It also looks at either scrapping or significantly increasing the £8,500 ‘higher paid’ earnings threshold above which employees (other than directors) are taxed on benefits, though it makes no definite recommendation.
The report also suggests smoothing the difference between tax and national insurance rules on benefits, changes to HMRC forms and publishing a list of items that automatically qualify for a ‘dispensation’ and so are not taxed. It also makes 43 suggestions for quick simplifications, including aligning tax and national insurance treatment of mileage rates over 45p and changes to the Cycle to Work scheme.
The current ‘higher paid’ threshold of £8,500 was set in 1979 and according to the report was based on the “level at which a married man started paying tax at the higher rates”. It says if the threshold had increased with inflation it would have been at £39,139 in May 2013, but warns that raising it to that level would result in a “considerable” drop in revenue, though it has not tried to estimate the cost. In the course of the review, the OTS was told many firms simply ignore the threshold and it has concluded that “life has moved on since the last time that abolition was considered.”
The OTS and Treasury will agree the areas the review will continue to focus on for its final report over the summer. Final recommendations will be published before the Budget in March 2014.