UK Unveils Tough New Tax Avoidance Penalties
New laws to punish those who help set up offshore schemes to enable tax evasion were revealed Monday, as the U.K. government cranks up the heat on advisers and planners.
Britain’s government has widened the Finance Bill 2017 to include further measures that will tackle tax evasion, avoidance and aggressive tax-planning.
The legislation has introduced a penalty for those who design, sell or otherwise enable the use of tax avoidance arrangements that are defeated by Her Majesty’s Revenue and Customs. The bill also removes the defense that one relied on nonindependent advice, as evidence of taking “reasonable care” when penalties are being considered for taxpayers who use such avoidance schemes that HMRC defeats.
“We are recognized as having one of the world’s most effective tax regimes, and this government is acting to ensure it continues to provide certainty for businesses, fairness for workers, and a sound tax base to fund productivity boosting investment,” said Jane Ellison, financial secretary to HM Treasury.
Revelations in April’s Panama Papers scandal highlighting how wealthy individuals hide money offshore have thrust tax avoidance into the public spotlight.
The U.K. is aiming to target not only tax avoiders but also the entire supply chain that helps them, tackling a practice that the government estimated cost the Treasury £2.7 billion ($3.5 billion) in lost revenue in 2014.
After a wide-ranging consultation, the government decided to legislate in Finance Bill 2017 to strengthen the sanctions and deterrents for tax avoidance.
HMRC stirred a wave of concern among banks, law firms and accountants who advised clients in the past on how to minimize tax exposure, by planning to sanction anyone helping a client to dodge tax with fines of up to 100 percent of the missing money.
Many industry professionals were frustrated by the lack of details, worrying that honest advisers could be caught up in the dragnet. Officials at HMRC told Law360 earlier this year that the tax authority still had to work out how to handle legacy issues borne in existing tax deals.
As a result, the new penalties will apply to abusive schemes defeated in the courts by HMRC, will impose a fixed 100 percent fee-based penalty on everyone in the supply chain, and apply to advice provided after Royal Assent to the Finance Bill 2017.
“Many people have legitimate reasons to use offshore structures but can unwittingly get caught up in those could land them in trouble,” Ellison said. “Asking people to report complex structures on their tax returns may make them stop to examine them more closely.”
The draft legislation is open for consultation until Feb. 1.
Lawyers remain unconvinced by the need for HMRC to extends its powers.
“One has to question the necessity of implementing further powers, particularly where much of the information captured by the proposed notification system is already obtainable by HMRC, under, for example the Disclosure Of Tax Avoidance Schemes rules,” said David Sleight, a partner at Kingsley Napley LLP. “With a multitude of new consultations and legislation being implemented in the new year, the risk for those who house assets offshore has never been greater. The most difficult question for HMRC will be choosing which stick to beat you with.”
HMRC has won more than £1.2 billion in disputed tax avoidance litigation since April, according to the authority’s website.
At the start of August, the Court of Appeal ruled in favor of HMRC in a £30 million dispute with brewer Greene King PLC over a tax avoidance scheme created by accounting giant Ernst & Young.
Even though Ernst & Young came up with the scheme, it faced no penalty. Now the government wants to “raise the stakes” for those involved in the supply chain.
If someone designs a scheme, uses an independent financial adviser to then market the scheme, and uses lawyers and bankers to implement the scheme, then each of those parties in the supply chain would have to pay a penalty for failed arrangements.
Since 2010, the U.K. has invested more than £1 billion into HMRC to strengthen its powers to tackle avoidance and evasion, and made more than 40 legislative changes to combat tax avoidance, the government said.
But in June, Transparency International, the world’s leading nongovernmental anti-corruption organization, alleged that many forms of financial crime are flourishing in the U.K. because a lack of dedicated laws makes enforcement and prosecution difficult.
And the U.K. appears to have played a key role in the efforts of the Panama law firm Mossack Fonseca, set up in the 1970s, which has helped wealthy clients, including world leaders, establish anonymous shell companies, some of which were used to avoid paying taxes.
Data released by the International Consortium of Investigative Journalists in May showed the U.K. had links to 214,000 offshore shell companies, more than any other country in the world.
Also included in Monday’s release was final government policy design for a new requirement to correct past tax evasion. As a result, anyone who has failed to correct past evaded taxes by Sept. 30, 2018, would be hit with tough new penalties and possibly criminal charges, the government said.