Tackling Tax Avoidance, Evasion and Non-Compliance

Posted On: 25 Nov 2017

hmrc paper – Tackling Tax Avoidance, Evasion and Non-Compliance

HMRC have recently published a paper entitled “Tackling Tax Avoidance, Evasion and Non-Compliance”, which details over 100 measures introduced by the Government since 2010. These are summarised in an appendix to the paper but fall broadly within the following four areas:

  1. Marketed tax avoidance,
  2. Offshore tax evasion and the use of offshore structures,
  3. Cross border tax arrangements of multinational businesses, and
  4. Other measures to tackle avoidance, evasion and non-compliance.

Further information is included below but, in all cases, HMRC have sought to increase the penalties and consequences for those who, in their eyes, have opted not to comply.  They have also sought to remove the economic benefit of avoidance and/or evasion.

Although not detailed in the Chancellor’s speech, the Autumn Budget 2017 also contained 18 measures and additional investment in HMRC to tackle perceived avoidance, evasion and non-compliance.  Together these are forecast to raise an additional £4.8 billion between now and 2022/23.

The “Tax Gap”

One of HMRC’s main focuses is on closing the perceived “Tax Gap” (this being the difference between what HMRC believe is owed and what HMRC actually collect).  At 6%, the UK currently has one of the smallest published tax gaps in the world. Whilst the accuracy of this figure is debateable, it is interesting to see how HMRC consider this gap breaks down.

According to their recent paper, the UK’s Tax Gap is attributable to the following:

  • Failing to take reasonable care 18%
  • Differences in interpretation of legislation 18%
  • Organised criminality 15%
  • Evasion 15%
  • Taxpayer errors 10%
  • Avoidance 5%
  • Other 19%

100%

HMRC have targeted the main areas as follows:

  • Marketed Tax Avoidance

HMRC have brought in a number of measures over the last few Finance Acts in order to tackle marketed tax avoidance.  These include:

  • Finance Act 2013: Introduced the General Anti-Abuse Rule (GAAR), which was intended to help HMRC recognise abusive tax arrangements and provide a process for counteracting them. Penalties were later introduced in 2014, allowing penalties of 60% of the tax due to be charged in all cases successfully tackled by the GAAR
  • Finance Act 2014: Introduced Accelerated Payment Notices (APNs) and Follower Notices and powers to act against “Promoters of Tax Avoidance Schemes” – this means that users of tax avoidance schemes have to pay the perceived benefit upfront, whilst their tax liabilities are disputed. This has changed the underlying economics of tax avoidance and has resulted in more than £4 billion being paid over to the Exchequer, albeit some (or all) of this may ultimately be refunded to the taxpayers once the disputes are settled
  • Finance Act 2015: Expanded the Disclosure of Tax Avoidance Schemes (DOTAS) regime
  • Finance Act 2016: Introduced new penalties for serial avoiders who persistently enter into tax avoidance schemes that are defeated, called the “Serial Tax Avoiders Regime” (STAR)
  • Finance Act (No. 2) 2017: Introduced tough new financial penalties to deter enablers of tax avoidance as well as a new disclosure regime for indirect tax avoidance schemes

They have also sought to tackle what they call “disguised remuneration” (usually arrangements which provide loans via 3rd parties) by imposing a new income tax and NICs charge from April 2011 (Finance Act 2011) and a charge on loans outstanding at 5 April 2019 (Finance Act 2016 and Finance (No.2) Act 2017).

As a final example of how HMRC are restricting opportunities to avoid tax, the Autumn Budget 2017 also brought in changes to the double tax relief (DTR) targeted anti-avoidance rule.  For tax returns with a filing date on or after 1 April 2018, HMRC will no longer be required to issue a counteraction notice before the DTR targeted anti-avoidance rule (TAAR) applies.

Instead, taxpayers will be required to consider whether the DTR TAAR applies as part of the self-assessment process.  A second change will be made which widens the scope of schemes or arrangements to which the DTR TAAR applies and which will apply to payments of foreign tax made on or after Budget day.

  • Offshore tax evasion and the use of offshore structures

The UK was at the forefront of the OECD work to develop the Common Reporting Standard (CRS), which is an international tax transparency standard that means that HMRC, along with almost 50 other tax authorities, will automatically receive information on financial accounts held offshore.  By September 2018, over 100 jurisdictions will be participating.

The “Panama Papers” leak resulted in 66 criminal and civil tax investigations and HMRC have also asked the ICIJ for the data from the recent “Paradise Papers” to see what further investigations are required.  Off the back of this, the Government introduced:

  • A new, simpler criminal offence and increased penalties for offshore evaders
  • Penalties for those who deliberately help others evade tax offshore, and a new corporate criminal offence for corporate bodies and partnerships that fail to prevent their representatives from facilitating tax evasion

 

  • The “Requirement to Correct”, which gives taxpayers until 30 September 2018 to regularise any historical offshore tax non-compliance or else greatly increased penalties will apply. More information is included under “potential issues” below

Finally, the Autumn Budget 2017 also brought in a proposed increase in the time limits for HMRC to assess offshore tax non-compliance to a minimum of 12 years in all cases, with a consultation on this due in spring 2018.

  • Cross border tax arrangements of multinational businesses

In 2015 the Government introduced the “Diverted Profits Tax” (DVT), which counters aggressive tax planning by large multinational companies that enter contrived arrangements to artificially divert profits away from the UK.

As part of the Autumn Budget 2017, the Government has gone further and announced that it will again expand the UK’s withholding tax rights on royalties to prevent multinational businesses, primarily in the digital sector, recognising profits which relate to UK sales in companies in low-tax countries.

The UK has also been at the forefront of multilateral action taken over the last few years through the G20 and OECD to address Base Erosion and Profit Shifting (BEPS) by reforming international tax standards, and agreeing rules that each country can introduce to address BEPS.

Action taken in the UK as a result of this international effort includes introducing interest restriction rules, which prevent large multinationals claiming excessive tax deductions for interest expenses and hybrid mismatch rules, which prevent multinationals from exploiting differences in how countries tax financial instruments, entities and branches.

  • Other measures to tackle avoidance, evasion and non-compliance

Finally, the Government has also acted to tackle onshore evasion and the “hidden economy”, including:

  • Extending HMRC’s data-gathering powers to merchant acquirers and aggregators who process credit and debit card payments on behalf of retailers, business intermediaries, providers of electronic stored-value payment services and Money Service Businesses
  • Reducing Excise fraud by introducing a registration scheme for alcohol wholesalers
  • Addressing online sales fraud by non-compliant overseas traders by enabling HMRC to hold an online marketplace jointly and severally liable for the unpaid VAT of an overseas business that sells goods in the UK via the online marketplace’s website and introducing a due diligence scheme for UK fulfilment houses

As part of the Autumn Budget 2017, the Government also introduced an extension to HMRC’s powers to hold online marketplaces jointly and severally liable for the unpaid VAT of all traders on their platforms.

The Government also announced that it will publish a consultation response on the proposed requirement for designers of certain offshore structures, that it said could be misused to evade taxes, to notify HMRC of these structures and the clients using them.

What are the potential issues?

Clearly, HMRC are taking several steps to counteract perceived tax avoidance and evasion.

In respect of onshore matters, HMRC now have significantly increased powers to obtain information from third parties and, with their recent investment in technology which can identify discrepancies between taxpayers’ declared position and their actual lifestyle/business prowess, HMRC will be able to more easily target those who have irregularities.

With the introduction of the Common Reporting Standard and various Beneficial Ownership Registers, HMRC’s ability to access third party information in offshore jurisdictions has also increased significantly.  These new data sources will enable HMRC to more easily identify individuals who have not ensured that their tax affairs are up to date.

The new Requirement to Correct (RTC) legislation dictates that any entity in the world has an obligation to identify and disclose historic non-disclosure relating to UK Income Tax, Capital Gains Tax and Inheritance Tax.  Failure to correct will mean:

  • Penalties of up to 300% of the potential lost revenue (minimum 100%),
  • A potential 10% asset-based penalty, and
  • Potential “naming and shaming”, whereby your name, address and details of tax underpaid are published by HMRC

Over the past few years there have been many favourable amnesties available to facilitate the disclosure of any historical income and gains linked to offshore assets, in particular.  HMRC are therefore taking a much stronger stance against any taxpayers who, in their eyes, opted not to disclose despite several prompts and opportunities.

HMRC have made it clear that they will not hesitate to prosecute individuals where appropriate.  Given the complexity of the UK tax legislation, it is therefore vital that all persons with any arrangement which has a UK connection undertake a review of their tax affairs.

With the ever-more draconian approach HMRC is taking to penalties more generally, and the political backing they are receiving from our Government, it has never been more important that those who have historical issues either on or offshore come forward to rectify the position before HMRC make their own approach.

HOW CAN LANCASTER KNOX HELP?

At Lancaster Knox our Tax Investigation specialists are industry recognised and have dealt with hundreds of potentially contentious situations with HMRC over the years. We are adept at managing interactions with the tax authorities to ensure that the process runs smoothly and that your interests are best protected.

Lancaster Knox will work with you (and your current adviser, if applicable) to undertake a review of your affairs, arrange a UK tax disclosure if necessary prior to the 30 September 2018 “Requirement to Correct” deadline and ensure that HMRC do not seek to obtain information they are not entitled to.

We can also review APNs and Follower Notices to advise on their validity and negotiate Time to Pay the liability, where required.

If HMRC have already opened an enquiry or commenced an investigation into your affairs, either under COP8 or COP9 then please do get in contact as soon as possible so that we can ensure that the process is managed correctly and in a timely manner so that HMRC receive the correct amount of tax and that your interests are best protected.