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Penalties for abusive tax arrangements

Mercia Blog Abusive Tax Arrangements

HMRC have issued draft guidance on how the penalties system will operate for those enabling or otherwise facilitating another person to enter into abusive tax arrangements.

The regime of penalties is intended to deter advisors from promoting and enabling such arrangements, by not only charging penalties and tax for the taxpayer, but also those that promoted the arrangement that has been defeated in the courts or tribunal.

Within the regime, the GAAR Advisory Panel is an important safeguard, as no penalty can be charged unless HMRC has obtained an opinion of the Panel in relation to the arrangement in question. The legislation and guidance is not aimed at the vast majority of tax professionals, who already act in a professional way by following, for example, the Professional Conduct in Relation to Taxation (PCRT). Advisors should always consider, however, if they might be advising on an arrangement that they know is, or is likely to be considered, abusive.

Abusive tax arrangements

A tax arrangement is considered to be abusive if:

  • There is a GAAR counteraction of the tax advantage/s which becomes final; or
  • The tax advantage/s arising from the arrangements have been counteracted either by settlement before any counteraction under GAAR or under another provision, but could have been counteracted under the GAAR had it not been for the settlement or for that other provision.

In other words, in a very general sense, an arrangement has failed due to GAAR or some other provision, for instance in a tribunal or court.

It is important to appreciate the breadth of what is caught so we will look at some of the definitions pertinent to this.

An arrangement includes any agreement, understanding, scheme, transaction or series of transactions whether or not legally enforceable.

An arrangement is a tax arrangement if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangement.

There is, as one might expect, an awful lot of further explanation regarding what types of advice might meet the definition of an abusive tax arrangement as described above and who an enabler is (which includes those marketing or financing the schemes as well those designing or managing them).

Ending up as an enabler

One interesting aspect of the guidance is Example 6, which sets out the situation in which an auditor might end up (possibly inadvertently) becoming an enabler. Here is an extract from the analysis:

However, if an auditor goes further than exercising their audit function, and provides advice which they know will be taken into account in a design or re-design of abusive tax arrangements, they will be an enabler by virtue of being a designer.

Audit firms and those preparing accounts should take care to ensure that they do not accidentally step over the line into becoming a designer by giving advice on accounts treatments that might help in a tax arrangement.

Interaction with PCRT

There is also a section within the guidance regarding the interaction with PCRT. The guidance states that although a person complying with the PCRT is not exempt from the offence, it is highly unlikely that such a person would come within the scope of the enablers legislation. This is because they should already be ensuring that they do not advise upon or otherwise facilitate abusive tax arrangements.

Purpose of the guidance

The draft guidance issued is 61 pages long and of course, this article only gives a high level view of key points. The reason for this is that the vast majority of professional accountants will already have in place procedures to ensure they do not advise on abusive tax arrangements. However, it is worth everyone being aware of the guidance and to ensure they have fully considered the risks involved, including inadvertently becoming an enabler of such schemes, even if there was never an intention to do this.