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Lawyers baulk at government plans to sanction ‘tax avoidance enablers’

Retrospective measures are defined too broadly and could ensnare legal advisers, warn experts

18 August 2016

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New government proposals designed to strengthen sanctions against enablers of tax avoidance are a 'fanciful scheme' that 'goes too far', according to lawyers that fear the disproportionate measures could be applied retrospectively.

In an effort to address an estimated £3bn a year loss to the Treasury, the government intends to introduce heavy penalties for any organisation or professional that creates tax avoidance schemes.

Under the proposals, banks, accountants, financial advisers, and lawyers would be charged up to a 100 per cent of the tax owed from all sources, including offshore havens, if their schemes are proved illegitimate before a tribunal.

'Some aspects of these proposals go too far and could end up capturing traditionally accepted tax planning,' said Fiona Fernie, a partner at Pinsent Masons. 'The document lays out a definition of tax avoidance which is far too broad at present.'

The international firm's head of tax investigations explained that the consultation wording suggested that measures will cover all schemes counter-acted by the General Anti-Abuse Rule and notifiable under Disclosure of Tax Avoidance Schemes (DOTAS), as well as those targeted by avoidance-related rule or 'unallowable purpose test'.

'This is incredibly wide-ranging and the criteria need to be tightened,' she said. 'Restricting the proposals to all schemes notifiable under DOTAS would be a more sensible approach.'

There are also concerns over whether the sanctions would be applied retrospectively, thereby capturing historic cases and schemes.

'Given the emphasis placed on deterring future avoidance, and influencing taxpayer behaviour going forward, such an approach would make little sense,' said Fernie. 'A line in the sand should be drawn and clear timescales set out- the legislation should apply to all cases after a future date.'

The government's consultation document also proposes defining how tax avoiders are judged to have 'taken reasonable care' to avoid errors in their tax returns, thereby making penalties easier to impose.

Furthermore, it also moves the burden of demonstrating this 'reasonable care' was taken onto the taxpayer, rather than HMRC.

'Moving the burden onto the taxpayer would be a significant concern,' said Fernie. 'The time and resources it would take are considerable. Compliance costs for individuals have soared over recent years, and this would be an unreasonable additional ask.

'It is a David and Goliath situation. The Revenue has huge resource at its disposal while the average everyday taxpayer does not.'

In addition, there is widespread concern the government will be unable to police the new initiative, due to public sector cuts on HMRC's infrastructure and a lack of judicial capacity to deal with cases.

'Once again, the government has announced proposals to tackle tax avoidance schemes, though it is clear they are not aimed at legitimate solutions to reduce or mitigate tax burdens. There has always been a fundamental principle that arranging one's affairs to pay less tax is not illegal,' said Jeffrey Cohen, an associate at Mackrell Turner Garrett.

'Although we have seen much legislation chipping away at this, it remains a cornerstone of tax planning. The key to tax planning is to arrange one's affairs within the law, not to create fanciful schemes which have no practical or commercial merit.'

The London-based tax solicitor recommended advisers use tailored HMRC-recognised solutions such as asset rearrangement and reinvestment to mitigate tax liability.

Also commenting on the plans, Rufus Ballaster, a partner at Carter Lemon Camerons, said that a penalty requiring payment of multiple times the outstanding tax sum, plus costs, interest, and 'a figure to ensure nobody else dreams of attempting the same analysis in the future', was disproportionate.

'Successive governments have sought to influence investment behaviour by making rules about certain items being treated better or worse for tax purposes,' he remarked.

'Research and development is often promoted as a tax break, as it reinvigorates neglected areas, but the purchase of a residential home for investment purposes now suffers a higher charge to SDLT than the purchase of a home for principal residence.'

'Tax avoidance - bad; thinking about tax and planning with it in mind - good,' added Ballaster. 'Making a personal choice to undertake tax efficient transactions, based on good and legally sound advice, must be allowed. Is buying a property rather than a company, or vice versa, part of an industry of tax avoidance which costs the UK £3bn annually? No, it clearly is not.'

The City lawyer continued: 'Dying poor leads to HMRC receiving no inheritance tax. Is spending your money on holidays while you are fit enough to enjoy them tax cheating? Clearly not.

'Is a professional, who points out to a client that going on world cruises can help reduce the likely tax on death, now worry about being penalised for helping with tax avoidance? I sincerely hope not!'

John van der Luit-Drummond is deputy editor for Solicitors Journal
john.vanderluit@solicitorsjournal.co.uk
 | @JvdLD

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Financial services & Tax Tax & Wealth structuring