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HMRC handed new powers to Clampdown on promoters of tax avoidance schemes

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ICAEW warns that the current legislative phrasing provides HMRC with “a very wide-ranging power with extremely serious consequences.”

The government is giving the nation’s tax authority, the HMRC, more legislative powers to clamp down on promoters of tax avoidance schemes, according to the Institute of Chartered Accountants in England and Wales (ICAEW).

The four new measures will enable HMRC to :

  • seek freezing orders to prevent promoters from hiding assets;
  • name promoters and publish details of how they promote tax avoidance;
  • issue additional penalties to UK entities facilitating promotion of tax avoidance by offshore promoters;
  • present winding-up petitions for companies operating against the public interest. 

ICAEW’s Tax Faculty has already highlighted key areas in the four draft clauses published by HMRC in July, where alternative wording, more objective tests or further guidance could be used to improve the clarity of the legislation and its application.

Why is it so difficult to legislate against promoters?

In ICAEW Rep 85/21, ICAEW acknowledges the difficulties in legislating against the promotion of tax avoidance schemes, given its subjective nature, but suggests that phrases such as “a good arguable case” and “expedient in the public interest” are unclear.

The Tax Faculty raises concerns that such phrasing could potentially cause confusion for the courts and see a broader application of powers than may be intended, before outlining recommendations for amendments or further guidance.

For example, clause 1 details the new freezing orders and the draft legislation calls on the court to satisfy itself that HMRC “has a good arguable case” in relation to the penalties being sought.

The faculty suggests that if this phrase isn’t a well-recognised legal term, guidance is created to help courts to interpret it or a more objective test is included instead, such as whether penalties had been raised against the promoter in the past.

Penalty on UK entities who facilitate tax avoidance schemes provided by offshore promoters

“Offshore promoters operate in the UK through a network of willing associates and collaborators”, says the HMRC, “and as a result, they are able to sell their schemes in the UK and profit from these mass-marketed products.”

Although the offshore promoter is running the avoidance scheme, the UK entity acts as the interface between the underlying promoter and the client.

Changes made to the anti-avoidance regimes in Finance Act 2021 (sections 121 – 124) will enable HMRC to pursue these UK entities for failing to comply with DOTAS and POTAS anti-avoidance rules as a result of their own activities, but further measures are needed to address the wider impact the UK entity has on facilitating offshore tax avoidance.

Winding up companies that promote tax avoidance

Section 124A of the Insolvency Act 1986 enables the Secretary of State (SoS) for the Department for Business, Energy and Industrial Strategy (BEIS) can petition the Court to wind up a company on the grounds that its activities are against the public interest in England, Scotland and Wales.

Article 104A of the Insolvency (Northern Ireland) Order 1989 gives the Department for the Economy in Northern Ireland a right to petition the Court to have a company wound up in the public interest on similar grounds.

Currently, HMRC can only take action itself against promoter companies under the existing insolvency legislation where there is a tax debt.

Do the new legislative measures give the HMRC too much power?

Meanwhile, in relation to clause 4, which states winding up petitions can be made “where it appears to an officer of HMRC that it is expedient in the public interest for the purposes of protecting the public revenue”, ICAEW warns that the current phrasing provides HMRC with “a very wide-ranging power with extremely serious consequences”.

ICAEW recommends that: “A statement is published detailing how HMRC will determine whether a winding-up petition is expedient in the public interest and what safeguards it will have in place to ensure that this power is properly exercised.”

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