The Serial Tax Avoidance Regime & HMRC Penalties

The recovery of all forms of tax revenue is an essential feature of our economic system, necessary for the operation of public services and essential in the maintenance of a healthy economy.

Tax avoidance schemes continue to be promoted commercially with the aim of attracting those seeking to avoid payment of all or part of their tax liability, often in exchange for a fee to participate in these schemes.

HMRC continues to warn that many schemes never work and are more likely to result in financial penalties and additional costs being incurred by those determined to pursue such an avenue.

HMRC describes such schemes as ‘contrived, artificial transactions that serve little or no purpose other than [seek] to produce this [alleged] advantage.’

Avoidance schemes frequently produce outcomes never envisaged or intended by Parliament and, upon discovery, will be challenged. In order to combat their use, the Serial Tax Avoidance Regime (‘the Star Regime’) was introduced by Schedule 18 of the Finance Act 2016 (‘the Act’) and came into force on 15 September 2016 and catches:

• new arrangements entered into since that date and

• arrangements entered into before that date if they were defeated after 5th April 2017.

The Star Regime targets taxpayers who engage in tax avoidance schemes which HMRC has defeated in court or tribunal and involves a series of warnings and sanctions which include financial penalties and ‘naming and shaming.’

The Star Regime applies to all users of avoidance schemes whether they are persistent users or have only used one defeated scheme.

Tim Thompson of KANGS outlines the Star Regime.

Implementation of the Star Regime

Arrangements prior to 15th September 2016.

HMRC states that a person who entered into any scheme(s) prior to this date will not be affected if, prior to 6th April 2017, in respect of each scheme:

• the tax affairs relating to it were settled,

• full disclosure of the use of the scheme had been made,

• it had been confirmed in writing that any time limit allowed for disclosure will have been met.

Schemes defeated after 5th April 2017.

HMRC is concerned with those schemes defeated after 5th April 2017:

• that have been counteracted under the general anti-abuse rule (GAAR),

• where it has sent the taxpayer a follower notice,

• which fall under the disclosure of tax avoidance schemes (DOTAS),

• that are notified or notifiable under the VAT avoidance disclosure regime rules (VADR),

• falling under the disclosure of tax avoidance schemes for VAT and other indirect taxes rules (DASVOIT).

If the use of any of these schemes has not been fully disclosed, HMRC may serve a Warning Notice, following receipt of which, continued use may result in:

• financial penalties,

• public naming as a serial tax avoider,

• restrictions to direct tax relief affecting, for example, income tax and inheritance tax.

Involvement in a tax avoidance scheme may result in HMRC serving one or both of the following.

A Follower Notice

HMRC may send this Notice where a taxpayer uses a scheme with the same or similar arrangements to one which it has already successfully challenged in court. The Notice requires that the recipient’s tax affairs be settled, failing which a penalty may be imposed.

Accelerated Payment Notice

HMRC may serve such an Accelerated Payment Notice (an ‘APN’) where an enquiry, dispute or appeal is in progress and:

• a Follower Notice has been served,

• a DOTAS (defined above) has been used,

• a GAAR (defined above) Counteraction Notice has been served.

Upon receipt of an APN, the amount of disputed tax must be paid to HMRC which will hold the same until the dispute has been resolved.

Defeated Tax Avoidance Schemes

A tax avoidance scheme is classed as defeated if:

• an agreement is reached with HMRC whereby the expected tax advantage of using the scheme is abandoned,

• corrective action is taken after receipt of a Follower Notice,

• HMRC submits a tax assessment or readjustment of tax affairs which is accepted and not appealed,

• the taxpayer makes an unsuccessful appeal to a tribunal or court against HMRC's assessment of a scheme.

Warning Notices

Any taxpayer who is involved with a tax avoidance scheme which is defeated by HMRC will receive a Warning Notice within ninety days which provides:

• relevant details about the defeated scheme,

• confirmation that the warning period has started and the expiry date of this period.

The warning period runs for five years during which time HMRC must be furnished with such extra information about the taxpayer’s tax affairs as is required, such as use of other avoidance schemes or an explanation for late or missed tax returns.

In respect of a Partnership, an information period will be provided and both warning and information periods can be extended if:

• the required information is not provided,

• another tax avoidance scheme which has been used has also been defeated

Penalties Upon Breach

The Act provides at Schedule 18 Part 5:

Section 30

A person who incurs a relevant defeat in respect to any arrangement used during a warning period is liable to pay a penalty, calculated on the advantage gained, of:

• 20% : where there have been no previous warning notices for defeats of new arrangements used in the warning period.

• 40% : if, before the relevant defeat is incurred, the taxpayer has been given, or become liable to be given, one relevant prior notice warning.

• 60%: if two such notices have been given.

Aggregation of penalties

Section 40

The amount of a penalty for which a person is liable under section 30 can be reduced by the amount of any other penalty or surcharge incurred on the same tax liability.

This includes, for example, penalties for:

• the late payment of tax under schedule 56 Finance Act 2009,

• errors in returns under schedule 24 Finance Act 2007.

Appeals

A taxpayer may appeal against a decision of HMRC:

• that a penalty is due,

• as to the amount of such penalty.

An appeal must be made within thirty days beginning the day on which notification of the penalty is given.

Reasonable Excuse

A taxpayer is not liable to a penalty in respect of a relevant defeat if HMRC is satisfied or, (on appeal), the First-tier Tribunal or Upper Tribunal that there existed reasonable excuse for the relevant failure to which that relevant defeat relates.

Public Notification of Serial Tax Avoiders

HMRC may publish details of and identify a serial tax avoider where it has:

• defeated an avoidance scheme which has been used during a warning period.

• given warning notices for two other schemes used during the warning period.

• given notice of the intention to publish and provided an opportunity to object.

How Can We Assist?

The Team at KANGS is able to provide enormous experience gained over many years whilst assisting clients facing HMRC investigations, enquiries and criminal prosecutions of every nature. Amongst other aspects of support, our team of skilled solicitors assist clients by:

• advising upon any Penalty Notice or similar received from HMRC,

• ensuring HMRC compliance with all relevant legislation in the course of any recovery action,

• seeking to mitigate, wherever possible, potential liabilities,

• defending/mitigating the implementation of any penalty,

• advising upon and conducting any appropriate Appeal,

• advising upon and, where appropriate, defending any criminal prosecution commenced by HMRC.

If you receive communication from HMRC indicating any form of enforcement process or proceedings, it is essential that you seek immediate expert legal guidance. The Team at KANGS would be delighted to hear from you.

Please feel free to contact our Team using the details below as they will be delighted to hear from you.

Tel:       0333 370 4333

Email: info@kangssolicitors.co.uk

We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.

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