The government and HMRC have been pledging to clamp down on enablers and promoters of aggressive tax avoidance strategies for years. In recent times it has been hard to keep up with the plethora of measures and legislation brought in to stop these “unscrupulous advisers."
In March 2020 the Spring Budget promised a package of measures to tackle the promoters of tax avoidance schemes, whilst HMRC published a new tax avoidance strategy which pledged to:
Use the full range of criminal powers and civil sanctions to tackle those enablers who fraudulently design, promote or market tax schemes that facilitate tax evasion, or who fail to prevent the facilitation of tax evasion."
This month further proposals and legislation which forms part of the draft Finance Bill 2019-21 have been released for consultation. This includes a series of legislative changes to existing anti-avoidance regimes such as the Promoters of Tax Avoidance Scheme (POTAS) and Disclosure of Tax Avoidance Schemes (DOTAS) promising once more to “clamp down on the market for tax avoidance."
The reality is that despite all the rhetoric, legislation and anti-avoidance strategies, HMRC have simply not been able to stop the enablers of aggressive tax avoidance schemes finding loopholes and avoiding paying tax. Correspondingly, the numbers of criminal prosecutions of those who have facilitated fraudulent schemes remains conspicuously low.
An All Party Parliamentary Group (APPG) led by Dame Margaret Hodge MP has had enough. They want to make it easier to criminally prosecute those who promote failed tax avoidance schemes and commit tax evasion. They propose removing the requirement to prove dishonest intent (common to all fraud based offences) and suggest replacing it with “a double reasonableness” test, used for penalising enablers under the General Anti Abuse Rule (GAAR) regime. The issue identified by the APPG is that even when a tax adviser knows that a scheme does not work from a technical tax perspective, there is no way of proving dishonest intent as he/she can rely on legal arguments supporting the scheme regardless of how implausible or unreasonable they are.
But would such a dramatic shift in the law have the desired results and is it ever right that someone should be prosecuted for tax fraud without evidence of dishonesty?
It is worth remembering that by definition tax evasion is criminal whereas tax avoidance is not. Aggressive schemes may well exploit tax rules contrary to the intentions of parliament and HMRC may well disagree that they work from a technical tax perspective, but they are not criminal per se. The purpose behind the implementation of DOTAS and POTAS was to identify and weed out those schemes that do not work at an early stage. The process is predicated on there being grey areas that will need to be interpreted by HMRC or ultimately a tax tribunal.
The problem, according to the APPG, is that sophisticated advisers play the system knowing that they can argue that the arrangements work even when they know they do not: “They are effectively daring HMRC to contest a resource-intensive tax appeal that could last years, potentially all the way to the Supreme Court, which it may well lose.” As the financial penalty for enablers of defeated tax avoidance schemes is currently limited to the fee that the enabler or adviser received for the promotion of the scheme, there is relatively little deterrent to stop a promoter trying their luck.
However, using the criminal law as an alternative to challenging a scheme in the tax tribunal is not a viable solution. It is certainly not as easy as inserting “a simple one-liner” into the common law offence of cheating the public revenue, as the APPG suggest. A Jury should not be left to interpret whether a particular scheme is reasonable or abusive from a technical tax perspective and the overburdened criminal justice system is certainly not the place to be resolving complex tax disputes.
Tax evasion is quintessentially a dishonesty based offence. If the prosecution cannot prove that someone has acted fraudulently then ultimately the act should not be considered criminal. The Government and HMRC need to focus on increasing prosecution rates under existing powers, such as the infrequently used Criminal Finance Act 2017. Resources should be spent on evidence gathering and building the prosecution case rather than attempting to shoehorn a civil test into a criminal offence.
About the author
David Sleight is a Partner in the criminal litigation team who regularly acts for individuals and companies in high profile cases. He specialises in defending tax evasion and fraud allegations brought by HMRC and has developed a specialist expertise in advising in cross border tax litigation involving Mutual Legal Assistance requests between Member States.