Wealth advisory industry reacts to latest HMRC avoidance crackdown

Wealth managers, accountants, lawyers, tax specialists and others involved in helping British clients to save and invest their money in a tax-efficient manner expressed general support for the ideas behind the British Government’s latest proposals to crack down on illegal tax avoidance.

Some expressed concern that the new approach – which would target the individuals deemed responsible for advising their clients to make use of illegal schemes, rather than the individuals themselves – could result in “good” advisers being unfairly targeted, and fined, for merely encouraging clients to take advantage of legal, tax-efficient schemes intended, for example, to encourage certain types of investment behaviour.

Many shared the view of Richard Murphy, founder of the UK-based Tax Justice Network advocacy organisation and a regular commentator on tax evasion issues, who told a Radio 4 Today show interviewer that the new regulations were unlikely ever to actually end up in court, because their impact, as intended, would be to cause tax advisers to “no longer be able to take the risk of selling these schemes”.

As reported here on Wednesday, the latest plans are contained in a just-published  HM Revenue & Customs consultation document,  which could see what the Revenue calls “enablers of tax avoidance” to pay fines of up to 100% of the tax a client of a scheme later found to have been illegal is deemed to have avoided paying.

“The Government is acting to make sure that tax avoidance is rooted out at source, and this action will target all those in the supply chain of tax avoidance arrangements,” HMRC said in a statement.

Frank Strachan, partner and head of tax services for Edwin Coe LLP in London, said that in principal he “fully support[ed] a strengthening of HMRC’s ability to penalise those who continue to peddle these schemes, which most professionals and indeed most potential purchasers of tax avoidance schemes now know they are fools gold and shouldn’t be touched”.

“But I worry – every time HMRC is given new powers or sanctions, they misuse and misinterpret them, seeking to use them in scenarios that they weren’t initially designed for,” he added.

“So yes, great to see that those who peddle these schemes will face sanctions, but I’d want to see safeguards in place to ensure HMRC is fit for purpose to use [them].”

John Cassidy, partner at Crowe Clark Whitehill LLP, prefaced his remarks by noting that at this stage, the document in question is “only a consultation” at the moment. Beyond that, he added, “if it has the desired effect, will we ever see it used in practice? [Because] if it deters the promotion of aggressive avoidance schemes [with] the risk of a huge financial penalty, it will never be used.

“If it is used, I hope HMRC use it properly, and don’t target those of us who give bespoke tax planning advice.”

Welcome transparency for clients

Tax regulations affect life insurance companies operating in the UK when, as in the case of Canada Life, they market investment products that can include tax-efficient elements, typically having their origins in incentives designed to encourage people to set aside money for their retirement.

Neil Jones, technical manager at Canada Life, said it was “sadly…understandable that HMRC want to penalise those who promote and [mis-use]” certain tax reliefs and loopholes for purposes other than those that they were originally intended for – – and added that, in his opinion, the proposals contained in the consultation could potentially be a good thing for worried clients.

“This transparency, and the use of bona-fide tax planning arrangements, is important to provide investors with the comfort of knowing that they are not doing anything illegal,” Jones said, noting that it comes at a time when there has also been a measurable rise in the information being shared between financial institutions, governments and tax authorities in recent years.

“Advisers need to guide their clients through the range of [legal] options available to them.

“The Government has made no secret of targeting illegal tax avoidance, so the publication of this document isn’t really surprising.”

‘Avoidance vrs evasion’

Nigel Green, chief executive and founder of the global deVere advisory group, stressed the need to ensure that the UK authorities establish “clearer distinctions” than are now being made “between tax avoidance, which is perfectly legal and can form a sensible part of a robust tax planning strategy, and tax evasion, which is illegal and therefore punishable under the law”.

“Of course we champion the idea of cracking down on illegal tax evasion, and prosecuting those involved in tax evasion,” Green said. “Tackling it head-on would be beneficial to the country’s coffers, to clients – as often those dodgy schemes don’t work – and also to the financial services profession’s reputation.

“However, before a policy of fining advisers is rolled out, clearer distinctions need to be made.

“The idea that it will be punishable to be an ‘enabler of tax avoidance’ – when tax avoidance is legal – is surely ill-conceived.

“All grey areas need to be removed, and illegal loopholes closed, so that everyone knows where they stand.

“If politicians, the Treasury and others are unhappy with the system as it currently stands, it is they who need to answer questions. It is they who have the power to change the country’s tax laws and regulations, and remove grey areas and unacceptable loopholes.

“Perhaps there is indeed a need to overhaul the complex system, but it is not financial advisers who can do this.”

‘Bad news for taxpayer’

Mark Davies is managing director of London-based Mark Davies and Associates, which advises clients on their wealth structuring and tax matters. His take on the consultation was that the measures it proposes “fail to take into account some fundamental issues”.

“The end-game with this document appears to be to put HMRC in a very strong position against all tax advisers, which is bad news for the taxpayer,” he said.

There are also “huge inconsistencies” in the document, Davies noted, pointing out that “the penalties are aimed at tax scheme enablers and not tax agents, or people who prepare tax returns”, then says tax agents “could be penalised unless that they can prove that they told the taxpayer not to [adopt a certain scheme], or the taxpayer implemented it without their knowledge”.

“It is also surprising how broad the Government intends the definition of an ‘enabler’ to be,” Davies added.

“HMRC says that anyone in the supply chain who benefits from a defeated tax avoidance scheme can be penalised, from the ‘designer’ of the scheme, to the ‘marketers’ (IFAs) of the scheme, to the people who assist with the ‘machinery’ of the scheme (banks, trustees, company formation agents etc).

“Everyone involved can face a penalty.”

Davies said he believes the “real issue in question is that we are entitled to arrange our affairs to pay the least amount of tax, but a tax avoidance scheme may become ‘illegal’ or ‘tax evasion’ only when it is so determined by the courts.

“Some parts of the HMRC manuals on points of contention are blocked from public view which means that the taxpayer and their advisers will only know if the scheme is illegal when it is too late.

“This uncertainty could be prevented and the opportunity to avoid tax reduced if HMRC systematically simplified the UK tax system. Tax avoidance schemes rely on mistakes and lacunas in the law.

“If the tax law is well designed there is no opportunity to avoid tax and less motive if the tax payable appears to be fair and reasonable.

“Most importantly, a system of pre-clearance would mean that taxpayers would know from the very beginning whether an arrangement was considered to be acceptable or not.”

In a statement on Thursday, the Tax Justice Network described the proposed measures in the HMRC consultation document as “broadly positive” but said they would “only be effective to the extent that HMRC are resourced and politically backed to be able to take major cases to court”.

“Without that, major multinationals and their Big Four advisers will remain largely free to pursue the marketing of schemes that pose a significant revenue risk,” the TJN statement said.

“The major step forward is that the proposal reflects the growing awareness in government of the systemic nature of much tax abuse. By and large, the threats do not come from individuals or individual companies deciding unilaterally to take a punt.

“Instead, the threats stem from schemes which are marketed widely – from the central role of major banks in setting up their clients’ anonymous companies, as uncovered in the Panama Papers, to the mass marketing of corporate avoidance schemes by the Big Four accounting firms that were revealed in the LuxLeaks.

“The proposal implies that a successful HMRC challenge against a scheme may have costs for the marketers of such schemes, and not only their clients.

“Aside from any questions over the level of penalties, the major weakness here reflects the persistent failure to take multinational companies and their Big Four advisers to court.

“The proposal to go after enablers of schemes that have been successfully challenged will have little impact on this major area of tax losses, unless the government is finally willing to take on [the] multinationals and the Big Four in court.

“That means reversing cuts to HMRC – which will more than pay for itself – and giving it the political support that has been sadly lacking.”

ABOUT THE AUTHOR
Helen Burggraf
Helen Burggraf is the editor of International Investment. A US-trained journalist, she has worked in Rome, New York City and London, covering everything from the fashion and retailing industries to the global drinking water and water-treatment sector, private equity, and most recently, the international cross-border financial services/advice industry.

Read more from Helen Burggraf

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