High Risk Avoidance Schemes – is another new regime really the way forward?
HMRC's consultation on "High Risk Tax Avoidance Schemes", which closed at the end of August, has attracted some heavyweight responses it seems.
In particular, the response of the Law Society Tax Law Committee ("the Tax Law Committee") is well worth a read (see Law Society Tax Law Committee Notice 31 August 2011).
Removing the "cash flow advantage"
One of the headline policies outlined in HMRC's consultation document was the proposal to remove the purported cash flow advantage of certain marketed tax avoidance schemes, by imposing additional charges on the users of those schemes if the scheme is found to be ineffective. The taxpayer can only protect themselves against such a charge by paying the disputed tax upfront.
There are two main aspects to the Tax Law Committee's concerns about HMRC's proposed regime; firstly that is not necessary, and secondly that it will generate more uncertainty for taxpayers.
The salient passage of the notice reads:
"The stated aim of the proposed new regime is to remove the cash flow advantage obtained by users of high risk schemes. In our view, however, current provisions for interest on overdue tax should be sufficient to counter any cash flow advantage from using avoidance schemes which are found (possibly after litigation) to have been ineffective. If there are some tax regimes where interest does not run from the date that tax should have been paid but only from the date HMRC proves that a tax avoidance scheme has failed (per paragraph 2.4 "Tackling Tax Avoidance"), then this should be addressed by amending the provisions which impose the interest liability. If it is thought that the rate of interest charged on overdue tax is too low, the rate should be reviewed."
The view of the Tax Law Committee is that aside from the stated objective of removing the cash flow advantage of certain tax avoidance schemes, HMRC are also seeking to discourage their use in the first place, and to punish taxpayers who do utilise these schemes.
The Tax Law Committee go on to say:
"Whilst we can understand HMRC's desire to discourage use of schemes so as to reduce the burden of pursuing disputes with taxpayers, we believe that it is an important taxpayer right to be able to challenge HMRC's interpretation of the law through the courts. Increasing the penalty that attaches to particular schemes if a taxpayer chooses to exercise his or its right to disagree with HMRC would be a deterrent to exercise of that right which we believe is not justified."
"High risk" schemes
The other key concern relates to the uncertainty generated by the current definition of "high risk schemes". At paragraph 2.18 of the HMRC consultation document, a high risk scheme is defined as one that "uses contrived arrangements to seek tax advantages in circumstances where they are not intended to be available and which HMRC believes does not deliver the advertised tax advantages." One does not need to be an expert to appreciate that what HMRC view as "contrived arrangements" will not always coincide with the views of taxpayers. Likewise, discerning Parliament's intention in relation to specific provisions of complex tax legislation is not straightforward, and it by no means follows that HMRC's view is always correct. That is a matter for the specialist Tax Tribunal and if necessary the higher courts.
Furthermore, given the complexity of a number of tax avoidance schemes, it is inevitable that there will be arguments surrounding whether a particular scheme constitutes a listed High Risk Avoidance Scheme. As the Tax Law Committee puts it:
"…tax avoidance schemes are often complex, involving a number of steps and transactions. Paragraph 3.11 of the consultation document acknowledges that schemes must be described on the list in terms that are narrowly targeted but not so narrowly targeted that minor changes would take a scheme outside the description. Listed schemes would need to be clearly and accurately described if they are to constitute adequate notice to a taxpayer of the dangers of pursuing a particular scheme. Any description will have to be far more detailed than those currently used in HMRC's "Spotlights" publication".
We welcome the Tax Law Committee's helpful comments, and it is to be hoped that HMRC will take these, and the other responses to the consultation, on board. In particular, we hope HMRC will consider whether both HMRC and the taxpayer would be better served by improving the existing DOTAS and statutory interest regimes to achieve its objectives, instead of implementing another new regime.