In the 2016 Budget, the then Chancellor, George Osborne, signalled an intention to introduce harsher penalties for those who take part in tax avoidance schemes. As part of this the Government confirmed that clarification would be given on the definition of ‘reasonable care’ in relation to the penalty provisions where a person uses tax avoidance arrangements which HMRC later defeats. The Finance Act 2016 introduced a new ‘Serial Tax Avoidance Regime’ (STAR). Whilst the legislation uses the word ‘serial’, it is not only aimed at frequent users of avoidance schemes, but also includes any taxpayer who has used any scheme which is later defeated by HMRC.
STAR will apply to any tax avoidance schemes entered into after 15 September 2016, as well as any schemes entered into before that date which HMRC defeats on or after 6 April 2017. HMRC have, however, confirmed that the regime should not apply to schemes entered into before 15 September where either:
- the taxpayer advises HMRC before 6 April 2017 of their firm intention to relinquish their position and settle their case; or
- where ‘full disclosure’ has been made before 5 April 2017.
The schemes or arrangements caught under this regime include those:
- disclosed or disclosable under Disclosure of tax avoidance schemes (DOTAS) or VAT Avoidance Disclosure Regime (VADR);
- arrangements for which HMRC have given a follower notice to the taxpayer;
- arrangements counteracted under the General Anti-Abuse Rule (GAAR).
Following the first defeat, HMRC will issue the taxpayer with a warning notice saying that if the taxpayer participates in any further tax avoidance schemes within the next five years, which are defeated by HMRC, any penalties levied will be at a higher rate and the warning period will be extended.
During the warning period, the taxpayer will also be required to send details to HMRC about any tax avoidance schemes entered into.
If HMRC defeat three tax avoidance schemes while the taxpayer is on warning, the taxpayer’s names and other details will be published.
In addition to the above measures, HMRC released a consultation document in August 2016 called ‘Strengthening tax avoidance sanctions and deterrents’.
The Government’s proposals set out in this document were to:
- introduce penalties for those who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC; and
- to look at modifying the way the penalty regime works for those whose tax returns are found to be ‘inaccurate’ as a result of using such arrangements, by defining what does not constitute the taking of ‘reasonable care’ and placing the requirement to prove ‘reasonable care’ on to the taxpayer.
The legislation, included in the 2017 Finance Bill, introduces a penalty for those who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC, and focuses on abusive schemes rather than reasonable commercial arrangements.
By introducing these measures, the Government is sending a clear message of much tougher sanctions to not only those who get involved in such schemes, but also to those who promote the arrangements.
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