BRIEFING PAPER Number 7948, 13 April 2021

Tax avoidance and tax By Antony Seely

evasion

Contents: 1. Introduction - what is tax avoidance and what is tax evasion? 2. The tax gap 3. The Coalition Government’s approach 4. Follower notices & accelerated payment notices (2013-15) 5. The Conservative Government’s approach

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Contents

Summary 3 1. Introduction - what is tax avoidance and what is tax evasion? 5 2. The tax gap 9 2.1 What is the tax gap, and how big is it? 9 2.2 HMRC’s approach in assessing the tax gap 12 2.3 The tax gap and ‘tax dodging’ 18 2.4 Recent debate of the size of the tax gap 20 3. The Coalition Government’s approach 30 3.1 A new anti-avoidance strategy 30 3.2 The impact of the new strategy – HMRC’s compliance yield (up to 2015) 37 3.3 Recent estimates of HMRC’s compliance yield (since 2015) 39 4. Follower notices & accelerated payment notices (2013-15) 43 4.1 ‘Raising the stakes on tax avoidance’ - summer 2013 43 4.2 Budget 2014: accelerated payment notices (APNs) 49 4.3 Finance Bill 2014 54 4.4 Impact of the new APN regime 64 4.5 Subsequent proposals regarding ‘serial avoiders’ and offshore evasion 70 5. The Conservative Government’s approach 77 5.1 Summer Budget 2015 77 5.2 Offshore evasion & the Panama Papers 80 5.3 Spring Budget 2017 89 5.4 The Paradise Papers & Autumn Budget 2017 107 5.5 Budget 2018 116 5.6 Budget 2020 120 The 2019 Loan Charge 120 Tackling promoters of mass-marketed schemes 126 Follower Notice penalties 133 HMRC’s ‘Tax Avoidance – don’t get caught out’ campaign 138 The evaluation of HMRC’s powers since 2012 143 5.7 Budget 2021 149

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3 Commons Library Briefing, 13 April 2021

Summary

In recent years tax avoidance has been the subject of considerable public concern, although there is no statutory definition of what tax avoidance consists of. Tax avoidance is to be distinguished from tax evasion, where someone acts against the law. By contrast tax avoidance is compliant with the law, though aggressive or abusive avoidance, as opposed to simple tax planning, will seek to comply with the letter of the law, but to subvert its purpose. As Treasury Minister David Gauke noted in 2010, there is a distinction between tax planning and tax avoidance, “although there will be occasions when the line is a little blurred.”1 In recent years HM Revenue & Customs (HMRC) has produced estimates of the tax gap, the difference between tax that is collected and that which is ‘theoretically due’: The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law) ... An equivalent way of defining the tax gap is the tax that is lost through non-payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attack.2 In July 2020 HMRC published revised estimates, which put the tax gap at £31 billion for 2018/19, representing 4.7% of total tax liabilities.3 Over the last five years the tax gap has fallen consistently – from 7.2% of tax liabilities in 2013/14. HMRC’s analysis provides a breakdown of the gap by reference to the different types of taxpayer behaviour that lead to a shortfall in receipts, though as HMRC note, the “estimates give a broad indication of behaviours and are calculated using assumptions and judgment.” It is estimated that in 2018/19 the Exchequer loss from tax avoidance was £1.7 billion, while the cost of tax evasion was £4.6 billion.4 Historically UK tax law has been specifically targeted rather than purposive; in tackling the exploitation of loopholes in the law, governments have legislated against individual avoidance schemes as and when these have come to light. Often the response to this legislation has been the creation of new schemes to circumvent the law, which in turn has seen further legislation – an ‘arms race’ between the revenue authorities and Parliamentary counsel on one side, and on the other, taxpayers aided and abetted by the legal profession. In recent years concerns as to the scale of mass marketed tax avoidance schemes have led to three major initiatives to undermine this market and encourage a sea change in attitudes: the Disclosure of Tax Avoidance Schemes regime (DOTAS); the General Anti-Abuse Rule (GAAR); and the system of follower notices & accelerated payments notices. Many commentators have suggested having legislation to counter tax avoidance in general: by providing certainty for both sides as to the tax consequences of any transaction, a ‘general anti-avoidance rule’ might dissuade the most egregious efforts to avoid tax, encourage taxpayers and legal counsel to redirect their energies to more productive activities and allow the authorities to simplify the law without fear of it being systematically undermined. In the late 1990s the Labour Government consulted on an anti-avoidance rule before deciding against it. Concerns over the scale of tax avoidance

1 HC Deb 12 July 2010 c706 2 Measuring Tax Gaps 2013, October 2013 p6. HMRC’s work on the tax gap is collated on Gov.uk 3 HMRC press notice, Tax gap falls to lowest recorded rate, 9 July 2020 4 HMRC, Measuring tax gaps 2020 edition - tax gap estimates for 2018 to 2019, July 2020 p5 4 Tax avoidance and tax evasion

rekindled interest in the idea, though in its 2004 Budget the Labour Government announced a new ‘disclosure regime’ (DOTAS) as an alternative, whereby avoidance schemes would have to be disclosed to HMRC.5 Under DOTAS accountants, financial advisers and other 'promoters' selling tax avoidance schemes are required to notify the tax authorities of any new scheme they are to offer to taxpayers. Each scheme is given a reference number which, in turn, taxpayers have to use in their tax return, if they have used it. HMRC have used this information to track the take-up of avoidance schemes, challenge individual schemes in the courts if HMRC have assessed that they do not work in the way the promoter claims, or to address unintended loopholes in the law that some schemes seek to exploit. In its first Budget in June 2010 the Coalition Government announced it would consult on a general anti-avoidance rule, and commissioned a study group, led by Graham Aaronson QC, to consider the case. In his report, published in 2011, Mr Aaronson recommended a narrowly focused rule targeted at ‘abusive arrangements’, and following a consultation exercise, in December 2012 the Government announced the introduction of a General Anti-Abuse Rule (GAAR) in 2013.6 In 2014 the Coalition Government announced the introduction of a system of follower notices & accelerated payment notices (APNs).7 Broadly speaking, in cases where someone is in dispute over their assessment, HMRC may issue a ‘follower notice’ if this arises from the use of an avoidance scheme that is either the same or has similar arrangements to one that HMRC has successfully challenged in court. Taxpayers must settle their affairs, or pay a penalty. HMRC may also issue a notice for an APN, where the taxpayer is required to pay the disputed sum ‘up front’, before their assessment had been definitively decided – either by the taxpayer agreeing HMRC’s assessment, or the courts making a final judgement in their case. Taxpayers do not have the right to appeal HMRC’s decision to the Tribunal. Controversially, the Government proposed these arrangements would apply to outstanding disputes for past tax years, and that HMRC would also issue APNs in relation to avoidance schemes notified under ‘DOTAS’. Despite concerns as the ‘retrospective’ nature of the new regime, the new rules were agreed, with only minor amendments, in July 2014. By July 2017 HMRC reported that it had issued over 75,000 notices worth in excess of £7 billion and collected nearly £4 billion.8 The Government has continued to introduce provisions to tackle tax avoidance and tax evasion, including measures in each successive Budget.9 This paper discusses the incidence of tax avoidance and evasion, before looking at the development of follower notices and APNs, and further initiatives to reduce the tax gap. A second paper looks at the introduction of the 2019 Loan Charge, legislation to tackle mass marketed ‘loan schemes’ announced in the 2016 Budget, which has proved highly controversial.10 Two other Library papers look at the Labour Government’s consideration of a general anti-avoidance rule and the establishment of DOTAS, and at the Coalition Government’s decision to introduce a GAAR.11

5 Budget 2004, HC 301, March 2004, p202. Guidance on DOTAS is on Gov.uk 6 Autumn Statement, Cm 8480 December 2012 para 1.178. Guidance on the GAAR is on Gov.uk 7 Budget 2014, HC 1104, March 2014 para 1.198-201 8 HMRC Annual Report 2016/17, HC 18, July 2017 p24. Guidance on FNS & APNs is on Gov.uk. 9 For an overview of initiatives since 2010 see, HMT/HMRC, Tackling tax avoidance, evasion and other forms of non-compliance, March 2019. 10 The 2019 Loan Charge, Commons Briefing paper CBP8811, 17 March 2021 11 Tax avoidance: a General Anti-Avoidance Rule - background history (1990-2010), CBP2956, 16 January 2020; and, Tax avoidance: a General Anti-Abuse Rule, CBP6265, 17 September 2020. 5 Commons Library Briefing, 13 April 2021

1. Introduction - what is tax avoidance and what is tax evasion?

During a debate on tax avoidance and tax evasion in July 2010 Treasury Minister David Gauke drew the following distinction: Tax evasion occurs when someone acts against the law. Tax avoidance involves compliance with the letter but not the spirit of the law, and it is right that the Government seek to minimise that. Tax planning is a case of acting in both the spirit and the letter of the law. There is a distinction, although there will be occasions when the line is a little blurred.12 A longer definition was provided in answer to a PQ in the Lords a few years before: Lord Patten asked Her Majesty's Government: Whether they will clarify their use of the terms "tax avoidance" and "tax evasion". Lord McKenzie of Luton: These terms lack any single or universally applied legal definition and their meaning will depend upon the context in which they are used. The term "tax evasion" refers to reduction of tax liability by illegal means. The term "tax avoidance" is usually used to refer to an inappropriate reduction in tax liability and was described by Lord Nolan in the following terms: "The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability."13 The reference is to an expression used by Lord Noland in a case heard by the House of Lords in 1997, when he distinguished between avoidance and actions where the taxpayer mitigates his tax liability: The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option.14 (The appeal of this definition is not unchallenged – as one guide to the law has noted, “the trouble with this explanation is that while it provides a coherent reason for saying in a particular case that the facts do not amount to avoidance and so do not trigger the application of some rule, it does not provide a way of telling whether those particular facts fall one side of the line or the other – it is a conclusion, not a test - and so it restates the problem rather than solving it.”15)

12 HC Deb 12 July 2010 c706 13 HC Deb 24 May 2006 ccWA111-2 14 IRC v Willoughby & Another [1997] 15 Tiley & Collison’s UK Tax Guide 2016/17 para 3.2 6 Tax avoidance and tax evasion

While it is often noted that tax avoidance is not illegal, in the past governments have drawn a distinction between the exploitation of the tax system and simple compliance with the law – for example, in answer to a PQ in July 2010: Andrew George: To ask the Chancellor of the Exchequer what definition of the terms (a) tax avoidance and (b) tax efficiency his Department uses. Mr Gauke: The Government have not published a definition of avoidance. However it is widely understood to entail taking a view of the tax treatment of a transaction that is tenable but has tax consequences that were not intended by the legislature. This does not prevent taxpayers organising their affairs in an efficient manner, consistent with the intentions of the legislation. Tackling tax avoidance is essential and we make every effort to do so. The Government consider the economic efficiency of tax measures as part of the tax policy-making process.16 The House of Lords Economic Affairs Committee considered this question in their 2013 report on the Government’s proposals for a ‘General Anti-Abuse Rule’ – or GAAR. The Committee cited Mr Gauke’s distinction between avoidance and evasion, reproduced above, but went on to quote the evidence of Ms Judith Knott (then HMRC Director, Corporation Tax International Anti-Avoidance) when she appeared before the Committee: “What we mean by legitimate tax planning is tax planning that is very much in line with Parliament’s intentions when it passed the rules. A good example would be putting cash into an ISA account. That is legitimate and what Parliament intended to happen. Avoidance, on the other hand, is behaviour that seeks to bend the tax rules in a way that Parliament did not intend. It is often accompanied by artificial transactions—trying to seek a result that was not intended.”17 The Committee observed that the definitions “depend on the existence of a common interpretation of what the original lawmakers had in mind in enacting a particular tax statute”: The courts interpret Parliamentary intention as that revealed by the wording and context of the legislation itself and extraneous comment or other guidance can be taken into account only in very limited circumstances. This is a much narrower definition of Parliamentary intention than the wider colloquial definition which might either infer intention or take into account external information. Consequently, in practice, a good deal of uncertainty can often attach to the question of whether a particular arrangement constitutes ‘tax avoidance’ and, if so, whether it is to be regarded as ‘acceptable’ (tax planning or tax mitigation) or ‘unacceptable’ (aggressive or abusive avoidance).18

16 HC Deb 12 July 2010 c544W 17 The draft Finance Bill 2013, 13 March 2013, HL Paper 139 2012-13 para 12 18 op.cit. para 14. For more details on the distinction between evasion and avoidance see, Hamilton v Hamilton & Anor [2016] EWHC 1132 (Ch) (13 May 2016) para 37. 7 Commons Library Briefing, 13 April 2021

The concept of “parliamentary intention” is not a simple or obvious one – as noted in a paper on tax avoidance published by the Oxford Centre for Business Taxation: The aim of the courts is to construe legislation in a way that gives effect to “parliamentary intention”. Parliamentary intention in this context is a term of art, extensively debated in legal literature and should be distinguished from a colloquial usage. Lord Nicholls has explained: "...the 'intention of Parliament' is an objective concept, not subjective. The phrase is a shorthand reference to the intention which the court reasonably imputes to Parliament in respect of the language used. It is not the subjective intention of the minister or other persons who promoted the legislation. Nor is it the subjective intention of the draftsman, or of individual members or even of a majority of individual members of either House.”19 In other words the political and authoritative process of Parliament passing legislation produces the text of legislation, the intention of which is found by the courts looking at the wording of that legislation.20,21 Further to the questions of legal interpretation, the choice of words in this area has important political consequences. Graham Aaronson QC made this point when he gave evidence to the Lords Economic Affairs Committee in January 2013: “Avoidance” is a rather unfortunate word in this context because avoidance can be regarded as a particularly nasty thing to do or, if it is an accident, it is a very sensible thing to do—you avoid an accident. So I would rather use words that are less emotive when describing the intellectual process in determining whether you should be paying a smaller amount of tax than you would otherwise pay. You can call that tax planning because it is planning. Whether it is good planning or bad planning, whether it is abusive planning or innocent planning, it is planning. Tax avoidance is a very dangerous expression to use if you want to have a serious debate because one person’s avoidance is another person’s perfectly reasonable planning.22 However, the term ‘tax avoidance’ has continued to be widely used, and in a paper on its tax policy over the 2010-15 Parliament, the Coalition Government provided a terminology that, arguably, illustrates how the debate about this issue changed over this period: Clarifying tax terminology Tax evasion is always illegal. It is when people or businesses deliberately do not declare and account for the taxes that they

19 R v Secretary of State for Environment, Transport and the Regions [2001] 2 AC 349. 20 See also Lord Reid in Black-Clawson International Ltd v Papierwerke Waldhof- Aschaffenburg AG [1975] A.C. 591, at 613: “In seeking for the intention of Parliament we are seeking not what Parliament meant but the true meaning of what they said”. On Parliamentary intention see also Judith Freedman, “Interpreting tax statutes: tax avoidance and the intention of Parliament”, Law Quarterly Review 2007, 53 at 72 et seq. especially the literature referred to there. 21 Michael Devereux, Judith Freedman & John Vella, Tax Avoidance, OCBT December 2012 p4. See also, “Seeking after meaning”, Taxation, 21 April 2016, and for another view barrister Jolyon Maugham’s blog post, “Is tax avoidance like hardcore pornography?”, Waiting for Godot, 30 August 2016. 22 Draft Finance Bill 2013: Oral & Written Evidence, March 2013 pp12-13 (Q10) 8 Tax avoidance and tax evasion

owe. It includes the hidden economy, where people conceal their presence or taxable sources of income. Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter – but not the spirit – of the law. Most tax avoidance schemes simply do not work, and those who engage in it can find they pay more than the tax they attempted to save once HMRC has successfully challenged them. Tax planning involves using tax reliefs for the purpose for which they were intended, for example, claiming tax relief on capital investment, or saving via ISAs or for retirement by making contributions to a pension scheme. However, tax reliefs can be used excessively or aggressively, by others than those intended to benefit from them or in ways that clearly go beyond the intention of Parliament. Where this is the case it is right to take action, because it is important that the tax system is fair and perceived to be so.23

23 HM Treasury, Tackling tax evasion & avoidance, Cm 9047, March 2015 p5 (Box 1.A: Clarifying tax terminology). See also, PQ HL4794, 25 February 2015 9 Commons Library Briefing, 13 April 2021

2. The tax gap 2.1 What is the tax gap, and how big is it? In recent years HMRC has produced estimates of the tax gap - the difference between tax that is actually collected and that which is ‘theoretically due’: The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law) ... An equivalent way of defining the tax gap is the tax that is lost through non- payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attack.24 In July 2020 HMRC published revised estimates, which put the tax gap at £31 billion for 2018/19, representing 4.7% of total tax liabilities.25

Key Findings • The UK tax gap in 2018 to 2019 is estimated to be 4.7% of total theoretical tax liabilities, with an associated point estimate of £31 billion — this means in 2018 to 2019, HMRC secured 95.3% of all tax due • There has been a long-term reduction in the overall tax gap, from 7.5% in the tax year 2005 to 2006 to 4.7% in 2018 to 2019. • The tax gap for Income Tax, National Insurance contributions and Capital Gains Tax (IT, NICS and CGT) is 3.4% in 2018 to 2019 at £12.1 billion — this represents the biggest share of the total tax gap by type of tax.

24 Measuring Tax Gaps 2013, October 2013 p6 25 HMRC press notice, Tax gap falls to lowest recorded rate, 9 July 2020 10 Tax avoidance and tax evasion

• There has been a long-term reduction for the Value Added Tax (VAT) gap from 14.0% in 2005 to 2006 to 7.0% in 2018 to 2019. • The excise duty gap has reduced from 8.4% in 2005 to 2006 to 5.0% in 2018 to 2019. • The Corporation Tax gap has reduced from 11.3% in 2005 to 2006 to 7.0% in 2018 to 2019. • The avoidance tax gap has reduced from £3.7 billion in 2005 to 2006 to £1.7 billion in 2018 to 2019. • The tax gap from the wealthy customer group has been presented separately for the first time and is £1.7 billion in 2018 to 2019.26 HMRC suggest the percentage figure is a better measure of compliance over time, as “it takes account of some of the effects of inflation, economic growth and changes to tax rates, whereas the cash figure does not. For example, in a growing economy where the tax base is increasing, even if the percentage tax gap remained level, the cash figure would grow.”27 HMRC describe the tax gap as “a useful tool for understanding the relative size and nature of non-compliance”: This understanding can be applied in many different ways: • it provides a foundation for HMRC’s strategy. Thinking about the tax gap helps the department to understand how non-compliance occurs and how HMRC can address the causes and improve the overall health of the tax system. • drawing on information on how other countries manage their tax gaps, our tax gap analysis provides insight into which strategies are most effective at reducing the tax gap. • although the tax gap isn’t sufficiently timely or precise enough to set performance targets, it provides important information that helps us to understand our long-term performance. The tax gap also provides important information to the public on tax compliance, creating greater transparency in the tax system.28 HMRC’s analysis provides a breakdown of the gap by reference to the different types of taxpayer behaviour that lead to a shortfall in receipts, though as HMRC note, the “estimates give a broad indication of behaviours and are calculated using assumptions and judgment.” The report’s description of each of these categories is given overleaf.

26 HMRC, Measuring tax gaps 2020 edition - tax gap estimates for 2018 to 2019, July 2020 p4, p6 27 op.cit. p7 28 op.cit. p3. The ‘tax base’ is the aggregate value of the financial streams or assets on which tax can be imposed. 11 Commons Library Briefing, 13 April 2021

Description of different behaviours that generate the tax gap

1 More information and frequently asked question on the OECD’s Inclusive Framework on BEPS can be found at: www.oecd.org/ctp/beps-frequentlyaskedquestions.htm

It is estimated that in 2018/19 the Exchequer loss from tax avoidance was £1.7 billion, while the cost of tax evasion was £4.6 billion.29

29 op.cit. p24, p5, p13. In Figure 1.6, figures may not appear to sum due to rounding. 12 Tax avoidance and tax evasion

The report provides estimates of the tax gap by type of tax, and by customer group. In the latter case it underlines that, “the tax gap breakdown by customer groups is primarily based on data — however as some judgment and assumptions are involved, the estimates are subject to uncertainty which cannot be accurately be quantified”: In 2018 to 2019, over 40% of the tax gap is attributed to small businesses, whereas wealthy customers account for the smallest share of the tax gap. The tax gap from wealthy customers has been estimated for the first time in ‘Measuring tax gaps 2020 edition’. A wealthy customer is defined as an individual with an income greater than £200,000 or assets of greater than £2 million.

The report also provides a time series of the tax gap by customer group, as a percentage of total theoretical liabilities. This shows that the breakdown of the tax gap by customer group over the past five years has been broadly stable.30

2.2 HMRC’s approach in assessing the tax gap In September 2011 the Treasury Committee took evidence from HMRC on its action to close the tax gap; during this session Dave Hartnett, then Permanent Secretary for Tax and his colleague, Melanie Dawes, Director General, Business Tax, explained how analysis of the size of the tax gap shaped the department’s priorities: Dave Hartnett: I think … for us, the tax gap is quite an important tool, if I can put it that way, in promoting understanding of all the causes of non-compliance and helping us to focus on ways of reducing them. If I can put it this way, it is a bit like a long-term health check for us. A definition of it is the difference between what the Government can expect to receive and actually do receive, but I think, as you may have seen, unlike some other countries, we include avoidance in it, and also the slightly contentious issue of measuring that in line with the spirit of the law-what the intention of Parliament might have been … Q180 Stewart Hosie: … Some of the professional bodies take the [the department’s estimate of the tax gap] and say it is

30 op.cit. p9, p12. Details of this time series are given in Table 1.4 of the report. 13 Commons Library Briefing, 13 April 2021

inflated because it includes legitimate disagreements over legal interpretation, which is a perfectly valid position for them to take. Others say it is understated due to inadequate information. You say it is your best guess but you invest a lot in calculating it … What more do we all need to do to get this right, given how important it is? Dave Hartnett: …On legal interpretation and other things in particular, the focus we put on legal interpretation is where we lose-but not while the argument is going on-and where the Government are therefore going to receive less than expected. We recognise that "legitimate debate" contention around issues will always happen. Melanie Dawes: Yes, and it is important to say on avoidance that where we resolve an issue with a taxpayer and we agree with their legal interpretation, we do not record that as a tax cut. We record that as the tax gap having been closed because the treatment has been agreed. In terms of what we should be doing with this …we think it is a very useful strategic tool. We used it to get a feel for the overall big areas of risk when we were putting together our plans for the spending review, for example, so it is very helpful. The important thing is not to use it in the wrong way, so we are not using it for performance targets to measure up actual operation performance in the business.31 In 2010 HMRC’s approach to measuring the tax gap was questioned, in the context of alternative estimates published by Tax Research UK, which put the tax gap in the region of £70-£120 billion.32 In a debate on tax avoidance in June 2010, Treasury Minister David Gauke acknowledged these figures implied the gap was much, much greater than HMRC had estimated, but went on to argue that the analysis was ‘deeply and systematically flawed’; the Ministers comments are worth reproducing at some length: It must be accepted that in preparing estimates, organisations external to Government have access to much less data than HMRC ... However, having considered the methodology used to produce the figure of £120 billion, I must tell the House that even a brief analysis reveals that it is deeply and systematically flawed. For example, Tax Research LLP estimates total revenue lost due to tax evasion at £70 billion. That figure is obtained by applying the percentage tax gap from VAT to direct taxes. There are two main problems with that. First, different tax regimes have different tax gaps. According to independent research by the OECD, for example, the operational experience shows that tax regimes such as pay-as-you-earn that withhold tax at source have far smaller tax gaps than other types. To apply the VAT gap percentage to taxes collected by PAYE or otherwise at source greatly overstates the tax gap, because the VAT tax gap is considerably higher. Secondly, an element of double counting is involved, although, to be fair, that might not be apparent from the numbers used by Tax Research. The VAT gap already includes amounts due to tax

31 Administration and effectiveness of HMRC: closing the tax gap – Oral Evidence, HC 1371-iii, 12 September 2011 Q178, Q180 32 Tax Research UK is run by the writer Richard Murphy. See, Tax Justice and Jobs: the business case for investing in staff at HMRC, March 2010. These estimates have been widely quoted in the press: eg, “On charity George Osborne must stand up to the self-interested super-rich”, Guardian, 16 April 2012 & “Editorial - Tax: share the burden fairly or anger will grow”, Observer, 15 April 2012. 14 Tax avoidance and tax evasion

avoidance and tax debt. Applying that percentage to direct taxes and then adding additional amounts for both avoidance and tax debt, as does Tax Research, results in the double counting of losses from the avoidance of direct taxes and non-payment. The Tax Research estimate of tax debt is £28 billion. That is a snapshot figure of all tax owed to HMRC on 31 March 2009, which does not represent the actual losses to the Exchequer from non-payment. Almost all tax owed to HMRC is eventually paid, sometimes within days of becoming due. A proportion of debts outstanding are in staged repayment plans, such as those covered by the business payment support service. Only the tax debt written off as uncollectable by HMRC is an actual loss to the Exchequer from debt. That is therefore the amount that HMRC uses in its estimate of the tax gap, which in the 2007-08 tax gap figures was not £28 billion but £3 billion … The final and most significant point concerns tax loss due to tax avoidance, which Tax Research estimates at £25 billion. That estimate includes the use of legitimate reliefs promoted by the Government to encourage certain activities, such as capital allowances to encourage investment and research and development tax credits to encourage innovation. Tax avoidance is generally regarded as the use of legal structures and allowances to reduce tax bills in manners not intended by Parliament when enacting the legislation. It is simply nonsense to categorise as tax avoidance the use of allowances for purposes intended by Parliament ... Furthermore, the Tax Research estimate does not provide HMRC with any credit for the significant amount of tax that it recovers by challenging avoidance schemes. The figure of £25 billion therefore seems somewhat wide of the mark.33 In a follow-up report published in March 2012 the Treasury Committee expressed some doubts as to the value of completing such a detailed annual assessment of the tax gap: “HMRC should not be aiming to collect more tax at any cost, but should be ensuring that all taxpayers pay the correct amount of tax … [in addition] the tax gap calculation is … misleading as a comparison from year to year, because its size depends on a number of factors which have nothing to do with whether the correct amount of tax is being paid, for instance the applicable rates of tax.”34 A longer extract from this part of the Committee’s report is given below: The tax gap can be a useful concept for assessing trends in the amount of possible unpaid tax. We are not, however, convinced that the process of calculating, publishing and publicising an aggregate figure for the tax gap is a sensible use of HMRC's limited resources. The aggregate tax gap figure is misleading and risks focusing HMRC on the wrong task as it only provides an order of magnitude. We recognise that it is useful for HMRC's employees to have some idea of the difference between what HMRC should be collecting and what is collected, particularly in the case of criminal activity. However, in other areas it would be more useful for it to identify ambiguities in tax law rather than employ resources in calculating

33 HC Deb 16 June 2010 cc190-1WH 34 Treasury Committee, Closing the tax gap – HMRC’s record at ensuring tax compliance, HC 1371, 9 March 2012 para 14-15 15 Commons Library Briefing, 13 April 2021

how much tax would be collected if everyone shared its interpretation of the law. Separate reports on how much tax was lost through criminal activity and areas where HMRC had encountered different interpretations of tax law would be a better use of resources. We would welcome further submissions from HMRC and tax experts both on how the tax gap calculation can be improved, and on whether it serves any useful purpose in HMRC's work.35 In turn the Government gave a robust defence of HMRC’s approach: HMRC believes the aggregate tax gap analysis is a valuable tool in prioritising resources, as the Committee recommends, and agrees that the focus of work on tax gaps needs to be proportionate and help the best use of the resources available. HMRC does identify areas where there are different interpretations of tax law. Quantifying the scale of these issues helps set priorities for policy development and resource deployment. This allows the department to compare these priorities against tax losses resulting from other types of behaviour. There have been recommendations from both the Public Accounts Committee and the National Audit Office36 to develop and use tax gap estimates in this way, and to publish the figures. In the interest of clarity HMRC thinks it makes sense to describe all of our tax gap estimates in one document so that a reader can understand more easily how the figures are calculated and the methodological issues which underpin them.37 HMRC also provided a detailed submission on measuring the gap, specifically in relation to the estimates published by Tax Research UK.38 The department argued that the £120bn figure “could be dangerous if not countered by HMRC’s published estimates … partly because they give a misleading view of HMRC’s effectiveness and the amount of uncollected revenues. But also because they encourage the perception that deliberate non-compliance in the UK is the norm—a perception which could encourage further non-compliance.”39 The submission raises similar concerns to those set out by the Exchequer Secretary to the House in June 2010 – quoted above – though further detail is given on the question of measuring tax evasion. Richard Murphy had claimed the annual cost of evasion was £70 billion – while HMRC had put it at £26 billion. The primary explanation for this disparity is that Mr Murphy had assumed that the size of any tax gap would be the same across all taxes. An extended extract is reproduced over the next two pages:

35 op.cit. para 16-18. For a critique that these estimates should ignore the sums that would be paid if taxpayers complied with ‘the spirit of the law’ see, “The tax chink”, Tax Journal, 19 December 2014. 36 Following the NAO 2003 report Tackling Fraud against the Inland Revenue PAC recommended ‘The Revenue should focus their work on making a reasonable estimate of the tax gap so they can judge the effort needed for a given reduction in losses’. Following the NAO 2007 report Management of Large Business Corporation Tax PAC recommended ‘The department does not have a robust measurement of the corporation tax gap… it should develop such a measure and publish the result, with separate estimates for large businesses and small and medium sized businesses.’ 37 Treasury Committee, First special report, HC 124, 18 May 2012 p2 38 Appendix 2, First special report, 18 May 2012, HC 124 of 2012-13 pp11-18 39 op.cit. p15 16 Tax avoidance and tax evasion

Tax Research UK particularly criticises HMRC’s use of bottom-up methodologies to measure the direct tax gap and applies the VAT gap rate to arrive at an evasion figure for all direct taxes. This is highly inappropriate for three reasons: • the VAT gap includes all forms of non-compliance such as non-payment, avoidance and criminal attack as well as evasion. So the VAT gap arises from much more than just suppression of turnover that might feed through to evasion of direct taxes; • the use of the VAT gap in this way counts debt and avoidance twice for direct taxes—an arithmetical error, and • very importantly, tax gaps vary considerably by type of tax. Tax gaps for taxes using deduction of tax at source, or with significant third party reporting requirements are much lower than for taxes without these features. This is established by very detailed research in the US and Denmark40 and borne out by UK experience. Using the percentage VAT gap—9.7% for 2010–11 is the latest estimate—to estimate a tax gap for business profits of companies and sole traders may give an answer of the right order of magnitude. But it gives completely the wrong answer for the income tax due from employees where PAYE is operated. International research suggests a tax gap for this of around 1%. This incorrect assumption accounts for £30bn of the £120bn estimate. Tax Research UK have supported their evasion estimate through comparison with an academic paper produced for the World Bank41 which contains estimates of the size of the hidden economy for a number of countries including the UK. The estimate for the hidden economy in the UK is 13% of GDP which Tax Research UK then convert to a tax gap estimate of £73bn. Rather than support the Tax Research UK figure we believe that this comparison, if anything, further undermines it. The methodology uses a variant of a ‘currency demand’ model to estimate the size of the hidden economy. The use of ‘currency demand’ models for this purpose has been comprehensively and extensively criticised in unusually strong terms by other academics42,43 and national statistical bodies.44,45 The main theme of the criticism is that the methodology relies upon the application of assumptions which result in estimates that are much too large to be plausible. For example the Australian Bureau of Statistics explore what it would mean for Australia to have a hidden economy of 15% (as predicted in an application of this methodology by the same author).

40 Denmark, Henrik J Kleven, et. Al, Unwilling or Unable to Cheat? Evidence from a Randomized Tax Audit Experiment, Tax Gap for Tax Year 2006, IRS 41 Friedrich Schneider, Andreas Buehn, Claudio E. Montenegro, Shadow Economies All over the World New Estimates for 162 Countries from 1999 to 2007, July 2010 42 Trevor Breusch, Estimating the Underground Economy MIMIC models, November 2005 43 Konstantin Kholodilin, Ulrich Thiessen, The Shadow Economy in OECD Countries: Panel Data Evidence, May 2011 44 Australian Bureau of Statistics, The Underground Economy and Australia’s GDP, March 2004 45 Statistics Canada, Estimating the Underground Economy in Canada 1992–2008, June 2011 17 Commons Library Briefing, 13 April 2021

Critically they point out that a hidden economy of this overall size implies much higher levels of non-compliance in the areas of the economy where there is scope for underreporting. For example it implies underreporting of around 50% for every single self- employed taxpayer—which they reject as being implausible. Certainly non-compliance of the scale suggested for the UK is completely incompatible with all of our customer research and operational data. As a result of the general concern about the use such models a body consisting of a number of international organisations including OECD, IMF, the World Bank, UN and the European Commission have issued a strongly worded statement advising against use.46 Part of their statement says: Unofficial estimates are often based on macroeconomic models. For instance, they may assume a fixed relation between the size of the economy and money in circulation. Such methods may yield grossly exaggerated results, attracting the attention of politicians and newspapers and thereby gaining wide publicity. In a more recent report ‘Reducing opportunities for tax non- compliance in the underground economy’,47 OECD comment: the OECD (and other international organisations) reject these methods as being useful in obtaining exhaustive estimates of GDP or in estimating underground production and have observed that when applied they produce for most countries spectacularly high estimates of NOE [Non Observed Economy] activities which have no sound scientific base but which, nevertheless, attract much attention from the media and other parties.48 Following these exchanges, these arguments were reiterated in a pair of articles published in the journal Taxation in summer 2012 – first by Ed Hagger, a deputy director at HMRC, and second by Mr Murphy.49 Reviewing the exchange, the then editor, Mike Truman, suggested one reason for the disagreement was that the Tax Justice approach was trying to measure something fundamentally different; in Mr Murphy’s view the gap was the difference between the contribution society ‘expected’ in tax and the amount actually paid, so that the legitimate use of corporate tax reliefs, say, could be termed ‘avoidance’: “this is a logical and consistent approach, but it does not measure the gap between the tax HMRC could collect and what they do collect.”50 In December 2013 the Public Accounts Committee published a report on HMRC’s annual accounts, in which it was strongly critical of the tax gap, arguing that it did not “include an assessment of the amount of tax lost through tax avoidance” and so “represents only a fraction of the amount that the public might expect to be payable.”51

46 Estimates of the unrecorded economy and national accounts, Declaration of the Intersecretariat Working Group on National Accounts, October 2006 47 Forum on Tax Administration : SME Compliance sub-group, Reducing opportunities for tax non-compliance in the underground economy, OECD, January 2012 48 Treasury Committee, First special report, HC 124, 18 May 2012 pp17-18 49 “Mind the gap” & “What’s the tax gap?”, Taxation, 8 & 23 August 2012 50 Mr Truman concluded that “as a definition, and an estimate, of the tax gap”, Mr Hagger had made “a better, if less philosophically satisfying case” (“The third round”, Taxation, 13 September 2012). 51 Public Accounts Committee, Thirty-fourth report: HMRC Tax Collection – annual report & accounts 2012/13, HC 666, 19 December 2013 p8 18 Tax avoidance and tax evasion

In evidence Edward Troup (then Tax Assurance Commissioner, HMRC) and Jim Harra (then Director-General, Business Tax, HMRC) were both asked if these figures included estimates of the amounts of money that many felt companies, like Starbucks, Amazon and Google, should be paying.52 Both witnesses suggested that this would be misleading: Q231 Chair: Am I right in saying that the sort of issues that we were discussing in relation to Starbucks, Amazon and Google … and the tax that could have been payable from those companies is not included, because it is not seen to be within the rules? Edward Troup: The tax gap that we measure is a compliance tax gap. Q232 Chair: It does not include that. I am asking whether it includes the Starbucks scenario, the Amazon scenario or the Google scenario. Edward Troup: It does not include the amounts of tax that some of the commentators have said these companies should pay. That is correct … Q258 Chair: At the moment … your tax gap is purely the tip of an iceberg. Jim Harra: Our tax gap is a complete measure of non-compliance with current tax law. It does not include a measure of how much additional tax might be collected if you changed the policy.53

2.3 The tax gap and ‘tax dodging’ Some critics of HMRC’s approach to measuring the tax gap have argued that this type of analysis should provide figures for the amounts of tax that should be paid. In January 2015 an alliance of charities, including Christian Aid and Oxfam, published proposals for a ‘Tax Dodging Bill’, to ensure that companies, particularly multinationals, paid their “fair share” of taxes.54 The authors argued that “tax dodging” encompassed three different types of behaviour (emphasis added): There is no single, agreed, definition of “tax dodging”, but it is a phrase that has become widely accepted and understood by the public in the UK and is thus used here in place of a more specific definition of the behaviours that we are asking parties to tackle in this campaign. In this case we include in our definition three broad types of behaviour: 1) Using opportunities provided by the tax system to attempt to reduce tax payments in a way that, on examination, would be deemed to be outside the law and thus illegal; 2) Using opportunities provided by the tax system to attempt to reduce tax payments in a way that is deemed legal, but is contrary to the intention of the law; 3) Using tax incentives, that are provided for

52 In late 2012 there was considerable media coverage contrasting the scale of these multinationals’ operations and the amounts of tax they paid – an issue on which the Committee published a critical report (HC 716 of 2012-13). For more details see, Corporate tax reform (2010-2015), Commons Briefing paper CBP5945, 25 July 2016. 53 Thirty-fourth report, HC 666, 19 December 2013 para 3 (fn 7), Ev25, Ev27 54 TaxDodgingBill.org press notice, Parties given 200-day challenge to fight back at global tax dodgers, 26 January 2015 19 Commons Library Briefing, 13 April 2021

in law, but which are not proven to provide the economic or social benefits that would justify the loss of tax revenue.55 Writing on this question some years ago, Judith Freedman, Professor of Taxation Law at Oxford, argued, “how much tax should be paid is not a question of moral intuition but a question of what is imposed by law.”56 Taking up this point, barrister Jolyon Maugham has suggested that “as a tool for delivering tax outcomes, morality is highly imperfect: subjective, imprecise, and enforceable indirectly at best.” However, there was a risk for the tax community from ignoring the truism: that which is legal isn’t always moral: Discrimination on the grounds of ‘colour’ (to use the language of the Act) did not become immoral only on 8 December 1965 when the first Race Relations Act received royal assent … At the second reading of the Race Relations Bill, Peter, later Baron, Thorneycroft, argued that one should not legislate against discrimination on the grounds of ‘colour’; it was too soon. As he put it: ‘The British people can be led, but they cannot be driven.’ Thorneycroft was right, albeit in only the narrowest sense. That there can be a relationship between law and morality is a basic requirement of the law. The law becomes difficult to enforce if it is too advanced of morality: this was the Baron’s contention. However, the law falls into disrepair where it fails to keep pace with changing mores. And that, Dear Reader, is what we have here.57 Turning back to the tax gap, in their report in December 2013 the Public Accounts Committee argued that HMRC “should be explicit about the limitations of its current measure of the tax gap”: The tax gap is a theoretical concept to assess tax revenues lost to the Exchequer. It does not cover the full amount lost through tax avoidance. It sets out to measure the difference between the amount collected and the amount that should be collected. The stated tax gap underestimates the amount of money lost to the Exchequer … HMRC should be explicit about the limitations of its current measure of the tax gap and gather intelligence about the value of tax lost through aggressive tax avoidance schemes.58 At the time HMRC published a press notice in which they took issue with this point: HMRC’s methodology for measuring the tax gap is robust and has been endorsed by the International Monetary Fund (IMF). Contrary to what the PAC report says, the published tax gap does include a measure of the tax lost from avoidance, as well as evasion, but it can only measure non-compliance with existing tax law – it cannot estimate how much tax might be due if tax laws were different. HMRC can only bring in the tax that is due under the law and we cannot collect what is not legally due, however much the Committee might want us to.

55 Oxfam, The Tax Dodging Bill: what it is and why we need it, January 2015 p19 56 “Chapter 8: Is tax avoidance ‘fair’?”, in, Chris Wales (ed)., Fair tax: towards a modern tax system, Smith Institute 2008 p94. 57 “The uses of morality in tax”, Tax Journal, 19 December 2014. See also Mike Truman’s valedictory editorial in Taxation: “So long …”, 4 March 2015. 58 Thirty-fourth report, HC 666, 19 December 2013 p5 20 Tax avoidance and tax evasion

The Public Accounts Committee already knows that we cannot prosecute multinational companies for activities that are lawful within the international tax framework and has itself acknowledged that the kinds of international tax planning by large businesses that it has reviewed are lawful.59 Subsequently the Government published a response to the Committee’s report, endorsing HMRC’s approach: The Government disagrees with the Committee’s recommendation. The tax gap definition, calculation and the limitations are described in detail in the departments’ annual tax gap publication. The tax gap measures compliance with existing tax law and is informed by the intelligence the department gathers on the use of avoidance schemes. It does not cover how much tax might be paid if tax laws were different.60

2.4 Recent debate of the size of the tax gap Despite these concerns as to the value of this exercise, HMRC has continued to produce annual estimates of the tax gap. Following the publication of its 2015 report, Edward Troup, then HMRC Permanent Secretary, restated why, in his view, it was “one of the most important documents [HMRC] publish”: An Ipsos MORI poll of the British public in September 2015 showed that they believe 36% of their compatriots have avoided paying the full amount of tax on income or purchases in the past year. However, the proportion of people who admitted they had done so in the same anonymous survey was just 6%. Due in part to our work in tax gap estimation, we know that more than 90% of the tax that is due is paid with little or no involvement from HMRC. This “perception gap” between what people think about non- compliance and the objective truth is important; if people think everybody is at it, they are more likely to dodge tax themselves. If HMRC can show objectively, transparently and clearly that non- compliance is not nearly as big a problem as people’s assumptions suggest, we can increase tax morale, reinforce social norms and – cyclically – reduce the tax gap further.61 In June 2016 Mr Troup gave evidence to the Treasury Select Committee, and on this occasion the then Chair of the Committee, Andrew Tyrie, asked “just how much of the tax gap is ever going to be eradicable in practice, given human nature.” In response, Mr Troup made a couple of points: [The tax gap is] in a very real sense, the best measure of the long‑term performance of a tax administration, because it is effectively the tax that is not collected, for whatever reason, and our goal should always be to reduce [it] … We are always going to have a tax gap, because there are always going to be criminal attacks; there is always going to be evasion … We think what we are doing, particularly with our digital

59 HMRC press notice, HMRC responds to PAC report, 19 December 2013 60 HM Treasury, Treasury Minutes, Cm 8819, February 2014 p13 61 “Measuring the gap”, Taxation, 15 October 2015 21 Commons Library Briefing, 13 April 2021

transformation, will give taxpayers, particularly business taxpayers, the tools that effectively allow them to reduce their errors … [Moreover] no country in the world has an observed tax gap significantly lower than ours, which means we are already pushing at the boundaries of what is doable with current technology, with the current tax system.62 Following publication of the 2018 edition of the tax gap, Chris Sanger (global head of tax policy at EY), writing in the Tax Journal, noted that “at first glance, the results for this year look uninspiring” as the percentage figure “had been relatively constant since 2011/12.” He went on to argue that “dismissing the report because of the lack of movement in the year is to be misunderstand the purpose of the tax gap figures”: HMRC uses the information to inform its operational strategy, to compare itself to other countries and to track its long-term performance. And it’s clear that the tax gap has impacted HMRC’s strategy. Consider the fact that the largest risk to the Exchequer, at over 40%, comes from small business. Also, the largest source of tax risk is failure to take reasonable care, which together with error, makes up more than a quarter of the tax gap. This fits with HMRC’s policy of mandating the ‘making tax digital’ requirements.63 Mr Sanger went on to note that the figures provide “an opportunity for HMRC to demonstrate its success, something that can be difficult given the necessary and wholly justified constraints to taxpayer confidentiality”, citing the evidence that HMRC’s director of customer strategy, David Richardson, had given in April 2018 to the Treasury Sub- Committee, as part of an inquiry into tax avoidance and evasion. In his evidence Mr Richardson was asked whether HMRC’s compliance policy was unfairly focused on smaller traders: Q2 Chair: One thing that is sometimes said about you is that you love to go after the sole trader, the white van man, the person running a childcare business from home, as opposed to the wealthiest, those with the most money and those doing the biggest amounts of avoidance. The figures that you have made public would suggest that, to some extent—that you are aiming at people primarily with less money and not looking at getting large amounts of money from richer individuals. David Richardson: That is said sometimes; it is not true. Our compliance policy is the same right across the different sectors of the population, which is to try to prevent non‑compliance happening before it would otherwise happen, and then to pursue people where there is non‑compliance to get the correct amount of tax in. If you make the contrast between large business and small business, which is the one that is often suggested in the papers—that we go after small businesses and let large businesses off—that is completely untrue. If you look at our investigation rate, you will find that over one in two of every large business is under investigation by us at any one

62 Treasury Committee, Oral evidence: HMRC Executive Chair and Chief Executive, HC 232, 8 June 2016 Qs9-11 63 “The tax gap: a right riveting read?”, Tax Journal, 6 July 2018. For more details of HMRC’s programme to introduce a new system of digital tax accounts see, Making Tax Digital, Commons Briefing paper CBP7949, 12 July 2019. 22 Tax avoidance and tax evasion

time and, last year, we collected £8 billion in compliance yield from large business. If you look at small businesses, the number of businesses under investigation at any time is about one in 10. It is important that we investigate small businesses, because they make up 46% of the tax gap, so we need to have a presence with small business. But large business represents a particular risk to us, and we investigate large businesses much more frequently and with much greater technical expertise than at the small end. Q3 Chair: If we take people you define as wealthy individuals, how certain can we be that your estimate of the tax that is being avoided by them is an accurate one, and that you are not understating the amount of money? David Richardson: We publish a tax gap. We are one of the few countries that publish a tax gap. That has been looked at by the IMF, by Government statisticians, so we have reasonable confidence in the tax gap and stand by that. We publish it so that people can see what is going on. What is important with the tax gap is the trend. By applying it in the same way every year, you can see a downward trend over the last 10 years. We are now at 6%, which is the lowest it has ever been and certainly one of the lowest of the countries that produce a tax gap. It is a good indicator of the extent of evasion and avoidance. Like all statistics, it is unlikely to be 100% accurate, but it is a consistent measure that shows a clear trend and a reliable, broad view of the make-up of the gap.64 In this context it is worth noting the results of a small qualitative survey that HMRC commissioned, to consider the drivers of tax compliance and behaviour among the wealthy, published in April 2019.65 Researchers carried out in-depth one-to-one interviews with 32 wealthy individuals and 10 agents, an approach guided by the fact that this category of taxpayers “are a relatively small, hard-to-engage population” and this tactic “would be more effective at capturing and unpicking the nuances and complexities of discussions of wealthy individuals’ tax affairs.”66 Researchers found that although there was some resentment at investment in tax avoidance being cast as a moral issue, the tone taken in much public discourse about this had been “an effective deterrent”: Tax behaviour seems to be primarily shaped by a delicate balance between wanting to contribute to society, while being intolerant of too onerous or punitive a tax regime. The near consensus is that the core goal is paying the ‘legally correct’ amount of tax – and there is irritation at this becoming a morally loaded issue in media coverage and political/public discourse. Other motivations are more varied and seem to map to risk appetite – and these imply some possible messaging approaches to encourage compliance: more effectively ‘selling’ the benefits to society to those with a stronger social conscience; warning those with a higher risk appetite to avoid being the ‘guinea pig’ who proves a scheme doesn’t work; and – cutting across wealthy individuals more generally – the idea that, by using only safer tax

64 Treasury Sub‑Committee, Oral evidence: Tax avoidance and evasion, HC 934, 17 April 2018 Qs2-3 65 HMRC, Researching the drivers of tax compliance behaviour among the wealthy, and ways to improve it: HMRC Research report 537, April 2019 66 op.cit. para 1.3 23 Commons Library Briefing, 13 April 2021

arrangements, you protect the peace of mind and quality of life that are among the key advantages of being wealthy. The ‘acid test’ for agents and some individuals when weighing up a specific scheme, is whether it feels overly-complex or contrived, and whether they believe it will ‘fall down’ eventually – if this is the case, agents will not recommend it. Agents said they have the ultimate sanction of rejecting clients who they feel have tax affairs that are too opaque or who display too high a risk appetite. That said, agents and individuals mostly seem to be ‘on the same page’ in avoiding arrangements that feel overly-complex or contrived. Few in our sample of wealthy individuals seemed to be countenancing more risky arrangements; and agents reported that there is now little client appetite for these. Legal challenges, changes to regulation and the aforementioned ‘moral’ tone of media/public discourse are felt to have made risky arrangements less acceptable. While resented, the moral tone of media/public discourse therefore seems to have been an effective deterrent.67 Estimates for the 2019 tax gap were published in June that year, and showed a small increase from 5.5% to 5.6% of all tax liabilities; in cash terms from £33bn to £35bn.68 In a letter to the Treasury Committee, Jon Thompson, then HMRC Permanent Secretary noted that the cash value of the tax gap was higher than in earlier years: It’s essential to refer to the percentage tax gap to understand compliance trends over time. The cash figure is affected by economic growth and changes to tax rates, whereas the percentage gap takes the impact of these factors into account. You will see that the cash value of the tax gap in 2017-18 is higher than in some earlier years – despite being at a low percentage. This reflects that HMRC is also collecting record levels of revenue. Total revenue, as reported in our Annual Report and Accounts publications, has for example increased from £536.8 billion in 2015-16 to £605.8bn in 2017-18. The tax gap has fallen from 7.2% in 2005-06 to 5.6% in 2017- 18, albeit with some year to year variations. Its lowest point to date was 5.3% in 2015-16 and although there has been a slight increase this year (primarily driven by an increase in the latest VAT gap estimate), it remains low, with the trend in recent years being best described as flat.69 In their commentary on the figures the Chartered Institute of Taxation highlighted the fact that while the cost of tax avoidance had fallen considerably in recent years, the estimates of tax lost from taxpayers making unintentional mistakes had “remained stubbornly high”: Estimating the tax gap is a complex and necessarily imprecise process so we should be careful not to read too much into small year on year changes. But a sustained fall of three quarters in the share of the potential tax take being lost to avoidance since 2005 is significant and a tribute to the actions of successive governments as well as a change of culture around what is regarded as acceptable behaviour ...

67 op.cit. para 8.2-3 68 HMRC press notice, Tax gap remains low, 20 June 2019. See also, “HMRC reveals sharp increase in lost self-assessment tax”, Financial Times, 21 June 2019 69 Treasury Committee, Letter from Sir Jonathan Thompson to Chair relating to the Tax Gap, 20 June 2019 24 Tax avoidance and tax evasion

Nearly £10 billion of the tax gap relates to taxpayers inadvertently not getting things right, through what HMRC categorise as error or a failure to take reasonable care. As some other parts of the tax gap have fallen these have remained stubbornly high. The CIOT suggests that HMRC should focus on customer service as a direct way to help large numbers of ordinary taxpayers who find themselves confronted by ever more complex tax law and increasing compliance obligations.70 On 21 October 2019 the Public Accounts Committee took evidence from HMRC officials on its 2018/19 Annual Report. On this occasion Nigel Mills asked Jim Harra, now HMRC’s Chief Executive, about the department’s future target for the tax gap: Jim Harra: … The key thing for us is whether we are collecting all the tax that is due, so a key measure for us is the tax gap. Ideally, you would target me on managing the tax gap, but the problem is that in operational terms there is quite a lag in measuring that, so we have to use some proxies to do that. The key figure that I watch in a trend over time is the tax gap. Nigel Mills: I like this idea of a target on the tax gap. What would be a reasonable target? … Is a 5% target for the tax gap in three years’ time realistic? Jim Harra: I would dearly love to achieve that. It would set the Government quite an investment challenge for us. Having brought it down, we are finding it tough to get it down again. It is very difficult to get a benchmark with the rest of the world, because we are the only country that does a comprehensive measure. The main benchmark we have is on VAT. You have lots of countries with a very similar system, and all of them measure it in a broadly similar way. You can see that we have performed pretty well. In the EU, for example, we are at the median. You can also see how some countries have been putting measures in place that mean they are making very rapid and accelerating improvement through things such as e-invoicing, fiscal tills and withholding taxes. Those are the kinds of areas that the UK would have to move into if it wanted to see that further shift in the tax gap.71 Meg Hillier wrote to Mr Harra after this session to raise several issues, and argued that HMRC should have a target to cut the tax gap: We note HMRC’s desire to reduce the Tax Gap, including through a greater focus on preventative measures to help taxpayers get their affairs right first time and reduce the opportunities for mistakes to be made. However, despite the Tax Gap being a key measure for HMRC’s performance, there is no target for reducing its size. Recommendation: HMRC should establish a stretching annual target for reducing the size of the Tax Gap. This should be in place by 1 April 2020.72

70 CIOT press notice, Chartered Institute of Taxation urges focus on customer service to close the tax gap, 20 June 2019 71 Public Accounts Committee, Oral evidence: HMRC Standard Report 2018-19, HC 28, 21 October 2019 Qs 60,61,65 72 Public Accounts Committee, Letter from Chair to Jim Harra, follow up to evidence session on HMRC Standard Report 2018-19, 30 October 2019. The Committee had made a similar recommendation the year before (Twelfth report: HMRC’s performance in 2016-17, HC 456, 12 January 2018 p5). 25 Commons Library Briefing, 13 April 2021

The Committee’s inquiry was interrupted by the dissolution of the House prior to the 2019 General Election, and the Government did not publish a response to the Committee’s letter until after the 2020 Budget. On this specific proposal, Ministers rejected the case for setting HMRC an annual target for reducing the tax gap: HMRC maintains its long-term strategic ambition to drive down the tax gap and accept that it is right to be assessed on movement in the tax gap over time. The department continues to measure and publish estimates of the tax gap and agrees with the committee that this provides important information to monitor HMRC’s long-term performance in managing tax compliance. However, in line with the government’s previous comments on the matter, HMRC believes that tax gap reduction is not suitable as an annual performance target. This is because it cannot be measured in a timely way and cannot directly inform resource deployment and other operational decision making. Nonetheless, HMRC is fully committed to work to both prevent growth of, and tackle, the existing tax gap. This is already reflected in HMRC’s long established compliance yield targets, which drive decisions on policy and operational compliance interventions. Compliance yield captures the impact of HMRC’s activity to tackle the tax gap in a timely and practical way. The department uses a range of operational targets, which are set each year by HM Treasury (HMT) ministers, to focus on performance. HMRC will continue to keep the basket of measures and targets under review in discussion with HMT.73 As noted above, HMRC published its updated figures for the tax gap in July 2020, and, as has been standard practice, updates in the department’s methodology saw adjustments to the estimates for prior years. At this time the National Audit Office completed an inquiry on the tax gap which noted that “the precise scale of the tax gap is inherently uncertain and difficult to estimate” and that, “large revisions to the tax gap have reversed past trends reported by HMRC, highlighting the uncertainties associated with this measure”: Evasion and the hidden economy (which taxpayers conceal from HMRC, deliberately or otherwise), are particularly difficult to estimate because they are inherently less visible. HMRC is able to estimate a range of uncertainty for around 42% of the tax gap’s value. Data limitations mean that it does not produce range estimates for the rest. … HMRC updates the tax gap methodology each year to improve accuracy. It adjusts prior years so trends are comparable. In July 2020, HMRC made substantial revisions to previous tax gap estimates reflecting changes to the national statistics used to estimate VAT and the settlement of long-running tax disputes. For example, in 2019 HMRC reported that the tax gap had increased to £35 billion or 5.6% of tax owed in 2017-18. It now estimates the tax gap reduced to £31 billion or 5.0% of tax owed in that year. It has increased its estimates of the tax gap for some earlier years. Notably for 2013-14 HMRC now estimates the

73 HMRC, Response to the recommendations of the Public Accounts Committee, 23 March 2020. This was the Government’s response to the Committee’s earlier recommendation: Treasury Minutes, Government response to the Committee of Public Accounts, Cm 9596, March 2018 p9. 26 Tax avoidance and tax evasion

tax gap increased rather than decreasing, as it first reported. While HMRC can be increasingly confident about historic years, the risk remains that its most recent estimates change again, making the trend analysis difficult to rely upon. While this limits some of its value in making operational decisions, the analysis still helps HMRC understand the relative size of each element of the tax gap and how to approach non-compliance. HMRC produces the estimate to help make timely decisions, recognising the trade- off with certainty.74 The NAO’s report went on to make a number of recommendations for HMRC to improve its approach: To improve its approach to tackling the tax gap, HMRC should: a seek opportunities to base more of the overall tax gap estimate on established methodologies to reduce the level of uncertainty; b in developing its new performance measures: i develop measures for each significant factor affecting the tax gap, for example, costs to taxpayers and intermediaries of complying, taxpayer experience, perceptions of fairness and the deterrence effect of its activities; ii review the impact of compliance yield on the tax gap, and the significance of timing differences between the compliance yield and the tax gap measures; iii in partnership with HM Treasury develop shared and trusted data on the impact of different resourcing options, including the marginal rates of return from compliance activity and wider trade-offs, to help judge how to maximise tax revenues cost-effectively; and c while recognising that it is appropriate for HMRC to primarily organise its approach to compliance by risk and customer group, consider extending, where relevant to other tax gap behaviours, good practice shown in its tax avoidance strategy and approach. For example, by setting out, in a single place for other behaviours, clear strategic objectives for tackling the underlying behaviour and a summary of the different actions HMRC is taking to achieve those objectives.75 Following the NAO’s inquiry in October 2020 the Public Accounts Committee published a report in which it was strongly critical of HMRC’s approach, arguing that it was “misleading … to report the tax gap as a single figure” and that HMRC should “state more clearly … that its tax gap figures are highly uncertain and subject to revision … and report the known range and scale of uncertainty.”76 In a press notice the Committee stated that it was “calling on HMRC to give a more honest picture of the likely levels of the so-called ‘tax gap’.”77 In its report Committee noted that there were breakdowns of the tax gap by taxpayer group, tax type and behaviour, but went on to argue that HMRC “ought to be able to produce reasonable estimates for the tax gaps in the four nations of the UK”, should “include analysis of the tax

74 NAO, Tackling the tax gap, HC 372, 22 July 2020 pp8-9. See also, NAO press notice, Tackling the tax gap, 22 July 2020 75 op.cit. pp12-13 76 Public Accounts Committee, Tackling the tax gap, HC 650, 16 October 2020 p6 77 Public Accounts Committee press notice, Chair calls on Government to publish list of companies that received furlough money, 16 October 2020 27 Commons Library Briefing, 13 April 2021

gaps for each industrial sector” and, “look at ways to measure and report the estimated scale of sophisticated tax planning that is legal but undesirable from a policy perspective by tax type and taxpayer group each year.”78 On the publication of the Committee’s report Jim Harra, HMRC’s Chief Executive, wrote to the Committee, concerned that its characterisation of HMRC’s work was “wholly unfair and unsubstantiated”: I wanted to note straight away my concern that the report (p6, para 1) describes HMRC’s presentation of the tax gap statistics as “misleading”, and that the accompanying press notice calls on us to be “more honest” in relation to the tax gap. HMRC is the only revenue authority in the world that compiles and publishes a comprehensive measure of the tax gap, covering both direct and indirect taxes, every year. We publish the tax gap because we believe it’s important to be transparent in our work. HMRC’s tax gap estimates are official statistics produced in accordance with the Code of Practice for Statistics, which assures objectivity and integrity. The tax gap methodology has been intensively reviewed and given a clean bill of health by the International Monetary Fund (IMF) and reviewed by the Office for Statistics Regulation (OSR). The Office for Statistics Regulation (OSR) stated that: HMRC is world-leading in measuring tax gaps and is setting the bar for others to follow. With this in mind, I find the Committee’s characterisation of our work in this area to be wholly unfair and unsubstantiated.79 Writing in the Tax Journal Heather Self (Blick Rothenberg) commented, “actually, I think the PAC has a point”: The problem is that the headline [to HMRC’s press release on its latest figures] … boils down the tax gap to a single figure with a superficial air of accuracy. When you dig deeper into the analysis, the uncertainties become more obvious … So I agree that it would be better to release the tax tap figures with a more nuanced headline, making it clear that the gap is a long term performance indicator and not an accurate figure for tax which could be collected if only HMRC were perfect. Ms Self went on to argue that a better measure would be if HMRC published a forecast for the amount of tax it expected to collect for the year, and then set out why actual receipts had differed from the forecast. “Of course, some of the factors will be outside HMRC’s control … but the reconciliation would put the tax gap movements into much clearer context.” That noted, Ms Self added, “where I do have huge sympathy for HMRC is with its frustration with another of the PAC’s comments that the tax gap does not include amounts for legal, but ‘sophisticated and undesirable’ tax planning”: Leaving aside the practical difficulty of how you would define ‘undesirable’ tax planning … this would undermine the whole purpose of the tax gap, which is to measure the gap between tax which could be collected in line with current legislation and the amount actually collected. If politicians, on the PAC or more

78 Public Accounts Committee, Tackling the tax gap, HC 650, 16 October 2020 pp6-7 79 HMRC, Letter to PAC Chair on tackling the tax gap report, 16 October 2020 28 Tax avoidance and tax evasion

generally, want to know how much ‘undesirable’ tax planning is being undertaken, they should examine more closely how much various reliefs are costing (which they are, belatedly, beginning to do) – and then change the law if they don’t like the answer.80 The Government’s full response to the report was published in January 2021. Although this did not address the Committee’s claim that HMRC’s approach was ‘misleading’, the Government agreed that the department should do more to publicise the fact that these figures are both uncertain and subject to revision: In Measuring tax gaps 2020 edition, HM Revenue & Customs (HMRC or the department) published ranges around its tax gap estimates for 42% of the tax gap by value. These ranges were mostly provided where the estimates were derived from sample data, for which there is an established method for calculating confidence intervals. The department will explore methodologies for calculating and presenting ranges around more of its tax gap statistics, particularly for those elements not based on sample data. In Measuring tax gaps 2021 edition, which is due for publication in June 2021, the department will publish ranges where they can be calculated, describe where this is not possible, and provide an uncertainty assessment against those areas where there is no method for calculating a meaningful range. The department has implemented changes to its Annual Report and Accounts 2019-20, including an explanation that the tax gap is an estimate, with sources of uncertainty and potential error, and is subject to revision. The department will include a statement regarding uncertainty and revisions in its press notice accompanying the publication of the 2019-20 tax gap estimates in June 2021.81 However, it disagreed with the case made for making estimates of tax gaps by industrial sector or geographical region … In Measuring tax gaps 2020 edition, the department provided tax gap estimates by tax type, taxpayer group and behaviour. As tax gap models are built to estimate the total gaps by tax type, data and modelling techniques do not allow for some forms of subgroup analysis to be achieved comprehensively – such as analysis by industry sector. It may be possible to estimate some components of the tax gap by sector, for example for estimates based on data from the random enquiry programme. In this instance, data from multiple years would need to be pooled together to provide sufficient cases for subgroup analysis, which would mean the department could not present a time-series in this analysis. To improve precision for single-year estimates, additional resource would be needed for the random enquiry programme to increase the number of cases. This would also increase the burden on compliant customers who are selected for enquiry and would entail an opportunity cost as an equivalent number of risk-based enquiries would yield more revenue. In the absence of sufficient data, breaking down the total tax gap by industry sector would entail a high level of assumption and would result in extremely uncertain estimates that

80 “Self’s assessment: Mind the tax gap”, Tax Journal, 9 November 2020 81 HM Treasury, Treasury Minutes, CP 363, January 2021 p10 29 Commons Library Briefing, 13 April 2021

would not be in keeping with the level of precision offered by the statistics presented elsewhere in the report. The department recognises that from time-to-time risks will emerge in specific industries, regions or tax regimes, and the department will seek to provide tax gap estimates as to the magnitude of these where it is feasible. For example, in Measuring tax gaps, the oils tax gap for Northern Ireland is disaggregated from the gap for Great Britain, which demonstrates the difference in the size of the illicit diesel market between these regions. The department will continue to keep its tax gap estimates under review and will prioritise development where most value can be provided to users of its statistics. … or the Exchequer cost of ‘undesirable’ tax planning: The department measures the tax gap for taxes and duties which are due under law – the ‘compliance gap’. The department’s tax gap includes an estimate of revenue loss that results when taxpayers do not follow the spirit of the law, this is the avoidance tax gap. There would be issues of feasibility in estimating the value of tax saved through ‘undesirable’ sophisticated tax planning. There is no generally accepted definition of what tax planning is deemed ‘undesirable’ from a policy perspective, and the department has no objective way of assessing this.82 Over the last year public attention has been focused on the coronavirus pandemic, with relatively little discussion of this issue. That said, at the time of the Government’s response to the Committee’s report, there was a good deal of debate as to the continuing impact of Covid-19 infections, and the degree to which this could be attributed to the public failing to comply with government guidance. This led to an interesting exchange on Twitter about the prevalence of tax avoidance. Professor Rita de la Feria, Professor of Tax Law at Leeds University, observed, “I have been wondering why this emerging narrative of blaming the (supposedly non-compliant) public for failures of public policy bothers me so much. Just realised that it's identical to public narratives on tax avoidance. People work with the incentives the law gives them.” In one response, Edward Troup noted that this was an ‘insightful point’: “Tax avoidance is driven by the fact that the only incentive tax creates is to try to pay less. Which is why tax is different and tackling tax avoidance is so hard.”83

82 op.cit. pp11-12 83 Rita de la Fiera, Twitter, 19 January 2021 30 Tax avoidance and tax evasion

3. The Coalition Government’s approach

3.1 A new anti-avoidance strategy The Coalition Government set out its priorities for tax policy in its agreement published in May 2010, announcing that as a whole the tax system should be made “more competitive, simpler, greener and fairer.” On avoidance, the agreement stated that the Government would make “every effort” to tackle it “including detailed development of Liberal Democrat proposals.”84 In Opposition the Liberal Democrats had pin-pointed a number of anti- avoidance measures, including a new General Anti-Avoidance Principle - or ‘GAAP’ - that they estimated could raise up to £2.2bn a year. In their General Election briefing on the major parties’ tax proposals the Institute for Fiscal Studies (IFS) commented on the viability of a GAAP, citing earlier work by the Tax Law Review Committee: A general anti-avoidance principle (GAAP) is intended to help prevent behaviour that reduces tax liabilities through transactions that satisfy the letter of the law but are said to violate the spirit of the law in some way. In the past, concerns have been raised that a GAAP would be inherently vague and would potentially create uncertainty for taxpayers, and therefore that a resource-intensive ‘pre-clearance’ mechanism would be required whereby taxpayers could check in advance with HMRC whether particular arrangements would fall foul of the GAAP. The Liberal Democrats’ response to these concerns is to propose that ‘pre-clearance’ be provided by a new branch of HMRC which would charge commercial rates for such advice. This is a reasonable solution, but note that in effect it simply shifts the cost of pre-clearance from HMRC to the taxpayer. The effects and effectiveness of a GAAP would depend a great deal on exactly how it was worded and on how the courts interpreted it. International experience has been varied in these respects. It is not a panacea and is unlikely to remove the need for more specific anti-avoidance legislation, but it could potentially raise some revenue.85 To estimate how much a GAAP would yield, the Liberal Democrats have taken the Government’s estimates of how much it loses from both ‘avoidance’ and differences in ‘legal interpretation’, and simply guessed what fraction of this total a GAAP would deliver: 20% for income tax, NICs and capital gains tax, and 25% for corporation tax. Yet a GAAP of the kind they describe would do little to address differences in ‘legal interpretation’. The HMRC document from which the Liberal Democrats take their estimate of the tax gap describes the difference between ‘avoidance’ and ‘differences in legal interpretation’. Avoidance,

84 HMG, The Coalition: our programme for government, May 2010 p30 85 See Bowler, T. (2009), Countering tax avoidance in the UK: which way forward?, IFS Tax Law Review Committee Discussion Paper No. 7 … for an analysis of the impact a GAAP might have had on tax avoidance had the current Government introduced one following consultation in 1998. 31 Commons Library Briefing, 13 April 2021

according to HMRC, is “the use of schemes or arrangements that seem to HMRC to have been implemented primarily in order to deliver a tax advantage”; by contrast, “Legal interpretation relates to the potential tax loss from cases where HMRC and customers have different views of how, or whether, the law applies to specific and often complex transactions. Examples include the correct categorisation of an asset for allowances, the allocation of profits within a group of companies, or VAT liability of a particular item. In these situations the customer will have an alternative view of the law and of how it applies to the facts in their case to that held by HMRC.” A GAAP as normally envisaged would address avoidance but not differences in legal interpretation, on these definitions; and indeed it is notable that the stated aim of the Lib Dems’ GAAP is to target transactions “constructed in such a way that the sole or main purpose, or one of the main purposes, is to reduce or eliminate tax liability” – a phrase that is almost indistinguishable from the above definition of ‘avoidance’ rather than ‘legal interpretation’ To raise £2.2 billion, therefore, the fractions of ‘avoidance’ alone that a GAAP would need to eliminate are much larger than the 20% and 25% that Liberal Democrats assume. Since these percentages are arbitrary guesses in any case (and we have no better way of estimating the yield), it is possible that larger percentages would turn out to be accurate. But relying on bringing in £2.2 billion is clearly less cautious than the 20% and 25% numbers might suggest.86 In its first Budget in June 2010 the Government stated that as part of “wider work on improvements to the tax policy making process” it would “engage informally with interested parties to explore whether there is a case for developing a General Anti-Avoidance rule.”87 In September, just prior to the Spending Review, the Chief Secretary to the Treasury announced that HMRC would receive an extra £900m of funding for a number of additional activities over 2011-2015 to improve its collection record, by reducing the current incidence of both avoidance and evasion.88 In turn the Spending Review the next month stated that this extra £900m would bring in “an additional £7bn a year in tax revenues by 2014/15”:89 This will include: • a five-fold increase in criminal prosecutions to act as a deterrent to others; • a new dedicated team of investigators to crack down on offshore evasion; • more resources for the prevention of tobacco and alcohol fraud, an increase in registration checks, and a cyber team to address repayment fraud;

86 Taxes and Benefits: The Parties’ Plans, IFS April 2010 p39 87 Budget 2010, HC 61 June 2010 para 2.114. The Government published more details of its approach at the time in, Tax policy making: a new approach, 22 June 2010 88 Liberal Democrats press notice, Alexander announces major clampdown on tax avoidance and evasion, 19 September 2010 89 Spending Review 2010, Cm 7942 October 2010 pp 71-2 32 Tax avoidance and tax evasion

• dedicated tax experts to extend HMRC’s coverage of large businesses, focused on providing resources to tackle high risk areas; and • improving the scope of in house debt collection and placing up to £1 billion per year of tax debt to private sector debt collection agencies. It should be noted that this investment was in the context of a cut in HMRC’s total spending: Owen Smith: To ask the Chancellor of the Exchequer what effects he expects the outcomes of the comprehensive spending review to have on his Department's funding for HM Revenue and Customs in each year of the spending review period. Mr Gauke: The outcome of the spending review is that HMRC will be required to make savings of 25% in real terms on a straight line basis over the next four years and that they will re- invest £900 million to tackle non-compliance in the tax system. The overall net effect is a real terms reduction of about 15%.90 At the time there were some concerns that the reductions to the HMRC’s budget and consequent cuts in staff would see an increase in tax evasion and avoidance,91 though the Government argued that there was not a binary relationship between the two: Mr Jim Cunningham: To ask the Chancellor of the Exchequer what his most recent assessment is of the relationship between the number of staff employed by HM Revenue and Customs (HMRC) and the amount of tax revenue obtained by HMRC. Mr Gauke: The amount of tax revenue received by the Government in any given year depends on a number of factors, including: • the state of the economy eg the level of personal and corporate income, consumption, saving and investment; • the structure of the tax system eg the rates, thresholds and reliefs in operation; • the level of compliance by taxpayers; and • HM Revenue and Customs' (HMRC) administration of the tax system, and the productivity of its compliance activities. Through the use of new technology and increases in staff productivity HMRC has increased the amount of revenue bought in as a result of its compliance activities from £7.5 billion in 2005-06 to £12 billion in 2008-09. Over the period April 2005 to April 2010, HMRC has reduced the number of full-time equivalent staff it employs by 23% (excluding the transfer of 4,641 FTE staff to the UKBA).92 The Treasury Committee were critical of this funding decision, as part of their report on tax compliance published in March 2012:

90 HC Deb 23 November 2010 c278W 91 For example, The Association of Revenue & Customs, Being bold : a Radical Approach to Raising Revenue and Reducing the Deficit, September 2010 & FDA press notice, Tax gap figure reinforces case for increased HMRC resourcing, 17 September 2010; see also, “A challenge to the Chancellor”, and “Closing the gap”, Taxation, 5 May & 6 October 2010 92 HC Deb 11 October 2010 c242W 33 Commons Library Briefing, 13 April 2021

In the 2010 Spending Review, HM Treasury allocated £917 million to HMRC with the intention of generating an additional £7 billion in compliance yield annually and £18 billion over the four-year life of the Spending Review.93 Given HMRC's estimate of the 2009-10 tax gap of £35 billion, this is a reduction of 20%, which is a very ambitious target … We accept that, based upon figures in HMRC's latest tax gap report, these seem to be sensible areas in which to invest. However the process by which the areas to be invested in, the amount to be invested, and the estimated additional yield were calculated and decided lacks transparency. Mr David Gauke MP, Exchequer Secretary, explained the process as follows: “[HMRC] came forward with a proposal saying, "This is what we think we can do to reduce costs and this is what we can do to reinvest in a way that would increase the yield". I think it would be fair to say that pretty well the HMRC bid was accepted by the Government. The Treasury kicked the tyres very hard and examined all the detailed proposals that were contained within it, which broke down to, "Well, this particular programme we think would cost X and produce Y". We examined the various proposals and, by and large, the HMRC bid was accepted, and that is why we reached the settlement that we did [HC 731 Q372]. In a further memorandum intended to elaborate on this point, the Exchequer Secretary told us that: “HMRC came forward with a number of investment cases to further increase compliance and reduce the tax gap that the Treasury were satisfied with on that basis... The final £917m reinvestment proposals therefore met the test of standing up to intense Treasury scrutiny [HC 731 Ev 130].” Neither the Minister's oral evidence nor his supplementary evidence makes clear what criteria were applied to assess HMRC's proposals for investment, or whether this assessment was systematic. This makes it difficult for us to scrutinise in detail whether the areas to be invested in are the right ones, whether the estimated yield from each area is accurate, and whether proposals which were rejected should have been accepted.94 The Committee went on to raise concerns that investments in this area might encourage an overly aggressive attitude by tax officers: We welcome the Exchequer Secretary's view that "the Treasury could, in theory, seek to invest in HMRC until the marginal pound invested brought not less than a pound in return... [but] in practice the Treasury considers each additional investment in HMRC on a case-by-case basis". However we encourage the Treasury to include in its consideration the question of whether the activity invested in will yield the right amount of tax and not just the greatest possible amount.95 At the time of the 2011 Budget the Government published a strategy document on its anti-avoidance strategy. In the foreword to this, the then Exchequer Secretary, David Gauke, made the case for a new approach as follows:

93 Spending Review Settlement 2010, Cm 7942, October 2010; Treasury Committee, Administration and effectiveness of HM Revenue and Customs, 30 July 2011, HC 731 of 2010-12 Q258 94 HC 1371 2010-12 pp7-8 95 HC 1371 2010-12 p8 34 Tax avoidance and tax evasion

We inherited a tax system with a ‘tax gap’ of around £40 billion. More than a sixth of that is due to tax evasion – that is, illegally understating tax liabilities. But a further one sixth is estimated to be due to tax avoidance – that is, reducing tax liabilities by using the tax law to get a tax advantage that Parliament never intended. And the problem is a persistent one … Clearly, there is a problem we need to tackle and we are committed to tackling it differently from our predecessors. That means a more strategic approach that gets to the root of the problem, rather than treating the symptoms.96 The document went on to summarise the key elements of this approach… • making the most of opportunities to make the tax system more watertight against avoidance, for example, as part of wider policy reform; • reviewing areas of the tax system that have been under repeated avoidance attack, to get to the heart of the problem and develop sustainable solutions; and • creating new generic defences against avoidance, going beyond closing identified avoidance loopholes, including considering the case for a General Anti-Avoidance Rule (GAAR).97 … and to set out four strands of work on legislative defences against tax avoidance: • a new proposal to reduce the cash flow benefits that taxpayers can gain from using high risk avoidance schemes; • a new rolling programme of reviews on high risk areas of the tax code; • work in hand on a GAAR; and • the targeted tax measures that sit alongside this strategic work to address specific avoidance risks that have emerged.98 With regard to the specific proposal to consider a ‘GAAR’, in November 2011 the Treasury published a report by a study group, led by Graham Aaronson QC, which recommended a narrowly focused rule targeted at ‘abusive arrangements’ only,99 and following consultation, the Government introduced provision for this tax avoidance legislation in 2013.100 Several countries have introduced legislation along these lines, and an IMF survey of international practice gives a short description of how this rule is meant to work: A GAAR is a provision of last resort that is capable of being invoked by a tax authority to strike down unacceptable tax avoidance practices that would otherwise comply with the terms and statutory interpretation of the ordinary tax law. A GAAR is typically designed to strike down those otherwise lawful practices

96 HM Treasury/HM Revenue & Customs, Tackling Tax Avoidance, March 2011 p3 97 op.cit. p5 98 op.cit. p9 99 HM Treasury press notice 130/11, 21 November 2011 100 As noted above, these developments are set out at greater length in, Tax avoidance: a General Anti-Abuse Rule, Commons Briefing paper CBP6265, 17 September 2020. 35 Commons Library Briefing, 13 April 2021

that are found to be carried out in a manner which undermines the intention of the tax law such as where a taxpayer has misused or abused that law. This is typically achieved by giving the tax authority the power to cancel a particular tax benefit or assess a different (increased) tax liability against the taxpayer in circumstances where the course of action taken by a taxpayer is so blatant, artificial or contrived that it is only explicable by the desire to obtain a relevant tax benefit.101 As HMRC’s guidance explains, “to ensure that the taxpayer is given the benefit of any reasonable doubt when determining whether arrangements are abusive, a number of safeguards are built into the GAAR rules”: These include: • requiring HMRC to establish that the arrangements are abusive (it is not up to the taxpayer to show that the arrangements are non-abusive), • applying a ‘double reasonableness’ test - this requires HMRC to show that the arrangements ’cannot reasonably be regarded as a reasonable course of action’ - this recognises that there are some arrangements which some people would regard as a reasonable course of action while others would not - the ‘double reasonableness’ test sets a high threshold by asking whether it would be reasonable to hold the view that the arrangement was a reasonable course of action - the arrangement is treated as abusive only if it would not be reasonable to hold such a view • allowing the court or tribunal to take into account any relevant material as to the purpose of the legislation that it is suggested the taxpayer has abused, or as to the sort of transactions which had become established practice at the time when the arrangements were entered into • requiring HMRC to obtain the opinion of an independent advisory panel as to whether an arrangement constituted a reasonable course of action, before HMRC can finally apply the GAAR.102 In answer to a PQ in April 2019 Treasury Minister Mel Stride noted, “HMRC is actively using the GAAR to tackle tax avoidance. To date, all cases referred to the GAAR Advisory Panel have resulted in a Panel opinion in HMRC’s favour.”103 In their inquiry on the Finance Bill 2011, the House of Lords Economic Affairs Committee asked several witnesses about the new approach: [The Government's strategy and the three elements to this strategy identified in Tackling Tax Avoidance] … met with wide- spread approval from our private sector witnesses. The Chartered Institute of Taxation (CIOT) thought that "the idea of a strategic approach to tackling avoidance is sensible and in many ways much needed ... We are pleased to note that the new Protocol on unscheduled announcement of changes to tax law explicitly

101 Waerzeggers & Hillier, Introducing a General Anti-Avoidance Rule (GAAR) : Ensuring That a GAAR Achieves Its Purpose, International Monetary Fund, January 2016 p1 102 HMRC, GAAR Guidance with effect from 11/9/2020, September 2020 para B12.1 103 PQ237715, 1 April 2019 36 Tax avoidance and tax evasion

recognises that retrospective changes to tax legislation will be wholly exceptional …" [Written evidence (WE)]. The Institute of Directors (IoD) thought that although the "detailed articulation of the strategy may be new, we would be surprised and concerned if more than a small proportion of the practices that it mentions were new."[WE] They agreed with taking "away the cash-flow advantage of using high-risk avoidance schemes that fail."[WE] The CBI echoed this ... The Institute of Chartered Accountants (ICAEW) thought that "Tackling Tax Avoidance makes a number of sensible recommendations. We have welcomed previously the new Protocol on unscheduled announcement of changes to tax law which reiterates the fundamental principle that any tax changes should be made prospectively and not retrospectively."[WE] Mr Alex Jackman of the Forum of Private Business (FPB) was positive … but he had a concern "We do not want to see small business unfairly targeted … while there are a few big wins out there, I think the view might be taken by HMRC that there are a few more easy wins at the lower end of the business spectrum. That is something we would be seeking to avoid."[Q231] On the rolling programme of reviews of high-risk areas of the tax code, most of our private sector witnesses were content with HMRC having chosen income tax losses and unauthorised unit trusts ... Only Mr Murphy104 thought that these areas "seem to be relatively minor compared to major issues such as profit shifting, the use of tax havens, the abuse of the domicile rule, the residence rules and what they are giving rise to."[Q90]105 Witnesses raised two concerns: first, that the department should be stopping avoidance schemes more quickly, and second, that it should improve the drafting of legislation.106 In this context, officials pointed to the impact of the ‘disclosure regime’ (DOTAS), which has required promoters of avoidance schemes to give HMRC information on the nature of any new scheme, and the clients they have sold it to.107 For its part the Committee concluded that tackling evasion was just as important as tackling avoidance, if not more so: Some of our witnesses enjoined us not to forget about evasion. In their evidence, the CIOT wrote "As a final point in this section, we would urge the Government not to lose sight of evasion and other criminal activity, which can have a far greater impact on Exchequer revenues than avoidance."[WE] … [Richard Murphy] agreed "Let's be blunt about it; the biggest issue with regard to loss of revenue is not with regard to avoidance, it is with regard to evasion, and most people who are evading would in fact be basic rate taxpayers, probably not high rate taxpayers at all. This is cash put in pockets …."[Q85] Dave Hartnett (Permanent Secretary for Tax at HMRC) outlined for us what was happening to tackle evasion and stated that he was "expecting our numbers from compliance interventions to be very

104 Richard Murphy, Tax Research LLP 105 Select Committee on Economic Affairs, The Finance Bill 2011, HL Paper 158, 17 June 2011 pp32-33. Written evidence is collated on the Committee’s site. 106 HL Paper 158 2010-12 p33, pp35-36 107 see, National Audit Office, Tax avoidance: tackling marketed avoidance schemes, HC 730, 21 November 2012, and, Tax avoidance: a General Anti-Avoidance Rule – background history (1997-2010), CBP2956, 16 January 2020 (see section 2.1). 37 Commons Library Briefing, 13 April 2021

good for 2010-11—probably our best ever … We are in the throes of recruiting 200 more criminal investigators. We particularly want to focus on people who have hidden money offshore over a number of years, as a product of tax fraud. We have set up new groups around the country, with task forces looking at particular industries … We have teams of specialist investigators who are pursuing people working in the hidden economy."[Q270] On the basis of HMRC's figures the tax lost from all forms of evasion and default is very much greater than that lost from avoidance: £22 billion compared with £7.5 billion. We welcome action to tackle evasion. We recommend that the Government should publish an anti-evasion strategy in the same way as for anti-avoidance.108

3.2 The impact of the new strategy – HMRC’s compliance yield (up to 2015) HMRC seek to assess the effectiveness of their strategy to increasing tax revenues by estimating “compliance yield”: that is, the additional revenue it generates through its activities to identify and prevent tax losses arising from avoidance, evasion and criminal attack. As the National Audit Office has explained: HMRC estimates compliance yield to provide accountability and to support decision-making. The long-term aim of compliance work is to reduce the tax gap: the difference between the tax that is theoretically due and the tax HMRC actually collects. But a more direct measure of compliance yield is also necessary as the tax gap is subject to long reporting delays and is affected by factors outside HMRC’s control, such as the strength of the economy and changes to tax rates. HMRC therefore estimates the additional tax revenue attributable to its compliance activities, both to provide accountability for its overall performance and to manage its business and the performance of its compliance teams on a day-to-day basis.109 In 2014 it came to light that HMRC had made a £1.9bn error when it had established the baseline for these estimates in 2010.110 However, in an overview of HMRC’s work in February 2015, the NAO found that HMRC had made “significant progress since the 2010 spending review in delivering its strategic objectives, successfully reducing the cost of tax collection while increasing the tax it raises from its compliance work.” The report went on to provide details of HMRC’s (corrected) estimates of its compliance yield over this period: HMRC estimates that it secured compliance revenue of £23.9 billion in 2013-14, over £7 billion more than the baseline set at the beginning of the spending review period. Despite an error in the baseline that HMRC originally set, it met the additional compliance yield targets agreed in the 2010 spending review. In 2013-14, it generated an increase of £7.3 billion against the

108 HL Paper 158 2010-12 p42 109 NAO, HMRC 2013-14 accounts, 3 July 2014 pR19. Part Two of the report discusses the measurement of the compliance yield in detail. 110 Public Accounts Committee, HMRC’s progress in improving tax compliance and improving tax avoidance, HC 458, 18 November 2014 pp7-10 38 Tax avoidance and tax evasion

target of £5.3 billion. HMRC believes it is on track to meet its 2014-15 target.111 When HMRC’s 2015 estimates of the tax gap were published, the Chartered Institute of Taxation (CIOT) noted that despite the amount of press coverage given to the scale of tax avoidance, the costs from tax evasion and other illegal activities were much higher. John Cullinane, CIOT Tax Policy Director, commented: “These figures suggest that tax evasion and other illegal activity are costing the Exchequer nearly six times as much as tax avoidance.”112 Writing at this time barrister Jolyon Maugham suggested that without a significant reduction in the scale of the hidden economy “our scope for improvement is limited”: Legislative steps are an imperfect solution. They are imperfect because they cannot address the resource heavy areas of smuggling, the shadow economy and so on. Technological advances … can assist but we also need investigators. Perhaps more profoundly, they are imperfect because they create imbalances in the system. Over time they will erode – indeed, they are already eroding – the reputation HMRC has previously enjoyed for fair dealing … The tax avoidance figures next year will show the effects of the adoption in the Finance Act 2014 of a slew of radical legislative measures – and there is more to come from further legislation in subsequent Acts. And at some stage soon – although the current data records no such trend – we will see some modest benefits from a growing focus on evasion. Modest, because unless someone is brave enough really to tackle the shadow economy, our scope for improvement is limited.113 Similar concerns were raised the following year when HMRC published estimates of the tax gap for 2014/15: of a total tax gap of £36 billion, £2.2 billion was attributed to tax avoidance, and £16.2 billion to various types of illegal activity (the hidden economy, evasion and criminal attacks). In a press notice from the CIOT Mr Cullinane observed: “These figures suggest that tax evasion and other illegal activity are costing the Exchequer more than seven times as much as tax avoidance. The CIOT has long argued that HMRC needs to put more effort into investigating and prosecuting those who seek to evade tax. The Government are right to have put extra resources in this direction, as well as tackling artificial and abusive attempts to avoid tax. “Taxpayers will be reassured that HMRC is making good progress on tackling and managing the tax gap. We welcome HMRC’s continued commitment to providing impartial statistics that should inform the unprecedented debate about taxation and we will continue to push for the more simplified and workable tax

111 Increasing the effectiveness of tax collection: a stocktake of progress since 2010, HC 1029-I, 6 February 2015 p7, pp10-11 112 CIOT press notice, 22 October 2015 113 “The tax gap, updated”, Waiting for Godot blog, 22 October 2015 39 Commons Library Briefing, 13 April 2021

system that personal and corporate taxpayers tell us they want.”114 In December 2015 the NAO published a report on HMRC’s approach to dealing with tax fraud; the authors underlined the inherent difficulties to effectively prioritising risks in this area, despite HMRC’s work in estimating its compliance yield and the size of the tax gap: It is inherently challenging for HMRC to understand whether it is using the best mix of measures to tackle tax fraud in the long term. HMRC uses compliance yield as a direct measure of the effectiveness of its compliance work, while its annual tax gap calculation provides an indicator of the long-term impact of HMRC’s work overall. However, it is difficult for HMRC to know how its interventions interact with one another or whether it is achieving the best outcome from the resources it deploys to tackle tax fraud in the round. It is also hard to detect or quantify potential unintended consequences of its compliance work, such as whether disrupted criminal activity is displaced to other gangs, or the long-term effect on taxpayers’ behaviour of encouraging tax evaders to volunteer information about their income and assets so they can benefit from lighter penalties than might otherwise have been imposed. The problem of measuring outcomes is one faced by all tax administrations worldwide. HMRC recognises this complexity and is developing its thinking on how to design a new range of performance measures that will give it a better understanding of the impact from its work.115 The report discussed several initiatives to tackle evasion, including provision to give HMRC powers to obtain data from payment providers and business intermediaries to identify hidden economic activity. Further details of this were published in December 2015,116 and provision to this effect was included in the Finance Act 2016 (specifically ss176-7).

3.3 Recent estimates of HMRC’s compliance yield (since 2015) In April 2016 the Public Accounts Committee published a report following the NAO’s work on tax fraud, which was critical of HMRC’s record to reducing its scale – and in particular, the relatively small numbers of investigations and prosecutions in this area.117 Among its recommendations the Committee argued that HMRC should improve the way it reported its performance, clarify its strategy, and tackle public perceptions that wealthy individuals were able to evade tax successfully:

114 CIOT press notice, ‘Tax gap’ figures – help the compliant comply, and bear down on those who do not, 20 October 2016. See also, CIOT, ‘Tax gap’ continues its slow fall, 26 October 2017. 115 Tackling tax fraud: how HMRC responds to tax evasion, the hidden economy and criminal attacks, HC601, 17 December 2015 p9 116 HMRC, Tackling the hidden economy: extension of new data-gathering powers – tax information & impact note, December 2015 117 Public Accounts Committee press notice, New measures and greater clarity needed to fight tax fraud, 15 April 2016 40 Tax avoidance and tax evasion

We cannot judge how effective HMRC is at reducing the tax gap because the way it reports its performance is too confusing. HMRC told us that its performance in addressing tax fraud was good. But HMRC’s assessment of the tax gap shows that the level of tax fraud has remained virtually static over the last five years, at around 3% of all tax liabilities. The impact that HMRC claims for its work far exceeds any reduction in the tax gap … Recommendation: HMRC should clearly set out in its annual reports the relationship between its compliance yields and changes in the tax gap. It should also publish this information in a way that is accessible for everyone to understand. HMRC has not set out a clear strategy for tackling tax fraud. HMRC referred to a number of areas where it plans to focus its activities to tackle different types of tax fraud including the risks posed by illicit alcohol and evasion by wealthy individuals. HMRC is missing key information that would be necessary to inform a properly strategic approach. For example, HMRC could not tell us how much resource it puts into tackling tax fraud compared to other types of compliance work, such as dealing with tax avoidance or error ... Recommendation: HMRC should set out its strategy to tackle fraud by November 2016. It should identify how much resource is devoted to tackling different tax risks and the corresponding yield in each area of the tax gap. The perception that HMRC does not tackle tax fraud by the wealthy needs to be addressed … HMRC told us it investigates around 35 wealthy individuals for tax evasion each year, but did not know how many wealthy individuals it had successfully prosecuted. We welcome the fact that HMRC has sought and received funding to increase the number of investigations it undertakes into corporates and wealthy individuals to 100 a year by 2020, indicating that the current level is insufficient. Recommendation: HMRC must do more to tackle tax fraud and counter the belief that people are getting away with tax evasion. It needs to increase the number of investigations and prosecutions, including wealthy tax evaders, and publicise this work to deter others from evading tax and to send out a message that those who try will not get away with it.118 In its response the Government accepted that HMRC should improve its performance reporting, and engage with public perceptions about tax evasion, though it rejected the suggestion that the department did not have an effective strategy to reduce fraud.119 HMRC’s 2015/16 Annual Report had a section discussing both the tax gap and the compliance yield, with some comments on the difficulties to trying to explicitly link the two.120 However, as the NAO observed, in its commentary on the annual accounts, “this is a useful step in explaining the relationship, but it will take longer-term work to address the issues raised by the Committee of Public Accounts about how HMRC’s reported headline performance measures relate to each other.”121 HMRC confirmed changes in its estimates of the ‘future

118 Tackling tax fraud, 15 April 2016, HC 674 of 2015-16, pp5-6 119 Treasury Minutes, Cm 9323, July 2016 pp1-3 120 HMRC 2015/16 Annual Report, HC 338, July 2016 pp16-19 121 HM Revenue & Customs 2015-16 Accounts, July 2016 para 1.33 41 Commons Library Briefing, 13 April 2021

revenue benefit’ of its compliance interventions – that is, the impact this work is estimated to have on tax receipts over future years.122 As the NAO noted, “from 2016-17, following our recommendation, HMRC will report future revenue benefit in the year of impact rather than the year in which it is assessed. The new method is more consistent with the way the rest of compliance yield is reported, although there will still be a degree of uncertainty around the estimation … The new approach will help to improve the transparency and internal consistency of HMRC’s performance measurement.”123 The Committee reiterated its concerns about public perceptions of the scale of tax evasion by the wealthy in a report in January 2017,124 and in response HMRC stated that it would publish more details of this aspect of its work in its next Annual Report.125 In July 2017 HMRC published its 2016/17 Report, which estimated that the department’s compliance yield for 2016/17 was £28.9 billion, of which £6.3 billion was accounted for by future revenue benefit, and £1.3 billion from the use of ‘accelerated payment notices’, which are discussed in the next section of this paper.126 The department also published short papers on its calculation of future revenue benefit,127 and on the relationship between compliance yield and the tax gap. In the latter case, this paper observed, “the amount of compliance yield HMRC generates and the size of the tax gap are related but the links are not straightforward”: Compliance yield records many aspects of compliance work, including tax recovered directly from our work, future revenue benefit and losses prevented. It can also cover more than one tax year. Different factors, such as the number of new businesses, new customers, changes in levels of voluntary compliance, economic factors, tax policy and rate changes all affect the tax gap. Because the tax gap reflects a single year, and some compliance cases can cover multiple years, it is possible that the amount of compliance yield HMRC secures might increase while the percentage tax gap remains the same or reduces.128 The National Audit Office’s report on HMRC’s 2016/17 accounts briefly addressed this, describing HMRC’s paper on the compliance yield and the tax gap as “a useful step in explaining the relationship”, but going on to say, “it will take longer-term work to address the issues raised by the Committee of Public Accounts on how HMRC’s reported headline performance measures relate to each other.”129

122 For details see, HMRC, HMRC compliance revenues – how HMRC will change how it reports ‘Future Revenue Benefit’, July 2016 123 HM Revenue & Customs 2015-16 Accounts, July 2016 para 1.32 124 Public Accounts Committee press notice, Government must take tougher stance on taxing the very wealthy, 27 January 2017. See also, Collecting tax from high net worth individuals, 27 January 2017, HC 774 of 2016-17 125 Treasury Minutes, Cm 9433, March 2017 pp5-7 126 HMRC Annual Report 2016/17, HC 18, July 2017 pp23-4 127 HMRC's Compliance Yield: How HMRC reports future revenue benefit – an update for 2016-17, July 2017 128 The tax gap and compliance yield – what they are and how they relate, July 2017 129 HMRC Annual Report and Accounts 2016-17, July 2017 para 1.20. The Committee did not discuss the issue it in their report: HMRC’s Performance in 2016–17, HC 456, 12 January 201. 42 Tax avoidance and tax evasion

HMRC has continued to publish estimates of its compliance yield in subsequent annual reports in July 2018,130 July 2019,131 and November 2020,132 although it has not been a major issue in the Public Accounts Committee’s enquiries into the department’s performance,133 nor more generally in PQs or debates. Details of HMRC’s most recent estimates are set out below:

This year, we are publishing upstream operational yield as a distinct category for the first time, because it has become a more significant proportion of total yield. This yield represents the estimated impact of operational activities that have an impact on customer behaviour, promote compliance and prevent non-compliance before it occurs — such as education, nudges and prompt campaigns. These activities include working with specific sectors to prevent criminal activity (i.e. promoting good supply chain management by tobacco and alcohol suppliers and manufacturers), changing processes so it’s easier for customers to get things right (e.g. improving HMRC forms) and introducing educational products, such as toolkits, to help customers comply.134

130 HMRC Annual Report 2017/18, HC 1222, July 2018 p21 & HMRC's compliance yield: How HMRC reports FRB – an update for 2017-18, July 2018 131 HMRC Annual Report 2018/19, HC 2394, July 2019 p29; HMRC's compliance yield: How HMRC reports future revenue benefit – an update for 2018-19, July 2019 132 HMRC Annual Report 2019/20, HC 891, November 2020 pp25-26; HMRC’s compliance yield: how HMRC reports future revenue benefit – an update for 2019 to 2020, November 2020 & HMRC’s compliance yield: how HMRC reports upstream yield, November 2020 133 HMRC’s performance in 2017–18, HC 1526, 2 November 2018;(Oral evidence: HMRC Standard Report 2018-19, HC 28, 21 October 2019; HMRC performance 2019-20, HC690, 20 January 2021. 134 HMRC Annual Report 2019/20, HC 891, November 2020 pp25-26 43 Commons Library Briefing, 13 April 2021

4. Follower notices & accelerated payment notices (2013-15)

4.1 ‘Raising the stakes on tax avoidance’ - summer 2013 In summer 2013 the Coalition Government published a consultation paper, Raising the stakes on tax avoidance. In this, HMRC focused on the difficulties in dealing effectively with “high risk promoters”, a relatively small number of individuals and firms who “would commonly encourage tax advisers’ clients to enter into avoidance schemes, attempt to impose conditions of confidentiality on clients and disrupt the relationship between the tax adviser and their client.” The paper noted that in general the types of scheme being sold “overwhelmingly do not work and have very little chance of succeeding at the outset.” Given this, “a key question to consider is why they continue to be used by taxpayers, usually at the cost of a significant fee”: Since summer 2012 HMRC has gained a better understanding of the market for avoidance schemes and the key players involved. Key factors emerging from the research to date are: • provision of minimal amounts of information by promoters to potential clients and their ‘mainstream advisers’; • disclosure to HMRC of the avoidance scheme only when absolutely necessary, and a willingness to challenge the application of DOTAS; • reassurance to potential clients that the product is backed up by legal advice, but with only minimal information about how and why; and • a willingness by taxpayers to accept a level of risk on the basis that a product might succeed or that they will not be challenged by HMRC.135 In a consultation paper the following year HMRC noted “over 80% of avoidance cases heard in the courts and tribunals were won by HMRC in the last financial year. In addition, piloting of behavioural change work has resulted in hundreds of users approaching HMRC to withdraw from avoidance arrangements, some as early as the start of HMRC’s investigation”136 Figures on HMRC’s success rates in court proceedings and tax tribunals have also been given in answer to PQs.137 Turning back to the 2013 paper, it noted that when schemes had been marketed to a significant number of taxpayers, HMRC incurred considerable costs in challenging each taxpayer who had used it: Buyers of a tax avoidance scheme will submit their returns to HMRC on the assumption that the scheme reduces their tax liability. Where a tax avoidance scheme is mass-marketed, as they

135 Raising the stakes on tax avoidance: consultation document, 12 August 2013. See also HMRC’s guidance for taxpayers informed by this research: Tempted by tax avoidance? A warning for people thinking about avoidance schemes, March 2014. 136 Tackling marketed tax avoidance, January 2014 para 2.3 137 PQ135813, 18 April 2018 44 Tax avoidance and tax evasion

often are, HMRC is presented with a large number of returns all based on the same assumption that the scheme will have reduced the person’s tax liability in a particular way. Where HMRC holds that the scheme does not work, it follows that it will argue that any returns based on that scheme are incorrect. When faced with a large number of very similar cases, it is sometimes most efficient for HMRC to investigate ‘representative cases’, taking them to litigation if necessary. However, when HMRC wins a representative case in the courts, other taxpayers who have used the same or very similar schemes sometimes see little incentive to settle their cases with HMRC. When HMRC pursues litigation in a number of very similar cases the Tribunal rules allow for the cases to be heard together in certain circumstances, but this only applies to cases which have been notified to the Tribunal. To get to this stage HMRC has to investigate these cases to litigation standard and close them. Not only does this use up the Tribunal’s resources, but it also places a strain on HMRC’s compliance resources, wastes HMRC’s time and delays the collection of the right tax.138 As noted above, during this period the Public Accounts Committee published a series of reports on corporate tax avoidance, in which it was strongly critical of HMRC’s efforts.139 The approach taken by the then Committee chair, Margaret Hodge, and the other members of the Committee, particularly in evidence sessions with witnesses, was not uncontroversial,140 but in an essay on tax avoidance over the last century, Graham Aaronson QC, argued that the Committee’s work had had a significant impact on the Government’s legislative approach: Depending on our viewpoint, Margaret Hodge’s and the PAC’s harsh criticism of HMRC was either excessive or wholly justified. In my opinion it was in fact both: it was excessive because it failed to do justice to the radical steps which HMRC was already taking to deter and counteract tax avoidance; but it also responded to and harnessed public intolerance of tax avoidance and so created a climate where HMRC could equip itself with the means needed to combat avoidance more effectively. So, like a surf-boarder rising a giant wave off Hawaii, the Treasury moved to introduce a succession of anti-avoidance measures having the aim of counteracting and deterring tax avoidance strategies across a range of taxes.141 In the Autumn Statement in December the Government confirmed that it would pursue two options set out in this consultation to deal more effectively with users of ‘failed schemes’ and the promoters who sold them: 1.308 Autumn Statement 2013 confirms that the government will: • introduce new requirements for users of failed avoidance schemes to oblige them to settle the dispute where the avoidance scheme they are using has been defeated in

138 Raising the stakes on tax avoidance …, 12 August 2013 para 5.1-2 139 See, for example, Tax Avoidance–Google, 13 June 2013, HC 112 of 2013-14. 140 See, for example, “Tax prat of the year” & “So farewell then …”, Taxation, 6 February 2013 & 10 June 2015 141 “Insight and analysis: The swing of the pendulum: tax avoidance in modern times”, Tax Journal, 30 September 2016 45 Commons Library Briefing, 13 April 2021

another party’s litigation through the Courts, with penalties attached for non-compliance • increase obligations and sanctions for high-risk promoters of tax avoidance schemes, by introducing objective criteria for identifying and publishing the names of high-risk promoters, seeking more information from them and applying penalties where there is failure to comply. Their clients will also be required to identify themselves to HMRC.142 The Government also announced that it would introduce new powers to require taxpayers in this situation to pay tax ‘upfront’, possibly extending this system of accelerated payments to other taxpayers using avoidance schemes: 1.309 Autumn Statement also announces that the government will: • introduce a new power that requires taxpayers who are using avoidance schemes that have been defeated through the Courts to pay the tax in dispute with HMRC upfront. This will provide HMRC will an additional tool to address a legacy stock of an estimated 65,000 avoidance cases, around 85% of which date back to before 2010. It will remove the cash advantage of sitting and waiting during an avoidance dispute, and bring in £700 million over the forecast period • consult on the scope for extending this power by widening the criteria for which taxpayers are required to pay any disputed tax upfront.143 Writing in the Tax Journal, James Bullock (Pinset Masons) observed, “one of the enticements to taking part in a tax-avoidance scheme is the cashflow benefit that such schemes bring. Even if the scheme is found ultimately to fail, a taxpayer undertaking a scheme can (and could until recently even for PAYE and NIC) generally secure the benefit of holding the tax whilst the dispute is determined. With ‘marketed’ schemes the deal was even better, as generally only one taxpayer is litigated – and it is open to so-called ‘follower’ taxpayers to argue that their fact patterns are different – and therefore they have to sit and wait until HMRC gets around to them. HMRC is now acting to end this particular party.”144 The scale of the Exchequer risk posed by disputed tax was set out in HMRC’s consultation document published in January: The existence of around 65,000 open cases involving marketed tax avoidance schemes illustrates how the current position can lead to a build-up of avoidance schemes that HMRC needs to tackle through investigation and litigation, which can take several years to complete. Over 85 per cent of these cases date back to

142 It was estimated that these two measures would raise £35m a year from 2015/16 (‘high-risk’ promoters), and £75m in 2015/16, falling to £30m a year in later years (penalties for ‘follower’ cases): Budget 2014, HC 1033, March 2014 p59 (Table 2.2 – items be & bf). Details of these changes were set out in: HMRC, Raising the stakes on tax avoidance - summary of responses & draft legislation, January 2014. 143 Autumn Statement 2013, Cm 8747, December 2013 p74 144 “Views on the Autumn Statement: enforcement and compliance issues”, Tax Journal, 6 December 2013 46 Tax avoidance and tax evasion

2009-10 or earlier … reflecting a market for avoidance products which was very active in earlier years. These 65,000 taxpayers have used a wide range of avoidance schemes to reduce their liability to SDLT, Capital Gains Tax, Corporation Tax, Income Tax and National Insurance Contributions (NICs). However the largest areas of legacy avoidance include:

Some of these users have used the same scheme more than once whilst others have used more than one scheme.145 The document set out the range of circumstances where disputed tax would be held by either the Exchequer or the taxpayer, before a final tax liability is determined: There is no inherent presumption that tax under dispute should sit with the taxpayer rather than the Exchequer. Under current law, there are a number of circumstances where the tax sits with the Exchequer while the liability is finalised. Currently: • HMRC is able to deny claims for tax repayments pending final resolution; • HMRC can enforce tax payment when there are claims for other years that might reduce or eliminate that tax; • Tax is payable following a court or tribunal decision, despite a continuing appeal; and • There are general circumstances where tax is withheld and repaid (eg: PAYE, tax on interest), but HMRC cannot normally intervene in a taxpayer’s self-assessment, even when the taxpayer deducts amounts claimed as a result of attempted tax avoidance.146 It went on to give an overview of how, once HMRC had identified ‘follower cases’ to a given scheme that had been struck down in the

145 Tackling marketed tax avoidance – consultation document, 24 January 2014 para 1.1, paras 2.6-8. Interested parties were given a month to response to this follow-up document – ie, by 24 February 2014. 146 op.cit. para 3.5-6 47 Commons Library Briefing, 13 April 2021

courts, it would require those taxpayers to amend their tax return, and pay over the disputed amount of tax: [Under the Government’s proposals for ‘follower notices’, HMRC would] issue … a notice to taxpayers involved in avoidance schemes where there has been a final judicial decision in another taxpayer’s case on the same or similar arrangements. The notice requires the taxpayer to amend their tax return (if the return is still under enquiry) or agree to settle the dispute (where a closure notice or tax assessment or determination has been made and is under appeal). At the heart of this notice is the proposition that the likelihood of the taxpayer’s scheme succeeding is remote, given that a tribunal or court has made a decision on the same or similar arrangements. In HMRC’s experience, it is extremely rare for a taxpayer to even proceed to their own litigation in the face of such a decision, but while the vast majority do eventually concede they prolong the dispute for as long as they are able, often agreeing to settle only as the date of litigation approaches. In the Government’s view, the delivery of a related judicial decision fundamentally changes the presumption of where the tax should sit during this period. The sum would be estimated by HMRC, though subject to revision if the actual amount due was larger, or, if the taxpayer successfully pursued an appeal that, in their own case, their use of the scheme was legal: Taxpayers receiving a ‘follower notice’ are required to tell HMRC the amount of the tax advantage being sought. However, this figure may not be available until the taxpayer agrees to resolve the dispute in response to the notice – and will not be provided by the taxpayer at all in cases where the taxpayer chooses not to resolve the dispute. It is proposed, therefore, that HMRC will issue a Payment Notice to the best of their judgement. In the majority of cases HMRC would expect to have a reasonable indication of the amount in dispute as the matter will have been under enquiry, or HMRC will have issued an assessment or determination. The amount of tax to be paid under the Payment Notice is the amount of additional tax that would otherwise have been paid if the arrangements had not been entered into. This is meant to be a simple recalculation of the additional tax due on the return (or similar document) having removed the effects of the avoidance scheme, less any relevant amounts already paid. It is not a calculation whereby the taxpayer can say that in the absence of these arrangements another structure would have been employed instead. The amount to be paid will be the amount remaining after any part of the tax in dispute that is already subject to a withheld repayment. It is important to note that this will simply be a form of payment on account and not a payment that determines the amount of the final liability. If the amount paid is less than the final amount due, the taxpayer will still be liable to pay any remaining balance when the dispute is finally resolved. Equally, if the taxpayer continues to 48 Tax avoidance and tax evasion

pursue their claim and is successful then they will get their money back with interest.147 The most contentious aspect of this consultation was the proposal that the system for accelerated payments would apply not only to ‘follower cases’ but to two other categories of taxpayer: those in dispute with HMRC because they have used a scheme notified under the disclosure regime (DOTAS), or those using a scheme which HMRC were seeking to frustrate using the new GAAR.148 Indeed the consultation document noted that although this would have an impact on a “significant proportion of avoidance schemes”, it would plan to keep the criteria “under review to determine whether any further broadening may be appropriate.”149 In a press notice issued after the end of the consultation, the Chartered Institute of Taxation argued that the proposals to tackle follower cases should be used only for a limited time: The Government’s proposals would link together cases which are deemed to be similar, so that if a court ruled against one taxpayer, not only that taxpayer but all others deemed to have ‘follower cases’ would have to pay straight away the tax HMRC believe is due. They would get the tax back if they pursued the case and ultimately won … CIOT President Stephen Coleclough commented: “We have sympathy with the Government's need to accelerate dealing with some tens of thousands of outstanding mass marketed avoidance cases which are jamming up the courts … However, handing HMRC almost unprecedented executive powers to decide who falls within the mischief they intend to deal with, without the usual safeguards and appeal rights, is not something which should be done lightly … If this is to proceed, HMRC should issue comprehensive guidance at the same time as the Bill is published to show what situations are to be tackled in this way. It should only apply to members of the same scheme or very close variants of it. Additionally the legislation should include a sunset clause repealing the legislation after, say, three years as the exceptional circumstances that are currently in existence should be dealt with in that time. These emergency measures should not become a permanent state of affairs.” The Institute went on to strongly oppose extending accelerated payments to existing schemes, which had been notified under DOTAS, as this was “in effect introducing retrospective legislation”: [CIOT President, Stephen Coleclough said] “the fact that there has been disclosure indicates an intention to be open and transparent with HMRC. In a number of cases the disclosure has been made even if the promoter or taxpayer did not believe it to be strictly necessary ‘to be on the safe side’. To now introduce a retrospective change of law leading to an accelerated payment of tax is unreasonable. To extend HMRC’s powers without

147 op.cit. paras 3.7-8, paras 3.15-9 148 For example, “Wealthy investors protest against new UK tax rules”, Financial Times, 9 March 2014 149 Tackling marketed tax avoidance, January 2014 para 4.3. The case for these changes was also set out by David Richardson, director of HMRC’s counter avoidance directorate, in a piece in Taxation: “Accelerated payment”, 20 February 2014. 49 Commons Library Briefing, 13 April 2021

safeguards to taxpayers who by definition have been transparent with the tax authority is unjustifiable. If these provisions are to come in at all then they should only apply to arrangements entered into after Finance Bill 2014 is passed.”150 In their response, the Institute for Chartered Accountants also set out their concerns about the retrospective aspect to these proposals, as well as the relatively short amount of time for interested parties to respond: [The consultation] proposes … all DOTAS registered tax planning arrangements under enquiry by HMRC would come within the accelerated payment scheme, even if they were entered into many years previously and in some cases a DOTAS registration was submitted as a precautionary measure. In principle we believe that retrospective legislation of this nature is wrong. We have seen a proposal that the accelerated payment regime should not apply to existing DOTAS registered schemes ‘where it can be shown that the promoters/taxpayers have taken all reasonable measures, and have acted with reasonable expedition, to enable the dispute to be brought before the statutory appeals tribunal.’ That sounds a reasonable suggestion. The proposal is also likely to lead to a perverse outcome in that it will offer no incentive for HMRC to reach closure on the case. Given that the tax may not legally be due that sounds completely contrary to natural justice and must inevitably result in further litigation … Finance Bill 2014 will be published, probably before the end of March ... we strongly urge the government to withhold those of the current draft clauses which they accept will need further improvement. We would welcome the opportunity to work with HMRC to deliver the necessary amendments and the improved clauses can then be introduced, as a Government amendment, during the course of the Public Bill debates on the Finance Bill.151

4.2 Budget 2014: accelerated payment notices (APNs) Despite these concerns, in his Budget on 19 March the Chancellor confirmed the introduction of a system of accelerated payments, which would provide a substantial cash flow boost to the Exchequer: While the vast majority of wealthy people pay their taxes, there is still a small minority who do not. We will now require that those who have signed up to disclosed tax avoidance schemes pay their taxes, like everyone else, up front. This will apply in future to schemes covered by our general anti-abuse rule too. If people feel they have been wronged, they can of course go to court. If they win, they get their money back with interest. We have already consulted on this idea; now we will implement it. The OBR confirms that this will bring forward £4 billion of tax receipts and

150 CIOT press notice, Tax avoidance schemes: 'Emergency measures' tolerable for dealing with courts backlog, but wider application goes too far, 4 March 2014. The CIOT also published formal responses to both consultation papers. 151 ICAEW (Tax Faculty), Tackling marketed tax avoidance (TAXREP 16/14), 26 February 2014 para 19, paras 45-7, paras 20-23 50 Tax avoidance and tax evasion

it will fundamentally reduce the incentive to engage in tax avoidance in the future.152 The Budget report gave more details, noting that accelerated payments would apply to follower cases and to those within DOTAS or counteracted by the GAAR: Following a consultation that closed in February 2014, the government will legislate to provide that HMRC may issue a notice to the user of a tax avoidance scheme that they should settle their dispute with HMRC when the claimed tax effect has been defeated in other litigation. If the taxpayer does not settle they risk a penalty and must make upfront payment of the tax in dispute. Budget 2014 announces that the requirement to pay upfront will also apply to the disputed tax associated with any scheme that falls within the disclosure of tax avoidance scheme rules (DOTAS) and with schemes that HMRC counteracts under the general anti-abuse rule (GAAR).153 The report also underlined that the new power “will only apply to tax avoidance schemes that are disputed by HMRC”: The legislation will make it clear that HMRC will only be able to issue an accelerated payment notice where they have first sent the taxpayer an enquiry notice or issued them with a notice of assessment. It is not a new tax demand and does not make any changes to tax liabilities. If the taxpayer subsequently wins their case in the courts, they will be reimbursed with interest.154 It was estimated that applying accelerated payments to follower cases will raise around £300m in both 2015/16 and 2016/17, with the annual yield falling to £100m by 2018/19. Extending the scheme to DOTAS and GAAR schemes was projected to raise considerably more:155

The department’s Policy Costings document underlines the significant size of the amounts of tax that are under dispute, as a consequence of marketed avoidance schemes: The total value of tax under dispute by HMRC related to marketed, artificial avoidance cases is around £14 billion, associated with a population of around 65,000 taxpayers. Of this, £2.5 billion concerns avoidance arrangements that fall outside the scope of the Budget and Autumn Statement measures as the schemes are outside the DOTAS rules and relate to taxpayers will not be issued with follower penalty notices. To arrive at the £7.1bn that is estimated to be the value of accelerated payments notices that will be issued in relation to existing cases the following adjustments are then made: • for cases where the issuance of a notice is dependent on future court decisions, the costing assumes a HMRC win

152 HC Deb 19 March 2014 c785 153 Budget 2014, HC 1104, March 2014 para 2.188 154 op.cit. para 1.201 155 op.cit. pp57-8 (Table 2.2 – item r; Table 2.1 – item 52). see also, HM Treasury, Budget 2014: policy costings, March 2014 p37. 51 Commons Library Briefing, 13 April 2021

rate of 80 per cent. This is based on HMRC‘s win rate in associated avoidance cases between 2010 and 2013 • an adjustment is also made for individuals that already concede their position and settle once their scheme is shown to fail in the courts in another party’s litigation • an adjustment is made to take account of the fact that in a relatively small number of cases some taxpayers will have already paid the amounts in dispute, while continuing to dispute the amounts in question • HMRC will also issue notices in relation to the future flow of cases which would arise from new avoidance, for which the estimated value of tax that would be disputed in the absence of this measure is estimated to be around £700 million per annum. To arrive at its costings, HM Treasury had made a number of assumptions: The costing is produced by making adjustments for: • The responses by taxpayers issued with payment notices. It is estimated that the majority of those issued with notices will pay, either (a) within the allowed 90 day payment period, (b) through managed payment plans (this will be evaluated on a case-by-case basis and will result in some payments being spread over time), or (c) following payment enforcement action by HMRC. • Repayments. HMRC will make repayments with interest in cases where upfront payments of tax have been made but where a taxpayer wins a subsequent tribunal or court decision. • Behavioural responses. A further adjustment is made for those taxpayers who stop using avoidance schemes as a result of this measure, which increases tax yield from this group. In line with the standard methodology for anti- avoidance costings, a behavioural adjustment is made to reflect evidence of attrition in the yield from previous anti- avoidance measures. • Tax under dispute which would have been collected in later years but which is now collected upfront. This reduces the costing by around £500 million in each year from 2015-16. • Amounts scored under the follower notices measure announced in Budget 2013 and the accelerated payment measure announced at Autumn Statement 2013 are subtracted from the final costing to avoid double counting.156 The Office for Budget Responsibility is required to certify that all Budget costings represent a ‘reasonable and central view given the information currently available’. In some cases the OBR highlights that the cost is subject to a greater level of uncertainty – so, with regard to the estimates for this scheme, the OBR noted these were “dependent on a

156 Budget 2014: policy costings, March 2014 pp36-7 52 Tax avoidance and tax evasion

large number of assumptions, some of which … concern the behavioural response of those affected.”157 In September 2017 the OBR published a working paper which looked at the costings of a variety of HMRC anti-avoidance and operational measures over the 2012-2016 period, including the introduction of accelerated payments.158 This found that current estimates of the amounts that accelerated payments would raise from 2014/15 to 2018/19 were about 15% less than the original estimates. There were a variety of explanations in this case, including the fact that the regime appears to have had a stronger deterrent effect than initially assumed: Tax base: The initial estimate of the existing stock of disputed tax that would be subject to AP notices was too high, partly due to some cases falling out of scope and partly due to more taxpayers choosing to settle with HMRC than expected. AP notices: The original costings underestimated the number of notices issued, but also the length of time required to do so. This is partly due to HMRC needing to issue separate notices for tax and NICs, but also because the original costings underestimated both the number of relevant avoidance cases and the proportion of cases where AP notices would be used. Outturn data also suggest the average value of cases was lower than assumed in the original costings. Timing: More payments were made upfront than assumed in the original costings and, for those that made payment arrangements with HMRC rather than paying upfront, the time period was shorter than originally expected. Behavioural response: It appears that the threat of receiving an AP notice has acted as a stronger deterrent than originally assumed. The number of avoidance schemes disclosed under DOTAS and declared usages of DOTAS schemes on tax returns, though already on a downward trend prior to the introduction of APs, has fallen significantly faster since … HMRC estimates that the number of DOTAS scheme usages has fallen by over a half due to the deterrent effect of AP notices.159 In two impact notes on this measure, HMRC confirmed that the new rules would take effect from the date of the Finance Bill’s Royal Assent: specifically, they would cover “all cases where there is an open enquiry or open appeal on or after [this date]”.160 These notes also give some details of the cohort of taxpayers which would be affected: It is estimated that accelerated payment notices relating to existing avoidance cases currently under dispute will be issued to approximately 33,000 individual taxpayers concerning £5.1 billion of tax under dispute under this measure and the Autumn Statement 2013 measure applying accelerated payments to follower cases.

157 op.cit. p67; OBR, Economic & fiscal outlook, Cm 8820, March 2014 para 4.43 158 OBR, Working paper No.11: Evaluation of HMRC anti-avoidance and operational measures, September 2017 159 op.cit. pp22-23 160 HMRC, Accelerated payments of tax for avoidance schemes & Avoidance schemes: relevant judicial ruling - notice to settle dispute, 19 March 2014. In the case of ‘follower cases’ there will also have to be a relevant qualifying judgement. 53 Commons Library Briefing, 13 April 2021

Estimates of the distributional impacts of these measures are affected by the use of avoidance schemes that deflate the income reported on self-assessment returns. Having noted this caveat, analysis shows that the population of individuals affected: • have a mean gross income of £262,000, compared to £29,000 for the wider income tax paying population; • around 85 per cent of individuals have multiple sources of income, with employment income (including self- employment) the predominant income source for 54 per cent and non-employment, non-pension income the predominant income source for 42 per cent of the individuals affected respectively, compared to 78 per cent and 5 per cent for the wider income tax paying population respectively.161 Budget 2014 also confirmed that the Government would proceed with one other measure first proposed in Raising the stakes on tax avoidance: the Promoters of Tax Avoidance Schemes (‘POTAS’) regime. Under these rules HMRC have powers to issue conduct notices to promoters, and in turn any breach of this notice triggers enhanced information powers with large financial penalties for non-compliance.162 At the time it was anticipated that about 20 businesses might be designated in this way,163 with a relatively small Exchequer impact,164 and in general the regime has attracted very little attention compared to accelerated payments.165 Generally press coverage of the Budget focused on other measures, though the Chartered Institute of Taxation issued a press notice, arguing that extending accelerated payments “beyond follower cases to DOTAS schemes raises serious questions about the breadth and proportionality of these proposals.” It went on to argue that it was incumbent on HMRC “to publish a list of DOTAS schemes to which this legislation will apply as quickly as possible.”166 The Financial Times quoted Jason Collins, head of tax at Pinset Masons, saying, “this is an audacious move. The backlash against tax planning is allowing them to push this change through without consultation.”167 By contrast the Times quoted Bill Dodwell, head of tax at Deloitte, who suggested it was “a realistic reaction to the current situation … The Revenue win almost all the cases in this area. There is no reason why they should have to wait 10 years to get their money. I hope this will discourage the sort of mass-market tax scheme from being sold in the future.”168

161 HM Treasury/HMRC, Overview of tax legislation and rates, 19 March 2014 ppA94-5 162 Budget 2014, HC 1104, March 2014 para 2.187 163 HMRC, Promoters of tax avoidance schemes, 17 July 2014 164 £5m in 2014/15, rising to £35m a year in later years (Budget 2014, HC 1104, March 2014 p59, Table 2.2 – item be). 165 For details of how POTAS operates see, HMRC, Promoters of tax avoidance schemes: guidance, updated 2 September 2015 166 CIOT press notice, Tax avoidance schemes: Retrospective measures without proper taxpayer safeguards go too far, 19 March 2014. 167 “Anti-avoidance measures attacked”, Financial Times, 20 March 2014 168 “Revenue wins power to raid bank accounts in battle over avoidance”, Times, 20 March 2014; see also, Law Society hits at tax crackdown plan”, Financial Times, 7 April 2014 54 Tax avoidance and tax evasion

4.3 Finance Bill 2014 Provisions with regard to these proposals for follower notices and accelerated payments were included in the Finance Bill 2014, published on 25 March.169 When the Bill was published, HMRC also published a summary of the responses it had had to its consultation on tackling marketed avoidance schemes. Many responses had “acknowledged the underlying policy issue”, but had gone on to argue “that there was no problem to address” – a position based “on three contentions”: • All taxpayers are entitled to have their dispute considered and resolved without being forced to pay over the tax in the meantime, irrespective of the nature of the dispute, and that in effect the taxpayer would be treated as being in the wrong until they were able to prove their case; • Any delays are caused by HMRC’s “slow and tardy response” and not by taxpayers, advisers and scheme promoters; and • HMRC already has adequate powers to force progress in these types of dispute and this gave more power and discretion than was necessary.170 The document presented the Government’s reasons for not accepting these contentions – first, on the cause of these delays and the suggestion that the proposals invoke a new principle: There is ample evidence that those who enter into these schemes do so in the expectation that they will, as a minimum, keep hold of the tax for many years, exploiting the current structure of the enquiry, appeals and postponement legislation. The Government is not prepared to let this continue. HMRC can under current law deny repayments claimed while a dispute is in progress. It is also the case that many taxpayers pay their tax upfront under PAYE, or through deduction of tax at source from interest. These proposals therefore introduce no new principle – instead they extend the current circumstances where the Exchequer holds the disputed tax.171 The document also set out HMRC’s existing powers in this respect and why, in the Government’s view, they were not sufficient to deal with this problem: HMRC currently has powers in section 28C of Taxes Management Act (TMA) 1970 to issue a determination of tax where there has been no return submitted – but that cannot be applied to these avoidance cases, where returns will have been submitted, claiming the tax advantage from the avoidance scheme. Section 9C of TMA permits HMRC to amend a taxpayer’s self- assessment where tax is at risk. This power is applicable in circumstances where HMRC believes that the subsequent settlement of the liability may be in jeopardy (for example, the

169 specifically, part 4 of the Bill (clauses 192-226). The text of the Bill, explanatory notes and details of its scrutiny are collated on its Parliament Bill page. 170 Tackling marketed tax avoidance: summary of responses, 27 March 2014 para 2.14 171 op.cit. para 2.15-6 55 Commons Library Briefing, 13 April 2021

taxpayer may leave the UK). This is not applicable to the generality of avoidance cases. Where there is an appeal, the taxpayer may make a postponement application under section 55 of TMA. If HMRC disagrees with the postponement, the matter must be resolved by the tribunal. Therefore, opposing postponement applications in many thousands of cases under the current rule would impose a substantial burden on the resources of the Tribunal Service. Furthermore this route can only be used where there is an appeal and not where an enquiry is still open. In the vast majority of cases there is an open enquiry rather than an appeal. HMRC has been criticised for delaying the issue of closure notices. However, as a number of recent published tribunal and court decisions show, these cases involve complex and contrived arrangements that take a significant length of time to resolve. HMRC cannot issue a closure notice prematurely as that would risk the wrong amount of tax arising from the return. Some responses pointed to HMRC’s ability under section 28ZA of TMA to refer matters to the tribunal during an open enquiry. However, this would make little impact on the overall problem in that it would to a large extent require consideration of the substantive tax point at issue.172 The paper went on to address the charge that the proposals would be retrospective: [The proposals] do not change the underlying tax liability. Where an accelerated payment is made and the taxpayer subsequently wins their dispute the tax will be repaid with interest – no different to the situation where, currently, a repayment is denied whilst the dispute is resolved. Application of the proposals to existing disputes will ensure that all taxpayers in an avoidance dispute after Royal Assent will be in the same position, irrespective of when their dispute began.173 Annex C to the document gave more detail on how the new system would work in practice, including a diagram of the ‘typical taxpayer journey’, reproduced below, where someone has purchased an avoidance scheme, submitted their assessment, and then had that assessment investigated by HMRC:

172 op.cit. para 2.18-22 173 op.cit. para 2.25 56 Tax avoidance and tax evasion

The teal line shows the journey before accelerated payments was introduced … The red line shows how accelerated payments will fit in with the existing customer journey and require payment sooner in the process. The journey can halt at any point when the taxpayer decides to drop their claim and settle, or where HMRC decides that the scheme works and repays the tax. In its description of accelerated payments, HMRC emphasized that “this measure in no way alters the underlying tax liability”: When a person is advised to reduce their tax liability, they are often introduced to a promoter who explains the scheme to them, then the person signs documents to enter into the scheme and pays a fee. The promoter tells the taxpayer that the scheme is a Disclosed Tax Avoidance Scheme and gives them a reference number which needs to be included in their tax return in the tax avoidance section. The taxpayer then submits their tax return with the scheme reference number or their adviser submits it for them. In either case, the taxpayer is responsible for the form being correct and a declaration is made to that effect. This is the stage at which a person would normally pay the tax due. The avoidance scheme has reduced that amount but not the income that the person has. HMRC considers the self-assessment tax return and considers more tax may be due than has been paid as a result of the avoidance scheme. An enquiry notice is issued … Even where taxpayers and promoters co-operate in full, the investigation and litigation process inevitably takes a considerable time and some take full advantage of that to hold onto the tax. From now on, tax in dispute in suspected avoidance cases will sit with the Exchequer … HMRC will only be able to issue an Accelerated Payment notice where they have sent the taxpayer an enquiry notice or where they have issued a notice of assessment for the disputed tax. So, as a minimum, everyone who receives an AP notice will have been notified by HMRC that their tax affairs are under consideration. 57 Commons Library Briefing, 13 April 2021

Once an accelerated payment notice is issued the tax payer will have 90 days to pay. If they cannot pay, they can contact HMRC in that time to agree arrangements for payment. If they think the tax due is incorrect they can also raise that with HMRC who will review the facts. HMRC will then issue a decision notice confirming the amount of tax due to be paid up front at which point the taxpayer has a further 30 days to pay. This measure in no way alters the underlying tax liability. A person will still have full access to the courts to determine their tax liability. HMRC wins around 80% of avoidance cases in the courts. If HMRC loses, they will repay the tax with interest.174 The response document noted that some revisions would be made to the legislation as initially drafted 175 The Government also confirmed that it would issue detailed guidance on the scheme in the next weeks, and, picking up a point made by the CIOT after the Budget, publish a list of existing DOTAS schemes to be subject to accelerated payment by the time the Finance Bill received Royal Assent.176 However, the Government rejected the case, made by many respondents, that taxpayers should be able to formally appeal HMRC’s decision to issue a demand for an accelerated payment: Many respondents objected to the discretion that HMRC would have to determine the amount and the absence of a formal appeal right at this stage. One response referred to this as appearing to make HMRC “the sole arbiters of the tax law.” Most responses, where comments were made, restated the view that there should be an appeal right to the tribunal, or recommending “some more independent review”, and that the proposed objection criteria were not sufficient in themselves. Other responses suggested a modified appeal right to restrict the possibility of the appeal being simply a delaying tactic … The Government does not intend to extend an appeal right against the issue of the accelerated payment ... Provision of a formal appeal right would in practice involve arguing the substantive issue of the dispute itself, which would do nothing to change the current position. HMRC is committed to applying clear and strong governance to the use of this measure and only “designated” officers will be authorised to calculate the tax due for the payment notice. It is also the case that taxpayers will have 90 days in which to dispute the amount calculated with a view to getting the correct figure agreed. The accelerated payment does not determine the final liability. Whilst the amount will be calculated as accurately as possible, taxpayers will still have full appeal rights against the eventual closure notice or any assessment or determination that may be issued … The Government does not believe that a specific

174 HMRC, Tackling marketed tax avoidance: summary of responses, 27 March 2014 pp34-5. See also, HC Deb 3 July 2014 c688W 175 First, when a late payment penalty is charged on an accelerated payment and, subsequently, that accelerated payment is found to have been too high, the excess penalty plus interest is to be paid back, when the overpayment is repaid (op.cit. para 3.41-2). Second, where HMRC seeks to apply accelerated penalties to a scheme it seeks to challenge using the GAAR, the GAAR Advisory Panel will have to agree this is appropriate (op.cit. para 4.25-6) 176 op.cit. para 5.1-3. See also, “Accelerating away”, Taxation, 8 May 2014 & “Analysis: FB2014 - Follower notices and accelerated payments”, Tax Journal, 9 May 2014. 58 Tax avoidance and tax evasion

provision for ‘financial extremity’ is necessary. HMRC will use its full range of existing tools in pursuing the collection of tax, including appropriately structured payment arrangements, to assist taxpayers in paying the required amounts.177 In their report on the Budget published on 9 May, the Treasury Committee argued that the Government had failed to make the case for making the new system of accelerated payments retrospective.178 In a press notice on their report the Committee said: Retrospective tax legislation conflicts with the principles of tax policy recommended by this Committee. In our Budget 2012 Report we recommended that the Government restrict the use of retrospection to wholly exceptional circumstances. Witnesses told us that the Government was not abiding by this recommendation. Furthermore, the Red Book announced an additional retrospective taxation policy: an extension of the requirement for taxpayers to pay upfront any disputed tax associated with anti-avoidance schemes. This policy will retrospectively apply to some of the 65,000 outstanding tax avoidance cases. There may be a case for this policy but the Government has yet to explain what is wholly exceptional about these cases that justifies this retrospective measure. It should do so in response to this Report. The then Chair of the Committee, Andrew Tyrie, added: “we have deep reservations about any extension of retrospection in the tax system. Retrospection runs counter to the Committee’s principles of tax policy. In particular, it undermines certainty. Retrospection should be considered only in wholly exceptional circumstances. The latest measure would have to be justified on those grounds. Retrospection puts policy on a slippery path to arbitrary taxation, discouraging investment and innovation and creating the scope for great unfairness.”179 The Government’s response to the Committee’s report was published two months later, and in this, the Government refuted the charge that these provisions were retrospective: The Government does not agree that this legislation is retrospective. This legislation does not take effect on a date before its announcement or enactment, and it does not change any tax liability arising from any transaction or arrangement, whether undertaken before or after the introduction of these new rules. It puts in place a new requirement that takes effect in the future, to pay over a sum of money in dispute. Those disputes will be resolved in the same manner as before, with full appeal rights to the tribunal and courts.180 Turning back to the Finance Bill, on 17 June 2014 the Public Bill Committee scrutinising the Finance Bill debated, and approved, these provisions, with just a small number of minor, technical amendments tabled by the Government.181

177 op.cit. para 3.28-34 178 Budget 2014, HC 1189, 9 May 2014, pp76-8 179 Treasury Committee press notice, 9 May 2014, 180 Treasury Committee, Second special report of 2013-14, HC 609, 1 August 2014 p13 181 PBC (Finance Bill), Thirteenth Sitting & Fourteenth Sitting, 17 June 2014 cc 467-510. For details see, HMT, Amendments 32 to 38 to Clauses 212 & 222 and Schedule 28 (Accelerated payments), 6 June 2014 59 Commons Library Briefing, 13 April 2021

Speaking for the Opposition Shabana Mahmood raised concerns over the relatively short time frame set for the consultation on these measures, but went on to say that, in the light of the sheer number of outstanding cases, “Opposition Members … support the principle of follower notices as a practical measure that should—hopefully— decrease the amount of time it takes to settle those matters and ensure that the currently uncollected tax is collected quickly.”182 Ms Mahmood noted two concerns about follower notices that had been raised: the fact that HMRC could rely on decisions made by a tribunal, as well as the court, in issuing a follower notice and that taxpayers could not appeal HMRC’s decision to take this action.183 She also asked if HMRC would have sufficient resources to administer the system. In response the then Exchequer Secretary, David Gauke, acknowledged that the time allotted for consultation had been shorter than normal, “because we were keen to ensure that we could progress this matter on a Budget timetable and make it part of the Finance Bill. HMRC made every effort to ensure that anyone who wanted to make a comment was able to, and it continued to accept responses and meet with concerned parties after the consultation formally closed.”184 On the use of tribunal decisions, and the absence of a formal right of appeal, Mr Gauke said: HMRC wins an overwhelming majority of avoidance cases at tribunal, and most taxpayers who lose accept the tribunal’s decision and do not take their case further. Therefore, in most cases the first-tier tribunal settles the matter. However, if a case is appealed further, follower notices cannot be issued until the litigation is finally settled in HMRC’s favour. Excluding first-tier cases would remove an important source of judicial decisions and might lead to taxpayers deliberately avoiding an appeal against and adverse judgment, so it could not be used to generate follower notices … Creating a right of appeal against a notice would simply clog up the process and not deliver a saving. Taxpayers will be able to require HMRC to reconsider any notice that they receive. There will be a full right of appeal against any penalty issued and against any amendment made to the taxpayer’s return if the taxpayer does not amend it himself. HMRC will be ensuring strict governance over the issue of notices, which will have to be authorised by senior leaders.185 As Mr Gauke noted, HMRC would be empowered to charge penalties for failure to response to a follower notice: Clause 200 allows a taxpayer to make representations about a notice within 90 days and requires HMRC to consider them. Having done so, if HMRC confirms the follower notice, the taxpayer is given a further 30 days to take corrective action … Clause 201 applies a penalty if a taxpayer is served with a follower notice, but does not take corrective action within the specified period. The penalty is charged on the amount of tax advantage

182 PBC (Finance Bill), Thirteenth Sitting, 17 June 2014 c469 183 Both of these concerns were raised by the Law Society (Finance (No.2) Bill 2013-14 committee stage - follower notices and accelerated payments, 3 April 2014). 184 PBC (Finance Bill), Thirteenth Sitting, 17 June 2014 c483 185 op.cit. c484 60 Tax avoidance and tax evasion

denied: the extra tax that becomes due, or the reduction in tax repayable, when the scheme is counteracted … [Under] clause 202 … the penalty … is set at 50% of the denied tax advantage. That is in line with the scale of penalties for inaccurate returns, which range from 30% to 100%, depending on behaviour. To encourage taxpayers to co-operate with HMRC to resolve their case, clause 203 allows the penalty due to be reduced to as little as 10% to reflect any co-operation.186 That said, taxpayers will be entitled to appeal against a penalty charged in these circumstances. Under clause 207, if a tribunal thinks that the basis of a follower notice is wrong, any penalty will be cancelled or reduced. Although this clause was agreed, unamended, by Committee, the Government tabled amendments for the Finance Bill’s Report Stage, to make clear the grounds on which a taxpayer could appeal against a penalty: a taxpayer may appeal on the grounds that the follower notice should not have been issued to him in the first place or that it was reasonable for him to continue his dispute rather than settle with HMRC on receipt of a follower notice. The amendments also provided that only a designated officer of HMRC will be allowed to issue a follower notice.187 In his comments in Committee, the Minister also addressed the question of whether HMRC had sufficient resources: In November 2013, HMRC created a new counter-avoidance directorate to bring together all marketed avoidance work in one place. The directorate is mainly made up of departmental resources that were already working in the marketed avoidance area rather than additional resource, but about 100 of its 850 people will be funded from new money announced by the Chancellor at the Budget to deliver accelerated payments. We do not believe there will be a detrimental impact on HMRC’s other operations.188 The Committee went on to consider accelerated payment notices, and the Minister was asked about the possibility that taxpayers might be made bankrupt. Mr Gauke said, “I record the fact that HMRC has time to pay arrangements for those who are constructively engaged with it and who are looking to pay off their tax debts in a constructive way but are constrained by cash flow matters. That is a perfectly reasonable approach.” While the Minister did not propose any substantive changes to the proposals, he noted that he had “asked HMRC to ensure that there is active consultation on the published guidance, to ensure that the important issues raised are dealt with in that process.”189 Mr Gauke was asked about the extension of accelerated payments to DOTAS cases, and whether this was not penalising those taxpayers who had been cautious to make sure they were fully compliant with the law,

186 op.cit. cc477-8 187 HM Treasury, Government amendment 1-3: Right to appeal follower penalty (Clause 207), 24 June 2014. This is discussed in a little more detail below. 188 PBC, Thirteenth Sitting, 17 June 2014 c485. The Chancellor mentioned this rise in funding in his Budget speech: HC Deb 19 March 2014 c785. 189 op.cit. c487, c488 61 Commons Library Briefing, 13 April 2021

and used DOTAS in good faith; in reply, the Minister made two observations: Disclosure under DOTAS does not necessarily mean that someone will be affected by the accelerated payments regime. HMRC will look at the particular scheme and assess whether it is effective. There may well be circumstances in which HMRC will look at a particular scheme and say, “A DOTAS disclosure has been made, but as far as we can see this scheme is entirely consistent with the law. It is effective and there is no tax under dispute, so no accelerated payment will need to be made.” If there is no tax under dispute, there is no accelerated payment. The other point that is worth bearing in mind is that the trend for DOTAS disclosures is a significant fall, and all the evidence suggests that that trend has been driven not by concerns about accelerated payments, because it was in place before that policy was announced, but due to the fact that not as much aggressive tax avoidance is being undertaken as a few years ago.190 On the question of retrospection, the Minister noted the nature of payments made this way: We are clear that the legislation is not retrospective. It does not change anybody’s tax liability, but it changes who holds the tax during an avoidance dispute ... [The accelerated payment] will be treated as a payment on account of the final liability, which means that interest will stop running on the amount paid from the date that the taxpayer pays it over. This is emphatically not any form of determination of the final tax liability, which will still be subject to all existing appeal rights. If the taxpayer is ultimately successful, they will get a repayment, with interest, just like the vast majority who have to reclaim any tax they think they are owed.191 Several Members contributed to the debate. Teresa Pearce took issue with the Minister’s view on retrospection: The definition of retrospection is to change the legal consequences of actions that were committed, or relationships that existed, before the enactment of a law, and that is exactly what this legislation does. I agree that it might not change an underlying tax liability, but it changes the consequences of actions ... It is not only my interpretation that the legislation is retrospective, but that of the Treasury Committee. The Chartered Institute of Taxation, the Law Society and several well-respected chambers have said that they find the legislation’s retrospective element unacceptable … If the Minister and the Government are trying to change behaviour, surely they cannot change behaviour in the past. They need to change it going forward, but the retrospective element will not do anything about that. People cannot change what they have already done, but they can change what they will do in the future.192 By contrast, Charlie Elphicke argued that retrospection was about the creation of uncertainty for the taxpayer:

190 op.cit. c490 191 op.cit. cc491-2. The Minister also gave a summary of the Government amendments to these provisions: c493. 192 op.cit. c494 62 Tax avoidance and tax evasion

That is not the case with these provisions, as they apply only in a DOTAS case when a filing has been made to the Revenue. If an adviser has been making a filing, they will say, “I have had to file this with the Revenue.” If they were a competent advisor, they would say, “Keep the money to one side; don’t go out and spend it.” The argument that we hear being made is that if a person puts £100 on red or black in a roulette tournament, it is okay for them, while the ball is still spinning, to take 50 quid of that stake and buy a round of drinks on the grounds that they might win, but that is a poorly founded argument. If someone is going to put a bet down … the stake should stay on the table. The principle that the Government are setting out is that the stake should remain on the table and in the hands of the house. In this particular case, the money should be held with the Revenue if it is making a challenge and has issued a follower notice.193 For the Opposition Shabana Mahmood argued that the Minister’s case was persuasive: This feels much more like a situation where, to borrow a concept from another aspect of our legal system, the legitimate expectations of a taxpayer have been changed. When that happens, as it does in other aspects of our law, particularly when we discuss concepts of reasonableness in judicial reviews and other matters, if legitimate expectations of taxpayers or others are changed, that mischief—the changing of legitimate expectations—is remedied by the time-to-pay arrangements, which should assist in righting any wrongs. There is also the remedy of an interest payment on top of the tax that was in dispute if it is found that it needs to be paid back to the taxpayer. If there is any unfairness as a result of the measures, it can be remedied by those other measures.194 In his response to the debate Mr Gauke addressed the point made by Ms Pearce: The point was made that, if this is about changing behaviour, it should only apply to arrangements people enter into after the measures come into effect. The point I would make in response is that new rules are intended to achieve two things: they change behaviour away from avoidance but have the additional objective of accelerating the resolution of the large number of existing cases and the receipt of the revenue tied up in them. We want all taxpayers in this type of dispute to be in the same predicament so that there is no reason to apply the rules differently depending on when the particular arrangements began.195 Members also raised concerns over the impact that the new regime would have on the legal service. In response to this Mr Gauke said: On some of the practical issues involving the impact on HMRC and the tribunal … the measures are expected to prompt a range of legal challenges, including judicial review proceedings, an increase in closure applications to the tribunal and disputed enforcement activity. Flexible legal resource options are being considered to meet the expected demands of the work. That legal resource will be increased and adapted depending on the scale

193 op.cit. c496 194 op.cit. cc502-3 195 op.cit. c507 63 Commons Library Briefing, 13 April 2021

and scope of any challenges … HMRC is in discussion with the Ministry of Justice to plan for the introduction of these measures and to deal with the likely consequences.196 The Minister went on to discuss concerns over the financial burden of payments and the position of taxpayers who had made disclosures simply to be sure they were being fully compliant, before confirming a formal review of DOTAS over the summer: In cases of genuine hardship, HMRC will consider alternative payment arrangements, as it does with any debt. The priority in cases of genuine hardship will be to get people on to a payment track so that the debt is paid as quickly as possible … Where individuals do not immediately have the cash, it may be appropriate in some instances to back up a payment arrangement with a security against assets. In cases where, for instance, individuals have taken deliberate action to put their assets out of reach of HMRC … so that they cannot pay the tax, bankruptcy action may well be appropriate, but the particular action will always depend on the precise facts and circumstances of the taxpayer … I took one or two interventions on the issue of whether DOTAS disclosures are on the safe side. If disclosures are made but there is no additional tax, there will not be an accelerated payment. HMRC will publish a list of scheme reference numbers before Royal Assent to tell taxpayers which schemes will get a payment notice and which will not ... DOTAS has been in place for 10 years and has been revised at various times. We believe that now is the right time to look at its hallmarks to see whether they still work properly or whether they need updating. We also want to look at how compliance can be updated. We will publish a consultation in the summer, and HMRC will … shortly publish draft guidance in consultation with professional bodies and other interested parties.197 Subsequently HMRC published its proposals to strengthen the DOTAS regime on 31 July.198 As mentioned, the Government tabled amendments to these provisions, specifically in regard to the grounds for making an appeal against follower notice penalties. These were debated and agreed without further changes at the Report stage of the Bill on 2 July.199 On this occasion the Exchequer Secretary clarified two points that he had made in Committee; first on the number of responses made to the draft provisions for follower notices, published in January: [In Committee] I mentioned then that 22 responses had been received to the January consultation on the draft legislation. Some commentators have subsequently questioned whether the number was not in fact higher. The draft legislation on follower notices was issued in two separate documents in January, one of which was on tackling marketed tax avoidance. Although we received a total of more than 800 responses, the vast majority

196 op.cit. c508. See, “Tide of tax bill challenges to spur hiring spree for judges”, Financial Times, 23 June 2014 197 op.cit. cc507-8, c509. The Committee proceeded to agree to this section of the Bill without a division. 198 Strengthening the Tax Avoidance Disclosure Regimes – consultation, 31 July 2014 199 HC Deb 2 July 2014 cc961-1017 64 Tax avoidance and tax evasion

related to accelerated payments, and only 22 specifically related to the draft legislation on follower notices that was published at the same time. I hope that that provides clarification. Mr Gauke went on to discuss the potential scope of accelerated payments to previous tax years: In Committee, I was asked whether the accelerated payments regime would “reach back to disputed tax liabilities relating to periods prior to the introduction of the DOTAS reporting?”–– [Official Report, Finance Public Bill Committee, 17 June 2014; c. 507.] I said that it would not. I want to clarify that an accelerated payment notice may not be issued to a taxpayer with a pre- DOTAS tax dispute where DOTAS—disclosure of tax avoidance schemes—is the only criterion available. Even though a scheme may have come into DOTAS after its introduction, anyone using it before DOTAS will not be subject to accelerated payment on DOTAS alone. However, accelerated payment based on a follower notice can apply to pre-DOTAS cases because the notice does not depend on the DOTAS disclosure.200 Subsequently the Minister confirmed that HMRC was ‘on course’ to issuing guidance, and details of those DOTAS schemes to be subject to accelerated payments notices.201 HMRC’s guidance on acclerated payments, and its checklist of schemes liable to an accelerated payment, are published online.202

4.4 Impact of the new APN regime When the legislation to introduce accelerated payment notices (APNs) was agreed, there was some press coverage of the fact that several celebrities would be amongst those taxpayers who were anticipating that they would be served with a demand for this type of payment.203 In October 2014 HMRC confirmed that over 600 APNs had been sent since late August, relating to over £25 million of disputed tax. In a press notice the department stated that it would be issuing 2,500 notices per month by January 2015, and that it was “on track to deliver notices to 43,000 tax avoidance scheme users, covering £7.1 billion of disputed tax, by the end of March 2016.”204 As noted above, it is a Parliamentary convention that Finance Bills do not include legislation relating to National Insurance, so that provision to extend both the system of accelerated payments, and the ‘POTAS’ regime, to NICs was included in a separate National Insurance Bill,

200 HC Deb 2 July cc965-6 201 op.cit. c986. These provisions now form part 4 (ss 199-233) of the Finance Act 2014. See also, “Thousands of taxpayers in avoidance schemes to repay billions”, Financial Times, 15 July 2014. 202 HMRC, Follower notices and accelerated payments: supporting guidance, updated July 2015 & Tax avoidance schemes: accelerated payments, updated January 2021 203 “Thousands of taxpayers in avoidance schemes to repay billions” & , “Ingenious Media tells celebrity investors they face tax crackdown”, Financial Times, 15 July & 7 July 2014. For a technical discussion see, “Press the accelerator”, Taxation, 9 October 2014. 204 HMRC press notice, Tax avoidance demands top £250m, 23 October 2014. By 9 January 2015 3,000 notices had been issued and £99m received (Strengthening Sanctions for Tax Avoidance, January 2015 p5). 65 Commons Library Briefing, 13 April 2021

published in July.205 When the Public Bill Committee took evidence of the Bill on 21 October, Members asked witnesses about the state of play regarding accelerated payments. Both Andrew Hubbard (from accountants Baker Tilly) and Frank Haskew (from the ICAEW) suggested it was too early to make a definitive assessment, though Mr Haskew suggested that the market for avoidance schemes “is starting to move already in relation to things such as … professional indemnity insurance.”206 Mr Haskew noted that both the ICAEW and the CIOT were worried that HMRC might not have the legal powers to return any overpayment of NICs associated with an accelerated payment. When asked, the Minister David Gauke assured the Committee this was not the case: If the courts determine that the amount that has been paid under an accelerated payments notice, whether in respect of tax or national insurance contributions, ultimately does not need to be paid, and if the scheme in question, for example, was legal and effective, HMRC would be obliged to make that repayment. Although it is not in the Bill, I am grateful for that question and I am happy to make that statement and to make it clear that that is the view of HMRC and the Government, having looked at it very closely.207 Both the Minister, David Gauke and David Edney, policy adviser at HMRC, gave details of how the new regime was working, and the department’s resources to administer it: Mr Gauke: The plan from HMRC has always been to start off relatively cautiously in terms of numbers and ramp it up. The first notices went out at the end of August. Something like 600 notices have been sent out, covering tax liability of up to £250 million. The notices give the parties concerned 90 days in which to settle and make the payment, so one would not expect us necessarily to see the money coming in until the end of November. I can inform the Committee that, up until now, over £25 million has been paid as a consequence of the accelerated payments project. There is clearly much more to come … Mr Edney: We set up a dedicated helpline for people to contact us. It was noticeable that, as soon as accelerated payments were talked about and the first notices went out, the calls started coming in. They first asked, “What is this all about and am I affected?” and then minds started to concentrate and people said, “I really want to get out of this. I see now that I cannot hold on to the money any longer. What do I have to do to settle?” As well as the advisers we have in place to issue the notice, we have advisers to settle their liabilities without even receiving a notice … We have added a little bit of resource to issue the first tranche of notices. We will build up the staffing into the new year as we build up to full capacity. As the reaction builds in, we will then look at resources on our debt management teams, for example,

205 For more details on the legislation see, Library Research paper 14/45, 21 August 2014, and Commons Briefing paper CBP6975, 11 February 2015. 206 Public Bill Committee (National Insurance Contributions Bill), First sitting, 21 October 2014 c10 207 op.cit. c26 66 Tax avoidance and tax evasion

and our legal teams. Rather than recruiting very large numbers up front, we are taking it in stages as the programme unfolds.208 When the Committee debated that part of the Bill relating to accelerated payments, Shabana Mahmood reiterated the Opposition’s support for these changes and their view that these arrangements did not constitute retrospective legislation. Ms Mahmood went on to ask if HMRC had sufficient resources to administer the new regime; in response, Mr Gauke said: The Government have provided significant reinvestment of £1 billion specifically to combat revenue lost and at risk through non- compliance … [so] while most of HMRC’s lines of business are reducing in size, the number of roles in compliance is increasing … Around 100 staff have been recruited into counter-avoidance to deal with the issue of accelerated payment notices, and another 100 will be added in 2015. In addition, HMRC is deploying additional staff to handle collection work. HMRC is taking a flexible approach on additional legal staff, which will depend on the number and nature of legal challenges. Her Majesty’s Courts and Tribunals Service is recruiting additional tribunal judges to handle the cases involving accelerated payments and follower notices and to accelerate the number of cases going through the tribunal generally. The Government have invested extra funds into HMRC’s work to tackle avoidance and evasion. That is bearing fruit, with compliance in 2013-14 bringing in £23.9 billion up substantially from where it was when we came to office.209 In January 2015 the National Audit Office published an overview of the department’s work to improve tax collection since 2010. On the question of compliance, the NAO found that HMRC had made “significant progress since the 2010 spending review in delivering its strategic objectives, successfully reducing the cost of tax collection while increasing the tax it raises from its compliance work.”210 The report also looked at HMRC’s response to concerns raised by the NAO and the Public Accounts Committee in 2012-13 over the scale of marketed avoidance schemes. Reviewing the introduction of accelerated payments & follower notices, as well as associated changes to the avoidance landscape – the GAAR, the strengthened disclosure regime, new sanctions on scheme promoters – the NAO concluded, “HMRC’s response … has been exemplary”: HMRC’s response to our and the Committee’s recommendations on marketed tax avoidance has been exemplary. In the next parliament, the Committee may want to examine whether HMRC’s new powers to tackle marketed avoidance are working as intended. HMRC will need to demonstrate that it is reducing its backlog of 65,000 open avoidance cases. It also faces the challenge of finding ways to measure the impact of new approaches it is introducing to promote compliance and prevent tax avoidance from happening. The impact of these will be harder

208 Public Bill Committee, Second sitting, 21 October 2014 c25 209 op.cit. cc47-8 210 Increasing the effectiveness of tax collection: a stocktake of progress since 2010, 6 February 2015, HC 1029-I of 2014-15 p7 67 Commons Library Briefing, 13 April 2021

for HMRC to measure than the additional tax yield HMRC secures from its investigations.211 Figures on the numbers of APNs issued and payments received were given in HMRC’s 2016/17 Annual Report, published in July 2017: Last year, as planned, we reached the end of our three-year programme of issuing Accelerated Payment Notices (APN) to users of eligible avoidance schemes. APNs are one of the most significant tools that we have to tackle avoidance by individuals and companies, removing their ability to defer payment of tax in ongoing disputes involving marketed tax avoidance schemes. Since 2014 we have issued more than 75,000 notices worth in excess of £7 billion and collecting nearly £4 billion. During the last year we issued more than 30,000 notices, worth £2.3 billion, with total revenue generated of £1.3 billion. This included £180 million of estimated compliance yield protected by APNs, through making the use of avoidance schemes less attractive to existing and potential avoidance scheme users. … Where a customer disagrees with an Accelerated Payment Notice, they have the right to make representations to us. Of the 75,000 notices issued we received a total of 40,000 representations. So far we have considered more than 32,000 of these representations and around 90%of the notices were upheld as valid, with more than 80% confirmed in the original amount.212 Following the introduction of this legislation there was relatively little debate or comment on the APN regime in the House. In March 2016 Greg Mulholland MP tabled an EDM critical of APNs – though only 3 Members signed it.213 Subsequently the operation of the regime has been raised in a few PQs: two examples are reproduced below: Asked by Mr Charles Walker : To ask Mr Chancellor of the Exchequer, what mechanisms there are for companies to appeal the terms of accelerated payment notices issued by HM Revenue and Customs; and if he will make a statement. Answered by: Jane Ellison : The accelerated payment regime was introduced in Finance Act 2014 to change the underlying economics of tax avoidance by requiring disputed tax to be paid upfront while an avoidance scheme is being challenged. Disputed tax remains due and payable under the accelerated payment regime until such time as the dispute is settled by agreement with HM Revenue and Customs (HMRC) or the dispute is litigated and there is a judicial decision. Where an accelerated payment has been made, it is repayable if HMRC agrees, or the courts decide, that the scheme in question does produce a tax advantage under the legislation. Taxpayers can make representations to HMRC about an accelerated payment notice if they believe the conditions for issue have not been met or the amount shown is incorrect. They can also ask the courts to judicially review the issue of an accelerated payment notice.214 * Asked by Grant Shapps :To ask Mr Chancellor of the Exchequer, what comparative assessment HM Revenue and Customs has

211 HC 1029-I of 2014-15 p22 212 HMRC Annual Report 2016/17, HC 18, July 2017 p24 213 EDM 1321 of 2015-16, 23 March 2016 214 PQs 59586, 59587 & 59588, 16 January 2017 68 Tax avoidance and tax evasion

made of the amount it will recover if a company goes into liquidation because of accelerated payment notice debt or if that company continues to trade. Answered by: Mel Stride : HM Revenue and Customs (HMRC) has stringent governance arrangements in place where insolvency is considered. Each case is considered individually and, where a company is trading insolvent, HMRC must take the most appropriate action to mitigate the tax losses. Many factors are considered when deciding whether to petition against a company. HMRC treats unpaid Accelerated Payments as any other established debt using their range of debt collection powers as necessary to recover what is owed, including insolvency powers where appropriate. HMRC does not hold information on the amount recovered from company liquidations caused by unpaid accelerated payment notice debts. Any insolvency action in relation to unpaid accelerated payment notices is currently at an early stage.215 In July 2015 the Court of Appeal rejected a legal challenge to the APN regime.216 One part of the judgement is striking in relation to the claimants’ argument that it was unfair to apply APNs to the scheme, given they had bought into this scheme essentially in good faith, several years ago (para 126) The claimants assert that “if they had known that participating in a business notified under DOTAS meant that monies contributed would be claimed by executive act some 10 years later at short notice and prior even to any enquiry or assessment to tax, it is highly unlikely that they would have made the investment”. This is untenable. The primary risk to the claimants was not precisely when they might have to pay the relevant tax, but whether they would have to pay it. That was a risk that must have been well understood and for which financial provision can be expected to have been made. At the time they participated in the schemes, the claimants could not have known when HMRC’s enquiries and any FTT appeal process would end. It was possible that the appeal process could have concluded much earlier, with a consequential requirement to pay the disputed sums. Writing on this judgement in Taxation, editor Andrew Hubbard, argued that “clients who have received APNs or PPNs [given to partnerships] must face the fact that they will almost certainly have to pay.”217 Subsequent legal challenges have failed.218 In November 2016 the Tribunal considered an appeal against penalties that HMRC had imposed on a taxpayer for late payment of an accelerated notice – in this case a ‘PPN’ as it was issued against a partnership. As part of the judgement the Tribunal noted that, “Parliament had deliberately enacted provisions that a challenge against a PPN should be made by

215 PQ4787, 18 July 2017 216 Rowe, Worrall and others v CIR [2015] EWHC 2293. See also, HMRC press notice, HMRC win Accelerated Payments challenge, 31 July 2015. 217 “Not so ingenious”, Taxation, 6 August 2015 218 “The failed JR challenges to APNs: lessons learned?”, Tax Journal, 9 September 2016; “Still in the fast lane?”, Taxation, 14 July 2017; “Judicial review applications against HMRC”, Taxation, 31 October 2018. 69 Commons Library Briefing, 13 April 2021

way of judicial review. The taxpayer, having chosen not to make such an application, could therefore not argue that the invalidity of the underlying assessment was a reasonable excuse not to pay the PPNs.”219 In December 2017 the Court of Appeal handed down judgement in two joined cases involving dozens of taxpayers, and, once again, upheld HMRC’s position.220 Subsequently in 2019 there were two exceptions to this pattern, in cases decided by the Court of Appeal in April221 and October222 striking down APNs that HMRC issued to taxpayers in two specific cases, though these have not led to the APN regime as a whole being put into question. HMRC regularly publish details of avoidance schemes which they believe are being used to unfairly avoid tax – their ‘Spotlights’ publication. In February 2016 HMRC published a notice, Misleading claims from tax avoidance scheme promoters, which observed, “promoters marketing these avoidance schemes and arrangements use a variety of terms or statements to reassure the potential user that the products they are marketing are acceptable. Such statements are often short and snappy and made without context so could be misleading”: There are a wide variety of claims and statements made but some examples include: • these arrangements fall outside the scope of tax avoidance • the scheme is not disclosable to HMRC and leading Tax Counsel (QC) have agreed this • the scheme has been disclosed and therefore you cannot be penalised • we have been offering these schemes for years and have not been challenged • you can receive tax-free payments that are compliant with tax law • we have won all previous court cases in relation to these arrangements • HMRC will write you a few letters and then give up and go away • the arrangements are recognised by HMRC as not an avoidance scheme • we have a successful track record of implementation • leading Tax Counsel have advised that the arrangements are legal and work

219 “Got to pay: Case summary”, Taxation, 23 November 2016 220 Rowe v HMRC [2017] EWCA Civ 2105. See also, Stephen Daly, “A case note on ‘notices’”, taxatlincolnox blog, 13 December 2017; and, Carlton & Ors v HMRC [2018] EWHC 130 (Admin) 221 R (oao Haworth) v HMRC [2019] EWCA Civ 747. See also, “Faulty follower: Haworth on follower and accelerated payment notices”, Taxation, 18 June 2019 222 R (oao Locke) v HMRC [2019] EWCA Civ 1909. See also, Stephen Day, “Access to justice and taxpayer protection”, taxatlincolnox blog, 8 November 2019; “Locke: Court of Appeal again quashes follower and accelerated payment notices”, Tax Journal, 14 November 2019. 70 Tax avoidance and tax evasion

• penalties can’t be applied as you have relied on advice of Tax Counsel • you can earn more and mitigate tax and do so using tax efficient structures fully compliant with the law • the product is low risk • you’re fully insured against any defeat • HMRC has approved the scheme - they’ve given it a reference number Such claims are made without context and are usually misleading. HMRC never approves avoidance schemes. Assertions that HMRC has never challenged schemes of a particular type, or claims that a scheme produces tax free payments that are compliant with tax law, are often simply incorrect. Saying ‘the scheme has been disclosed and therefore you can’t be penalised’ doesn’t mean that you won’t have to pay the disputed tax, interest and possibly penalties. Similarly, saying ‘leading Tax Counsel have advised that the arrangements are legal and work’ does not necessarily mean the scheme works. Counsel may be advising the promoter on the basis of assumptions which may not turn out to be correct when the scheme is implemented. And whilst Counsel may have advised that the scheme works, their advice is only one opinion. HMRC has a strong track record on avoidance and wins around 80% of all avoidance cases taken to court.223

4.5 Subsequent proposals regarding ‘serial avoiders’ and offshore evasion In the Autumn Statement in December 2014, the Coalition Government announced that it would consult on action to “impose additional financial costs, compliance and reporting requirements or repeat users of known avoidance schemes.”224 In January 2015 HMRC launched a consultation – Strengthening the sanctions for tax avoidance – which, as noted above, asked for views on having penalties for GAAR cases, and on measures to tackle ‘serial avoiders’: “a small group of risk takers, each of whom is repeatedly involved in tax avoidance schemes to avoid significant amounts of tax.”225 The consultation paper gave more details of what additional sanctions might be applied, while underlining that any new regime would have to be underpinned by certain safeguards: Introducing surcharges for repeated use of schemes that fail When a tax avoidance scheme fails, the tax return is inaccurate and penalties may be chargeable. This depends in each case on establishing that the taxpayer failed to take reasonable care. However, the law must look at each case in isolation, and cannot

223 HMRC, Misleading claims from tax avoidance scheme promoters, Spotlight 29, February 2016 224 Autumn Statement 2014, Cm 8961 December 2014 para 2.158. At this time the Government also proposed changes to make DOTAS more effective (paras 2.160-2). 225 Strengthening Sanctions for Tax Avoidance, 30 January 2015 p7 71 Commons Library Briefing, 13 April 2021

consider the evidence of a pattern of previous or parallel behaviour. Introducing a surcharge on the repeated or concurrent use of tax avoidance schemes that fail could help deter serial avoiders from persisting with flawed schemes year after year … Special Measures for Serial Avoiders Serial avoiders may be largely insulated against the personal impact of an intensive enquiry into their tax affairs by their agent or the scheme promoter. Currently, neither the threat of enquiry nor the burden of compliance are likely to carry weight with the serial avoider; or move them to cooperate and progress matters at pace; indeed, delay is a tactic frequently used to hold up settlement and payment. Increasing the level of scrutiny and obligation on taxpayers during an enquiry could raise the stakes for the avoider and help shift their behaviour ... On entering special measures, serial avoiders could be required: To provide certificates about their use of tax avoidance schemes to show whether or not they have used a tax avoidance scheme in a particular period, with a view to influencing their behaviour by making them formally acknowledge their involvement in tax avoidance; To provide as a matter of course more documents and information about their tax affairs or with their tax return rather than waiting for an enquiry or information request from HMRC, with a view to making clear that serial avoidance will result in the imposition of additional obligations on an avoider; To comply with a conduct notice or a stop notice requiring them to do, or refrain from doing, certain things, with a view to improving their tax compliance … Publishing the names of serial avoiders Some serial avoiders may be particularly sensitive to reputational risk. Introducing the additional prospect of publicity could alter the balance of risk for serial avoiders, and act as a deterrent to future involvement in high risk tax avoidance schemes. This sanction could be directly triggered by the imposition of a surcharge for repeated use of schemes that fail; or it could be a further consequence of failure to comply with special measures, which could themselves be triggered by imposition of a surcharge… Safeguards Whether in raising a surcharge, imposing special measures or naming a serial avoider there would need to be appropriate safeguards. Any new regime would need to include procedural safeguards and rights of appeal to ensure that it catches and sanctions only its intended, narrow target. The power to name would require especially careful handling, as it would be harder to demonstrate that any perceived reputational damage could be effectively undone.226 The then Chancellor George Osborne presented his last Budget of the Parliament on 18 March 2015, and in the Budget report the Government confirmed that it would go ahead with the proposed changes regarding serial avoiders in a future Finance Bill:

226 op.cit. pp 8-10. Responses to this consultation were invited by 12 March 2015. 72 Tax avoidance and tax evasion

2.203 Serial avoiders – The government will introduce legislation for tougher measures for those who persistently enter into tax avoidance schemes which fail (serial avoiders), including a special reporting requirement and a surcharge on those whose latest tax return is inaccurate as a result of a further failed avoidance scheme. The government will also look to restrict access to reliefs for the minority who have a record of trying to abuse them through avoidance schemes that don’t work and intends to develop further measures to name those who continue to use schemes that fail. Legislation will be introduced in due course that will widen the current scope of the Promoters of Tax Avoidance Schemes regime by bringing in promoters whose schemes regularly fail. (Future Finance Bill).227 The Budget report went on to note that the forthcoming Finance Bill, to be passed before the Dissolution, would enable HMRC to issue Conduct Notices to a broader range of connected persons under the POTAS regime, and, ensure that the 3 year time limit for issuing Conduct Notices to promoters who have failed to disclose avoidance schemes to HMRC applied from the date when a failure is established.228 Alongside the Budget the Coalition Government published Tackling tax evasion & avoidance – a paper setting out the action it had taken over the Parliament to deal with avoidance and evasion, both domestically, and in response to international concerns about corporate tax avoidance, as well as bank secrecy laws and their exploitation for the purposes of evasion and money laundering.229 With regard to the domestic scene it confirmed the Government’s intention to introduce a system of penalty payments for GAAR cases, while noting that only “a fairly small number of cases” were expected to fall foul of the rule.230 Following the introduction of accelerated payments, consideration would be given as to “whether the principle might be appropriate for different types of cases and whether the government should extend the acceleration of tax payments to more avoidance cases.”231 This paper also mentioned four initiatives to tackle offshore evasion. HMRC published a strategy paper on this issue in March 2013, which gave a summary description of what this constitutes … Offshore evasion is using a non-UK jurisdiction with the objective of evading UK tax. This includes moving UK gains, income or assets offshore to conceal them from HMRC; not declaring taxable income or gains that arise overseas, or taxable assets kept overseas; and using complex offshore structures to hide the beneficial ownership of assets, income or gains. … and estimates as to the scale of this activity: The hidden nature of the problem and the way that information is currently recorded mean that there is no clear view of the cost of offshore evasion. However, HMRC’s recent progress in tackling

227 Budget 2015, HC 1093, March 2015 p91 228 op.cit. para 2.204. This was made by s119 of FA2015 229 HM Treasury, Tackling tax evasion & avoidance, Cm9047, March 2015. The paper lists a series of measures taken from 2011 to 2015 to ‘close loopholes’ (Table 2.A). 230 Tackling tax evasion & avoidance, Cm9047, March 2015 para 3.22 231 op.cit. para 3.34 73 Commons Library Briefing, 13 April 2021

offshore evasion through exchange of information agreements and disclosure facilities indicates that it has a significant cost to the UK. That is why we are undertaking innovative new work to use a wide range of data sources and engage experts and academics to develop a comprehensive evidence base on the scale and nature of offshore evasion.232 The difficulties faced by many countries in tackling offshore evasion was a theme to the 2013 G8, and in July 2014 the OECD published a new global standard on automatic information exchange – the ‘Common Reporting Standard’ (CRS) – to tackle offshore tax evasion: The Standard provides for annual automatic exchange between governments of financial account information, including balances, interest, dividends, and sales proceeds from financial assets, reported to governments by financial institutions and covering accounts held by individuals and entities, including trusts and foundations. The new consolidated version includes commentary and guidance for implementation by governments and financial institutions, detailed model agreements, as well as standards for harmonised technical and information technology solutions, notably a standard format and requirements for secure transmission of data.233 The UK was one of an initial group of 51 countries that agreed later that year to implement the standard,234 including all EU Member States under an EU-wide Administrative Co-operation Agreement. Following consultation, legislation to give effect to these provisions was introduced in March 2015.235 Notably the Crown Dependencies and Overseas Territories agreed bilateral arrangements with the UK on automatic information exchange in 2013 and, in turn, signed up to implement this new global standard.236 Following consultation over 2014, the March 2015 Budget confirmed the introduction of enhanced civil penalties for offshore tax evasion.237 In addition the Government proposed that these civil penalties could be strengthened, possibly supplemented by other measures, including a new criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion by their agents: 3.11 The government has reached ground-breaking agreements to exchange information on financial accounts automatically every year with over 90 other countries. Building on this, it is introducing stronger sanctions for those who continue to evade tax and for those who assist them. 3.12 The Government today announces the introduction of a new strict liability offence for those who have not paid

232 HMRC, No safe havens: Our offshore evasion strategy 2013 and beyond, March 2013 p2. HMRC published an update to this strategy the following year: No safe havens 2014, April 2014. 233 OECD press notice, OECD releases full version of global standard for automatic exchange of information, 21 October 2014 Details are on the OECD’s site here. 234 HM Treasury press notice, Next step taken in stamping out international tax evasion, 30 October 2014 235 HMRC, Tax administration: regulations to implement the UK's automatic exchange of information agreements, March 2015 236 PQ HL4852, 18 February 2015. See also, PQ67167, 17 March 2017 237 Budget 2015, HC1093, March 2015 para 2.202. see also, HMRC, Strengthening penalties for offshore non-compliance, December 2014 74 Tax avoidance and tax evasion

the tax due on offshore income. This will act as a significant deterrent to the minority of people who evade their tax and will help to stamp out offshore tax evasion. There was previous consultation on a strict liability offence in 2014 at a time when fewer countries had agreed to begin exchanging information automatically in 2017 or 2018. In light of the significant increase in the number of participating countries, there will be a further consultation before legislation is introduced which takes account of this and considers appropriate defences and thresholds. 3.13 The Government is also taking tough action against those who enable offshore tax evasion. The Government today announces new civil penalties for enablers of tax evasion and will consult on the detail of this. This will include a new collateral penalty under which enablers will pay a fine equivalent to that paid by the individual that they helped to evade tax; and public naming of those that enable tax evasion. Criminal sanctions are already available against individuals who facilitate or encourage tax evasion. The Government today announces it will create a new offence of corporate failure to prevent tax evasion or the facilitation of tax evasion, following consultation. 3.14 HMRC is already able to apply penalties of up to 200% of the tax due. Changes introduced in Finance Bill 2015 will extend the scope of these. The government today announces that there will be a further toughening of the range of penalties available to HMRC, following consultation. This will include a new penalty that would take a portion of the asset that has been hidden and increasing the scope of the power to name those who have evaded tax.238 At this time the Government also announced that it would introduce a new ‘disclosure’ programme, for taxpayers to declare unreported tax liabilities connected with assets held offshore. As noted in Tackling tax evasion & avoidance, “without access to information on offshore financial assets, HMRC’s approach has long been to encourage people to come forward and disclose information voluntarily. It has done this by offering time-limited ‘disclosure facilities’, including through bilateral agreements, which encourage tax evaders to come forward and to disclose their offshore affairs, pay the tax due together with penalties and interest.”239 The Budget report noted that the new Worldwide Disclosure Facility (WDF) would not offer taxpayers similar incentives as previous schemes, that had sought to encourage voluntary disclosures by imposing lower penalties on unpaid tax recovered this way. The Government also stated that it would “invest £4 million in data analytics resource to maximise the yield from the Common Reporting Standard data.”240 The Budget report estimated that this would yield about £570m over 2015-20.241

238 Tackling tax evasion & avoidance, Cm 9047, March 2015 p16. Consultation on each of these measures was launched in July 2015, and subsequently the Conservative Government confirmed it would introduce them (Autumn Statement Cm 9162, November 2015 para 3.77-80). This is discussed below. 239 Tackling tax evasion & avoidance, Cm 9047, March 2015 para 2.16 240 Budget 2015, HC 1093, March 2015 para 2.197-9, para 2.201 241 op.cit. p64 (Table 2.1- item 25) 75 Commons Library Briefing, 13 April 2021

The WDF was launched in September 2016. Writing in Taxation magazine on its launch, Dawn Register & Helen Adams (BDO LLP) noted that, “the reason for no further incentives to encourage voluntary disclosure is HMRC’s improved capability of detecting and investigating offshore tax evasion and non-compliance”: The common reporting standard (CRS) is described by HMRC as a ‘game changer’, bringing the automatic exchange of bank information from more than 100 countries around the world over the next two years. This is in addition to data from more than 40 territories on the beneficial ownership of offshore companies and trusts. The result is to revolutionise tax transparency and make it easier for HMRC to tackle offshore tax evasion and avoidance. The author went on to note that this was one of a series of initiatives that HMRC was introducing to reduce offshore tax evasion: The WDF must be viewed with two other measures on which HMRC is working. First, the requirement to correct (RTC) [initiative] … will create a statutory obligation to correct any undeclared UK tax liabilities in respect of an offshore matter by 30 September 2018. These proposals will introduce tough new penalties for ‘failure to correct’ if the non-compliance is not resolved by then. Second, HMRC is putting into place the client notification regulations. The new SI 2016/899 states that advisers will need to contact specified clients to warn them of the consequences of failing to disclose fully their UK tax liabilities and advertise the WDF. Further guidance is expected before advisers contact these clients between 30 September 2016 and 31 August 2017. HMRC will use both the RTC and notification letters to encourage individuals to use the WDF to bring their tax affairs up to date, with a particular focus on anything offshore.242 In a second piece on the WDF that appeared in the Tax Journal at this time, Ms Adams and James Kennedy (also BDO LLP) noted: The launch of WDF is interlinked with the common reporting standard (CRS), the automatic information exchange of bank data from around the world and registers of beneficial ownership. HMRC has improved its efficient, effective data analysis capabilities to handle bulk data. Consequently, it simply does not believe that it needs to offer incentives for disclosure, as it will soon receive data from over 100 countries from which it will identify cases for investigation.243 Prior to the 2015 General Election the Institute for Fiscal Studies published an assessment of the Coalition Government’s tax policy, including its efforts to tackle tax avoidance and evasion.244 On the impact of the new GAAR the authors noted that it was still “very early days”: “to date there have been no test cases of the GAAR – not necessarily because it has no practical application, or because it is a completely effective deterrent, but because it takes time for relevant

242 “Sticks instead of carrots”, Taxation, 29 September 2016. For details of the first of these measures – the ‘requirement to correct’ – see, HMRC, Tackling offshore tax evasion: requirement to correct, December 2016. It is also discussed below. 243 “Q&A : the Worldwide Disclosure Facility”, Tax Journal, 23 September 2016 244 Stuart Adam & Barra Roantree, The Coalition Government’s Record on Tax: IFS Briefing note BN167, March 2015 76 Tax avoidance and tax evasion

transactions to arise, come to the attention of HMRC, be investigated and come to court.” DOTAS had facilitated the practice of clamping down on avoidance schemes as they came to light, but it was hard to say what the revenue impact of these initiatives had been: The principal weapon [to tackle avoidance] has still been to clamp down on specific avoidance schemes when they are uncovered (often through the Disclosure of Tax Avoidance Schemes, or DOTAS, provisions introduced by the previous Labour government). Every Budget and Autumn Statement has included a raft of anti-avoidance measures, most of them small individually but collectively forecast to raise billions of pounds. There is no clear dividing line between reducing avoidance opportunities and broadening the tax base, so it is hard to separate out ‘anti-avoidance’ measures and quantify their intended revenue yield. It is even harder to know whether the measures in fact bring in the sums forecast.245 More generally the authors argued that even though the GAAR represented “a move beyond the traditional approach of simply dealing with each avoidance scheme as it is uncovered”, it was “still tackling the symptoms rather than the underlying cause – often a lack of clarity or consistency in the tax base”: As the Mirrlees Review noted, ‘If activities were taxed similarly, there would be no (or, at least, much less) incentive for taxpayers to dress up one form of activity as another – and there would correspondingly be little or no revenue loss to the Exchequer if they did so.’246 If tax evasion is a function of enforcement, avoidance is a function of the tax base. Preventing tax avoidance is not an administrative exercise to be layered on top, but inextricably intertwined with the design of tax policy. Design a coherent tax policy and the problem of avoidance will be much reduced.247

245 The Coalition Government’s Record on Tax, March 2015 p27 246 Tax by Design: The Mirrlees Review, IFS 2011 p501 247 The Coalition Government’s Record on Tax, March 2015 p27 77 Commons Library Briefing, 13 April 2021

5. The Conservative Government’s approach

5.1 Summer Budget 2015 In the Conservative Government’s first Budget after the 2015 General Election, the then Chancellor George Osborne did not announce any major change in the Government’s approach to this issue. The Budget report included a number of separate measures relating to tax planning, tax avoidance, evasion and compliance.248 This included an increase in funding for HMRC – worth over £60m by 2020/21 - “to allow HMRC to step up criminal investigations into serious and complex tax crime particularly focusing on wealthy individuals and corporates, with the aim of raising £600 million by the end of the Parliament.”249 The Budget report also confirmed that the Government would consult on a penalty regime for GAAR, as well as measures, previously announced, regarding serial tax avoiders: The government will publish a consultation, ahead of introducing legislation in Finance Bill 2016, for serial avoiders who persistently enter into tax avoidance schemes which are defeated. These include a special reporting requirement and a surcharge on those whose latest tax return is inaccurate as a result of a further defeated avoidance scheme, restricting access to reliefs for the minority who have a record of trying to abuse them, and developing further measures to name serial avoiders. The scope of the Promoters of Tax Avoidance Schemes regime would be widened by bringing in promoters whose schemes are regularly defeated. (Finance Bill 2016).250 Following a consultation exercise, the Government confirmed it would introduce these arrangements with effect from 6 April 2017: Legislation will be introduced in Finance Bill 2016 to allow HMRC to send a notice when they defeat a tax avoidance scheme which puts that person on warning for 5 years. During this time, taxpayers will be required to notify HMRC each year that they have not used any further avoidance schemes, or if they have, to give full details of the schemes and the amount of the tax advantage the schemes are asserted to deliver. For taxpayers who use further avoidance schemes while under warning which HMRC defeat, they will become liable to a penalty of 20% of the understated tax. Subsequent defeats of such schemes will result in increasing penalties to a maximum of 60%. Taxpayers who use three schemes during a warning period which HMRC defeats will have their names and other details published by HMRC. Taxpayers who use at least three tax avoidance schemes during the warning period which exploit reliefs in a way not intended by Parliament and which HMRC defeats will have their access to certain reliefs deferred for a period of three years. If they use no further avoidance schemes which exploit reliefs in this time which

248 Summer Budget 2015, HC 264, July 2015 pp94-6, Table 2.1 – items 27-36. 249 op.cit. para 2.171 250 op.cit. para 2.174 78 Tax avoidance and tax evasion

HMRC defeat, they will be able to claim reliefs in relation to the deferred period, provided they are still in time to do so.251 Draft legislation was published at the time, and these provisions now form s159 & schedule 18 of FA2016.252 The Government also confirmed that it would introduce a new threshold condition for the ‘promoters regime’: Legislation will be introduced in Finance Bill 2016 to provide a new threshold condition for the POTAS regime. The July 2015 consultation proposed the detail for a new threshold condition for promoters who have marketed multiple tax avoidance schemes that are regularly defeated. Three such defeats over an eight-year period will trigger the threshold condition and bring the scheme promoter into consideration for a Conduct Notice. For this threshold condition, a defeat is defined as: litigation finally being in HMRC’s favour; the user of the scheme reaches agreement with HMRC about their case or makes no appeal against an assessment; a GAAR counteraction has been issued; or the user of the scheme corrects their return on receipt of a Follower Notice. Where there are multiple users of a defeated scheme, a scheme will be defeated if litigation is finally found in HMRC’s favour or 75% of the scheme users agree with HMRC that the scheme does not provide the asserted tax advantage.253 Finally, in the Summer 2015 Budget the Government also stated it would consult “on new measures to increase compliance and tax transparency in relation to large business tax strategies”: These will include the introduction of a ‘special measures’ regime to tackle businesses that persistently adopt highly aggressive behaviours including around tax planning, and a voluntary Code of Practice defining the standards HMRC expects large businesses to meet in their relationship with HMRC.254 Following consultation over the summer, in December 2015 the Government published details of how these initiatives would work; first, the ‘special measures’ regime - The government is legislating to provide that large businesses with an ongoing history of aggressive tax planning and/or refusing to engage with HMRC may be subject to special measures. A business in this position will be advised that they may be of risk of being put into special measures. A twelve month improvement period will then allow HMRC and the business to work together to resolve issues. At the end of the period, the business will either have improved and so not enter special measures or be notified of entry into special measures. At this stage no sanctions are triggered. Businesses who enter special measures risk sanctions if they demonstrate further instances of the behaviours that led to their

251 HMRC, Tax administration: serial avoiders special regime , December 2015. The Exchequer impact was estimated to be negligible. 252 No changes were made to the draft legislation: HM Treasury, Overview of tax legislation & rates, March 2016 p24 253 HMRC, Tax administration: new threshold condition for promoters of tax avoidance schemes, December 2015. Again, the Exchequer impact was thought to be negligible. This provisions form s160 of FA2016. 254 Summer Budget 2015, HC 264, July 2015 para 2.176 79 Commons Library Briefing, 13 April 2021

inclusions in special measures. Sanctions could include, removing access to non-statutory clearances, removing the defence of ‘reasonable care’ or potentially naming as being in special measures. Businesses enter special measures for a minimum of 2 years. Two years from entry into special measures HMRC will conduct an ‘exit review’ to decide whether the behaviours have improved and the business should exit special measures or whether an extension of special measures is required.255 - and second, the transparency strategy, which would cover 2,000 largest businesses in the UK: The measure will introduce a legislative requirement for all large businesses to publish an annual tax strategy, in so far as it relates to UK activities, approved by the Business’s Executive Board. The strategy will cover 4 areas: 1. the approach of the UK group to risk management and governance arrangements in relation to UK taxation 2. the attitude of the group towards tax planning (so far as affecting UK taxation) 3. the level of risk in relation to UK taxation that the group is prepared to accept 4. the approach of the group towards its dealings with HM Revenue and Customs (HMRC) Non-publication of an identifiable tax strategy or incomplete content based on the 4 areas outlined above could lead to a financial penalty. This penalty will be subject to the usual HMRC appeals process.256 Draft legislation was published at the time, and in the 2016 Budget the Government confirmed this would be included in the Finance Bill, subject to certain revisions “to clarify the population of those entities in scope of the legislation. The legislation will be effective for accounting periods commencing on or after Royal Assent to Finance Bill 2016.”257 The Exchequer yield from these changes was estimated to be £175m in 201/18, rising consistently to £635m by 2020/21.258 These three measures were debated, and agreed, at the Committee stage of the Bill on 28 June – though the debate focused on the separate, if related issue of corporate tax avoidance, and the proposal for multinational companies (MNEs) to provide public country-by- country (CbC) reporting. Under provisions introduced in 2016 UK MNEs must provide HMRC with information on their global activities, profits and taxes,259 and Caroline Flint tabled an amendment to require MNEs to make this information public, as part of their transparency strategy. However, Ms Flint’s amendment was unsuccessful, as the Government

255 Tax administration: large business special measures regime, 9 December 2015 256 Tax administration: large businesses transparency strategy, 9 December 2015 257 Overview of Tax Legislation & Rates, March 2016 para 1.76. The provision forms s161 & schedule 19 of FA2016. 258 Budget 2016, HC 901, March 2016 (Table 2.2 – item an). See also, HMT, Summer Budget 2015 Policy Costings, July 2015 p35 259 HMRC, Country-by-country reporting – updated, March 2017 80 Tax avoidance and tax evasion

maintained its position that public CbC reporting should only be implemented on a multilateral basis.260 It is worth adding that, as with previous Budgets, the 2016 Budget also included several new measures to reduce avoidance, evasion and certain ‘imbalances’ in the tax system (where support disproportionately benefits certain groups or types of business structure.)261

5.2 Offshore evasion & the Panama Papers As noted above, in March 2015 the Coalition Government had proposed four initiatives to tackle offshore evasion: • A new criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion by their agents; • Tougher financial penalties for offshore evaders, including the possibility of a penalty based on the value of the asset on which tax was evaded as well as wider public naming of offshore evaders; • A new penalty regime for those who enable tax evasion, based on the tax they have helped taxpayers to evade and naming of enablers; • A new simpler criminal offence to make prosecution of offshore evaders easier.262 Consultation documents on each of these measures were published in July 2015, and in December the Government confirmed it would bring forward legislation for three of these measures in the Finance Bill 2016: • a new criminal offence for tax evasion, • new civil penalties for offshore tax evaders, and • new civil penalties for those enabling offshore evasion.263 Tax information notes on each measure were published at the time. • Tax administration: criminal offence for offshore tax evaders • Increased civil sanctions for offshore tax evaders • Tax administration: civil sanctions for enablers of offshore tax evasion In turn provision for these measures was included in the Finance Bill published after the 2016 Budget, well as provision for an additional penalty for serious cases of deliberate offshore evasion, equivalent to up to 10% of the underlying asset value.264

260 HC Deb 28 June 2016 cc157-9. For more details see, Corporate tax reform (2010-20), Commons Briefing paper CBP5945, 1 April 2021 (section 6.2). 261 Budget 2016, HC 901, March 2016 (Item 2.1 – items 39-53). The term ‘imbalances’ seems to have been used first in the preceding Budget (Summer Budget 2015, HC 264, July 2015 para 1.184). 262 Tackling tax evasion & avoidance, Cm9047, March 2015 p16 263 Autumn Statement Cm 9162, November 2015 para 3.77-80. See also, Budget 2016, HC901, March 2016 para 2.200-2 264 HMT, Overview of Tax Legislation & Rates, March 2016 para 1.77. These now form ss162-67 of FA2017. See also, “The door is closing”, Taxation, 16 June 2016. 81 Commons Library Briefing, 13 April 2021

In the 2016 Budget the Government also announced that Finance Bill 2017 would include provision for a new legal requirement to correct past offshore non-compliance within a defined period of time with new sanctions for those who failed to do so.265 In the latter case, a consultation exercise on a ‘requirement to correct’ was launched in the summer.266 In the case of a criminal offence for corporates, stakeholders and respondents had been “broadly understanding of the need for greater corporate responsibility in relation to the acts carried out by those who represent the corporation”, though there were concerns that there might be practical difficulties in prosecution. Given this response, the Government proposed that it would publish draft legislation and draft guidance in early 2016 for further consultation before proceeding.267 The then Prime Minister David Cameron reiterated the Government’s plans to introduce this criminal offence, in a statement on 11 April 2016.268 This followed the publication a few days before of the ‘Panama papers’ – a leak of financial records from Mossack Fonseca, a law firm that had provided advice on establishing offshore companies in tax havens to a wide variety of politicians, celebrities, and other wealthy individuals.269 Mr Cameron announced a joint taskforce would be established to investigate potential cases of evasion, led by HMRC and the National Crime Agency270 – and gave details of ongoing efforts to improve the financial information provided by the Crown Dependencies and Overseas Territories to the revenue authorities. Part of Mr Cameron’s statement to the House is reproduced below: As the revelations in the Panama papers have made clear, we need to go even further. So we are taking three additional measures, to make it harder for people to hide the proceeds of corruption offshore, to make sure that those who smooth the way can no longer get away with it and to investigate wrongdoing. First, let me deal with our Crown dependencies and overseas territories that function as financial centres. They have already agreed to exchange taxpayer financial account information automatically, and will begin doing so from this September … Today I can tell the House that we have now agreed that they will provide UK law enforcement and tax agencies with full access to information on the beneficial ownership of companies. We have finalised arrangements with all of them except for Anguilla and Guernsey, both of which we believe will follow in the coming days and months. For the first time, UK police and

265 Budget 2016, HC 901, March 2016 para 2.200-3 266 HMRC press notice, Tough new sanctions announced for offshore tax evaders, 24 August 2016; see also, “UK plans tougher penalties for offshore tax evaders”, Financial Times, 24 August 2016. 267 Tackling offshore tax evasion: a new corporate criminal offence of failure to prevent the facilitation of tax evasion - Summary of Responses, December 2015 pp7-8, p36 268 No.10 Downing Street press notice, PM: Companies to be liable for employees who facilitate tax cheating, 11 April 2016 269 “What are the Panama Papers? A guide to history's biggest data leak”, Guardian, 5 April 2016 270 HMT press notice, UK launches cross-government taskforce on the ‘Panama Papers’, 10 April 2016 82 Tax avoidance and tax evasion

law enforcement agencies will be able to see exactly who really owns and controls every company incorporated in those territories … Next month we will seek to go further still, using our anti-corruption summit to encourage consensus not just on exchanging information, but on publishing such information and putting it into the public domain … Next, we will take another major step forward in dealing with those who facilitate corruption. Under current legislation it is difficult to prosecute a company that assists with tax evasion, but we are going to change that. We will legislate this year for a new criminal offence to apply to corporations that fail to prevent their representatives from criminally facilitating tax evasion. Finally, we are providing initial new funding of up to £10 million for a new cross-agency taskforce to swiftly analyse all the information that has been made available from Panama, and to take rapid action. That taskforce will include analysts, compliance specialists, and investigators from across HMRC, the National Crime Agency, the Serious Fraud Office, and the Financial Conduct Authority.271 With regard to the new corporate offence, in April HMRC published draft legislation and draft guidance for consultation.272 The paper set out the policy objectives of the new offence as follows: 1.3 The new corporate offence aims to overcome the difficulties in attributing criminal liability to corporations for the criminal acts of those who act on their behalf. Whilst this consultation refers to the application of the new offence to “corporations”, the draft legislation refers to a “relevant body” to encompass the broad range of legal persons to which the new offence will apply.273 1.4 Attributing criminal liability to a corporation normally requires prosecutors to show that the most senior members of the corporation were involved in and aware of the illegal activity, typically those at the Board of Directors level. This has a number of impacts: 1. In large multinational organisations decision making is often decentralised and may be taken at a level lower than that of the Board of Directors, with the effect that the corporation can be shielded from criminal liability. This also makes it harder to hold such organisations to account compared to a smaller organisation where decision making is centralised. 2. The existing law can act as an incentive for the most senior members of a corporation to turn a blind eye to the criminal acts of its representatives in order to shield the corporation from criminal liability. 3. The existing law can act as a disincentive for internal reporting of suspected illegal activity to the most senior members of the corporation. 1.5 The cumulative effect is an environment that does not foster corporate monitoring and self-reporting of criminal activity. The criminal law currently renders corporations that refrain from

271 HC Deb 11 April 2016 cc23-26 272 Tackling tax evasion: a new corporate offence of failure to prevent the criminal facilitation of tax evasion, April 2016 273 “Relevant body” is defined within section 1(2) of the new draft clauses. 83 Commons Library Briefing, 13 April 2021

implementing good corporate governance and strong reporting procedures hard to prosecute, and offers no incentive to invest in such procedures. It is those corporations that deliberately turn a blind eye to wrongdoing and preserve their ignorance of criminality within their organisation that the current criminal law most advantages.274 Subsequently the Government introduced legislation, as part of the Criminal Finances Act 2017, to establish a new statutory offence to hold corporations and partnerships criminally liable when they fail to prevent their employees, agents, or others who provide services on their behalf from criminally facilitating tax evasion. These new offences took effect from 30 September 2018;275 further details are in two Library papers, the first prepared for the Second Reading of the Criminal Finances Bill in October 2016 (CBP7739), the second summarising the Committee stage of the Bill (CBP7825). With regard to beneficial ownership, the Government had introduced provisions for this country as part of the Small Business, Enterprise & Employment Act 2015.276 In April 2014 the Prime Minister wrote to the Crown Dependencies and Overseas Territories to encourage them to follow the UK’s example. The speed with which individual territories responded to this appeal has often been raised in the House – though, as noted by the Foreign Office Minister, James Duddridge, in February, “this is a matter of direction, rather than an ultimate destination.” The Minister said that he wished to see “significant progress” ahead of the anti-corruption summit in May.277 On 14 April 2016 the Chancellor announced that the UK had agreed with Germany, France, Italy and Spain for the automatic exchange of information of data on company beneficial ownership between tax and law enforcement agencies.278 The five participants also made a commitment to establish new registers of trusts.279 Subsequently, just before the anti-corruption summit, the Government announced that the UK had completed a series of bilateral agreements with the Crown dependencies and overseas territories on sharing beneficial ownership information. Details are collated on Gov.uk, but, as underlined in a written answer, generally this information would be shared with the relevant legal and tax authorities only: Jonathan Ashworth : To ask the Secretary of State for Foreign and Commonwealth Affairs, what plans the Government has to

274 Tackling tax evasion: a new corporate offence of failure to prevent the criminal facilitation of tax evasion, April 2016 pp6-7. The consultation document gives a case study of how the offence would work “to help inform stakeholder feedback” (see para 3.6, pp24-26). 275 HMRC press notice, 30 September 2017. For discussion of its impact see, “FTSE 100 split down the middle on the CFA”, Tax Journal, 28 September 2018. 276 For more details see, Small Business, Enterprise and Employment Bill, Commons Briefing paper RP14-39, 14 July 2014. 277 HC Deb 23 February 2016 cc145-6. The Prime Minister had first announced this summit in a speech in Singapore last year (No.10 Downing Street, 28 July 2015). 278 HM Treasury press notice, UK leads European calls for G20 action on beneficial ownership, 14 April 2016 279 HM Treasury, G5 letter to G20 counterparts regarding action on beneficial ownership, 14 April 2016. Several countries joined this initiative some days later: HMT press notice, Tax transparency progress hailed by Chancellor, 22 April 2016 84 Tax avoidance and tax evasion

force Overseas Territories and Crown Dependencies to establish public central registers of beneficial ownership. Answered by: Sir Alan Duncan : While the Overseas Territories (OTs) and Crown Dependencies (CDs) are separate jurisdictions, and are responsible for their own fiscal matters, we are working closely with them on their role on company transparency. Our priority has been for them to establish a central register of beneficial ownership information (or a similarly effective system) where they do not already have one, and for UK law enforcement and tax authorities to have full and automatic access to that information. Bilateral arrangements to this effect have now been concluded with all the relevant OTs and with the CDs, and these will enter into effect by June 2017. The registers will, with one exception, not be public, but these measures will place our Crown Dependencies and Overseas Territories well ahead of other similar jurisdictions and represent a significant step forward in our ability to counter criminal activity.280 The question of requiring the Crown Dependencies and Overseas Territories to establish public registers of beneficial ownership continued to be debated – particularly during the proceedings of the Criminal Finances Bill .281 As a compromise at the Report stage of the Bill in the Lords in April 2017, the Government introduced a new provision to require Ministers to report to the House on the effectiveness of the arrangements for the exchange of beneficial ownership information with these territories.282 Over this period the Government reiterated that should public registers become the global standard, “we would expect the Crown Dependencies to follow suit.”283 In a short Lords debate on the Paradise Papers on 14 December DIFD Minister Lord Bates said, “we already have central registers in four of those authorities, including the Cayman Islands, Bermuda and Gibraltar. Montserrat and Anguilla will have registers by April of next year. The Turks and Caicos Islands have been particularly affected by the hurricane, so they have been given a little extra time, but we are very clear that action needs to be taken.”284 Finally, with regard to the new task-force, in a press notice following the announcement the CIOT’s Tax Policy Director, John Cullianane, said, “This is a sensible, joined-up approach from the Government. There is a huge amount of data to work through, and this is an extremely complex area, with a number of different criminal offences in scope, with different expiry periods and burdens of proof. So it makes sense to bring together specialists from HMRC, the National Crime Agency and elsewhere in a dedicated, focused taskforce.”285

280 PQ43422, 2 August 2016. For more details on the summit see, The international anti-corruption summit in May 2016, CBP7580, 20 May 2016 281 See, Criminal Finances Bill: Committee Stage Report, CBP7825, 16 February 2017. 282 HL Deb 25 April 2017 cc1309-35. This now forms s9 of the Criminal Finances Act 2017. 283 PQ68007, 21 March 2017. See also, PQ112793, 20 November 2017. 284 HL Deb 14 December 2017 c1664. For details on developments in this area since then, see, Registers of beneficial ownership, Commons Briefing paper CBP8259, 8 February 2021. 285 CIOT press notice, 11 April 2016 85 Commons Library Briefing, 13 April 2021

In a debate on tax avoidance just after Mr Cameron’s statement to the House, Treasury Minister David Gauke said the following: The taskforce will report to my right hon. Friends the Chancellor of the Exchequer and the Home Secretary on the strategy for taking action, and we will update Parliament later this year. I stress that the taskforce will have total operational independence. If it finds people to prosecute, it will prosecute them. If it finds information about illegality, it can act on it. In addition, the independent FCA has written to financial firms asking them to declare their links to Mossack Fonseca. If the FCA were to find any evidence that firms have been breaking the rules, it, too, has strong powers to take punitive action.286 In June 2016 Edward Troup, HMRC Permanent Secretary, gave evidence to the Treasury Select Committee, and on this occasion Wes Streeting asked Mr Troup about the setup of the task force, and its progress to date. In response, Mr Troup made a couple of points: Although I would not understate the importance of this, I would not suggest that somehow [the leak] has given us information that we had not had before; we were already following up on 700 leads that, in some way, were linked to Panama before this dataset was published. The task force … currently has about 100 staff and, of those, around 70 are HMRC staff working on this project … We are not suddenly going to produce thousands of prosecutions that we would not otherwise have done ... the ICIJ, which actually holds the dataset—because the BBC and The Guardian have just had bits of information from the ICIJ—have a stated policy of not releasing information to government agencies. Although we have asked them for it, we do not have the dataset from the ICIJ, so I have to be a bit careful... There is progress. There are people on the ground from the task force in Panama. The Financial Conduct Authority is analysing the returns from 64 companies … with contacts with Mossack Fonseca. I am not going to either give an update on progress or say exactly what we expect and when, because it depends on the outcome of that work.287 The Chancellor Philip Hammond provided an update to the House on the work of the taskforce on 8 November 2016, in a detailed written statement;288 this is reproduced in full over the following two pages.

286 HC Deb 13 April 2016 c374. See also, PQ33514, 18 April 2016. On the impact for individuals with offshore accounts see, “Stormy skies”, Taxation, 18 August 2016. 287 Treasury Committee, Oral evidence: HMRC Executive Chair and Chief Executive, HC 232, 8 June 2016 Qs17-18 288 These details were also set out in a press notice published at the time. See also, PQ60460, 21 January 2017. 86 Tax avoidance and tax evasion

Panama Papers Taskforce Written statement HCWS247, 8 November 2016 In his statement to the House on 11 April 2016, the former Prime Minister David Cameron announced the creation of a cross-agency taskforce to analyse all the information that had been made available from the International Consortium of Investigative Journalists (ICIJ)’s Panama papers data leak. My right hon. Friend the Home Secretary and I now wish to update the House on the work of the taskforce. In its short existence, the taskforce has added greatly to the UK’s understanding of the evermore complex and contrived structures that are being developed to mask offshore tax evasion and economic crime. This intelligence will ensure that the UK remains uniquely placed to contribute to the international effort to uncover, and take action, on wrongdoing, regardless of how deeply hidden the arrangements are, as well as identify those jurisdictions where regulatory oversight requires improvement. We can today report that the taskforce has: - opened civil and criminal investigations into 22 individuals for suspected tax evasion - led the international acquisition of high-quality, significant and credible data on offshore activity in Panama—ensuring the important work of the taskforce was not delayed by the ICIJ’s refusal to release all of the information that it holds to any tax authority or law enforcement agency - identified a number of leads relevant to a major insider-trading operation led by the Financial Conduct Authority and supported by the National Crime Agency - identified nine potential professional enablers of economic crime—all of whom have links with known criminals - placed 43 high net worth individuals under special review while their links to Panama are further investigated - identified two new UK properties and a number of companies relevant to a National Crime Agency financial sanctions enquiry - established links to eight active Serious Fraud Office investigations - identified 26 offshore companies whose beneficial ownership of UK property was previously concealed, and whose financial activity has been identified to the National Crime Agency as potentially suspicious - contacted 64 firms to determine their links with Mossack Fonseca to establish potential further avenues for investigation by the taskforce - seen individuals coming forward to settle their affairs in advance of taskforce partners taking action. The taskforce’s respective partners will engage the relevant prosecuting authorities to bring any identified wrongdoing before the courts. The Government have also invested to develop their expertise in data and intelligence exploitation. This has ensured that Departments and agencies are well placed to forensically analyse massive-scale data of this kind, which are becoming ever-more frequently available. The taskforce has established a Joint Financial Analysis Centre (JFAC). Using the data and intelligence gathered from across the taskforce, the JFAC has developed cutting-edge software tools and techniques, ensuring the taskforce has access to the very best information from which to work. The proactive acquisition of data, alongside the establishment of the JFAC, has enabled the taskforce to identify a number of areas for further investigation across the full range of tax and economic crime, as well as links to organised crime, which will be the focus of its work over the coming months.

87 Commons Library Briefing, 13 April 2021

Taskforce members are present in Panama, using established relationships with the Panamanian authorities, and working with diplomatic colleagues, to offer support to analyse all the available data. Taskforce members have also worked with international partners as part of the Joint International Tax Shelter Information Centre to exchange information and intelligence as part of the wider international effort. More generally, the Government have introduced tough new powers, increased penalties and game-changing measures to tackle offshore and onshore tax evasion. In the summer 2015 Budget, the Government gave HMRC an additional £800 million to invest in compliance and tax evasion work. This is expected to recover £7.2 billion in tax by the end of 2020-21. This includes tripling the number of criminal investigations that it undertakes into serious and complex tax crime, focusing particularly on wealthy individuals and companies. The aim is to increase prosecutions in this area to 100 a year, by the end of this Parliament. The Government have also been pivotal in increasing global financial transparency in more than 100 countries, including British overseas territories and crown dependencies, by automatically sharing offshore account data. This additional data will help identify and pursue the tiny minority of tax evaders still hiding their money offshore. The Government aim to make the UK a more hostile place for those seeking to move, hide or use the proceeds of crime or corruption. In October 2015, the Government published the national risk assessment for money laundering and terrorist financing to better understand the risks and vulnerabilities for the UK. The action plan, published in April 2016, and the Criminal Finances Bill, introduced to Parliament in September, will significantly improve our capabilities to tackle money laundering and recover the proceeds of crime, including proceeds of corruption. The London anti-corruption summit earlier this year brought more than 40 countries together and resulted in a commitment to more than 600 actions. Since then, the UK has made real progress on its own commitments —our public register of beneficial ownership information is now live, the first G20 country to do so; and the National Crime Agency is working to get the new international anti-corruption co-ordination centre operational by next April.

At this time the National Audit Office published a report on HMRC’s strategy to collect tax from the wealthiest individuals. Part of this looked at HMRC’s approach to tackling offshore evasion, noting “HMRC expects that criminal investigations and sanctions will play a more prominent role in its response to offshore evasion in the future”: HMRC offered disclosure facilities with incentives for people to tell it about the tax they had evaded because it found it very difficult to identify assets held overseas. HMRC is now seeking to take a tougher approach to tackling offshore evasion by taking advantage of new sources of data and new powers that will be available to it. A common reporting standard is being introduced from 2017. This is an agreement by more than 100 countries to automatically exchange information on taxpayers. This should enable HMRC to better identify and investigate people with undisclosed assets and income offshore. In advance of this, the government has opened a new Worldwide Disclosure Facility, which will be a final opportunity for people to bring their tax affairs into line.289

289 HMRC’s approach to collecting tax from high net worth individuals, HC790, 1 November 2016 p44 88 Tax avoidance and tax evasion

An update on the work of the taskforce was given in answer to a PQ in October 2017: Asked by Kelvin Hopkins : To ask Mr Chancellor of the Exchequer, what progress his Department has made in its inquiry into the Panama Papers. Answered by: Mel Stride : Since the last update to Parliament in November 2016, HMRC has tripled the number of criminal and civil investigations linked to the Panama papers. To date, the work of the Panama Papers Taskforce has led to civil and criminal investigations into 66 individuals for suspected tax evasion, including high net worth individuals. As part of this HMRC has made four arrests; and carried out six interviews under caution. Taskforce partners have made three arrests in relation to an organised crime group suspected of a £125m conspiracy to defraud pension investors, tax evasion and associated money laundering. They have also identified leads relevant to a major insider trading operation, in relation to which a number of individuals have been arrested and are on bail pending further activity. UK law enforcement continues to interrogate and exploit Panama Papers related data, identifying previously unknown individuals, companies and properties, making links between them and providing intelligence and investigative opportunities. The systems used to launder money and evade tax through offshore structures are complex and highly sophisticated. The Joint Financial Analysis Centre and HMRC’s expert analysts are using leading-edge technology to unpick these structures and trace them back to individuals. This work is painstaking and forensic and there are no easy shortcuts. HMRC is not a prosecuting authority. Its focus is on building the strongest possible cases in order to secure convictions, and it expects to refer cases to the prosecuting authorities from autumn 2017 onwards.290 In a piece on HMRC’s approach to wealthy individuals published in March 2021, Andrew Sackey and Josie Hills (Pinsent Masons) argued that over this period there had been a “seismic shift in HMRC’s willingness to use criminal powers to deter wealthy non-compliance” and that the department’s fraud investigation service (FIS), established with the increase in funding announced in the Summer 2015 Budget, “has taken the strategic decision to deliver fewer mass-market criminal interventions, but to focus rather on a far greater deterrent impact and much needed returns for the Exchequer”: During 2019-20, the FIS charged 573 individuals with some form of tax fraud, but it also closed 21,000 civil files including 856 of their most serious code of practice 8 and 9 civil investigations … A recent freedom of information request revealed that 15% of those charged with tax offences last year were from the ‘wealthy’ segment. The result of this strategic focus on resourcing to risk, rather than chasing smaller and less impactful casework, is that the FIS protected or recovered more than £5bn in 2019-20 … In 2009-10, FIS’s predecessor (HMRC’s criminal investigations directorate) at its height, prosecuted no more than 165 individuals

290 PQ105360, 12 October 2017; see also, PQ118090, 12 December 2017 89 Commons Library Briefing, 13 April 2021

each year, protecting the revenue from associated losses believed to be in the region of around £150m. Most of those cases related to organised crime such as carousel or missing trader intra- community (MTIC) frauds, or commodities smuggling – predominantly alcohol and tobacco. In terms of actions against wealthy taxpayers, very little criminal action was attempted.291

5.3 Spring Budget 2017 In the 2016 Budget the Government announced that it would consult on a number of initiatives to mitigate the scale of avoidance and evasion, and launched four consultation exercises over the summer covering tax avoidance sanctions and deterrents; the DOTAS regime as it applies to indirect taxes; the penalty regime dealing with offshore evasion; and, the penalty regime dealing with VAT fraud.292 Spring Budget 2017 confirmed that provisions would be included in the Finance Bill 2017 in relation to each of these initiatives, as well as amendments to the ‘POTAS’ rules (the 2014 legislation affecting scheme promoters identified by HMRC as being especially aggressive and uncooperative).293 The estimated Exchequer impact of these measures was not especially large,294 and there was much less debate over their introduction compared with earlier initiatives, although the Government’s proposals to impose penalties on those ‘enabling’ avoidance, as initially drafted, were strongly criticised by the tax profession, leading to some important modifications. Strengthening tax avoidance sanctions and deterrents In the 2016 Budget the Government announced several further initiatives to tackle marketed tax avoidance, stating it would “consider the case for clarifying what constitutes reasonable care in avoidance penalty cases”, and “consider options to address the issue of those who “enable” tax avoidance schemes.”295 On 17 August HMRC launched its consultation; responses were invited by 12 October. On the first issue, the consultation document explained HMRC has faced considerable difficulties to establish a failure to take reasonable care involving complex avoidance arrangements: first, because of the nature of the advice that taxpayers will have relied upon, when deciding to invest in an avoidance scheme that has proved faulty … Many tax avoiders argue that they have taken reasonable care and that their tax return was made on a reasonably arguable view of

291 “No hiding place”, Taxation, 25 March 2021 292 Budget 2016, HC 901, March 2016, para 2.145 (VAT fraud), para 2.203 (requirement to correct), and para 2.204 (marketed tax avoidance) 293 Overview of Tax Legislation & Rates, March 2017 para 1.38-1.42 For an overview of the issue at this time see, Chartered Institute of Taxation, The state of play on tax evasion and avoidance, 2 March 2017. 294 Spring Budget 2017, HC 1025, March 2017 (Table 2.1-item 22; Table 2.2 – item p). 295 Budget 2016, HC 901, March 2016, para 2.204 90 Tax avoidance and tax evasion

the law as it applied to the transactions they entered into. They contend this is based on what they were told by the person who promoted the avoidance, by an Independent Financial Adviser, personal tax accountant, or by any other person in the supply or facilitation chain, i.e. by an enabler of the avoidance arrangements they used … To support this they often rely on marketing or other material provided by those marketing it, or generic, plausible-sounding, statements from an “eminent QC”, which they have also been given by those in the supply chain, endorsing the arrangements and their effectiveness. In the worst examples, advice offered to users is very limited in quality, scope and relevance. Generic marketing material is sometimes presented as financial or tax advice, when in fact it has not been written or considered by anyone with the requisite knowledge or experience.296 … and second, because the burden of proof rests with HMRC: This means there can be little incentive for a tax avoider to co- operate and they may frequently try to frustrate HMRC investigations by withholding basic information about the arrangements. They may need to seek this information from the promoter who may also be disinclined to cooperate. When contesting that they have taken reasonable care, they might be slow to produce supporting evidence, or submit incomplete information. This can make it difficult to identify whether a penalty is appropriate. These tactics can lead to drawn out and more costly investigations, prolonging the resolution of avoidance disputes for all parties.297 In turn the consultation proposed several tests to determine whether a taxpayer had, or had not, taken reasonable care, putting the burden of proof on the taxpayer – while the imposition of a penalty would be subject to certain existing safeguards regarding penalties. Turning to ‘enablers’, the consultation document explained that the term “encompasses more than those who design, promote and market avoidance. It includes anyone in the supply chain who benefits from an end user implementing tax avoidance arrangements and without whom the arrangements as designed could not be implemented.”298 The main driver to enablers actively encouraging taxpayers to invest in dubious schemes has been that they “do not feel affected by the suite of sanctions and deterrents designed to influence avoider behaviour”: Indeed, some judge that the business and reputational risks associated with HMRC defeating avoidance arrangements they have helped enable are outweighed by the financial rewards to them. There can be few downsides to their continued involvement with such arrangements, notwithstanding the hardship which may be faced by their clients.299

296 Strengthening tax avoidance sanctions and deterrents: discussion document, August 2016 para 3.9-11 297 op.cit. para 3.14-5 298 op.cit. para 2.7 299 op.cit. para 2.10. The consultation document provides two case studies to illustrate the problem (see p9). 91 Commons Library Briefing, 13 April 2021

As a solution to this problem, the consultation proposed a new penalty to be paid by anyone who had enabled tax avoidance that HMRC was successful in defeating. “It should penalise everyone in the supply chair who has enabled avoidance arrangements which are defeated.” As noted briefly above, Budget 2016 included the introduction of new civil penalties for those enabling offshore evasion, and the consultation proposed drawing on the criteria employed in this case: The 2015 consultation “Tackling offshore tax evasion: Civil sanctions for enablers of offshore evasion” outlined a number of ways in which an individual or business might enable someone to evade tax through the use of offshore structures. They include: • Acting as a “middleman”– arranging access and providing introductions to others who may provide services relevant to evasion • Providing planning and bespoke advice on the jurisdictions, investments and structures that will enable the taxpayer to hide their money and any income, profit or gains • Delivery of infrastructure – including setting up companies, trusts and other vehicles that are used to hide beneficial ownership; opening bank accounts; providing legal services and documentation which underpin the structures used in the evasion such as notary services and powers of attorney • Maintenance of infrastructure – providing professional trustee or company director services including nominee services; providing virtual offices, IT structures, legal services and documentation which obscures the true nature of the arrangements such as audit certificates • Financial assistance – helping the evader to move their money or assets out of the UK, and/or keep it hidden by providing ongoing banking services and platforms; providing client accounts and escrow services; moving money through financial instruments, currency conversions etc. • Non-reporting – not fulfilling their reporting, regulatory or legal obligations, which in itself helps to hide the activities of the evader from HMRC Many of these descriptions apply equally to tax avoidance. With this in mind, we propose developing a definition of enabler based on the broad criteria used for the offshore evasion measure but specifically tailored to the avoidance supply chain and ensuring that appropriate safeguards are included to exclude those who are unwittingly party to enabling the avoidance in question.300 Initial responses from the tax profession expressed considerable concern about the potential scope of the new penalties for tax enablers, though tax justice campaigners welcomed the proposals.301 John Cullinane, tax policy director at the Chartered Institute of Taxation argued, “it is far

300 op.cit. para 2.15, para 2.12-4 301 “HMRC gets ‘nasty’ in tax clampdown”, Financial Times, 18 August 2016. See also, “The proposals targeting tax avoidance enablers”, Tax Journal, 2 September 2016. 92 Tax avoidance and tax evasion

from clear that a definition drafted for ‘enabling’ a criminal offence will be appropriate for defining an activity which, while undesirable in the eyes of most people, is legal, provided all appropriate disclosures are made to the tax authorities”: “We are concerned about a scenario where a taxpayer goes to their tax adviser for advice on risks attached to participating in a scheme, receives appropriate advice setting out these risks and the likelihood of the scheme being defeated, but decides to join the scheme despite this. It would be extremely harsh to penalise a tax adviser in this scenario where all the tax adviser has done is advise the taxpayer on the law as it stands. “It is important to be aware that court cases on tax matters are not only about avoidance. Often there are simply disagreements between HMRC and taxpayers about how the rules operate and the courts are asked to adjudicate. Losing a case of this kind in the courts should not be seen as tax avoidance by the taxpayer or as enabling avoidance by their advisers.”302 An editorial in the Financial Times argued, “taking the battle to the supply side of the tax avoidance industry is sensible” though “the Government should take care to ensure that it does not unreasonably hit defensible tax planning”: Tax rules are not ultimately set in aspic. Avoidance is generally defined as creating a tax break that Parliament never intended. Yet what legislators mean at a particular time can change as circumstances evolve.303 Writing in the Tax Journal, Peter Vaines, a member of Field Court Tax Chambers, argued that “it is simply unacceptable, in a civilized society, for a government department to penalise professional advisers for advising on the law”: [HMRC] has a genuine problem which deserves to be addressed, but it is important not to get carried away. Indeed, HMRC might usefully reflect on whether it should be subject to the same penalties if it was unsuccessful in a challenge to a claim by a taxpayer to a tax relief or deduction – and if not, why not.304 Writing in Taxation, Fiona Fernie, partner at Pinsent Masons, argued that the proposed definition of defeated tax avoidance “is incredibly wide-ranging and could end up capturing conventionally accepted tax planning.”305 In their response to the consultation, the Tax Law Review Committee argued, “the proposals, if adopted in anything approximating their current form, carry a real risk of a wholesale reduction in the numbers of onshore tax professionals who presently provide responsible and accurate professional advice to taxpayers”: The Committee does not doubt that popular sentiment has expressed considerable objection to many of the tax avoidance

302 CIOT press release, ‘Enabling’ tax avoidance – legislation must draw distinction between promoting avoidance and advising on the law, 17 August 2016 303 “Editorial: May flexes her muscles over tax avoidance”, Financial Times, 18 August 2016 304 “Comment: Deterring tax avoidance”, Tax Journal, 9 September 2016 305 “Stronger sanctions”, Taxation, 1 September 2016. See also, CIOT press notice, Tax experts call for new penalties to target deliberate promotion of avoidance rather than commercial advice, 12 October 2016. 93 Commons Library Briefing, 13 April 2021

arrangements indulged in by the “persistent minority”. It recalls, however, that a swathe of measures have been enacted in recent years designed to identify, discourage, shame and penalise tax avoiders and those who promote and market tax avoidance arrangements. These measures are not all fully operational yet, and there has been no sensible opportunity to assess their longer-term impact on the tax avoidance industry, in particular the type of avoidance indulged in by “the persistent minority” supposedly targeted by these proposals. The need for further measures is therefore untested and unproven. The current measures in particular are unjustified by any evidence of an on-going widespread problem necessitating far reaching, untargeted and potentially damaging measures such as those currently proposed. In particular, the Consultative Document fails to consider and identify adequately (or indeed at all) the type of behaviour and the nature of the avoidance in which “the persistent minority” engage, which is the supposed target of the proposal. It therefore fails to distinguish “the persistent minority” from the vast majority of responsible tax professionals without whom the tax system, commercial business activity and the organisation of individual financial affairs could not function satisfactorily. In effect, all are inappropriately tarred with the same brush. We do not imagine that the issues to which we draw attention in this submission are intended by government or HMRC. In the Committee’s view, however, they would be an inevitable outcome of the proposal if enacted in its current form. In short, the scope of the proposal and the targeting of the issues created by “the persistent minority” require a more considered, careful and targeted approach than is evidenced by the Consultative Document. 306 Writing in his blog barrister Jolyon Maugham argued that the action of enablers represented a “very real” problem, and the consultation set out “very real solutions” though “they may well go too far.” His description of the incentives for the unscrupulous enabler is worth reproducing: The real issue is this. A tax advisor gets his fee for telling you that you can declare 10 rather than 100. He’s in the money from the start. And if you should happen to sue him later, he might have wound himself up, or he might shelter behind the advice given by a barrister, or he might point to the small print in the scheme documentation telling you that (despite the fact he’s charging you a fee) you must take your own tax advice. So he gets handsome reward and very often without any personal accountability for the consequences. This state of affairs can encourage abysmal behaviour by highly paid professionals.307 In December the Government confirmed it would proceed with this reform, but with substantive modifications, publishing draft legislation

306 Strengthening Tax Avoidance Sanctions and Deterrents: a discussion document - Response to Consultation, October 2016 pp1-2. The Committee was established by the IFS in 1994, and, in its words, “represent a broad cross-section of informed opinion from industry and commerce, the judiciary, academia, the professions and political and public life.” 307 “Tax avoidance penalties”, Waiting for Godot blog, 17 August 2016 94 Tax avoidance and tax evasion

and an impact assessment – which gave a short summary of both measures: Legislation will be introduced in Finance Bill 2017 to provide for a penalty on those who enable tax avoidance which is later defeated. Key elements of the regime will: • define who is an ‘enabler’ to draw the distinction between those who design, market or otherwise facilitate avoidance arrangements implemented from those who solely advise, report or otherwise provide opinion on such arrangements and whose advice does not result in any amendment to the arrangements or any resulting arrangements • ensure that those who are brought within the meaning of enabler through unwittingly becoming involved in the arrangements are excluded from that definition • describe the types of arrangements which, if defeated, bring those who enabled those arrangements within scope for penalties • describe how the amount of any penalty is calculated and assessed and provide a right of appeal against that assessment Legislation will also be introduced in Finance Bill 2017 to clarify what constitutes the taking of reasonable care in relation to the application of the existing penalty regime in Schedule 24 to FA2007, in relation to inaccuracies arising in a person’s tax return from the defeat of tax avoidance arrangements they have entered into. The new legislation will change the regime to presume that a person has been careless unless they can prove they have taken reasonable care and describe circumstances and events which are explicitly stated not to represent taking reasonable care in cases of defeated avoidance. Examples of such circumstances and events include (but are not limited to): • advice addressed to a third party or without reference to the taxpayer’s specific circumstances and use of the scheme • advice commissioned or funded by a party with a direct financial interest in selling the scheme or not provided by a disinterested party • material produced by parties without the relevant tax or legal expertise/experience to advise on complicated tax avoidance arrangements, typically this would be the sort of material used to market the arrangements and would not amount to advice setting out the legal options necessary for a potential user to assess the efficacy of the scheme or the risks involved.308 In its summary of the responses, HMRC noted, there had been “strong support for the [proposal for penalties on enablers] from some … but there were also strongly expressed concerns from others that, if

308 Strengthening sanctions and deterrents for tax avoidance; TIIN, 5 December 2016 95 Commons Library Briefing, 13 April 2021

inappropriately targeted, the measure could inhibit genuine commercial arrangements and impartial advice.”309 In the light of this the Government announced that it would amend its approach to achieve “the original aim of tackling the enablers of tax avoidance schemes while the vast majority of professionals providing advice to their clients on genuine commercial arrangements have nothing to fear”: While there was general agreement that the proposed description of enablers and all relevant classes or groups of persons were captured, there was some concern that there should be a clear distinction in applying any new sanction between tax planning, tax avoidance and tax evasion. There was also concern that the proposed safeguards would not go far enough. This was particularly pertinent to those who are acting within their professional capacity (and already subject to other professional conduct regulations) and merely giving ‘second opinion’ advice, or those whose advice/service may unwittingly be caught up with wider avoidance arrangements. A number of respondents commented that the rules would not capture those who could easily re-establish their business/services offshore and so would not capture the “persistent minority” the measure is targeted at ... Government response The government noted the views of everyone who responded. The measure will cover all those in the avoidance supply chain. The regime will describe those who enable avoidance and distinguish them from those who simply provide second opinion advice to clients on arrangements designed or enabled by others. The government also recognises that the definition of an enabler needs to be well-targeted to ensure those who are unwittingly within the meaning of enabler, or whose advice about arrangements included a clear recommendation that they should not be proceeded with, are excluded and will provide for this in the draft legislation. The consultation suggested bringing an enabler within scope for a penalty when the tax avoidance they had enabled had been defeated, and not to link an enabler’s penalty with the final penalty position of the user. Most respondents considered the scope was appropriate in relation to aggressive avoidance, but felt there was not enough emphasis to distinguish evasion from avoidance. Responses also suggested more clarity was needed in relation to key terms, particularly “defeated arrangements”, and the type of activities that would place a person firmly within scope as an enabler of tax avoidance. Some respondents held strong views that the enabler ought only to face a penalty in circumstances when the scheme user would also do so. Many of those responding also sought clarity regarding when the policy would apply from. Government response The government noted these views. The rules will be prospective. They will apply to actions taken by the enabler on or after Royal Assent to Finance Bill 2017, so that a person enabling avoidance will be fully aware that they are in scope of a penalty. The draft legislation will set out the

309 Strengthening Tax Avoidance Sanctions and Deterrents - Summary of responses, 5 December 2016 para 1.7-8 96 Tax avoidance and tax evasion

arrangements which, if defeated, bring an enabler within scope for a penalty. The government does not consider that an enabler should face a penalty in relation to defeated avoidance only where the user does so. The conditions for a penalty to apply to the user are, necessarily, different from those for enablers. It may well be that a user, having been able to show that they had taken reasonable care in making their tax return, or being subject to one of the other safeguards in that regime, would not face a penalty, but where it may be appropriate for an enabler to face a penalty by reference to their actions as an enabler of those defeated arrangements.310 The proposed changes to the ‘enablers’ regime were welcomed by stakeholders. In a press notice CIOT tax policy director John Cullinane gave his reaction: “It is pleasing to see that after a wide ranging consultation with the CIOT and other stakeholders, the government has taken on board our concerns and recognises that the vast majority of tax professionals providing advice on commercial arrangements are in no sense ‘enabling tax avoidance’ but are simply helping their clients to understand as well as comply with their tax obligations. “It is crucial that they can continue to do so without being exposed to this new penalty. “The moves outlined in today’s draft legislation present a measured and balanced approach towards tackling those who enable tax avoidance while ensuring that the interests of the overwhelming majority of agents who provide genuine professional advice to their clients are protected. “By defining ‘abusive tax arrangements’ around the principles of the General Anti-Abuse Rule (GAAR) – which asks whether entering into or carrying out the tax arrangements could have been a reasonable course of action – the proposals are better focussed on the small minority of advisers who profit from devising, marketing and facilitating aggressive tax avoidance schemes.311 Writing in the Tax Journal on the draft provisions, Richard Woolich and Geoffrey Tack, both at DLA Piper, concluded, “it is clear that the Government has listened and advisers are now much less likely to fall foul of these rules, giving bona fide advice”: The government was clearly impressed by the extent of responses and has published a lengthy list of respondents. There are some impressive names in the list, from well-known law firms and accountancy practices to the Law Society and the Bar Council. One suspects that, with respondents of such calibre, the government was really made to think about the pending penalty regime against enablers and has listened to the comments about its original proposals in the consultation exercise. This process may be a lesson for future opposition to unwelcome proposed legislation. Yet, essentially, the government will persevere with its crackdown on the production and selling of abusive tax avoidance

310 op.cit. para 1.11, paras 2.3-7 311 CIOT press release, Professional Body welcomes increased focus of government action on ‘enablers’ of tax avoidance, 5 December 2016. See also, “Tax avoiders remain in HMRC’s line of fire”, Financial Times, 10 December 2016. 97 Commons Library Briefing, 13 April 2021

schemes and target in the Finance Bill 2017 those who make profit from giving aggressive tax advice which is shown to be wrong.312 In the 2017 Budget the Government confirmed it would introduce both measures, with certain amendments to the legislation as drafted: Following consultation, the enablers legislation has been revised to provide further detail of when and how the General Anti Abuse Rule (GAAR) Advisory Panel will consider enabler cases. Further changes have been made to apply the enablers regime to arrangements that seek to avoid NICs, to make consequential changes to the Promoters of Tax Avoidance Scheme legislation and to provide further detail regarding when enablers will be named. Minor amendments have also been made to further improve the clarity and targeting of both the legislation for enablers and reasonable care. The changes relating to reasonable care come into effect at Royal Assent and apply to inaccuracies in documents relating to tax periods which begin on or after 6 April 2017. The penalty for enablers will apply prospectively to enabling activity after Royal Assent.313 It was estimated that these changes would raise £50m in 2018/19, falling to £15-£20m a year in later years.314 ‘DOTAS’: indirect taxes – reform and extension of scope Budget 2016 announced it would “consult during the summer on updating the VAT Disclosure of Schemes Regime (VADR), including by extending coverage to other indirect taxes and by alignment with the Disclosure of Tax Avoidance Schemes regime.”315 HMRC launched a consultation the following month; as this explained, it was HMRC’s view that the disclosure regime as it applied to VAT was “no longer fulfilling its policy intentions”: VADR has been an important component of HMRC’s fight against VAT avoidance, allowing HMRC to identify avoidance patterns and risks at an early stage and plan their responses accordingly. A large number of disclosures were made in the early years of the regime, but, unlike DOTAS, VADR has not been significantly updated since it was introduced. The number of disclosures has declined, the regime has not kept pace with changes in the VAT avoidance landscape and it is no longer fulfilling its policy intentions. It is important that it is reviewed to make sure it operates effectively to protect the Exchequer and to discourage the avoidance of VAT. VADR currently requires disclosure to be made by those who use an avoidance scheme. This is in contrast to DOTAS where, for the most part, it is promoters of tax avoidance schemes who are

312 “Finance Bill 2017: Enablers of defeated avoidance schemes and penalties”, Tax Journal, 19 January 2017. See also, “Turning up the heat”, Accountancy, April 2017 313 HMT, Overview of Tax Legislation & Rates, March 2017 para 1.41. Provision to this effect was made by ss64-5 of the Finance (No 2) Act 2017. The provision was the subject of a brief debate at the Committee stage of the Bill: PBC, Fifth Sitting, 24 October 2017 cc140-2. 314 Spring Budget 2017, HC 1025, March 2017 (Table 2.1-item 22). 315 Budget 2016, HC 901, March 2016, para 2.145 98 Tax avoidance and tax evasion

required to disclose them to HMRC. Those promoters then have ongoing obligations to provide information to both users of their schemes and to HMRC. And users have to include details of disclosed schemes in their tax returns.316 In December HMRC published a summary of responses it had received. In general there was support for the principle for reforming VADR: While there was general agreement from respondents with the proposed changes to VADR, a small number of respondents considered that the government had not made a sufficiently strong case for change. One was concerned that the proposed revisions would increase administrative burdens rather than decrease them. Only one respondent suggested an alternative approach, to simply require earlier disclosure under the existing structure. Government response The government is grateful for the views expressed but does not accept that the proposed revised structure for VADR would result in any significant increase in burdens for customers. In principle, the change should reduce burdens as the focus for compliance shifts from all taxpayers to a much smaller number of promoters. However, the government will continue to ensure any administrative load is proportionate when drafting the regulations. … Respondents … agreed that the DOTAS rules on who is a promoter and when a scheme user has to disclose an avoidance scheme provided a suitable model to apply in VADR. One respondent suggested that, due to the nature of VAT avoidance, most schemes do not involve a promoter and so the relevance of the question is moot. Some respondents stated that due to the often very short timescales in VAT between an intermediary being consulted about arrangements and the relevant transactions taking place, the time allowed for promoters to notify HMRC about notifiable proposals or arrangements should be longer than provided for under DOTAS. Government response The government is grateful for these views and considers the DOTAS rules on who is a promoter and when a scheme user has to disclose an avoidance scheme can be appropriately applied to VADR.317 Respondents were less convinced of the need to extend VADR to other indirect taxes, though the Government took the view that this was an important measure to improve HMRC’s assessment of the scale of avoidance across the tax system: Views were mixed about whether the scope of VADR should be extended to include other indirect taxes. A narrow majority were in favour or could see no reason to object to the proposal, but others considered such a move would impose unnecessary burdens on taxpayers for little discernible benefit to HMRC. Government response It is currently difficult for HMRC to form a clear view of the risks of avoidance in these taxes and the government therefore believes it is important that they be brought within the scope of VADR. There will be no extra burden on those who do not use reportable tax arrangements and so the

316 Strengthening the Tax Avoidance Disclosure Regimes for Indirect Taxes and Inheritance Tax, April 2016 para 1.8-9 317 Strengthening the Tax Avoidance Disclosure Regimes for Indirect Taxes and Inheritance Tax: Summary of responses, 5 December 2016 para 2.2-6 99 Commons Library Briefing, 13 April 2021

government does not believe this extension would be disproportionate.318 At this time HMRC published draft legislation and an impact assessment of reforming VADR; the latter explained how the disclosure regime would be reformed: This measure replaces the VAT regime for disclosure of avoidance, which currently only covers VAT. It moves the responsibility for disclosing VAT avoidance schemes to HM Revenue and Customs (HMRC) from scheme users to scheme promoters. It also widens the scope of the disclosure regime to include all indirect taxes. The measure will require promoters of indirect tax avoidance schemes to provide details of schemes at the earliest of: the date the promoter first makes a firm approach to another person about the proposed scheme; the date the proposals are first made available for implementation by another; or the date the promoter first becomes aware of any transaction which forms part of the scheme. In some circumstances where arrangements or proposed arrangements are substantially the same as arrangements already notified to HMRC, the promoter will not be required to make a further disclosure. If a person uses a tax avoidance scheme the promoter of which does not belong in the UK, or there is no promoter of the scheme, the user of the scheme will be required to disclose it to HMRC. When a promoter notifies HMRC of details of a scheme, HMRC will issue a reference number and the promoter must notify their clients of this number. The promoter must provide HMRC with certain details about these clients; those details will be contained in Regulations. The client will be required to notify HMRC of their use of a scheme, and the scheme number.319 It was not anticipated that this measure would have an Exchequer impact. In the 2017 Budget the Government confirmed it would proceed with these changes, to take effect from 1 September 2017.320 Offshore evasion: requirement to correct In the 2016 Budget the Government announced that as part of the Finance Bill 2017 it would “introduce a new legal requirement to correct past offshore non-compliance within a defined period of time with new sanctions for those who fail to do so.”321 HMRC published a consultation document in August which set out the rationale for this measure: The introduction of a new requirement to correct (RTC) and tougher penalties for a failure to correct (FTC) aims to send a strong message that there is a step change in HMRC’s approach to offshore tax compliance. The measure will introduce an obligation for taxpayers to put past affairs in order and strongly penalise those who do not meet this obligation. In doing so, the

318 op.cit. para 3.2-3 319 Strengthening the Indirect Tax Avoidance Disclosure Regime: TIIN, 5 December 2016 320 Overview of Tax Legislation & Rates, March 2017 para 1.38. Provision to this effect was made by s66 of the Finance (No 2) Act 2017. See also, HMRC, Notice 799: disclosure of tax avoidance schemes for VAT and other indirect taxes, January 2018. 321 Budget 2016, HC 901, March 2016, para 2.203 100 Tax avoidance and tax evasion

measure will drive taxpayers with offshore interests to review their affairs to either: • assure themselves that their offshore interests have been treated correctly for tax purposes, or • to identify the incorrect tax treatment and put it right by notifying HMRC to ensure the appropriate tax, interest and penalties can be charged. We believe the RTC proposal and increased sanctions for failing to correct set out in this document will provide a strong incentive for taxpayers to review their offshore affairs and come forward to put them in order before HMRC receives the full Common Reporting Standard (CRS) data.322 Those who do not put their affairs in order will face the tougher failure to correct sanctions for any existing non-compliance and could also face … significantly tougher sanctions … for any offences in subsequent years. The RTC period will end on 30 September 2018 by which point HMRC will be receiving CRS data from all those committed, which will allow it to identify and pursue those who have not come forward to regularise their affairs. HMRC has provided a number of opportunities for taxpayers to disclose offshore issues in the past. These were appropriate for periods when HMRC had relatively little data on UK taxpayers’ offshore interests and they were successful with over 59,000 people putting their affairs in order. These activities and other offshore work have raised over £2.9bn. In the future HMRC will receive significantly more data and any taxpayers who have not taken advantage of previous opportunities to disclose and do not comply with the new RTC should face much stiffer penalties. The RTC will introduce much tougher penalties and will also provide a strong legal underpinning to drive taxpayers to regularise their offshore affairs.323 In December the Government published details of the responses it had received; there had been broad support for this initiative, though many stakeholders had “commented on the need for a significant communications campaign to ensure all taxpayers are aware of the requirement”: Stakeholders and respondents broadly supported the initiative, its scope and definition and many said they would like to see a single and simplified set of sanctions for tackling offshore tax evasion. Many stakeholders commented on the need for a significant communications campaign to ensure all taxpayers are aware of the requirement, particularly those where any non-compliance has not been deliberate. This is seen as an important part of encouraging taxpayers to come forward where they may not associate their activities with evasion ... Many respondents welcomed a failure to correct penalty model that simplifies the currently complex application of offshore penalties. However many respondents wanted to ensure sanctions

322 [As noted, the CRS is a multinational agreement for the automatic exchange of taxpayer information. The consultation paper noted exchanges would start in 2017 for 54 early adopters, with all other participants exchanging by 2018.] 323 Tackling offshore tax evasion: a requirement to correct, August 2016 para 3.1-3. See also, HMRC press notice, Tough new sanctions announced for offshore tax evaders, 24 August 2016 101 Commons Library Briefing, 13 April 2021

retain some flexibility with recognition of taxpayer behaviour and co-operation. Some respondents commented on the need for any toughened sanctions to retain sufficient incentive for taxpayers to come forward and disclose … Government response … The government is determined to ensure the toughest sanctions are there for those that evade taxes, whilst providing a period for taxpayers to review their offshore interests and come forward to clear up any past issues and therefore avoid the possibility of the heavier penalties. The requirement will also include reasonable excuse provisions that ensure that, where the taxpayer has good reason for not having corrected, they will not face the new higher penalty. We are aiming to provide a clear and unambiguous message that acting early is vital and believe the proposed structure of the RTC and associated sanctions do that. The incentives to come forward and correct are clear. A number of respondents also raised the issue of the incentive for taxpayers to come forward following the requirement to correct period, stating that the failure to correct penalty would not provide any incentive to disclosure if a taxpayer had not corrected during the window. However the penalty range proposed provides this incentive. If taxpayers come forward after the correction period, the starting point for the penalty would be 200%, but disclosure and cooperation mean it could be halved to a minimum penalty of 100% of the tax that has not been corrected. The government will also ensure that the criteria for reducing the penalty from 200% will take account of whether the person comes forward voluntarily and the seriousness of the offence. A potential reduction in penalties from a maximum of 200% to 100% is a significant incentive.324 The Government published draft legislation and an impact assessment of this new legal requirement, which explained how this provision would work in practice: Taxpayers within scope of the RTC will be those who have not declared the right amount of UK tax in respect of offshore interests on or before 5 April 2017. These will be taxpayers who have done one of the following in respect of offshore tax: • failed to notify chargeability • failed to make and deliver a return • delivered an inaccurate document (for example, a return) to HMRC In addition the failure must relate to Income Tax, Inheritance Tax or Capital Gains Tax and not have been corrected on or before 5 April 2017. Taxpayers within scope of the RTC are required to correct that position on or before 30 September 2018 by providing the appropriate information to HMRC. For example, a taxpayer who delivered an inaccurate return to HMRC by omitting a source of offshore income will be required to provide sufficient information

324 Tackling offshore tax evasion: Requirement to Correct - Summary of Responses, 5 December 2016 para 2.3-11 102 Tax avoidance and tax evasion

to HMRC to allow that inaccuracy to be corrected by HMRC assessing the under-declared tax. Where a taxpayer fails to correct the offshore tax non-compliance on or before 30 September 2018 the legislation will introduce a new sanctions for that failure. The new sanctions: • are a tax geared penalty of between 100% and 200% of the tax not corrected - penalties will be reduced within this range to reflect the taxpayer’s cooperation with HMRC, including whether they came forward unprompted to tell HMRC of their failure • are an asset based penalty of up to 10% of the value of the relevant asset would apply in the most serious cases, and involved over £25,000 in any tax year • will have the ability for HMRC to name those who have failed to correct in the most serious cases, and where over £25,000 tax per investigation is involved • will adopt the enhanced penalty for asset moves of 50% of the amount of the standard penalty, which would apply if HMRC could show that assets or funds had been moved to attempt to avoid the requirement to correct • will have no penalty where the taxpayer has a reasonable excuse for failing to correct the position. HMRC will also have the option of, exceptionally, charging the existing penalties instead if that is appropriate.325 HMRC’s impact assessment also noted that taxpayers affected by the RTC were likely to be of above average wealth, though “there is no data to identify the size of this group.” In the 2017 Budget the Government confirmed that it would introduce this measure, subject to certain amendments to the legislation as originally drafted: This new “requirement to correct” is expected to come into force when the Finance Bill 2017 receives Royal Assent and will apply to all taxpayers with offshore interests who have not complied with their UK tax obligations as at 5 April 2017 … The draft legislation will be revised to ensure the reasonable excuse provision does not apply where advice is received from an adviser who is not independent. This reflects the government's response on this point in [its response to the consultation] published on 5 December 2016.326 At this time it was estimated this measure would raise £10m in 2017/18, rising to £70m by 2021/22.327 VAT: penalty charges in fraud cases In the Budget 2016 the Government announced it would consult on a new penalty for participating in VAT fraud, and subject to this

325 Tackling offshore tax evasion: requirement to correct, 5 December 2016. See also, HMRC press notice, New Year brings in new penalties for enablers of offshore tax evasion, 1 January 2017. 326 Overview of Tax Legislation & Rates, March 2017 para 1.42 327 Autumn Statement, Cm 9362, November 2016 para 4.53, Table 2.1 – item 28. Provision to this effect was made by s67 of the Finance (No 2) Act 2017. See also, HMRC, Requirement to Correct tax due on offshore assets, August 2018. 103 Commons Library Briefing, 13 April 2021

consultation “the intention is to legislate in Finance Bill 2017.”328 HMRC’s consultation document was published in September; as this explained, at present, when issuing a penalty for a business’ failure to properly account for VAT, HMRC has to decide if the business’ failure is ‘deliberate’ or ‘careless’, a factor that does not apply when charging penalties for serious VAT fraud: The knowledge principle and Schedule 24 penalties It is settled case law329 that businesses are denied the right to reclaim VAT as input tax when they know or should have known that their transactions are connected with VAT fraud. Such businesses are regarded in law as participants in the fraud. This approach is often referred to as the knowledge principle … HMRC applies this principle successfully to tackle MTIC (Missing Trader Intra-Community) fraud and to a lesser extent other VAT frauds. When applying the knowledge principle to individual cases, it is difficult for HMRC to separate evidence of ‘knowledge’ from evidence that the business ‘should have known’ of a connection with VAT fraud. So in most instances we issue a decision covering both eventualities. However the relevant civil penalties legislation (Schedule 24 of FA2007) operates on a different basis. This requires HMRC to decide, when issuing the penalty, whether the business’s non- compliance is “deliberate” or “careless”. This determines the level of the penalty. HMRC cannot choose a combined careless and deliberate penalty: we must choose one or the other. This misalignment between these regimes causes practical difficulties. A ’deliberate’ penalty implies we think the customer has actual knowledge, whilst a ‘careless’ penalty implies we think the customer ‘should have known’ of the connection with fraud. Having to make this distinction in behaviour in order to issue a penalty affects HMRC’s ability to defend the underlying decision on the primary fraud issue against any appeal.330 This misalignment has created practical difficulties for HMRC in tackling VAT fraud: HMRC’s current approach – delay issuing the penalty To address this, our current practice is to wait until after the VAT case has been finalised, including any litigation, before issuing the Schedule 24 penalty. This approach causes two problems: • Firstly, it opens up the opportunity of a second round of litigation, this time against the penalty. Any challenge to the behavioural aspect of the penalty is effectively a relitigation of the findings in the underlying VAT appeal. This adds to the costs for HMRC, appellants and the courts. ‘Knowledge principle’ cases are already costly in time and money due to the volume of evidence required. • Secondly, the delay in issuing the penalty increases the risk that, by the time the penalty is issued, it will be ineffective.

328 Budget 2016, HC 901, March 2016, para 2.145 329 see Axel Kittel v Belgian State v Recolta Recycling SPRL (cases C-439/04 and C-440/04) 330 Penalty for participating in VAT fraud, September 2016 para 2.5-10 104 Tax avoidance and tax evasion

This is because the monies to pay the penalty may have been dispersed by those involved in the fraud. Penalty for participating in VAT fraud To address the issue we are proposing a new penalty that aligns with the knowledge principle. The key design features are a penalty that: • can be issued at the same time as the knowledge principle decision in the underlying VAT fraud case; and • does not rely on the distinction between whether a business or individual knew or should have known of the connection with VAT fraud.331 In its summary of responses to the consultation, published in December, HMRC stated that, “a majority of respondents were in favour of introducing a penalty for participating in VAT fraud at a ratio of around three to one” though “there were different views about the design options with no clear preference.” Further to this, Most respondents favoured applying the new penalty to company officers whose companies participated in VAT fraud, although some wished to restrict this application to circumstances where the company officer could reasonably be held culpable. Others wished to restrict the application of the penalty to company officers to cases where they had actual knowledge of fraud. Most respondents favoured naming businesses that knew or should have known that their transactions were connected with VAT fraud.332 In the light of these responses, the Government announced it would introduce this new penalty: Having carefully considered the responses to this consultation, the government has decided to proceed with the introduction of a penalty for participating in VAT fraud. It considers that there is a strong case for having a new penalty aligned with the knowledge principle. This will help streamline cases and strengthen HMRC’s ability to tackle serious VAT fraud. The government also recognises the deterrent benefits of a strengthened penalty regime in this area. The government recognises the concerns about the application of the penalty to cases where participants “should have known” that the transactions were connected with fraud. This concept is quite narrowly defined in case law. Some of the respondents, perhaps understandably, were unaware of the scope of the current knowledge principle and how this term has been defined by the courts. HMRC will be applying the penalty in the context of the existing case law and want to reassure respondents that the new penalty cannot apply to cases where businesses could not have known that their transactions were connected with fraud. A few respondents suggested, as an alternative, that the existing error penalty regime could be run in the alternative (i.e. deliberate or careless) as a way of solving the misalignment with the knowledge principle. HMRC looked into this but came to the conclusion that it is not a practical policy solution or legally

331 op.cit. para 2.11-12 332 Penalty for participating in VAT fraud: summary of responses, 5 December 2016 para 2.1-3 105 Commons Library Briefing, 13 April 2021

possible. It would not solve the current problem of misalignment between the two regimes. HMRC would still be required to state its preferred case for the error penalty, either at the point of issuing the penalty (in order to notify the business of the rate of the penalty), or alternatively once the case reached court (as the appellant would need to know the case they had to answer).333 As with the other tax avoidance and evasion initiatives announced in Budget 2016, draft legislation and an impact assessment of this measure was published at the time; the latter stated that this change is expected to have a negligible impact on the Exchequer.334 In Spring Budget 2017 the Government confirmed it would proceed with this measure: “following consultation on the draft legislation some minor changes have been made to improve the clarity of the measure and also to limit the naming of a company officer to instances where the amount of tax due exceeds £25,000. The new penalty will take effect once the Finance Bill receives Royal Assent.”335 Promoters of Tax Avoidance Schemes (POTAS) Finally, in Spring Budget 2017 the Government announced it would introduce legislation to “ensure that promoters of tax avoidance schemes cannot circumvent the POTAS regime by re-organising their business by either sharing control of a promoting business, or putting a person or persons between themselves and the promoting business. This will ensure that HMRC can apply the POTAS regime as intended.”336 Further details are given in a tax information & impact note, which stated this measure was not expected to have additional Exchequer impact.337 Finance Bill 2017 Following the Prime Minister's announcement, on 18 April, of the Government's intention to call a General Election on 8 June, the House completed all of the remaining stages of the Bill in the Commons on Tuesday 25 April. With cross-party support the Government removed a series of clauses from the Bill, with the intention of legislating for these at the start of the new Parliament. On this occasion Treasury Minister Jane Ellison said the following: The Bill is progressing on the basis of consensus and therefore, at the request of the Opposition, we are not proceeding with a number of clauses. However, there has been no policy change. These provisions will make a significant contribution to the public finances, and the Government will legislate for the remaining provisions at the earliest opportunity, at the start of the new Parliament.338

333 op.cit. para 3.2-4 334 VAT: penalty for participating in VAT fraud, 5 December 2016 335 HMT, Overview of Tax Legislation & Rates, March 2017 para 1.39. Provision to this effect was made by s68 of the Finance (No 2) Act 2017. 336 Spring Budget 2017, HC 1025, March 2017 para 3.43 337 Promoters of Tax Avoidance Schemes: associated and successor entities rules: TIIN, 8 March 2017. Budget 2013 estimated the POTAS regime would raise about £35m a year (HC 1033, March 2013 p65, Table 2.1 – item 54). 338 HC Deb 25 April 2017 c1013 106 Tax avoidance and tax evasion

As part of this measure, all of the clauses in the Bill relating to the five avoidance and evasion initiatives discussed above were removed from the Bill, except the provision making amendments to the existing POTAS legislation for associated and successor entities rules.339 On 13 July the Government confirmed, in a written statement, that a Finance Bill would be introduced to this effect “as soon as possible after the summer recess.”340 In turn this second Finance Bill was introduced on 6 September, including these clauses, which were agreed without amendment.341 In an overview of HMRC’s information powers by Nigel Barker, Annis Lampard and Jenny Tevlin (Deloitte) in the Tax Journal in May 2017, the authors commented on the “significant recent shift what is available to HMRC, reflecting increasing globalisation in business and personal finances”: Following data leaks from territories including Liechtenstein and Panama, emphasis on international data cooperation across tax agencies has increased. In the corporate sphere, country by country reporting to tax authorities under the OECD Action 13 BEPS initiative will soon be relevant to all groups with a turnover of more than €750m. In addition, more than 100 jurisdictions have joined the common reporting standard (CRS), an important global initiative where financial intermediaries will have to file details of individual accounts with national tax authorities. For early adopters, there will be an automatic exchange of financial data from September 2017 and a year later for others. They went on to argue that this in turn had led to a change in HMRC’s approach: Reflecting the new data sources available, we are seeing a change in how HMRC is using its information powers. Previously, requests for information may have been made on a speculative basis; however, HMRC is now much more confident about its right to ask for what it is requesting, and may even have an expectation itself as to what response it will receive. In the rest of this article, we will therefore review HMRC's informal and formal information gathering powers, as well as some of the more unusual and newer powers available to HMRC.342 As noted, the ‘requirement to collect’ (RTC) provisions introduce a statutory obligation on taxpayers to correct any undeclared UK tax liabilities in respect of an offshore matter by 30 September 2018. In a recent piece on the RTC in Taxation magazine, Garry Ashford (Harbottle and Lewis) noted the significance of the 30 September deadline: The most important feature of the RTC is its potential breadth in terms of issues that it might affect. Any personal tax matter that has an overseas nature will amount to offshore non-compliance if it is found to be incorrect after 30 September …

339 Committee of the Whole House proceedings, 25 April 2017. See, Chartered Institute of Taxation press notice, Tax advisers welcome sensible, pragmatic approach to Finance Bill, 25 April 2017. This provision forms s24 of the Finance Act 2017. 340 Finance Bill: Written Statement, HCWS47, 13 July 2017 341 Public Bill Committee, Fifth Sitting, 24 October 2017 cc140-4. As noted these provisions form ss64-68 of Finance (No.2) Act 2017. See also, CIOT press notice, Major new tax penalties in force, 17 November 2017. 342 “HMRC’s information powers”, Tax Journal, 19 May 2017 107 Commons Library Briefing, 13 April 2021

Many advisers will think this is focused on people deliberately evading UK tax – for example, routeing UK income through an offshore bank account – but the RTC has the potential to capture all sorts of tax positions, including individuals who are unaware that a tax liability exists or might have existed. The RTC deadline coincides with HMRC receiving huge quantities of personal financial data under the provisions for automatic exchange of financial account information in tax matters – the common reporting standard (CRS). Over the past ten years or so, HMRC has signed various agreements, the result of which is that overseas jurisdictions will be exchanging vast quantities of information relating to residents holding assets or receiving income in each others’ jurisdictions. The CRS is the latest such agreement and will involve more than 100 countries exchanging information. The first tranche of data was exchanged last year, with the final group of signatory countries exchanging from 30 September 2018.343

5.4 The Paradise Papers & Autumn Budget 2017 On 5 November 2017 the International Consortium of Investigative Journalists started to publish details and commentary on material it had obtained from two offshore service providers and 19 tax havens' company registries, which it called the ‘Paradise Papers’. In turn details of the financial holdings of both wealthy individuals and multinational enterprises from this leak were reported by the BBC, the Guardian, and other media organisations, reiterating public concerns as to the scale of tax avoidance and evasion, particularly by high net-worth individuals, and the actions of offshore jurisdictions to facilitate these activities. In evidence to the Public Accounts Committee on 6 November, Jon Thompson (then HMRC’s chief executive) noted that the ‘Paradise Papers’ cache was “different from the Panama papers in 2016, which were published on a website in an unstructured way and you could inquire through those papers. In this particular situation, the papers have not been made publicly available; they are only available to those within the International Consortium of Investigative Journalists.”344 He explained that HMRC had requested information on the material held by the ICIJ but without receiving a response – a point also made by the Financial Secretary Mel Stride a few days later.345 In answer to a written question at this time the Minister said the following: HMRC does not have power to acquire journalistic material held overseas and, therefore, is unable to obtain the information held by the ICIJ known as the Paradise Papers. However, HMRC has requested access to the material that has been provided by the International Consortium of Investigative Journalists to the BBC and The Guardian. HMRC has also encouraged these

343 “Don’t get snarled”, Taxation, 6 September 2018 344 Oral evidence: 2016-17 HMRC Standard Report, HC 456, 6 November 2017 Q6 345 HC Deb 14 November 2017 cc168-9 108 Tax avoidance and tax evasion

organisations to pass on any information that points to wrongdoing and are prepared to look at every allegation in full.346 Turning back to his evidence session with the PAC, Mr Thompson said a little on HMRC’s response to the Paradise Papers publication: Q17 Chair: In terms of your legal powers, how quickly could you secure any of that data? Give us a range if you cannot give an exact timetable. Jon Thompson: The tax treaties and exchange of information agreements that we have with all Crown dependencies—the overseas treaties—allow us to inquire about specific taxpayers. At this point, we are trying to work off what is in the public domain and then work from that in terms of making specific inquiries. That is not the same as saying that there is a bulk set of data that is apparently available. Obviously we would like that, but we have to do it by individual allegation, taxpayer by taxpayer, in order to get that information. Q18 Chair: And you are prepared to look at every allegation in full. Jon Thompson: We certainly are. In the same way we did with Panama, we will look at every case of tax evasion very seriously. We have secured significant revenues from those trying to hide overseas—more than £2.8 billion over the last few years ... Q19 Chair: With the Panama papers, we were frustrated—I suspect you were, too—about how long it took to dig through that information. How quickly could we see results if you had all that information on the Paradise papers? Jon Thompson: I think it depends on whether we conclude early on that the acts are civil or criminal. With criminal acts, it takes quite a bit longer to prepare a case. The Panama papers were published on 4 April 2016. There are currently 66 criminal or civil investigations; four people have been arrested and a further six have been interviewed under caution. Those cases continue to be live. We would expect an additional tax yield of £100 million from the Panama papers. That gives you some sense of how long quite complicated tax cases take to bring to some sort of fruition. Q20 Chair: That is quite encouraging news, because when we have asked about the Panama papers before, we have got very little information. Are you better prepared now for dealing with these papers than HMRC was when the Panama papers were leaked? Jon Thompson: I would say that we are, in one significant respect: over the last 18 months or so we have significantly improved the way in which we can ingest data from other sources. There is now a director-led speciality function within our customer compliance group: the director of risk and intelligence services. We have created a dedicated function that can ingest data from as many sources as we can get them and put that data together around individual taxpayers, so that our interventions are risk-based.347 Mr Thompson and his colleague Jim Harra (then Director General, Customer Strategy and Tax Design), also acknowledged that HMRC had

346 PQ113170, 20 November 2017 347 op.cit., Qs 17-20 109 Commons Library Briefing, 13 April 2021

only been able to obtain access to the Panama Papers by making a payment for this information: Q47 Chair: May I just ask, with the Panama papers, did you have to make any payment to receive any information, or was it passed over to you freely? Jon Thompson: It was not passed to us freely. Q48 Chair: You had to pay a fee? Jon Thompson: We obtained it. I need to be careful about what the law limits me to say. We obtained it, but not from the ICIJ. Jim Harra: It was part of an international effort to obtain that data.348 The publication of this material was debated, briefly, the same day, in response to an Urgent Question tabled by the Shadow Chancellor, John McDonnell,349 and then a few days later, following a successful application by Dame Margaret Hodge for an emergency debate on the issue.350 On this occasion Dame Margaret highlighted three specific areas where, in her view, the Government had failed to take effective action: in penalising tax advisers, in requiring overseas territories to publicise beneficial ownership, and in resourcing HMRC: The Treasury, and other Ministers and Departments, listen only to a very small and exclusive group of tax professionals when making decisions on tax policy … Curtailing the influence of tax professionals on tax policy is essential, and making the advisers accountable for the schemes that they invent and market is central to the campaign to destroy tax avoidance. The measures in the Finance Act 2017 represent one small step in the right direction of holding advisers to account, but the small print suggests that very few, if any, will be caught by the legislation. The definitions are too narrow, and the penalties too weak … We should lead by example. We should demonstrate that transparency can and does change behaviour. We should compel our overseas territories and Crown dependencies to publish public registers. In the past, a Conservative Government used their powers to outlaw capital punishment in our Crown dependencies and overseas territories, and a Labour Government used the same powers to outlaw discrimination against gay people. Today we should work together to outlaw the secrecy of those jurisdictions, which leads to such massive tax injustices … We can and should properly resource HMRC now so that it has the capability to pursue all who seek to avoid paying tax, not just the small businesses who form an easy target that can be hounded with little effort. Every £1 invested in HMRC enforcement yields £97 in additional tax revenues. It is a complete no-brainer that we should be strengthening HMRC and reversing some of the cuts.351 In his response the Financial Secretary made some comments on each of these matters:

348 Op.cit. Qs 47-48 349 HC Deb 6 November 2017 c1195-1208 350 HC Deb 13 November 2017 cc55-6. This procedure is established under the rules of Standing Order No.24; details are on the Parliament site. 351 HC Deb 14 November 2017 cc163-4 110 Tax avoidance and tax evasion

We have brought in 75 measures since 2010 to clamp down on these practices. A further 35 will come in from 2015, raising £18.5 billion by 2020-21. One of the problems is that we have been so active in bringing in so many measures that, unfortunately, not all of them have been noticed. In last week’s debate, the right hon. Member for Barking raised the issue of taking action against those who promote tax avoidance schemes … She only to look at the Finance Bill … in which she will find measures to deal with precisely what she was urging us to take action on last week … We all agree that we need to look closely at what is happening in the international sphere. On that, this Government have a record of which we can be proud. Through the OECD, we have been in the vanguard of the base erosion and profit shifting project. We have worked closely with the Crown dependencies and overseas territories. We have brought in a diverted profits tax, which will raise £1.3 billion by 2019, and common reporting standards to ensure that information is exchanged in relation to around 100 countries. We have introduced a directory of beneficial ownership that is accessible by HMRC, the authority that needs to have that information. All this has happened in the last couple of years, and it is a game changer. Many of the issues arising from the Paradise papers go back very many years, but these measures are in place right now … Some £1.8 billion of additional money has been invested in HMRC since 2010, of which £800 million will relate to the period after 2015, bringing in £7.2 billion by 2020-21. We will also be trebling the number of investigations of the wealthy to ensure they are paying their appropriate level of tax, as a direct consequence of all that additional investment.352 In January 2018 the Public Accounts Committee published its report on HMRC’s performance in the previous year in which raised concerns over the ‘Paradise Papers’ leak and whether HMRC had sufficient resources “to deal with the full scale of the recent allegations:” The ‘Paradise Papers’ leak suggests potentially serious and extensive allegations of tax evasion and avoidance. The ‘Paradise Papers’ leak of a large volume of financial documents has highlighted the potentially dubious practices of many high- profile individuals and corporations in their use of offshore tax havens. HM Revenue and Customs (HMRC) has requested the leaked documents but it has not yet received a response. HMRC tells us that if the information is not forthcoming it can then use its network of exchange of information agreements with other countries to obtain the data. The ‘Panama Papers’ were published in April 2016, and have to date resulted in 66 criminal or civil investigations, and expected additional tax revenues of £100 million. HMRC now claims to be better equipped to deal promptly with any large-scale leak of data. However, the speed with which cases can be investigated depends on whether they are civil or criminal, as criminal cases will take longer to prepare. We are far from confident that HMRC has sufficient resources to deal with the full scale of the recent allegations. Recommendation: HMRC should obtain the information from the ‘Paradise Papers’ as soon as possible, and report back to the

352 HC Deb 14 November 2017 c167, c168, cc165-6 111 Commons Library Briefing, 13 April 2021

Committee by March 2018 to set out its response, including any additional revenue likely to be at stake.353 In its response, published in March, the Government agreed, although it appears HMRC has been unable to obtain this material: 1.2 The Department welcomes all information that could assist in its work on tackling tax evasion and avoidance. The Department has therefore sought access to the International Consortium of Investigative Journalists (ICIJ) material. However, the ICIJ (which is based outside the UK’s jurisdiction) has refused to provide the Department with material beyond that already publicly available. 1.3 The Department has requested access to the ICIJ material that was used by the BBC and The Guardian. The Department has also encouraged these media organisations to pass on any information that points to wrongdoing and is prepared to look at every allegation in full. Only the Guardian have responded, explaining that they are not in possession of the data, and only have access to it through the ICIJ and therefore cannot help our enquiries. 1: PAC conclusion: The ‘Paradise Papers’ leak suggests potentially serious and extensive allegations of tax evasion and avoidance. 1: PAC recommendation: HMRC should obtain the information from the ‘Paradise Papers’ as soon as possible, and report back to the Committee by March 2018 to set out its response, including any additional revenue likely to be at stake. 1.4 The Department is looking very closely at all the information the ICIJ and its members have disclosed in both the media and on the ICIJ published database. The Department is also reviewing this information in relation to existing enquiry work2016. This would make measuring performance against an annual target uncertain.354 In answer to a PQ in June, Treasury Minister Mel Stride said that “HMRC is looking very closely at the information the ICIJ has released in the Paradise Papers to see if it reveals anything new that could add to their existing leads and investigations” although “in a significant number of cases that HMRC have reviewed, the practices and schemes which the data points to were either already known to HMRC or have no UK tax consequences.”355 Writing on the Paradise Papers in Taxation, Fiona Fernie (Blick Rothenberg) argued that the most recent statutory provisions represented a change in approach by HMRC, from using ‘carrots’, to encourage individuals to voluntarily disclose irregularities, to “new tools and ‘sticks’ in the form of increasingly punitive measures … against those evading (or serially avoiding) UK tax.”356 On this theme the IFS’ Tax Law Review Committee published a review of the changes that had made to HMRC powers, in which it raised concerns as to the effectiveness of the safeguards provided for

353 Public Accounts Committee, Twelfth report: HMRC’s performance in 2016-17, HC 456, 12 January 2018 p5 354 Treasury Minutes, Government response to the Committee of Public Accounts, Cm 9596, March 2018 pp8-9 355 PQ155663, 29 June 2018 356 “Paradise lost”, Taxation, 16 November 2017 112 Tax avoidance and tax evasion

taxpayers.357 The report paid particular attention to two issues: HMRC’s practice in issuing accelerated payment notices (APNs) … In the case of the APNs, the position is ameliorated by the fact that the taxpayer can recover all the money paid (plus interest) if successful in appealing the substantive tax issue. Although no safeguards were introduced in the APN legislation to limit the application of the powers where bankruptcy of the taxpayer would result, the courts have imposed such a restriction. With this restriction in place, the APNs generally lead to a process and cash-flow change so that taxpayers must expect to pay disputed tax at an early stage of a tax dispute, rather than after the matter has been litigated, but the APNs do not by themselves deter taxpayers from disputing HMRC’s assessment of a tax liability. If the taxpayer served with an APN is successful in disputing the underlying tax, they get the tax paid back with interest. However, taxpayers can be, and indeed have been, served with APNs where HMRC has incorrectly applied the APN rules. The taxpayer must then seek to persuade HMRC that an error has occurred or incur the cost and procedural demands of seeking judicial review because there is no right of appeal to the tribunal against HMRC’s procedural error. … and the penalties that HMRC may charge in relation to both follower notices (FN) and the application of the General Anti-Abuse Rule: A potentially more serious problem arises with the FN penalty and GAAR penalty provisions (the ‘Penalty Powers’). They make the financial risks of appeal so great that even taxpayers with strong cases may not be prepared to risk going to court. Those powers, which have been introduced expressly to encourage taxpayers to settle disputes with HMRC on the meaning and application of tax law – in other words, to deter taxpayers from seeking an independent review by the tribunals and courts as to the meaning and application of tax law – have significantly increased the financial risks to taxpayers of continuing to dispute with HMRC the tax due in their cases. The taxpayer does not just pay over the disputed tax but faces the imposition of a 50 per cent or 60 per cent penalty if they continue to dispute the matter and lose in the courts. Concern has been expressed by others, and is shared by this paper, that the Penalty Powers have effectively given HMRC quasi-judicial powers to determine what tax law means and how it applies in particular cases. The financial risks to taxpayers of seeking independent adjudication of their cases through the tribunals and courts are so high when some of the Penalty Powers are exercised that few taxpayers will wish to dispute the tax claimed by HMRC, even when they have a strong case deserving judicial consideration. In that situation, taxpayers are effectively denied access to justice.358

357 IFS press notice, The implications of recent additions to HMRC powers and the shifting balance in the relationship with taxpayers, 20 November 2017. See also, “Fears raised over expansion of powers for the taxman”, Financial Times, 13 December 2017 358 Tracey Bowler, The implications of recent additions to HMRC powers and the shifting balance in the relationship with taxpayers, TLRC Discussion Paper No.13, 113 Commons Library Briefing, 13 April 2021

The Chancellor presented the Government’s first Autumn Budget on 22 November 2017.359 Tax avoidance was not a major theme to the speech, nor in press coverage, though the Budget report set out a list of individual measures to mitigate both avoidance and evasion, going on to note: Since 2010 the government has secured almost £160 billion in additional tax revenue and alongside the Budget publishes details of over 100 measures it has introduced. These actions have also helped the UK achieve one of the lowest tax gaps in the world … Further steps taken in the Budget are forecast to raise £4.8 billion between now and 2022-23.360 The Government published a policy paper alongside the Budget report which included two annexes listing measures introduced since 2010, and those announced in the Budget.361 (As discussed below, an updated version of this policy paper was published in March 2019.) The ‘Red Book’ also gave details of an increase in HMRC’s budget: 3.88 The government is investing a further £155 million in additional resources and new technology for HMRC. This investment is forecast to help bring in £2.3 billion of additional tax revenues by allowing HMRC to: • transform their approach to tackling the hidden economy through new technology • further tackle those who are engaging in marketed tax avoidance schemes • enhance efforts to tackle the enablers of tax fraud and hold intermediaries accountable for the services they provide using the Corporate Criminal Offence • increase their ability to tackle non-compliance among mid- size businesses and wealthy individuals • recover greater amounts of tax debt including through a new taskforce to specifically tackle tax debts more than 9 months old.362 In its discussion of the policy costings for the Budget, the Office for Budget Responsibility highlighted the difficulty of estimating the Exchequer impact of this package of measures: HMRC operational measures A.8 The Government has announced a package of measures designed to generate additional revenue from HMRC compliance activity. The various components were combined into the single line of the scorecard: ‘Avoidance and Evasion: additional compliance resource’ (Table 2.1 – item 39).

November 2017 pp7-8. See also, Stephen Daly, “TLRC discussion paper”, taxatlinconox blog, 14 December 2017 359 The move to having an Autumn Budget has changed the normal timetable for introducing new tax legislation: see, HMT, The new Budget timetable and the tax policy making process, December 2017 360 Autumn Budget 2017, HC 57, November 2017 para 3.65-77. See also, HM Treasury, Overview of Tax Legislation & Rates, November 2017 para 1.43 361 HMT, Tackling tax avoidance, evasion and non-compliance, November 2017. see also, PQ117106, 7 December 2017 & PQ135367, 18 April 2018. 362 Autumn Budget 2017, HC 57, November 2017 para 3.88, p29 (Table 2.1 – item 39) 114 Tax avoidance and tax evasion

As we have previously set out, the costing of these type of measures is often subject to a high degree of uncertainty. While we only certify measures that we judge to be reasonable and central, efforts to tackle avoidance and evasion have not always brought in the expected yield.363 The measures often target a subset of individuals or companies that are already actively changing their behaviour to avoid or evade tax. As a result there is typically a high degree of behavioural uncertainty. Similarly, since the measures are directed at uncollected tax, there is usually less reliable data available to inform the costing. And there are often uncertainties relating to the timely delivery of operational changes, especially when they rely on new IT systems … A.9 Scrutinising this package of measures brought about some further challenges. The approach HMRC takes to measuring compliance yield does not map directly onto the National Accounts receipts definitions used in the Government’s fiscal targets and that we therefore forecast. This makes it difficult to distinguish what is relevant to our forecast with any precision. Another challenge was determining whether the yield from this package would be additional to that already captured in previously announced measures. In particular the large July 2015 package of HMRC measures has yet to become fully effective, so we needed to assure ourselves that the yield in our baseline forecast in respect of previous measures was not being factored into these new measures too. A.10 To overcome some of these challenges we looked at HMRC’s past compliance performance. For example, we considered the progression of HMRC’s estimates of the tax gaps for the different taxes, groups of taxpayers and activities targeted by this package. This allowed us to consider top-down whether the expected yield from different elements of the package was reasonable relative to the types of activity the Government each seeks to tackle. We also looked at the returns to investment for the July 2015 package of measures and how they compared to the current package. For most, we expected to see diminishing returns from additional investment and challenged those costings where that had not been assumed. We required each costing to show that appropriate contingencies were in place for delays in recruitment and for training lags. Where staff were being redeployed from elsewhere within HMRC we asked for an appropriate opportunity cost to be incorporated. A.11 We assign this package of measures a ‘very high’ uncertainty rating, with each of data, behaviour and modelling also classed as ‘high’ or ‘very high’. For some elements, such as those targeting the hidden economy or criminals, the level of uncertainty is very high. We will continue to evaluate the performance of these and previous anti-avoidance and evasion measures on a regular basis. This Budget has continued the recent pattern whereby the yield from revenue-raising measures is concentrated in these more uncertain areas while the cost of the tax giveaways is far more certain.364

363 See for example Chapter 5 in our 2017 Fiscal risks report and Johal, Evaluation of HMRC anti-avoidance and operational measures, OBR Working Paper No.11. 364 Economic & Fiscal Outlook, Cm 9530, November 2017 pp230-1 115 Commons Library Briefing, 13 April 2021

As part of its inquiry on the Autumn Budget the Treasury Committee took evidence from the main professional bodies on 5 December, and on this occasion Alister Jack asked about the impact that the debate on avoidance and evasion had had on the profession: Q249 Mr Jack: … I want to go on to the Panama Papers and Paradise Papers and all that … Do you think the public perception is that those structures are tax avoidance or even tax evasion? … Has that made practitioners more cautious about the way they offer advice? Ray McCann: [Deputy President, Chartered Institute of Taxation] It is undoubtedly the case that practitioners today are warier of falling foul of both new tax rules and HMRC … Allied to that, the professional bodies have, in the past two years, taken quite considerable steps in ramping up our professional standards… Specifically on the Paradise Papers, we have to recognise that many of those structures have been around for decades, certainly years, and they will quite often predate a lot of the upsurge in public disapproval of offshore tax planning structures. Whether they can be changed, altered or some of them are even impacted by some of the changes that Government are bringing forward remains to be seen, because many of them will no doubt say that they have put in place a compliant structure that complies with every rule in every jurisdiction that is going … Frank Haskew [Head of Tax Faculty, Institute of Chartered Accountants in England and Wales] Amplifying what Ray said, our professional conduct in relation to taxation [PCRT] that Ray mentioned is signed up to by seven professional bodies … The Government, in the Finance Act that was passed last month— the Finance (No.2) Act—included some provisions to have penalties on what is described as enablers of tax avoidance. We now have measures there on the statute book whereby, if advice to a client is outside the parameters of the general anti-abuse rule, the advisers can also be subject to a penalty. This pincer movement is coming in on advisers from a number of directions… We also need to remember the tax advice market in the UK. HMRC estimates that about 30% of tax advisers are not affiliated to a professional body. There are overseas advisers as well. The UK tax market is quite fragmented. With our PCRT and the enablers, we have stepped up to the plate, and HMRC has introduced rules that should have an impact on the way advisers go about giving their business to clients. Subsequently Rushanara Ali asked about HMRC’s estimates for compliance yields and the extent to which these figures were driven by government action or a change in public attitudes. Q264 Rushanara Ali: … The Chancellor said that the Government had collected £160 billion in additional tax revenue through the crackdown on evasion. To what extent would you assign that to government policy ... To what extent is it public pressure, media pressure or the moral imperative? Could it be a bit of both? Frank Haskew: That is a difficult question. It probably is a bit of all of that … I would mention here that HMRC published only last month its most recent tax gap figures. However much some commentators question the basis of some of the calculations, we 116 Tax avoidance and tax evasion

have to accept that up to an extent this is evolving. The UK’s methodology is, at the moment, as good as it gets. Clearly, more can be done … but it shows that the UK’s trajectory in terms of the tax gap has been coming down. … We have had a huge amount of anti-avoidance and anti-evasion legislation over the past five years ... We have had more resources invested into HMRC. We saw that in the latest Red Book … We have seen public pressure and public concerns. We have seen reputation concerns. We have had our own PCRT, which we have revised. Coming to it from a lot of different directions, the climate has changed remarkably.365 Turning back to the disclosures of offshore avoidance and evasion in the Panama & Paradise Papers, in its 2018/19 report HMRC noted the following: We have opened investigations identified from a range of intelligence sources. Cases linked to the Panama Papers are forecast to produce more than £190 million in yield with civil and criminal investigations into around 190 people for suspected tax offences. This is in addition to the 215 investigations which were already open, which have subsequently been linked to the Panama Papers. We have also reviewed more than 300 corporate groups and individuals identified in the Paradise Papers. For around 80% of these, the structures we identified have no UK tax consequences or were already known to us. In addition, we have shared intelligence relating to 315 existing enquiries, fully embedding this dataset into business as usual compliance activity.366 The potential yield from these investigations was the subject of a written answer in November 2020: Dame Margaret Hodge : To ask the Chancellor of the Exchequer, whether he has made an estimate of the potential revenue to the Exchequer from the portfolio of civil and criminal investigations resulting from the Panama Papers and Paradise Papers investigations. Jesse Norman : To date, the work of HMRC in response to the Panama Papers and Paradise Papers has protected over £188.2 million in revenue, and from the current portfolio of civil and criminal investigations it is estimated that a further £12.6million will be protected. This is broadly consistent with the HMRC 2018-19 annual report publication, where it was stated that cases linked to the Panama Papers are forecast to produce more than £190 million in yield.367

5.5 Budget 2018 The then Chancellor Philip Hammond presented the Budget on 29 October and although tax avoidance was not a major theme to either the Budget or the responses to it, Mr Hammond mentioned the issue briefly in his speech:

365 Budget Autumn 2017: Oral Evidence, HC 600, 5 December 2017 Qs249, 264 366 HMRC Annual Report 2018/19, HC 2394, July 2019 p30 367 PQ108197, 2 November 2020. See also, PQ HL10116, 23 November 2020 117 Commons Library Briefing, 13 April 2021

Today we continue the work of the past eight years, where we have secured £185 billion since 2010 that would otherwise have gone unpaid, with a package of measures today to further clamp down on tax avoidance, evasion and unfair outcomes, raising another £2 billion over the next five years. We will make HMRC a preferred creditor in business insolvencies, to ensure that tax that has been collected on behalf of HMRC is actually paid to HMRC. We will end the practice of purchasing services through overseas branches to avoid UK VAT, and we will crack down on insurance companies routing services through offshore territories. And we will stop our generous R&D tax credits system being abused by reintroducing a PAYE restriction for the small and medium-sized companies scheme.368 Further details were published in the Budget report. 369 Statutory provision for most of these measures was to be made either in secondary legislation or a future Finance Bill,370 although legislation regarding profit fragmentation, VAT grouping and the misuse of entrepreneurs’ relief was included in the Finance Bill published after the 2018 Budget.371 The Committee of the Whole House considered a selection of provisions from the Bill on 19-20 November; as part of this, on the second day, the House considered one grouping of anti-avoidance clauses.372 Although no changes were made to these provisions, the House agreed two new clauses tabled by the Opposition: • NC5, to require a review of the impact of the tax avoidance provisions in the Bill, with regards to child poverty, households on different levels of income, people with protected characteristics and on a regional basis - tabled by the Labour Party. • NC14, to require a review of the effectiveness of the tax avoidance provisions in the Bill – tabled by the SNP. During the debate, Anneliese Dodds put the case for NC5 as follows: Our new clause 5 is directed at another Government blank spot: the distributional impact of their tax measures. It would require an equality impact assessment of the Government’s tax avoidance measures in relation to child poverty, household income levels, people with protected characteristics, and our nations and regions. That assessment is necessary because of the continuing leakage from our tax system owing to avoidance as well as evasion. Failure to deal with avoidance has put pressure on the rest of the tax system, which … has been exacerbated by unnecessary tax cuts to the very best-off people and to profitable corporations.373

368 HC Deb 29 October 2018 c662 369 Budget 2018, HC 1629, October 2018 pp51-2; OBR, Economic & Fiscal Outlook, Cm 9713, October 2018 p235, p239-40 370 HMT, Overview of tax legislation & Rates, October 2018 para 2.17, 2.27-8, 2.49 371 Specifically, clause 16 (profit fragmentation), clause 53 (VAT grouping) and clause 38 (entrepreneurs’ relief) of Finance (No.3) Bill 2017-19. In the latter case, the clause made a number of other changes to the rules for the relief, and, following concerns about its impact, was amended at the Report stage of the Bill (HC Deb 8 January 2019 cc310-11). 372 HC Deb 20 November 2018 cc779-833 373 op.cit. c794 118 Tax avoidance and tax evasion

In turn, Alison Thewliss put the case for the SNP’s new clause as follows: On the provisions on tax avoidance, we must gauge our progress by continually measuring the value and effectiveness of those policies. … Our proposal is in the spirit of achieving better, more robust policies in the future … There are many reasons why HMRC does not always collect the tax that it ought to be paid, whether through criminal activity, through evasion or avoidance or just through human error, and there is much more that can be done to address that … The SNP has long argued that the tax system is unnecessarily cumbersome and complicated. There are layers and layers of regulations and exemptions, which lead to loopholes appearing. The system seems to get more complex every year when we look at the Finance Bill, and there also appear to be armies of tax avoidance specialists seeking to exploit whatever gaps they can find.374 When he opened the debate, Treasury Minister Mel Stride had opposed both new clauses, as well as a third new clause (NC6), tabled by the Labour Party, similar to the SNP’s new clause: New clause 5 would require the Government to carry out a review of the equality impact of some of the Bill’s anti-avoidance provisions. The tax information and impact notes published alongside the measures already set out the impact of anti- avoidance measures in the Bill on those sharing protected characteristics. In general, they show that HMRC does not expect the measures to have notably different impacts on people according to their protected characteristics. New clauses 6 and 14 would require the Government to publish a review of the effectiveness of the Bill’s provisions to tackle tax avoidance and tax evasion, and to reduce the tax gap. Such a review is unnecessary. The Government keep all taxes under review and will continue to measure and publish annual statistics on the tax gap. I have little doubt that those statistics will continue to show that the tax gap is lower than at any time under the previous Labour Government.375 However, at the conclusion of the debate Mr Stride announced that the Government would accept both NC5 and NC14: New clause 5 calls for a review of the impact of the clauses in this group on child poverty, on households at different levels of income, on those with protected characteristics and on the different parts of the United Kingdom. As I have stated, the Government already provide impact and distribution assessments and analysis in the Budget, as well as tax impact information and notes on individual tax measures … New clause 14, proposed by the Scottish National party, calls for a review of the effect of the clauses in this group on reducing tax avoidance and evasion and on “inducing new tax avoidance measures unanticipated by the Act”, and for estimates of the impact of the clauses on the tax gap. In the light of the Government’s desire to reinforce what we are doing already or what we will naturally provide in a timely manner as events unfold, the Government will not oppose new clause 5

374 op.cit. cc808-9 375 op.cit. c789 119 Commons Library Briefing, 13 April 2021

… or new clause 14. That is subject to the information that is being sought being available, in which case we will of course provide it.376 In March 2019 the Treasury and HMRC published a report giving an overview of government policy regarding tax avoidance and evasion, including a long, updated list of measures that have been introduced since 2010.377 It noted that when taken with HMRC’s compliance work, it is estimated that these measures “have secured and protected an additional £200 billion in tax revenue which would otherwise have gone unpaid.”378 The report also provides two reports to meet the statutory requirements of the Finance Act 2019. Two short extracts from these are reproduced below: first, on the effectiveness of the tax avoidance measures included in the Act … The government routinely assesses the impacts of all tax reforms, including measures to prevent or tackle avoidance and evasion, using available evidence to estimate the number of taxpayers affected and the extent of the impact. Indeed, the government publishes tax information and impact notes (TIINs) for tax policy changes. TIINs provide a clear explanation of the policy objective together with details of the tax impact on the Exchequer, the economy, individuals, businesses, civil society organisations, as well as any equality or other specific area of impact. In many cases, the ultimate measure of success of anti-avoidance measures will be the extent to which non-compliant behaviour is prevented or reduced, and more of the tax due is collected (raising revenue and reducing the tax gap) or tax potentially at risk is protected (thereby mitigating the risk of the tax gap becoming larger). Where measures have a fiscal impact, this is certified by the independent Office for Budget Responsibility, who review the available evidence and challenge the underlying assumptions to reach a central estimate of the effects of measures and their anticipated revenue or cost. Many of the provisions in question in Finance Act 2019 have not yet come into effect, and for those that have, the time lag before tax returns for the relevant period are filed means there is as yet no new data available to assess the effectiveness of the provisions. However, the government remains confident that the rationale for introducing the measures is sound and that they will be effective in fulfilling their purpose.379 And second, to provide an assessment of the impact of those measures regionally, as well as on child poverty, households across the income spectrum, and individuals with protected characteristics: While some of the measures covered in this report are important in tackling avoidance or improving the functioning of the tax system, they tend to solely impact companies or a small number of typically high-income individuals. Their direct impact on broad

376 op.cit. c831. They now form sections 92 & 93 of the Finance Act 2019. 377 HM Treasury/HMRC, Tackling tax avoidance, evasion, and other forms of non- compliance, March 2019 (see Annex A) 378 op.cit. p2. The report cites HMRC’s estimates of the compliance yield: see, HMRC Annual Report 2017/18, HC 1222, July 2018 p21 379 op.cit. p55 120 Tax avoidance and tax evasion

indicators of living standards and different types of households is thus difficult to determine, and will often be nil by definition, as set out below. This review does not make assumptions on how any additional revenue to the Exchequer raised or protected by these measures would be used. In general, the distribution of taxation and government spending in the UK remains highly redistributive. In 2019-20, the lowest income households will receive over £4 in public spending for every £1 they pay in tax on average. While the highest income 60 households will contribute over £5 in tax for every £1 they receive in public spending on average. Those sharing protected characteristics concentrated in lower income households are thus likely to benefit disproportionately from public spending. When considered on a regional basis, public spending is higher in Wales, Scotland and Northern Ireland compared to England, and highest in London, the North East and the North West within England.380 There was not very much discussion or debate over the Treasury’s report when published, although writing in the Sunday Times, economics editor Philip Aldrick argued that this survey of the government’s strategy over the last decade illustrated a major change in the purpose of this aspect of tax policy: Social norms are reshaping business norms at a time when HMRC enforcement is reducing the financial incentives to avoid tax. As the trade-off is changing, anti-avoidance work increasingly resembles a legitimate revenue-raising policy … Anti-avoidance measures are no longer a flaky fig leaf for Chancellors who need revenues but dare not raise general taxes. They are a legitimate means of taxation.381

5.6 Budget 2020 The 2019 Loan Charge Over the last decade one important development in the avoidance market has been the marketing of ‘loan schemes’: schemes seeking to ‘disguise’ income paid to employees or contractors in the form of a non- redeemable loan. Although the detailed arrangements for individual schemes are highly complex their basic design can be illustrated as follows:382

380 op.cit. pp59-60. With respect to this last point the authors cite, Public spending by country and region, Commons Briefing paper CBP4033, 28 November 2018 381 “Comment: The war on tax avoidance has been a remarkable and lucrative success”, Sunday Times, 19 March 2019 382 HM Treasury, Section 95 of the Finance Act 2019: report on time limits and the charge on disguised remuneration loans, March 2019 p16 121 Commons Library Briefing, 13 April 2021

In 2011 the Government introduced legislation to counter an expanding market for loan schemes, driven in part the rise in the number of individuals providing their services through an ‘umbrella company’ (a structure which provides employment to a number of individuals, signing contracts to provide individuals’ labour to third parties).383 This proved only partially successful in discouraging either scheme promoters in devising new schemes or taxpayers from entering these arrangements. In the 2016 Budget the Government confirmed new schemes “had emerged which attempt to sidestep the 2011 legislation” often involving “individuals being paid in loans through structures such as offshore Employee Benefit Trusts”, and that it would introduce legislation to counter their use, including “a new charge on loans paid through disguised remuneration schemes which have not been taxed and are still outstanding on 5 April 2019.”384 Provision for the Loan Charge was included in the Finance (No.2) Act 2017, and the Finance Act 2018. In brief, the Charge applies to the outstanding balance of disguised remuneration loans on 5 April 2019 that were made over the previous 20 years – that is, after 5 April 1999.385 As an alternative course of action taxpayers potentially liable to pay the Loan Charge have had the option of settling their tax affairs before the Charge came into effect on 6 April 2019.386 HMRC has estimated that 50,000 individuals and an additional 10,000 employers are affected by the Loan Charge.387 When introduced, the

383 For details on the growth of these schemes see, HMT, Independent Loan Charge Review: report on the policy and its implementation, December 2019 pp14-26 & HMRC, Use of marketed tax avoidance schemes in the UK, updated 17 March 2021 384 Budget 2016, HC901, March 2016 p60 385 HMRC, Tackling disguised remuneration – update, 5 December 2016 386 HMRC, Disguised remuneration: settling your tax affairs, updated July 2019 & Disguised remuneration: detailed settlement terms, updated July 2019. 387 HMT, Independent Loan Charge Review: report on the policy and its implementation, December 2019 p42 122 Tax avoidance and tax evasion

Government estimated that these provisions would raise £3.2 billion over five years.388 The Loan Charge “stacks” loans that the taxpayer has received through these avoidance schemes, so that they are liable to pay a single charge based on the value of all outstanding loans. HMRC have estimated that of individuals who used a scheme from 2011/12 onwards, 70% did so for two or fewer years and only 16% used a scheme for four or more years. That said, the length of the look-back period creates potential for many years’ usage of schemes to be taxed in a single year, and many scheme users’ circumstances are likely to have changed over this time, from reduced earning potential or retirement. As has been noted, the intention behind this element of the design was to encourage taxpayers to settle rather than pay the Loan Charge.389 In contrast to many other initiatives to tackle tax avoidance and evasion over the last twenty years, the Loan Charge has proved highly controversial. Over the 2017-19 Session 155 Members signed an EDM, tabled by Stephen Lloyd MP in May 2018, criticising the 2019 Loan Charge, arguing that “retrospectively taxing something that was technically allowed at the time, is unfair” and proposing that “the Charge to apply only to disguised remuneration loans entered into after the Finance Act 2017 received Royal Assent.”390 Over this period Ministers strongly rebutted these criticisms but with limited success.391 In December 2019 Sir Amyas Morse, former Comptroller and Auditor General, published a detailed independent review of the Loan Charge commissioned by Ministers, which was highly critical of some aspects of its design and the serious financial difficulties the Charge created for many taxpayers. One of the major concerns that has been raised is that many scheme users genuinely believed the claims made by promoters, and so made no provision for the possibility of having to pay tax on the income channelled through their scheme. In his report Sir Amyas acknowledged these concerns, although he argued that it would be unwise to simply absolve taxpayers of their personal responsibilities in these circumstances: There is a case for the Loan Charge applying from December 2010 [when the 2011 legislation was first announced], but given its abnormal nature there is also a strong case for moderating its impact for those who can afford to pay less. This is particularly relevant as those affected by the Loan Charge are not the ‘usual suspects’, by which I mean large corporates with an army of advisers, or – for the most part – very rich individuals. Large

388 Budget 2016, HC 901, March 2016 p85 (Table 2.1 – item 39) & Autumn Statement, Cm 9362, November 2016 p23 (Table 2.1 – item 24); PQ 274514, 11 July 2019. 389 HMT, Independent Loan Charge Review: report on the policy and its implementation, December 2019 para 7.9, para 3.10 390 EDM 1239 of 2017/19, 8 May 2018. see also, “HMRC tax crackdown victimises easy targets”, Financial Times, 25 September 2018 & “Living in the shadow of a tax scandal”, Financial Times, 26 January 2018. 391 eg, PQs152724-157732, 20 June 2018. Ministers reiterated the Government’s position on numerous occasions, whether in debate or PQs, since then: for example, in a debate on the Loan Charge on 11 April 2019 (HC Deb cc565-8). 123 Commons Library Briefing, 13 April 2021

corporates settled and ceased using schemes when they saw that they were unmistakably not viable after late 2010. Such companies and their employees are therefore not a material element of those subject to the Loan Charge. The residual group are frequently on mid-range or lower incomes, coming from industries like construction, IT and oil and gas, as well as financial or business services. It is clear to me that many of those affected may not have been fully aware what they were doing when using loan schemes or failed to distinguish between genuine professional advisers and those acting more as salespeople. Certain of them felt that they had little option but to use the schemes I have a great deal of sympathy for those people. There is, however, an important principle that the taxpayer is ultimately responsible for ensuring that they have paid the right amount of tax in accordance with the tax laws in force for the relevant period. After careful consideration I agree with the expert testimony given to the Review that any movement away from this principle would be unwise. The enhanced terms that I recommend to ensure that the Loan Charge is affordable for individuals on lower incomes are, however, justified by the fact that such people typically relied upon professional advisers who did not meet expected standards.392 At the time it was published the Government accepted all but one of the review’s recommendations about the Charge,393 and in Budget 2020 confirmed that the necessary statutory provisions to amend its application would be included in the forthcoming Finance Bill.394 These developments are examined in much greater detail in another Commons Briefing paper.395 The following paragraphs focus on the wider implications of the review for the Government’s approach to tackling the promotion of tax avoidance, and to improving the standards of tax advice. In the course of its work the review received a lot of information about the role played by some scheme promoters, minimising the risks for taxpayers from this type of aggressive avoidance: The tactics [promoters] used included misrepresenting the DOTAS system to claim that schemes had been approved by HMRC, or providing opinions from Queen’s Counsel (QCs) suggesting that HMRC would not be successful if they tried to claim the tax. The Review also received extensive evidence that some advisers minimised the importance of HMRC opening enquiries by suggesting that this was normal. Scheme users therefore felt confident in continuing to use the schemes though they might otherwise have chosen to stop doing so if they had realised the real implications.

392 HMT, Independent Loan Charge Review: report on the policy and its implementation, December 2019 p5 393 HM Treasury press notice, Government to take new actions on loan schemes following Morse review, 20 December 2019. 394 Budget 2020, HC 121, March 2020 para 2.255 395 The 2019 Loan Charge, Commons Briefing paper CBP8811, 17 March 2021 124 Tax avoidance and tax evasion

As a result of these kinds of tactics, many individuals and employers who used schemes placed significant reliance on advice of this type in determining whether schemes were legitimate. Taxpayers often placed significant trust in their promoter or advisers because the tax system was not their area of expertise but should have been the professional’s … The Review found numerous examples of contemporaneous promotional material from scheme promoters into the 2010s minimising the risks of using schemes and continuing to present such behaviour as legitimate tax planning despite the clear risks.396 It also noted that despite the introduction of the Loan Charge promoters were continuing to market schemes, and developments in the market posed serious obstacles to HMRC: The Review found there were more first-time users in 2017-18 (over 6,000) than in any year dating back to 1999-2000. Scheme usage continues to be extensive in the 2019-20 tax year to date, with over 8,000 individuals having entered into loan schemes between April and October 2019. A key driver of ongoing scheme usage is a limited number of promoters and professional advisers who are selling schemes in spite of knowing that they will not deliver the tax benefits being promised … Whilst the Review has set out its position that responsibility for tax affairs must ultimately rest with the individual, it is to be expected that people will want expert advice on their tax affairs, and will turn to professionals for that advice. The Review considers that the continuing marketing of loan schemes on the basis of tax benefits associated with them, given the clear legal position, is reprehensible. It is also deeply regrettable that the state of the market in tax advice is such that a large number of people were seemingly misled, and many continued to use schemes after 2010 even though the legal position had been made clear … HMRC reported that their activity is now concentrated on the remaining promoters who are likely responsible for the majority of loan schemes presently being sold. In 2019-20, HMRC expect to double the resources involved in tackling promoters. In spite of this increased resource, it remains challenging for HMRC to combat promoters of tax avoidance schemes. The evidence from HMRC is that the typical profile of a scheme user has changed towards a higher volume of less affluent users. The marketing of loan schemes has changed to reflect this, and increasingly now imitates legitimate price comparison tools. Promoters now increasingly claim to be offshore, and so are more challenging for HMRC and other UK authorities to enforce against.397 The review recommended that, “the government must improve the market in tax advice and tackle the people who continue to promote the use of loan schemes” and, “publish a new strategy within 6

396 HMT, Independent Loan Charge Review: report on the policy and its implementation, December 2019 para 8.3-5, para 8.7 397 HMT, Independent Loan Charge Review: report on the policy and its implementation, December 2019 p56, para 8.10-11, para 8.15-6 125 Commons Library Briefing, 13 April 2021

months, addressing how the government will establish a more effective system of oversight, which may include formal regulation, for tax advisers.”398 In its response the Government stated it would set out a series of measures in the forthcoming Budget “to tackle promoters of avoidance schemes that will reduce the scope for promoters to market tax avoidance schemes” as well as launching a review of how to improve standards in the market for tax advice.399 The review also recommended that HMRC should improve its support for external sources of taxpayer advice, report to Parliament on its implementation of the Loan Charge and review its Charter in the light of this experience, which the Government accepted.400 In the case of HMRC’s Charter,401 the Department launched a consultation exercise in February 2020 on a revised draft text … The revised draft charter aims to take account of views we have received so far for example that the revised charter: • is short and direct with simple, accessible language • embodies or represents HMRC’s values: we are professional, we act with integrity, we show respect and we are innovative • is more focussed on HMRC’s commitments to customers, while not losing sight of customers’ obligations to HMRC.402 … and published a new Charter in November that year.403 HMRC’s report to Parliament on its implementation of the review was published in December 2020,404 and as part of this, noted: HMRC have now funded Money Advice Trust (MAT) for three years, from 2020 to 2023, to provide debt advice specifically tailored to taxpayers who were impacted by the Loan Charge, free at the point of need. MAT debt-line advisers have been provided with details of the background and policy intent of the Loan Charge, so they can better understand and support these people. As an independent organisation, MAT will work with those impacted to prepare a joint assessment of affordability, which HMRC will accept and use when agreeing a TTP arrangement. Advice that MAT are able to provide can include the potential suitability of an individual voluntary arrangement (IVA) where appropriate to an individual’s personal circumstances.405 During the period of the review the Autumn Budget was postponed, due to the timing of the General Election on 12 December. In this

398 op.cit. para 8.17 399 HMT, Independent Loan Charge Review: Government response to the Review, December 2019 para 2.47-9 400 op.cit. para 2.33, paras 2.40-1 401 HMRC’s Charter is a legal requirement under s92 of Finance Act 2009; this states that the Charter ‘must include standards of behaviour and values to which HMRC will aspire when dealing with people in the exercise of their functions’. 402 HMRC, Consultation: HMRC Charter, 24 February 2020 403 HMRC, HMRC Charter, 5 November 2020. See also, PQ119985, 2 December 2020. 404 HMRC, Independent Loan Charge review, 3 December 2020. 405 op.cit. para 3.9 126 Tax avoidance and tax evasion

context it is worth noting that the Conservative Party’s manifesto set out a number of measures for “building a fairer taxation system”, to reduce the size of the tax gap: The gap between the amount of tax that should be paid and is actually collected stands at £35 billion – still too high … So we will set out a new anti-tax avoidance and evasion law. This will: • Double the maximum prison term to 14 years for individuals convicted of the most egregious examples of tax fraud. • Create a single, beefed-up Anti-Tax Evasion unit in HMRC that covers all duties and taxes, from individual errors to deliberate noncompliance – which is put on a legislative footing. • Consolidate existing anti-evasion and avoidance measures and powers. • Introduce a new package of anti-evasion measures, including measures to end tax abuse in the construction sector, crack down on illicit tobacco packaging and further measures to avoid profit-shifting by multinational companies to avoid paying taxes.406 Following the election the Government announced that the Budget would be presented on 11 March 2020.407 Tackling promoters of mass-marketed schemes The Chancellor Rishi Sunak did not mention the Loan Charge in his Budget statement to the House, although, as noted, the Budget report confirmed that the changes to be made to the Charge would be legislated for in the Finance Bill, and to implement these changes HMRC would be given “additional operational funding.”408 In addition, a call for evidence would be issued “on further action to stamp out these schemes.”409 The Budget report also announced the Government would invest in “additional compliance officers and new technology for HMRC” which, it was estimated, could “bring in £4.4 billion of additional tax revenue up to 2024/25 by enabling HMRC to further reduce the tax gap through additional compliance activity and expanding debt collection capabilities.”410 In its assessment of the Treasury’s Budget costings, the Office for Budget Responsibility gave this particular costing a ‘high uncertainty rating’ “on the grounds that it largely relates to the collection of tax and tax credits debt rather than compliance activity. The element of the measure that does relate to tax compliance,

406 Conservative Party, The Conservative and Unionist Party Manifesto 2019, December 2019 p35 407 HMT press notice, Chancellor launches Budget process to usher in ‘decade of renewal’, 7 January 2020 408 These provisions now form ss15-21 of FA2020. See also, HMRC, Implementation of recommendations from the independent review of the Loan Charge, 11 March 2020 409 Budget 2020, HC 121, March 2020 para 2.255. This was estimated to cost of £745m over 2019/20 to 2024/25 (op.cit. Table 2.1 – item 63). 410 op.cit. para 2.254; Table 2.1 – item 59. The forecast is “HM Treasury internal estimate using HMRC data.” (op.cit. p97, fn30). 127 Commons Library Briefing, 13 April 2021

affecting around a third of the yield, is highly uncertain, but costings relating to debt collection are less so.”411 As anticipated in the Government’s response to Sir Amyas’ review, the Budget set out a number of provisions to tackle promoters to be included in the next Finance Bill, in 2020-21: The legislation, which will take effect following Royal Assent, will: • allow HMRC to obtain information about the enabling of abusive schemes as soon as they are identified by strengthening information powers for HMRC’s existing regime to tackle enablers of tax avoidance schemes • ensure enabler penalties are felt without delay for multi- user schemes, meaning anyone enabling tax avoidance arrangements that are later defeated will face a penalty of 100% of the fees they earn • enable HMRC to act promptly where promoters fail to provide information on their avoidance schemes. In particular, these changes will help HMRC obtain the information needed to bring a scheme into the Disclosure of Tax Avoidance Schemes regime and empower HMRC to act faster where avoidance schemes are being promoted • equip HMRC to more effectively stop promoters from marketing and selling avoidance schemes as early as possible • ensure promoters fulfil their obligations under the Promoters of Tax Avoidance Scheme (POTAS) regime, including where they have tried to abuse corporate structures to get around the rules • make further technical amendments to the POTAS regime, including preventing spurious legal challenges from disrupting the process of scrutinising promoters, so the regime can continue to operate effectively • make additional changes to the General Anti-Abuse Rule (GAAR) so it can be used as intended to tackle avoidance using partnership structures.412 Some days after the Budget HMRC published its ‘promoter strategy’, to “outline the range of policy, operational and communications interventions both underway and in development to drive those who promote tax avoidance schemes out of the market, disrupt the supply chain to stop the spread of marketed tax avoidance, and deter taxpayers from taking up the schemes.”413 The document set out four broad areas for HMRC’s actions – collaboration with partner bodies; supporting taxpayers; tackling the actions of promoters; and, the series of future policy measures announced in Budget 2020. In a foreword to the strategy the Financial Secretary Jesse Norman noted, “to maintain public trust and consent, we all need to be confident that those who pay tax will not be disadvantaged by those who do not”:

411 OBR, Economic & Fiscal Outlook, CP 230, March 2020 p96 (para A26) 412 Budget 2020, HC 121, March 2020 para 2.256; HMT, Overview of tax legislation & rates, March 2020 para 2.46. 413 Budget 2020, HC 121, March 2020 para 2.257. For full details see, HMRC, Tackling promoters of mass-marketed tax avoidance schemes, March 2020. 128 Tax avoidance and tax evasion

This new strategy is designed not merely to collect tax due, but to generate that vital wider public confidence. We know that promoters will continue to devise new schemes to try to get around the tax rules, and that no strategy can be the final word. The government will continue to welcome new and ambitious ideas for tackling promoters of tax avoidance, including through the forthcoming Call for Evidence on Tackling Disguised Remuneration.414 At this time HMRC also published a call for evidence on raising standards for tax advice. In its introduction HMRC pointed out that the diverse nature of the market posed significant difficulties for crafting the correct approach: The majority of good advisers add value, both for their clients and for compliance … However, there are a minority of tax advisers who do not provide a good value service to their clients. Some do not have the required expertise, and some do not adhere to the high standards their professional bodies expect of them. Some of this small group have a significant negative impact on their clients. A partial regulatory regime operates in this market. Tax advisers who belong to a professional body are required to maintain professional competency and sign up to codes of conduct, most notably the Professional Conduct in Relation to Taxation (PCRT), although not all professional bodies incorporate the PCRT in their standards. Similarly, HMRC expects agents to adhere to the standards set out in its Standard for Agents and is taking steps to ensure compliance. However, anyone can set up as a tax adviser. And while they must be supervised for anti-money laundering purposes, there is no market-wide competence requirement or code of ethics except the HMRC Standard for Agents. HMRC has been discussing ways to raise standards with the profession for some time, but the issues that arise from not meeting those standards have been highlighted recently by the findings of the independent review into the loan charge.415 It went on to set out a range of potential approaches, while underlining that this is “illustrative only and does not represent the full range of approaches: these could be implemented singly or in conjunction”: Given that the market is diverse and any action has the potential to impact customers and the wider economy, this call for evidence seeks evidence on the case for intervention and on potential steps that could be taken to raise standards in both the tax advice and wider tax services market416 and give taxpayers confidence in the quality of the advice they receive. The government is asking for views on a range of potential approaches to tackling issues of poor performance in the tax advice and wider tax services market. These approaches vary from improving HMRC interventions to full regulation of the market as shown in figure 1 …

414 “Foreword”, HMRC, Tackling promoters of mass-marketed tax avoidance schemes, March 2020 415 HMRC, Call for evidence: raising standards in the tax advice market, 19 March 2020 para 2-5 416 All references to the tax advice market include tax advice and tax services 129 Commons Library Briefing, 13 April 2021

This call for evidence asks a series of questions but the government is also interested in general responses on the themes explored in this document. HMRC will be contacting a range of stakeholders who are likely be affected by any reform in this area. Figure 1: the spectrum of potential approaches417

In the weeks after the 2020 Budget the global outbreak of coronavirus dominated political debate, and, in this case, meant the extension to the Government’s consultation on the tax advice market, and the delay to its call for evidence on disguised remuneration schemes.418 One striking illustration of the resilience of the market for tax avoidance market came just a few days after the Budget when HMRC published a ‘Spotlight’ article on 30 March. This warned one-time NHS employees, re-joining the Service to help with the coronavirus outbreak, that some promoters were actively targeting them as potential clients for new avoidance schemes.419 Notably HMRC published two further Spotlight pieces later in the year on two other disguised remuneration schemes.420 Draft provisions to be included in the next Finance Bill were published on ‘L-day’ on 21 July.421

417 HMRC, Call for evidence: raising standards in the tax advice market, 19 March 2020 para 8-9, para 11. See also, “Raising standards in the tax advice market”, Tax Journal, 1 May 2020. 418 Update on tax policy documents: Written Statement HCWS211, 28 April 2020. For a general survey of this issue published at this time see, “The boundaries of acceptable tax planning” & “Measures available to HMRC to tackle tax avoidance and evasion”, Taxation, 6-19 May 2020. 419 HMRC, Tax avoidance promoters targeting returning NHS workers (Spotlight 54), updated 9 April 2020 420 HMRC, Disguised remuneration: tax avoidance by owner managed companies using remuneration trusts (Spotlight 56), 1 September 2020; Disguised remuneration: tax avoidance by selling future business revenues to a revenue service trust (Spotlight 57), 17 December 2020. 421 Written Statement HCWS400, 21 July 2020 130 Tax avoidance and tax evasion

At this time HMRC launched a further consultation on measures to tackle avoidance scheme promoters,422 and a call for evidence on disguised remuneration.423 With the continuing economic impact of Covid-19, the Chancellor gave three statements on the economy over the remainder of the year, and the Budget, expected in the Autumn, was postponed to Spring 2021. A second tranche of draft provisions for the Finance Bill was published in November 2020, and the Minister’s statement announcing this publication included an update on the Government’s plans to tackle promoters … Tackling promoters of tax avoidance In line with the Government’s strategy to tackle promoters of tax avoidance schemes, published in March, the Government is today announcing that it will consult in the new year on further measures to tackle promoters. These proposals will build on the proposals announced earlier this year and will: • disrupt the business model of offshore promoters by making it harder for such promoters to access the UK by making their onshore partners equally responsible for the anti-avoidance regime penalties that the offshore promoter generates. • directly tackle the secrecy on which promoters rely; the proposals here would ensure that taxpayers are fully informed of the reality of what is being sold to them. • disrupt the economics of tax avoidance by ensuring that, without delay, promoters face financial consequences for continuing to promote tax avoidance so that promoters cannot continue to profit from avoidance while HMRC investigates them. • give HMRC additional powers to act against companies that continue to promote schemes and who sidestep the rules designed to restrict their activities. The proposals would see such promoters shut down and restricted from setting up similar businesses. The Government continues to recognise that the many tax advisers who adhere to high professional standards are an important source of support for taxpayers. The proposals are aimed at targeting those promoters who exploit every opportunity to personally profit by side-stepping the rules and whose unscrupulous actions often leave taxpayers with significant tax bills. The Government continues to recognise that strengthening HMRC powers in the way described must be done in a carefully constrained way. HMRC will again work with stakeholders, and in particular those tax advisers who adhere to high professional

422 HMRC, Tackling Promoters of Tax Avoidance: Consultation, 21 July 2020. See also, HMRC, New proposals for tackling promoters and enablers of tax avoidance schemes, 21 July 2020 & “The new powers tackling promoters of avoidance schemes”, Tax Journal, 2 October 2020. 423 HMRC, Tackling disguised remuneration tax avoidance: Call for evidence, 21 July 2020. See also, CIOT press notice, Avoidance schemes - CIOT welcomes robust approach on promoters, 21 July 2020. 131 Commons Library Briefing, 13 April 2021

standards, to ensure that these proposals are both effective and proportionate.424 … and raising standards for tax advice: Raising standards for tax advice The Government is publishing a Summary of Responses and Next Steps from the call for evidence on raising standards in the market for tax advice. As a first step towards raising standards, the Government will consult on requiring tax advisers to hold professional indemnity insurance and how to define tax advice. The majority of respondents supported government action to raise standards.425 On 7 December HMRC officials gave evidence to the Treasury Select Committee on the department’s annual report and accounts. On this occasion Jim Harra (HMRC’s CEO) was asked by Alison Thewliss about the decision to propose that tax agents obtain professional indemnity insurance, as an alternative to requiring all agents to be professionally qualified … Alison Thewliss: … I understand you have been doing a call for evidence on the raising of standards for tax advice … Could I ask why there have not been many calls for a legal requirement that tax agents are professionally qualified? The Government have shied away from this and they are instead proposing a professional indemnity insurance requirement. Jim Harra: … In most countries there is a requirement for tax agents to have a qualification in order to operate, and that is not the case in the UK. In most countries, they are regulated to some extent or other, whereas here, although about 70% of tax agents are regulated by a professional body, around 30% are not. … It is not abundantly clear that there is evidence that the unqualified agents are significantly less professional in terms of the service they provide than those who have a qualification, so the Government probably want to move fairly carefully. However, the proposition is that the requirement to get professional indemnity insurance (PII) will in some ways be self- policing and self-regulating, because agents in particular at that end of promoting avoidance who are taking big risks will find it difficult to get insurance for the type of activity they engage in. … and whether this would be effective if insurers took the precaution of excluding avoidance advice from the scope of any policy: Alison Thewliss: Is it not the case that professional indemnity insurance policies are likely to have exclusions within them? Those types of exclusions will be specifically for the kinds of things you are looking at such as advice on tax avoidance. Does this not just create another loophole for people to get around, if that is what they are looking to do? Jim Harra: We will have to look at how we can make that work … Is this the end of the story? I suspect not. We have been

424 Written Statement HCWS572, 12 November 2020. See also, CIOT press notice, Tax advisers welcome modest steps towards better standards, & LITRG press notice, HMRC must help taxpayers to help themselves, 12 November 2020. 425 ibid. see also, HMRC, Raising standards in the tax advice market: Summary of responses and next steps, November 2020; and, “The tax market”, Taxation, 4 February 2021. 132 Tax avoidance and tax evasion

negotiating the relationship between the tax system and tax advisers for some time, but this review was particularly driven by a requirement to look at the abusive end of the tax-adviser market, particularly in relation to avoidance. It came out of a recommendation from Sir Amyas Morse’s report, and therefore the call for evidence and the outcome of that reflects in a sense the source of that recommendation, which is about how to prevent tax advisers from tempting people into avoidance schemes that are just going to land them in a lot of trouble. 426 In answer to a follow-up question, Mr Harra noted another development in HMRC’s efforts to tackle avoidance… In tackling avoidance, we are increasingly using non-tax means of driving these people out of the market. For example, we have recently agreed a joint enforcement notice with the Advertising Standards Authority to prevent online advertising of tax avoidance schemes that do not work. We would very much want to harness this to tackle what is a very small number of hardcore advisers who are operating in this market. If we could catch them operating without PII, that would be an extra thing we would be able to use against them.427 Ms Thewlis went on to ask,“how will you know this has been successful?”: Jim Harra: In terms of how we have tackled the market of tax avoidance, first of all, several years ago we effectively drove the banks, the big accountancy firms and the big solicitors out of this industry. More recently, in the last six years, we have been using more draconian powers to drive the more boutique end of the market out. What we are left with is a hardcore of about 20 or 30 really, frankly, unscrupulous promoters. What I want to see is them out of the market. Alison Thewliss: Is there further that the law could do to crack down on these unscrupulous promoters? Jim Harra: …. We have a two pronged approach for this remaining hardcore. One is to crack down on them from the supply side and make it increasingly difficult for them to operate; the other is to work on reducing the demand for their services, making the people who they target aware of the risks of what is being marketed to them and encouraging them to steer clear of it. … Penny Ciniewicz (Director General, Head of Customer Compliance) : We are doing a great deal. I will summarise it briefly. If you want to know more, by all means let us know. We are using all the legal powers that we have been given over the last few years. In the strategy that we set out in the spring, we have also explained how we are going to use a range of new powers, including those that were out on consultation in the summer, to reinforce the powers we already have.

426 Treasury Committee, Oral evidence: HMRC Annual Report and Accounts, HC 1061, 7 December 2020 Q64, Q66. see also, Compulsory insurance, not regulation, the way to tackle avoidance scheme promoters, says HMRC chief, CIOT blog, 11 December 2020 427 op.cit. Q69. See, Advertising Standards Authority, Enforcement Notice - Advertising Tax Arrangement Schemes, 26 November 2020 133 Commons Library Briefing, 13 April 2021

We also look at all the powers within HMRC’s disposal, including criminal investigations and prosecutions. We also work with insolvency practitioners. We work to disqualify directors of companies where they are behaving inappropriately; we leverage things that are within our gift such as the use of securities; and, as Jim has explained, we do our level best to encourage people not to get into avoidance in the first place. We have recently started a new campaign to help educate people about the signs of avoidance and to encourage them to stop, to challenge and to protect themselves and the tax system by not getting involved in avoidance.428

Follower Notice penalties In December 2018 the Lords Economic Affairs Finance Bill Sub- Committee published a report on HMRC’s powers, as part of its wider inquiry on the Finance Bill. The Committee raised concerns about “the Government’s “approach and rhetoric towards tax avoidance”, arguing that clearer distinctions should be made between “deliberate and contrived tax avoidance by sophisticated, high-income individuals, and uninformed or naive decisions by unrepresented taxpayers.”429 The report was strongly critical of the 2019 Loan Charge, and, more generally, the development of HMRC’s powers since 2012. In this context, the Committee noted that witnesses were particularly critical of the introduction of Follower Notices and Accelerated Payment Notices (as discussed in Section 4 of this paper), and the fact that taxpayers had no right of appeal against HMRC’s decision to issue a notice: Perhaps the strongest feelings expressed in evidence were about Accelerated Payment Notices and Follower Notices. Taxpayers have no right of appeal against a notice, only against the underlying tax liability. The only protection afforded to the taxpayer, other than judicial review, is the opportunity to make representations to HMRC. The protection of oversight by the tax tribunal is missing. An HMRC determination with no right of appeal is unusual … All HMRC determinations and notices should be appealable to the tax tribunal … We recommend the Accelerated Payment Notice/Follower Notice legislation be amended to include a right of appeal to the tax tribunal.430 It also argued that the penalties associated with Follower Notices, and with the General Anti-Abuse Rule (GAAR) were “disproportionate”: Witnesses were concerned that penalties for continuing appeals against underlying tax liabilities could undermine access to justice for taxpayers. Taxpayers continuing appeals after receiving a follower notice can face penalties of up to 50 per cent of the tax if they are unsuccessful …

428 Treasury Committee, Oral evidence: HMRC Annual Report and Accounts, HC 1061, 7 December 2020 Qs74-5. On HMRC’s resources to tackle promoters see also, PQ114925, 20 November 2020. 429 The Powers of HMRC: treating taxpayers fairly, HL Paper 242, 4 December 2018 para 26 430 op.cit. para 89, paras 93-4 134 Tax avoidance and tax evasion

Malcolm Gammie QC told us that a similar situation exists with the General Anti-Abuse Rule: “…if you wish to appeal beyond a certain point in the General Anti-Abuse Rule process, you are at risk of a 60 per cent penalty … I am not quite sure that I know any taxpayer who would take that risk with that type of arrangement.” … Penalties associated with General Anti-Abuse Rule and Follower Notices are draconian and restrict access to justice. We recognise that they were introduced to inhibit taxpayers from delaying settlement by appealing, but at their present level they are disproportionate and cannot be justified. Taxpayers who challenge HMRC’s view of the law and pursue litigation after a Follower Notice or General Anti-Abuse Rule ruling should not be penalised if they are ultimately unsuccessful. We recommend that these penalties are abolished.431 The Government published a response to the report on 22 January 2019, and rejected both the recommendation to allow taxpayers to appeal the issuance of FNs and APNs … The APN rules prevent avoiders from gaining an economic advantage during protracted litigation by requiring them to pay the disputed tax up front. The Follower Notices regime encourages avoiders, on the back of court decisions in similar cases of tax avoidance, to settle their dispute, so reducing the time taken to bring cases to conclusion. The APN and FN rules do not affect a taxpayer’s right to appeal against an HMRC decision or assessment concerning their tax liability and several legal challenges have been taken by taxpayers. In the event that the taxpayer wins their case, HMRC will, of course, refund any AP (including interest), and no FN penalty will be due. A right of appeal against APNs/FNs would simply mean running the substantive arguments on whether the avoidance scheme works in advance of, and in addition to, litigation on the scheme itself. That would make the APN/FN regimes ineffective - taxpayers would revert to being able to gain an economic advantage during protracted litigation (into the APN appeal), and avoiders whose argument had already been (substantively) decided in court, in someone else’s litigation, could await their own hearing, rather than being encouraged to settle their dispute early. The APN and FN rules provide a right for the taxpayer to object to a notice and make representations to HMRC. In around 90% of cases where representations are made, notices are upheld as valid, with over 80% confirmed in the original amount. HMRC has won (subject to appeal) all judgements given by the Court of Appeal on Judicial Reviews challenging APNs. … and the recommendation that FN and GAAR penalties be scrapped: Both these regimes are designed to address protracted delays in finalising avoidance cases and give the taxpayer opportunities to settle their disputes without the application of penalties. Penalties can be appealed to an independent tribunal.432

431 op.cit. paras 96-7, paras 103-4 432 HMRC, The Powers of HMRC: treating taxpayers fairly – Government response, 22 January 2019 pp8-9 135 Commons Library Briefing, 13 April 2021

The Committee’s report was debated on 29 April 2019, and on this occasion, as part of his speech, Lord Judge highlighted the Government’s response on the issue of penalties: If where the legislation is uncertain, a case is litigated, the court may decide that the scheme is lawful and, if it does, no penalty can be imposed on the taxpayer for going to court. It would be an extraordinary proposition if it could. However, what that successful taxpayer risked in going to court was not only the costs of losing the litigation, which is fair enough, but the imposition of a huge financial penalty—not tax, not back tax, not unpaid tax, not interest on tax, but just a straight penalty. That is precisely what is meant by the Government’s response on page 9 that this regime—I paraphrase—provides the taxpayer with an opportunity to settle the dispute without the application of penalties. That is a subtle threat, seemingly bedecked, as an inducement that, “It will be in your interests to do as we tell you”.433 A few weeks after the debate on 16 July Jesse Norman, Financial Secretary to the Treasury, gave evidence to the Committee,434 and on this occasion was asked about this issue: Baroness Bowles of Berkhamsted: … When the sub- committee’s report was given to the Lord Judge, the former Lord Chief Justice of England and Wales, he said: “If the taxpayer questions an asserted tax liability, HMRC cannot be judge in its own cause. The imposition of penalties on those who wish to use the court system to establish that, contrary to the views of HMRC, there is no liability, fetters access to justice”. … It seems that individuals are very quickly put on to an escalator with follower notices and accelerated payment notices. I understand the concern about the clever people with their advisers who can game the system, but, again, you cannot put everyone at risk just because there are some clever clogs out there who can do that. There needs to be some recourse to justice. Jesse Norman MP: ... Lord Judge’s intervention in that debate was extremely powerful .. I have agreed with HMRC that it will take his suggestion seriously, and, following proper consultation and internal discussions with the MoJ, it will revert to me, if I am in post, and certainly to the Committee with an analysis of how that concern can be addressed.435 In December 2020 the Minister announced a short consultation exercise on a proposal to reduce the size of FN penalties: The Government introduced the Follower Notice regime in Finance Act 2014, following a consultation titled ‘Raising the Stakes on Tax Avoidance’. The Government considers that the Follower Notice regime is an important element in the legal framework available to HMRC to tackle tax avoidance. In December 2018 the House of Lords Economic Affairs Committee published its report 'The Powers of HMRC: Treating

433 HL Deb 29 April 2019 cc799-800 434 Select Committee on Economic Affairs, Oral evidence: The Financial Secretary to the Treasury, 16 July 2019. The Minister mentioned a number of changes to meet concerns regarding HMRC powers, that he confirmed a few days later in a Written Statement (HCWS1785, 21 July 2019). This is discussed below. 435 Select Committee on Economic Affairs, Oral evidence: The Financial Secretary to the Treasury, 16 July 2019 Q3 136 Tax avoidance and tax evasion

Taxpayers Fairly'. In that report, the Committee recommended that the penalties associated with Follower Notices be abolished. The Government rejected the recommendation to abolish Follower Notice penalties as this would render the regime ineffective. However, I said in testimony to the Committee that HMRC would examine the possibility of providing greater judicial oversight of the Follower Notice safeguards. The Government understands the concerns that have been raised about Follower Notices, but it has not been possible to identify any effective means of providing greater judicial oversight of the Follower Notice regime which would not re-introduce, or even worsen, the delays in settlement and payment of disputed tax, which the regime was designed to address. However, the Government has also taken the opportunity to look closely at other options to ensure the Follower Notice regime can best achieve its objectives. It accepts that a better balance can be found between encouraging taxpayers who have used tax avoidance schemes which have been defeated in the courts, to reach agreement with HMRC; and allowing those who genuinely believe their case is different from that heard by the courts, to continue their dispute. This can best be achieved with a stronger focus on those whose continuation of their dispute, even once they have received a Follower Notice, is without merit. Therefore, I am announcing publication today of a consultation document ‘Follower Notices and Penalties’. This consultation proposes to reduce the level of penalty for a taxpayer not acting in response to a Follower Notice, from fifty per cent of the disputed tax to thirty per cent. A further penalty of twenty per cent would be chargeable only in cases where those receiving Follower Notices continue their disputes to litigation, and the tax tribunal rules that it was not reasonable for them to have done so. The Government is committed to tackling all aspects of the avoidance market, including those who promote tax avoidance schemes. The Government announced measures in July and November aimed at strengthening HMRC’s ability to tackle those who sell avoidance schemes. The consultation has been published here … It will run to Wednesday 27 January.436 Following this consultation exercise, in the 2021 Budget the Government confirmed it would proceed with this reform.437 HMRC published a summary of the responses it had had, noting “five responses were received, three from representative bodies and two from professional advisers”, and that while “in general respondents expressed their dissatisfaction with the Follower Notice regime, but all supported some level of reduction to the FN penalty.“438 HMRC’s summary of responses also provides some details as to why the Government took the view that FN penalties should be retained …

436 Follower Notices and Penalties - Written Statement HCWS661, 16 December 2020. See also, “Proposals to amend follower notice penalties”, Taxation, 9 February 2021 437 HMT, Overview of Tax Legislation & Rates, March 2021 para 1.62. 438 HMRC, Follower Notices and Penalties: Summary of responses, 3 March 2021 paras 1.8-1.9 137 Commons Library Briefing, 13 April 2021

The government believes that FNs are a necessary part of HMRC legal framework for tackling avoidance but that reducing the level of the FN penalty would provide a better balance than now between the objectives of FNs and the rights of taxpayers who believe their dispute is genuine. The government also believes that a penalty rate of 30% for FN penalties is appropriate for achieving this aim … The government does not accept that introducing a right of appeal against a FN would be helpful. As has been noted before, by introducing a further opportunity to carry on a dispute with HMRC such an appeal right would frustrate the purpose of the FN regime. HMRC is currently looking at the guidance on FNs and plans to expand and update it, clarifying potential points of difficulty. The responses to the consultation will help to inform that work and the updated guidance which will be published later in 2021 … A taxpayer can already appeal against a FN penalty on the basis that it was reasonable in all the circumstances for the person not to take corrective action. If HMRC or the tribunal accept that not taking corrective action was justified on that basis, any FN penalty is cancelled. This is a strong safeguard.439 … and why HMRC should have the power to charge a second penalty, in cases determined to be time-wasting, vexatious or otherwise without merit: The government is not persuaded that a single FN penalty, to be applied only when continued litigation was determined by the tribunal to be unreasonable, would achieve the objectives of the FN regime, which is to encourage prompt settlement of disputes when the points at issue have already been resolved in a relevant judicial ruling. The objective of the FN regime is to deter taxpayers from taking cases to litigation where the point has already been considered, it therefore needs to apply in advance of such litigation. Many FNs are issued in cases where there is an open enquiry (either into a tax return or a claim to relief), the case has not yet been litigated but HMRC wish to close the enquiry in line with a relevant judicial ruling. FNs issued in such cases encourage the taxpayer to amend their return or claim, to give up the advantage sought by the avoidance scheme. The change suggested would remove the effectiveness of FNs issued in enquiry cases … The draft legislation sets out strict criteria which must apply before a further penalty can be issued … including that a tribunal decides that the person was acting unreasonably in pursuing the appeal. This is a powerful safeguard. The government notes the concerns raised that the principle behind the further penalty might be applied in wider circumstances. However, these proposals are targeted to the specific aims and structure of the FN regime. The legislation sets out precise and narrow conditions which have to be met before the further penalty can be charged and they could have no application outside these circumstances. The government has no plans to extend this approach to other regimes. The government acknowledges that the criteria for issuing a further penalty are stretching. However, the government believes

439 op.cit. para 2.15, paras 2.18-20 138 Tax avoidance and tax evasion

the criteria to apply achieve the right balance between being an effective deterrent to unreasonably prolonged litigation and the rights of genuine litigants.440

HMRC’s ‘Tax Avoidance – don’t get caught out’ campaign As noted by Jim Harra and Penny Ciniewicz when they gave evidence to the Treasury Committee in December 2020, at this time HMRC launched a campaign to alert taxpayers of the risks to using avoidance schemes, and issued its joint enforcement notice with the Advertising Standards Authority that requires promoters to be clear about the potential consequences of tax avoidance in any online adverts.441 HMRC’s campaign included ‘personal stories’ of individuals caught up in avoidance schemes, “based on real people’s experiences, but personal details have been withheld to protect their identity”, and a detailed report on the current state of play for marketed schemes. An extract from one of these personal stories is reproduced below: The IT contractor - Duncan’s story Duncan is a 55-year-old IT project manager … When he started working as a contractor, he chose to use an umbrella company to help him manage his payroll admin. He found one through a comparison website. Duncan didn’t ask enough questions about the arrangements he was being sold so ended up in a tax avoidance scheme. This has left him with an unexpected tax bill on top of the fees he paid to use the scheme. Duncan was lucky as HMRC spotted discrepancies in his PAYE data. That meant we were able to step in quickly. But that’s not always possible, so no-one should ever assume their arrangements are fine because they haven’t heard from us. Duncan explains: “I did an online search for umbrella companies and came across a comparison website. I spoke to one of the guys there, filled in a form and he suggested three companies. He said, ‘these people have got this process in place, and it pays this much’. I just chose one of them, they got me set up and that was it. When I got the letter through from HMRC my first thought was ‘that was quick’. I had only started using the umbrella company a few months earlier, which was still the same tax year.” … The warning signs Duncan wished he had taken more time to consider what he was signing up to and had asked more questions. If he had, he would have spotted the warning signs of tax avoidance. These were: • the offer of increased take-home pay when signing his new contract of employment • signing a loan agreement in addition to his contract of employment

440 op.cit. paraa 2.16-7, paras 2.7-9 441 HMRC press notice, HMRC and Advertising Standard Authority launch new action to disrupt promoters of tax avoidance schemes, 26 November 2020 139 Commons Library Briefing, 13 April 2021

• paying a high fee on his gross pay for the umbrella company to set up his new employment contract and calculate his monthly earnings • a choice of three complex pay arrangements that all split his monthly earnings into two payments • accepting the consultant’s and customer relationship manager’s advice that the payment scheme was vetted and legal without seeking a second professional opinion.442 Two extracts from HMRC’s report on the market are reproduced below. First, the report discusses the changes to the economics of avoidance since 2013 … Our analysis shows the overall amount lost to avoidance schemes targeted at individuals, has more than halved since the 2013 to 2014 tax year, when we estimate it cost the Exchequer about £1.3 billion. This reduction is the result of a series of policy and operational changes. Most notably, the introduction of the General Anti-Abuse Rule in 2013, and Accelerated Payment Notices and Follower Notices in 2014, fundamentally changed the economics of avoidance … while other measures strengthened HMRC’s operational response... Our initial analysis shows the avoidance tax gap has levelled out over the last few years, indicating there is still more HMRC needs to do to further reduce the avoidance tax gap … We believe about 30,000 individuals and 2,000 employers were involved in avoidance schemes in 2018 to 2019. In comparison, we estimate about 22,000 individuals and 6,000 employers were involved in avoidance schemes during 2013 to 2014. This includes individuals and businesses using avoidance schemes for the first time in 2018 to 2019, and those who had used them before and continued to do so. HMRC is doing more work to understand why the number of individuals that we have identified as being involved in avoidance schemes has increased while the number of employers that we have identified as involved in has decreased. In part, this is a result of our ability to identify individuals involved in avoidance at an earlier stage (for example through PAYE data in-year as opposed to analysis of tax returns). We are also looking at whether changes in the wider employment market, notably the increase in freelancing, have had an impact. … and the associated changes in the nature of schemes being sold … In 2013 to 2014, the main types of avoidance schemes were disguised remuneration and sideways loss; the latter involved artificial losses created to offset tax liabilities. Many of these schemes were said to involve investment opportunities and were marketed to higher-income investors. For example, the “Ingenious” and “Icebreaker” avoidance

442 HMRC press notice, Tax avoidance - don't get caught out, 26 November 2020. A recent case gives a striking illustration of promoters assuring clients of the legality of schemes without explaining their nature or giving any advice in writing: White Collar Financial Limited, [2020] UKFTT 459 (TC). 140 Tax avoidance and tax evasion

schemes sought to use artificial losses arising from investments…443 Today, the investment avoidance schemes have largely disappeared, and the market is dominated by disguised remuneration avoidance schemes. This type of avoidance uses contrived arrangements to make the taxable money someone receives for doing a job look like non-taxable money, all with the aim of avoiding the tax that is rightly due ... As these avoidance schemes are so similar, it has become less relevant to count the number of schemes being marketed. Many are simply tweaked versions of earlier schemes that are then marketed under a new name or to different audiences. What matters is the overall number of people who use avoidance schemes and the amount of tax they seek to avoid paying.444 Second, HMRC’s report provides some data on the characteristics of those using marketed schemes – with regard to their age, past use of schemes, and declared income … HMRC data shows that, for individuals involved in tax avoidance during the 2018 to 2019 tax year, use of tax avoidance schemes is most prevalent in the 41-60 years age group. On average, they are involved in tax avoidance for about three years. Almost half have been involved in more than one avoidance scheme. Artificially reduced income levels among people who used tax avoidance schemes in the 2018 to 2019 tax year Income Percentage £0-25,000 61% £25-50,000 30% £50-75,000 6% £75-100,000 2% £100,000+ 2% More than nine out of ten people who used avoidance schemes reported an income of less than £50,000 per year for tax purposes. This is something we would expect, because people who used disguised remuneration avoidance schemes did not report their full income for tax purposes. That is because the avoidance scheme sought to artificially lower their taxable income. It is unclear what proportion of the people who reported income of £0-25,000 were genuinely on incomes of this level. However, anecdotal evidence in the wake of the Loan Charge and the fact that promoters of avoidance schemes targeted nurses and other NHS workers, indicates an increased level of interest from promoters in individuals on middle-incomes. Note: The reported income has been extracted from HMRC’s real time information PAYE data and Self Assessment data. Where a person had more than one employment in the tax year, the income was summed across the employments. Amounts declared will not reflect the full income for tax purposes. As Loan Charge

443 [for further details see, HMRC press notice, HMRC wins blockbuster tax avoidance cases, 11 August 2016; “Return of the taxman”, Taxation, 23 August 2016.] 444 HMRC, Use of marketed tax avoidance schemes in the UK, updated 17 March 2021 para 2.2-3 141 Commons Library Briefing, 13 April 2021

taxpayers had until 30 September 2020 to file their 2018 to 2019 Self Assessment tax returns, these figures are subject to revision. … their profession … Most common employment types for people who used avoidance schemes during 2018 to 2019 Employment type Percentage Bookkeeping activities 20% Hospital activities 18% Management consultancy activities other than financial management 9% Temporary employment agency activities 9% Combined office administrative service activities 6% Other business support activities n.e.c. 4% Other professional, scientific, and technical activities n.e.c. 3% Other human health activities 3% Other activities of employment placement agencies 3% Primary education 2% ‘n.e.c.’: ‘not elsewhere classified’ About a fifth of the people who used avoidance schemes during 2018 to 2019 had an employment categorised as “Bookkeeping activities”. Most of the employers in this group have been identified as umbrella companies. These are intermediaries who provide workers to other organisations. Where someone works through an umbrella company HMRC data does not show what type of business they are ultimately working for. Our data doesn’t give us a further breakdown of professions. Beyond bookkeeping activities, healthcare, temporary employment agency activities, consultancy, office and business support service activities are the most common sectors within this population. There is a notable level of use of avoidance schemes within the healthcare sector. HMRC has already stepped in where promoters have targeted NHS workers returning to the workforce to support the UK’s COVID-19 response. Note: Sectors are extracted from HMRC’s Real Time Information PAYE data. A relevant code from the International Standard Industrial Classification is associated to each employment. Whenever someone had more than one employment on record, the sector associated with the highest paid employment was selected. … and their reasons for using an avoidance scheme: There is relatively little hard data on why people get involved in tax avoidance and the evidence that we have points to a range of motives. At one end, there is a hard core of serial tax avoiders who are actively seeking to reduce the amount of tax they pay. They will have been in multiple schemes and for a number of years … in avoidance schemes in 2018 to 2019 had been in schemes for more than three years. The motivations of taxpayers outside this group are less clear. Our assessment of taxpayer motivations and behaviour is partly based on feedback from our colleagues who work with taxpayers to get them out of avoidance and help them settle their affairs. Some taxpayers who used avoidance schemes have told us that their aim was to simplify their tax affairs and reduce their 142 Tax avoidance and tax evasion

administrative burden. In these cases, they did not appear to ask questions about the arrangements they were getting into so did not fully understand the risks. Others knew they were engaged in tax avoidance and were prepared to either take the risk, did not understand the consequences, or did not believe that HMRC would identify them and ask questions. A number of people who used avoidance schemes have said they were instructed to join a scheme as a condition of securing a particular job. However, HMRC has not yet seen contracts or other paperwork that can verify this. We suspect that the majority of people who used avoidance schemes, particularly in recent years, didn’t look too deeply into the tax arrangements they were being offered. In part, this may simply be because they believed they had handed their affairs to someone they viewed as competent and professional. Few understood that tax advice is unregulated, and many were surprised to find they were personally responsible for ensuring they pay the right tax.445 In this context it is worth noting the submission the Low Incomes Tax Reform Group make to HMRC’s call for evidence on disguised remuneration avoidance, which the charity published in September 2020.446 In this LITRG argued that this type of avoidance was “largely driven by PAYE avoidance behaviour on the part of some employers (the umbrella companies), rather than the workers themselves having any kind of avoidance motive”, so that HMRC needed to ensure that this factor was taken into consideration in crafting its response: These days, the use of schemes, particularly at the lower end of the market, is largely driven by PAYE avoidance behaviour on the part of some employers (the umbrella companies). It is vital that HMRC recognise and understand this so that appropriate strategies can be developed, otherwise there is a risk that HMRC’s actions will fail to be effective because they are based on an erroneous underlying assumption … [Our report gives the example of] an agency worker (working 35 hours at a rate of, say, £10 an hour) is around £15 a week better off by being in a loan arrangement. Yet the engager is likely to have made savings of nearly £40 a week – generating more profit for them and/or making them more competitive through the savings being passed up the supply chain, potentially to the benefit of the end client. While we have no interest in protecting those who intentionally seek to minimise their taxes by using aggressive DR arrangements, in our view, this example demonstrates how easy it is for innocent agency workers to end up as pawns – in a game being played by their umbrella companies. HMRC, therefore, need to tackle the schemes at umbrella company level, for example by: • Working with bodies such as the ASA to intervene when they see false advertising or marketing, early – before harm is done.

445 op.cit. para 2.4-5. For some coverage of this in the press see, “It’s not just the rich that avoid tax: it’s teachers and nurses too”, Sunday Times, 21 March 2021. 446 LITRG press notice, Call for evidence: tackling disguised remuneration tax avoidance, 23 September 2020 143 Commons Library Briefing, 13 April 2021

• Demanding PAYE security deposits from certain umbrella companies, as this would surely help weed out potentially problematic providers. • Using their new joint and several liability powers, to help level the playing field (the insolvency regime seems to be behind the somewhat cavalier behaviour we have seen from certain umbrella companies with regard to their PAYE obligations).447

The evaluation of HMRC’s powers since 2012 As noted above, in December 2018 the Lords Economic Affairs Finance Bill Sub-Committee published a report on HMRC’s powers, as part of its wider inquiry on the Finance Bill. One of the themes to the report was the Committee’s concerns about the development of HMRC’s powers since 2012. While the Committee noted that many of these new powers had been “introduced following criticism from Parliament and the media of HMRC’s approach to tax avoidance and tax evasion”, it noted concerns “about the gradual accretion of powers over the last few years without any apparent oversight.”448 The report noted that following the creation of HMRC in 2005 from the merger of the Inland Revenue with HM Customs & Excise, the new revenue authority’s powers were the subject of the ‘Powers Review’: HMRC was created by the Commissioners for Revenue and Customs Act 2005. It combined the predecessor tax collection bodies—HM Customs and Excise, and the Inland Revenue—into one. In the early days of the new Department Treasury Ministers launched a review, Modernising Powers, Deterrents and Safeguards (referred to as “the Powers Review”), as the first step in a programme to modernise HMRC’s administrative powers. Ministers appointed a Consultative Committee on the review, which included representatives of tax credit claimants, businesses and tax professionals. A series of public consultations on particular aspects of HMRC’s powers took place. The outcome sought from the Powers Review was broad acceptance for “HMRC to support those who seek to comply but come down hard on those who seek an unfair advantage through non-compliance”. As consultations on discrete areas concluded they informed the drafting of new provisions, introduced in successive Finance Acts from 2007. To ensure effective implementation of the updated powers, which included a substantial training programme for HMRC staff, an Implementation Oversight Forum was formed in 2009. This comprised representatives of business and tax practitioners as well as the Permanent Secretary for Tax and senior HMRC officials. It reported to the Exchequer Secretary to the Treasury for three years until the Forum’s work was considered complete after its 2012 report …

447 LITRG, LITRG response: Tackling DR tax avoidance, 22 September 2020 para 1.4-7 448 The Powers of HMRC: treating taxpayers fairly, HL Paper 242, 4 December 2018 paras 26 See also, “HMRC censured for ‘aggressive’ pursuit over tax avoidance”, Financial Times, 4 December 2018; “Are HMRC’s powers tilted too far against taxpayers?”, Taxation, 9 June 2020. 144 Tax avoidance and tax evasion

The Powers Review, with its Consultative Committee, set new standards for consultation on tax matters. Although there were points of disagreement, witnesses generally welcomed the principles. Frank Haskew, Head of the Tax Faculty at the Institute of Chartered Accountants in England and Wales (ICAEW) said “we very much supported that (review) and participated in it. That set the benchmark for a generation in terms of HMRC’s powers.”449 In turn the Committee recommended that “the Government establishes a new Powers Review, both of the cumulative effect of recent developments and what is needed for the future as tax administration moves to digital systems.”450 In its initial response to the report, published in January 2019, the Government stated that it accepted this recommendation “in part”: The Government keeps the tax system under review and notes the Committee's recommendation to update the powers review principles for the digital age. HMRC will consider options for reviewing and updating the tax administration framework, to ensure that it is effective in underpinning modern tax administration. HMRC is also considering how the effectiveness of current arrangements such as the Adjudicator's Office could be enhanced, and how we can utilise our forums, such as the Customer Experience Committee and Compliance Reform Forum to help us develop our approach.451 The Financial Secretary gave evidence to the Committee in July 2019, and on this occasion announced HMRC would undertake an evaluation exercise on the powers it had been given since 2012: The Committee raised the issue of powers more widely. It will recall that there was an extensive powers review between 2005 and 2012. I have agreed with the Revenue that that should be given what I call a postimplementation update. By that, I mean evaluating how the powers introduced since 2012 have played out in relation to safeguards and the concerns that we have discussed today, but also talking to their various stakeholders, taxpayers and various professional bodies. I, my successor or the Permanent Secretary to HMRC will write to the Committee in the autumn in relation to that work. I do not think it is appropriate to have the full powers review that was requested by the Committee, given that the last powers review lasted until 2012. My own view is that these things should be once a decade or so, but it is absolutely appropriate to have a proper appraisal, a touch on the tiller, as to how those powers may have been used relative to safeguards since 2012.452 The Minister confirmed this exercise a few days later as part of a detailed written statement on a series of initiatives that HMRC were taking to “develop public trust in their operations”, reproduced in full in the text box overleaf.

449 op.cit. paras 8-10, para 16 450 op.cit. para 187 451 HMRC, The Powers of HMRC: treating taxpayers fairly – Government response, 22 January 2019 p18 452 Select Committee on Economic Affairs, Oral evidence: The Financial Secretary to the Treasury, 16 July 2019 Q8. On this issue see, “With great power …”, Taxation, 8 October 2020 145 Commons Library Briefing, 13 April 2021

HMRC Powers and Taxpayer Safeguards Jesse Norman, Financial Secretary, Written statement HCWS1785, 22 July 2019 HMRC have a vital purpose, to collect the tax revenue that pays for the UK’s public services and benefits system. The Government recognises that public trust is essential to a healthy and effective tax system. UK citizens must know that their tax authority is fair, careful and even- handed and that it adheres to those core values in all its work. But citizens also need to be reassured that HMRC have the powers they require to ensure that everyone pays their fair share of taxes. In some areas, particularly where HMRC are faced with fraud, evasion and complex avoidance, those powers are necessarily far-reaching. It is therefore of great public importance that they are exercised in a way that maintains public trust, with appropriate oversight and operational checks and balances, and statutory safeguards that enable taxpayers to dispute HMRC’s decisions or complain about their treatment. I am grateful to the House of Lords Economic Affairs Committee for its report The Powers of HMRC: Treating Taxpayers Fairly and for the opportunity to discuss these matters with them. I have also discussed matters of trust at HMRC in detail with officials and outside stakeholders, and I am today announcing several actions HMRC are taking to maintain and develop public trust in their operations. Professional Standards Committee The context in which HMRC operate is changing faster than ever before. New technology presents significant opportunities to make tax administration easier for both HMRC and for taxpayers. But it also presents new challenges, as a small minority of taxpayers who wish to escape paying tax seek new ways to find unfair advantages. As HMRC adapt to these changes, it is important both that they continue to maintain public trust in their approach to new technologies, and that the powers given by Parliament are implemented carefully and remain subject to appropriate oversight and safeguards. So HMRC will establish a new Professional Standards Committee to advise the Commissioners of Revenue & Customs. The Committee, which will take advice from a range of independent experts, will consider, amongst other things, issues relating to the implementation of HMRC powers. The Committee will not consider individual cases or Government tax policies. HMRC will publish details of the Committee’s membership and terms of reference in the autumn. Powers and Safeguards The House of Lords Economic Affairs Committee proposed a review of all powers granted to HMRC since the conclusion of the Powers Review in 2012. I have considered this carefully and concluded that a full review of HMRC powers is not necessary at this time. The powers granted to HMRC since 2012 were properly scrutinised before being granted by Parliament. The Government’s view is that they remain necessary and proportionate. I have, however, asked HMRC to evaluate the implementation of powers introduced since 2012 in relation to the powers and safeguards principles, engaging with stakeholders, including taxpayers and their representatives. This will be published in early 2020. Adjudicator The Adjudicator’s independent role in complaints handling is a core component of ensuring public trust in HMRC, and of HMRC’s evolution as a service organisation. HMRC will undertake a comprehensive review of the findings identified in the 2019 Adjudicator’s report and will publish the results of the review by the end of this year. HMRC are working with the Adjudicator to ensure that they have effective mechanisms in place to learn quickly and appropriately from complaints and, if necessary, to make changes to their operational policy and processes. To enable better access for taxpayers to the Adjudicator service, HMRC are also developing a secure digital channel for complaints.

146 Tax avoidance and tax evasion

Written statement HCWS1785, 22 July 2019 Support for Taxpayers HMRC understand that some taxpayers will always need extra help in their dealings with them and that others may need additional support at a point in time because they are dealing with a difficult life event. Some taxpayers may become anxious or distressed as a result of compliance activities, or when they get into debt. Ensuring that people who need support are treated with empathy and dignity is vital to maintaining wider public trust in HMRC. HMRC have provided tailored assistance to taxpayers who need extra help and those in vulnerable circumstances since 2014 via their Extra Support service and also work closely with the voluntary and community sector. Working with their new Customer Experience Committee, and drawing on the experience of the Committee’s independent, external advisers, HMRC have recently embarked on a programme to strengthen the support they provide to taxpayers who need extra help. Importantly, this includes extending the Extra Support service to people who may need additional help to deal with HMRC investigations and to help resolve disputes wherever possible without litigation. HMRC will report on the effectiveness of these measures in their next annual report. HMRC will continue to work closely with external representatives through their forums, such as the Additional Needs Working Group and Individual Stakeholder Forum, to understand taxpayers’ needs better and to improve support for taxpayers. Transparency HMRC have undertaken to increase transparency and enhance public trust by publishing more data and information about the exercise of their powers. HMRC will engage with stakeholders, including taxpayers and their representatives, to identify what further data and information HMRC should publish in support of these goals. This year, as a first step towards that commitment, HMRC will expand the range of performance and management information they publish in their monthly and quarterly performance publications. Previous reporting focussed on specific aspects of their telephony and post processes, for instance, call waiting and post turnaround times, as well as compliance yield figures. From August HMRC will publish further information, including but not limited to, their debt management, registrations and repayment services. Taxpayer experience Compliance enquiries are a necessary and important feature of HMRC’s work in collecting the right amount of tax. Maintaining public trust in HMRC requires that these enquiries are carried out, but also that they are done in an appropriate way. Compliance enquiries can be worrying for taxpayers and HMRC are committed to ensuring that their procedures are accessible and impartial and that HMRC officers treat taxpayers with professionalism and respect. This includes taking into account the specific circumstances of taxpayers. HMRC are reviewing taxpayers’ experiences during compliance enquiries. Drawing on taxpayer feedback, this work will look at how each stage of an enquiry or investigation can affect taxpayers. It will seek to identify improvements in the process and draw out appropriate common standards and expectations. This work includes a review of the content, language and tone of letters, to ensure that they are clear, courteous and tailored appropriately to the needs of the taxpayer, including those who need extra help. In this, HMRC are working closely with a range of stakeholder groups and forums to develop best practice, which should help HMRC to improve the way that they interact with taxpayers. The Government will provide a further update to the House of Lords Economic Affairs Committee later this year on all of the areas of work outlined in this statement.

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HMRC’s report was published in February 2021, and the Financial Secretary provided an update in a second written statement: HMRC Powers and Safeguards, Written statement HCWS762, 4 February 2021 Jesse Norman, Financial Secretary On 22 July 2019, I announced a comprehensive package of measures that HMRC were taking to maintain and develop public trust in their operations (HCWS1785). Today, HMRC have published a major part of this package; a report on their evaluation of the implementation of powers introduced since 2012 ... I asked HMRC to engage with stakeholders, including taxpayers and their representatives, and I am very grateful, in particular, to the 16 external stakeholder organisations that have offered constructive challenge to HMRC throughout the evaluation. Alongside changes that HMRC are already introducing, the evaluation has highlighted further opportunities for improvements that will build and maintain public trust in the tax system. HMRC are making a number of commitments as a result of the evaluation. These include commitments to improve communications with taxpayers about powers, obligations and compliance enquiries; to update and clarify guidance on taxpayers’ rights and obligations; to increase awareness of HMRC’s internal decision-making and governance processes; and to make further improvements to taxpayers’ customer experience. The commitments are designed to ensure that HMRC consistently meet the high standards that taxpayers expect, including those who do not have a tax agent, and especially where people may need extra support. All but one of the measures that I announced in my July 2019 statement have now been delivered by HMRC. They have created the new Professional Standards Committee, published responses to the 2019 and 2020 Adjudicator's reports and published new principles regarding help for taxpayers who may need extra support. HMRC have also expanded the range of data published regularly to include new data that will help taxpayers to understand how HMRC approach compliance work and how they use relevant powers, and to assess the effectiveness of HMRC’s safeguards for taxpayers. On the final measure I announced in my July 2019 statement, HMRC continue to take forward a range of actions to improve taxpayer experience. They have reviewed and improved over six hundred of HMRC’s most commonly used letters and factsheets, simplifying the language used. They have put processes in place to keep letters under review, and to respond where further areas for improvement are identified. Last year HMRC also set up a new Extra Support Team to improve their identification of, and assistance to, taxpayers who may need additional help during compliance checks. HMRC have already responded to over 1,000 referrals and provided training to nearly 12,000 caseworkers. HMRC have also made substantial progress in other areas. In particular, they are continuing to strengthen the guidance available to taxpayers to help them understand better the compliance check process, in order to reduce any stress involved and to build greater confidence and trust in HMRC. In December, 148 Tax avoidance and tax evasion

HMRC launched a series of bitesize YouTube videos on key aspects of this process, and they are also trialling a new introductory pack which taxpayers will receive when a compliance check is opened. HMRC’s programme of work on powers and safeguards is an important contribution towards the vision that the Government set out in July 2020 for a trusted and modern tax administration system. HMRC will implement the commitments in this report and continue to work with taxpayers, tax agents and their representatives, to maintain and develop public trust in their operations.453 It is not proposed to summarise HMRC’s report here, but it is worth noting its conclusion that, “overall, HMRC believes that the approach to implementing powers introduced since 2012 has been broadly consistent with the 2005-2012 Powers Review principles”: Internal processes are designed to ensure that substantial care is taken when making decisions, so that outcomes align with the principles. Data on reviews, complaints and litigation in relation to these powers show that taxpayers have formally challenged HMRC’s decisions in a small minority of cases.454 In preparing the report HMRC worked with a new ‘powers evaluation forum’, composed of representatives from 16 organisations. Although the number of legal challenges to HMRC’s new powers have been small, and largely unsuccessful, the report goes on to note, “members of the Forum shared a number of examples of individual cases where no formal challenge or complaint had been made, but where they felt that HMRC could and should have approached cases differently”: These examples highlight the need for HMRC to ensure a consistent approach and level playing field for all taxpayers, while taking account of the individual circumstances that a taxpayer may face. This evaluation has not reviewed individual cases and the examples that Forum members provided, which often reflect difficult and complex cases where the taxpayer and HMRC do not have a shared view of the facts, have not been verified. The individual examples complement, and should be read alongside, the narrative of this report. However, the evaluation has identified a number of instances where HMRC agree more could have done more to demonstrate that taxpayers’ circumstances had been understood and taken into account when difficult decisions that affected them were made. In order to reassure taxpayers that they are treated fairly, HMRC are committed to helping them to understand how and why decisions are made that affect them; and giving them the information and support they need to challenge HMRC, including submitting a complaint if they wish to do so.455

453 Written statement HCWS762, 4 February 2021. See also, HM Treasury, Government response to House of Lords Economic Affairs Report, New Powers for HMRC: fair and proportionate?, 19 February 2021. 454 HMRC, Evaluation of HMRC’s implementation of powers, obligations and safeguards introduced since 2012, February 2021 para 1.6. Further details are in table 2 and Annex E of the report. 455 ibid. para 1.7-8. See also, LITRG press notice, Low Incomes Tax Reform Group welcomes today’s report on HMRC’s powers, 4 February 2021. 149 Commons Library Briefing, 13 April 2021

5.7 Budget 2021 The Chancellor, Rishi Sunak, presented the Budget on 3 March 2021. Tax avoidance and evasion was not a theme of the Chancellor’s Budget speech, though, the Budget reported confirmed that the forthcoming Finance Bill would include provisions, previously consulted on, to tackle promoters of avoidance schemes … Tackling Promoters of Tax Avoidance As announced at Budget 2020 and following consultation, the Government will legislate in Finance Bill 2021 to take further action against those who promote and market tax avoidance schemes. The legislation, which will take effect following Royal Assent, will: • strengthen information powers for HMRC’s existing regime to tackle enablers of tax avoidance schemes and ensure enabler penalties are issued sooner for multi-user schemes • enable HMRC to act promptly where promoters fail to disclose their avoidance schemes under the Disclosure of Tax Avoidance Scheme and Disclosure of VAT and other Indirect Taxes (DOTAS and DASVOIT) regimes • allow HMRC to stop promoters from marketing and selling avoidance schemes earlier and ensure promoters fulfil their obligations under the Promoters of Tax Avoidance Schemes (POTAS) regime • make further technical amendments to the POTAS regime, so the regime can continue to operate effectively • make additional changes to the General Anti-Abuse Rule (GAAR) so it can be used as intended to tackle avoidance using partnerships … as well as changes to the penalty system underpinning Follower Notices: Follower Notice penalties As announced by written ministerial statement on 16 December 2020 and further to the consultation concluded in January 2021, the government will legislate in Finance Bill 2021 to change the penalties that may be charged to people receiving Follower Notices as a result of using avoidance schemes. The rate of penalty will be reduced from 50% to 30% of the tax in dispute. A further penalty of 20% will be charged if the tribunal decides that the recipient of a Follower Notice continued their litigation against HMRC’s decision on an unreasonable basis. The legislation will come into effect at Royal Assent.456 It would seem that the Exchequer impact of these changes is minimal, as they are not included in the Budget report costings.457 Provision for these measures is included in the Finance (No.2) Bill 2019-21, which was published a few days after the Budget: specifically, clauses 117-120

456 HMT, Overview of Tax Legislation & Rates, March 2021 para 1.61-2. HMRC has not published impact assessments of either of these changes. 457 Budget 2021, HC 1226, March 2021 para 2.99-100 150 Tax avoidance and tax evasion

& Schedules 29-21 (Tackling Promoters of Tax Avoidance), and, clause 115 & Schedule 27 (Follower Notice penalties). In a small change of practice, a few days after the Budget the Government published a number of tax-related consultations and calls for evidence.458 These include a call for evidence on raising standards in the market for tax advice … 1.7 Raising standards in the tax advice market – The government is publishing a consultation on raising standards in the tax advice market, following a call for evidence in 2020.459 This will seek views on the definition of tax advice and a requirement to make professional indemnity insurance compulsory for all tax advisers, with a view to improving tax advice and providing taxpayers with better access to redress where they have received bad advice. … confirmation of the measures to tackle promoters … 2.2 Clamping down on promoters of tax avoidance – As announced in November 2020,460 the government is publishing a consultation on a package of measures to clamp down on promoters of tax avoidance. Proposals include ensuring HMRC can protect their position by securing or freezing a promoter’s assets so that the penalties they are liable for are paid, tackling offshore promoters and the UK entities that support them, closing down companies that promote avoidance schemes and disqualifying their directors, and supporting taxpayers to identify and exit avoidance schemes. This package of measures builds on the Promoters Strategy,461 announced at Budget 2020, and the measures to strengthen existing anti-avoidance regimes which were consulted on over the summer462 and will be legislated for in Finance Bill 2021. HMRC is also publishing draft technical guidance on the package of measures being legislated for in Finance Bill 2021. … the outcome of its call for evidence on tackling disguised remuneration … 2.3 Tackling disguised remuneration tax avoidance – The government is publishing a summary of the responses to the 2020 call for evidence.463 Disguised remuneration schemes are contrived arrangements to avoid tax by paying people amounts that appear to be non-taxable (e.g. “loans”) in place of a salary. The call for evidence exercise was part of the government’s response to the recommendations in the Independent Loan Charge Review.464 The summary of responses document will also set out the government’s next steps.

458 Tax policies and consultations – Spring 2021: Written Statement HCWS873, 23 March 2021. The intention to defer publication this way was announced the month before (HMT press notice, Government to publish rage of tax consultations and calls for evidence on 23 March, 18 February 2021) 459 HMRC, Call for evidence: raising standards in the tax advice market, March 2020 460 Tax policy update: Written Statement HCWS572, 12 November 2020 461 HMRC, Tackling promoters of mass-marketed tax avoidance schemes, March 2020 462 HMRC, Consultation: tackling promoters of tax avoidance, July 2020 463 HMRC, Call for evidence: tackling disguised remuneration tax avoidance, July 2020 464 HMT/HMRC, Disguised remuneration: independent loan charge review, September 2019 151 Commons Library Briefing, 13 April 2021

… and two discussion documents as part of HMRC’s ongoing strategy to deal with offshore compliance: 2.5 No Safe Havens – The ‘No Safe Havens’465 strategy outlines how HMRC will ensure taxpayers comply with their UK tax obligations regardless of where their income or gains are made. The strategy focuses on assisting taxpayers to comply and responding appropriately if they do not. As part of implementing the strategy, the government is publishing two discussion documents to inform future policy measures: • Helping taxpayers get offshore tax right which seeks views on ways to help taxpayers get their offshore tax right first time. • Preventing and collecting international tax debt which seeks views on better ways to prevent and collect international tax debt.466

465 HMRC, No Safe Havens, March 2019 466 HMT/HMRC, Tax policies and consultations: Spring 2021, CP404, March 2021 pp5-7

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