Tackling tax evasion and avoidance: Possible new penalties

By Susan Cattell for ICAS

28 November 2016

Susan Cattell (Head of Taxation, England and Wales) considers three recent consultations on proposed new penalties and the ICAS responses to them.

Possible new penalties

A previous article looked at the bumper crop of autumn tax consultations and the ICAS responses to them.  Three of the consultations were part of the government’s ongoing initiative to tackle tax evasion and avoidance and proposed introducing new penalties.  Whilst ICAS is supportive of attempts to tackle evasion it is not clear that simply introducing more penalties is the best way to proceed, particularly whilst HMRC is still working on proposals for more general changes to penalties arising from ‘HMRC Penalties: A Discussion Document’ published in 2015.

The 2015 HMRC discussion document

This was published in February 2015 and was open for comments until May.  ICAS submitted comments. A summary of responses and next steps was published in September 2015.  The document sought views on how to change the way penalties are applied, as HMRC moves towards Making Tax Digital and increased digital services.  

The document proposed five broad principles that HMRC believes should underpin any new penalty regime.  These principles are:

  1. The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent noncompliance. Penalties are not to be applied with the objective of raising revenues.
  2. Penalties should be proportionate to the offence and may take into account past behaviour.
  3. Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.
  4. Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.
  5. Customers should see a consistent and standardised approach.  Variations will be those necessary to take into account customer behaviours and particular taxes.

The consultation generated a lot of interest with respondents supportive of the early engagement and in broad agreement with the five principles.

The next steps set out HMRC plans to develop proposals and then issue a further consultation document on proposals for a new penalty scheme for late filing and late payment and then a document on inaccuracy penalties.  These further consultations have not yet happened: ICAS therefore questions whether it makes sense to introduce new penalties before work has concluded on the proposals arising from the 2015 document.  It would be preferable to incorporate all proposed new penalties into the wider penalties review, to ensure consistency of approach and to avoid the need for future changes once the overall review concludes.  We accept that the proposed penalties linked to the Requirement to Correct (discussed below) would have to be an exception to this because the Requirement is time sensitive.  

Tackling offshore tax evasion: A requirement to correct

The proposal in this consultation is to introduce a ‘requirement to correct’ (RTC) past offshore tax evasion and harsher penalties for those who fail to put things right within a set timeframe.  HMRC will be receiving more data from offshore jurisdictions by the end of 2018 so the intention behind the proposal is to 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.

The ICAS response noted that for the new requirement to succeed in its objective there must be effective communication to all those who will be affected by the proposals, particularly those who are unrepresented and are not long term deliberate evaders.  HMRC’s own research into previous opportunities for disclosure suggests that many taxpayers with offshore compliance issues did not identify themselves as evaders, and some did not even realise that they were not paying the right amount of tax.  This could happen, for example, where someone inherited an overseas asset or took advice many years ago - and did not realise that tax legislation or their own circumstances had changed.

It is also essential that unrepresented taxpayers making small disclosures should have access to a mechanism for making disclosures which they can use.  The recently launched digital Worldwide Disclosure Facility is unlikely to meet this requirement.

ICAS did not support the proposed extension of the assessment period for tax and penalties by five years to allow HMRC time to review the CRS data.  Whilst we accept that some time is needed, five years is too long; there are good reasons for the assessing time limits.  It is essential that HMRC is properly resourced so that it can deal with the CRS data within a reasonable timescale.

ICAS held a meeting with the HMRC policy team at which the proposals were discussed in detail.  This included discussion of possible communication methods.

The Autumn Statement confirmed that the government will go ahead with the introduction of the requirement to correct.  Further details will no doubt be available in due course.  

Strengthening tax avoidance sanctions and deterrents

This consultation also proposed new penalties, this time for ‘enablers of tax avoidance which is defeated’. The intention is to deter promoters, advisers and other intermediaries who develop, market and facilitate tax avoidance arrangements.

The ICAS response noted that any new penalties need to dovetail into, and support, existing anti-avoidance legislation.  It also highlighted that the penalty structure must recognise that taxpayers need to be able to obtain advice on complex areas of legislation to ensure, for example, that they do not inadvertently fall within one of many targeted anti-avoidance rules.  It will not be helpful to taxpayers or HMRC if advisers refuse to provide that advice because of concerns about a possible penalty.

Again, the Autumn Statement confirmed that the government will go ahead with the introduction of this new regime noting that it will ‘reflect an extensive consultation and input from stakeholders and details will be published in draft legislation shortly.’

Penalty for participating in VAT fraud

ICAS took part in discussions with HMRC about this consultation at the Joint VAT Consultative Committee Meeting and the dedicated Talking Points session.  It was noted that Missing Trader Intra-Community (MTIC) fraud presents significant challenges and despite some HMRC successes in tackling it in recent years it continues to cost the exchequer between £0.5 billion and £1 billion per year.  

The ICAS response therefore welcomed attempts to reduce MTIC fraud further, whilst seeking clarification that the proposed new penalty is only intended to apply to cases of MTIC fraud.  If the penalty is intended to apply to other VAT frauds this should be explicitly stated and details of the circumstances in which it might be used should be set out and subject to consultation.

The response also highlighted flaws in the proposal, particularly the failure to distinguish between those who know that they are involved in fraudulent transactions and those who should have known.  It is an important principle that tax penalties should be proportionate to the offence, so it cannot be right to introduce a penalty which makes no distinction between, for example, an inexperienced trader (with no previous history of poor compliance) who does not carry out proper due diligence and hence gets involved in MTIC inadvertently - and a persistent offender who knowingly takes part in a fraudulent series of transactions.  

As currently proposed, HMRC would be able to apply the new penalty to company officers and would also be able to name and shame those involved in transactions caught by the penalty.  In line with our views on the calculation of the penalty, ICAS considers the penalty should only apply to company officers where they knew of the connection with VAT fraud.  Applying this approach where company officers should have known is likely to be disproportionate in some cases. Similarly, naming and shaming should be restricted to cases of deliberate behaviour, so to cases where the business or trader knew that the transactions were connected to VAT fraud.  The existing naming and shaming provisions only apply to ‘deliberate’ behaviour; we cannot see any reason for altering that approach.

Businesses, particularly small ones, find it hard to keep themselves up to date with tax changes in general – and understanding changes to penalties will certainly not be their top priority when they are concentrating on running their businesses.  For any new penalty to act as an effective deterrent HMRC will need to ensure it is properly publicised, particularly to businesses operating in sectors where MTIC fraud is known to be a problem.

The Autumn Statement documents included the following paragraph about this penalty:

‘As announced at Budget 2016 and following consultation, the government will legislate in Finance Bill 2017 to introduce a new and more effective penalty for participating in VAT fraud.  It will be applied to businesses and company officers when they knew or should have known that their transactions were connected with VAT fraud.  The penalty will improve the application of penalties to those facilitating orchestrated VAT fraud.  The new penalty will be a fixed rate penalty of 30% for participants in VAT fraud. This will be implemented following Royal Assent of the Finance Bill 2017.’

This appears to indicate that there will be no distinction between those who ‘knew’ and those who only ‘should have known’ they were getting involved in transactions related to MTIC fraud. However, we shall have to wait until the full details are published to find out exactly how the new penalty will apply.


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