There is much to be commended in the range of proposals to clampdown on tax avoidance being considered by government, but some could go further and faster.
Among the plans under consideration by the government is an “additional” penalty for UK-based enablers of assisting offshore promoters of tax avoidance.
This sounds great in principle, but in reality it does no more than reflect the amount of the total fees earned by all those involved in the development and sale of that tax avoidance scheme. A genuinely “additional” penalty would be a sum that is in addition to all fees earned by those involved. AAT has suggested considering an additional 25% penalty charge to act as a serious deterrent to many of those involved in the facilitating of offshore promoters’ activities.
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AAT absolutely agrees that any company’s significant breach of the anti-avoidance rules warrants consideration for disqualification of the company’s directors.
The consultation document highlighted that the current period of disqualification for directors of insolvent companies ranges between two and 15 years depending on the seriousness of the offence.
The period of disqualification is entirely at the discretion of the courts, which use a case from the 1990s, the Sevenoaks Court of Appeal case, as guidance to determine which bracket the conduct fits into.
This means there will be a disqualification for between two and five years for misconduct of a less serious nature, six to 10 years for more serious conduct, and 10 to 15 for the most serious misconduct involving fraud or dishonesty, such as inducing members of the public to invest fraudulent schemes. While these periods appear reasonable, in practice this guidance rarely appears to be followed, which seriously undermines this sanction.
In 2019, a £5.9m tax fraud resulted in an eight-year prison sentence but only a nine-year disqualification as a director. This effectively means a disqualification period of one year after the offender’s sentence is served. There are dozens of similar examples, which leads AAT to conclude that the current approach to disqualification is far from desirable and can in no way be relied upon. Alternatives could be considered. For instance, fixed periods could be imposed depending on the level of tax avoidance. For smaller sums (less than £100,000) one to five years, reasonably large sums (£100,000-£1m) six to 10 years and very large sums (more than £1m) 10 to 15 years.
Whatever is ultimately decided upon, it’s clear that the courts require more than frequently ignored case law guidance.
All taxpayers are legally responsible for their own tax affairs, including users of tax avoidance schemes.
However, AAT has repeatedly suggested that this situation be altered to ensure joint liability. Surely, one of the best ways to tackle promoters of tax avoidance schemes, and to stop schemes at their source, would be to impose joint liability – as happens in Canada and various other countries. This would not only better reflect the reality of many tax advice situations, it would discourage promoters of such schemes who recognise that the likelihood of incurring costs is low because the taxpayer, not the promoter, is currently liable.
Earlier this year, HMRC proposed introducing joint liability in relation to unregulated tax advisers (a position that AAT supports), but why not do so across the board? Joint liability would act as a significant deterrent for promoters while continuing to deter many individual taxpayers.
“The current approach to disqualification is far from desirable and can in no way be relied upon.”
Phil Hall is AAT's Head of Public Affairs and Public Policy.