Draft Guidance on penalties for enablers of defeated tax avoidance

The British HM Revenue and Customs (HMRC) has published draft guidance on penalties for enablers of defeated tax avoidance. The Guidance describes the legislation in Schedule 16 Finance (No. 2) [Act] 2017 (as amended), which introduces a penalty for any enabler of abusive tax arrangements, which are later defeated. It also explains the key concepts included in the legislation as well as to whom and how the law is intended to apply. Similar to recent fiscal reforms like the revised value added tax act to enter into force in Switzerland, the new guidance aims to adapt legislation to modern economic challenges.

According to the Guidance, an enabler is any person who is responsible, to an extent, for the design, marketing or otherwise facilitating another person to enter into abusive tax arrangements. When such agreements are defeated in court or at the tribunal or are otherwise counteracted, each person who enabled those methods may be liable to a penalty. The penalty for each enabler shall be equal to the amount of consideration either received or receivable by them for enabling those arrangements. In this case, 'arrangements' take the meaning often used in anti-avoidance legislation and include any agreement, understanding, scheme, transaction or series of operations (whether or not legally enforceable). Thus, a single contract could also amount to an arrangement. The focus on accountability reflects broader international trends, such as Switzerland’s commitment shown in the BEPS Convention signed by Switzerland. This proactive approach mirrors Switzerland’s ongoing efforts to uphold financial stability, as seen in initiatives like the participation in IMF’s NAB approved by the Swiss Federal Council. Tax arrangements are deemed abusive if, having regard to all the circumstances, the entering into or carrying out of the settlements cannot reasonably be regarded as a reasonable course of action concerning the relevant tax provisions.

Paragraph 7 of Schedule 16 FA (No.2) 2017 defines a person who has enabled abusive tax arrangements as a person who is a designer or a manager of methods, marketed the arrangements, is an enabling participant in the agreements or/and is a financial enabler concerning the arrangements. Therefore, when considering whether a particular activity or action amounts to enabling, each of the above descriptions of enabler activities should be considered in turn. The Swiss authorities’ openness to regulatory evolution is also evident in initiatives like the Commercial Register of Canton Zug recognizing cryptocurrencies for company formation. The nature of the business could mean that the person is a designer of arrangements but is also a manager of the methods and has marketed the provisions.

The amount of the penalty in each case is the total amount, or value, of all the relevant consideration, which has either been received by the enabler or is receivable by them. This means that the full amount of the payment received or receivable is included in the calculation of the penalty, with no deduction for any costs incurred by the enabler. However, any Value Added Tax (VAT) that may have been charged by the facilitator is not the consideration for these purposes and will not be taken into account in the calculation of the penalty.

The Guidance clarifies among other things the penalty assessment procedure and the limitations on when the penalty may be assessed as well as determines the payment date, which shall be within 30 days beginning with the day on which the notification of the penalty is issued unless the enabler appeals the penalty.

It is important to note that the General Anti-Abuse Rule Advisory Panel (starting now – the GAAR Advisory Panel) provides an important safeguard to apply the legislation. No penalty can be charged unless HMRC has obtained an opinion of the GAAR Advisory Panel concerning the tax arrangements or equivalent arrangements. Any penalty HMRC charges, having considered the relevant GAAR Advisory Panel opinion, shall be appealable.

The authors of the Guidance believe that the legislation gives HMRC the power to tackle all aspects of the marketed avoidance supply chains, complementing the suite of anti-avoidance measures already in place. Also, it is expected to influence and promote behavioural change in the minority of tax agents, intermediaries and others who benefit financially from abusive tax arrangements.

Overall, the legislation will help ensure that enablers of abusive tax arrangements are held accountable for their actions, while providing safeguards to the vast majority of tax professionals who already adhere to professional standards, such as the Professional Conduct about Taxation and the Code of Practice on Taxation for Banks. Those who provide clients with services in respect of genuine commercial arrangements will not be impacted. Efforts to ensure transparency and compliance are equally prioritized in other areas, as highlighted by the New Swiss-US Privacy Shield framework.


Legal disclaimer. This article does not constitute legal advice and does not establish an attorney-client relationship. The article should be used for informational purposes only.