However, the National Audit Office (NAO) said in its report that the regime introduced in 2004 which requires the promoters of these schemes to notify HMRC had helped the department to make “important headway” in reducing opportunities for tax avoidance. It also noted that many of the large accountancy firms no longer promoted such schemes.
HMRC has introduced 93 changes to tax law to reduce the opportunities for avoidance since the introduction of the Disclosure of Tax Avoidance Schemes (DOTAS) regime, with over 100 new schemes reported over each of the past four years, according to the NAO report.
“HMRC must push harder to find an effective way to tackle the promoters and users of the most aggressive tax avoidance schemes,” NAO head Amyas Morse said. “Though its disclosure regime has helped to change the market, it has had little impact on the persistent use of highly contrived schemes which deprive the public purse of millions of pounds.”
He added that although it was “inherently difficult” to stop tax avoidance, HMRC had to demonstrate how it planned to reduce the 41,000 avoidance cases relating to individuals and small businesses that it currently has open. Unlike tax evasion, which involves fraud or deliberate concealment, tax avoidance is not illegal but can involve using contrived and artificial arrangements to gain a tax advantage that the Government never intended.
According to the report, once HMRC can prove that a particular practice is inconsistent with tax law it usually has a “good success rate” when it takes the promoters of that scheme to court. However its investigations can take many years to resolve, and taxpayers can continue to use the schemes until they are closed. In addition, the department is not always able to apply the court rulings in its ‘lead cases’, brought to show others that a particular scheme will not succeed in the courts, to other cases, the NAO said.
Although HMRC has a strategy to prevent, detect and counteract tax avoidance, of which the DOTAS rules form a part, the NAO said that the department did not monitor the costs of that strategy or have the means to evaluate its effectiveness. This meant that its ability to make “informed decisions” about where to target its tax avoidance initiatives was limited, the NAO said.
Among the department’s recent anti-avoidance initiatives is an increased focus on the tax affairs of wealthy high net worth individuals (HNWIs). According to the report, HMRC’s high net worth unit brought in £200 million worth of revenue that would otherwise have been lost over the last financial year. However, 41,000 avoidance cases involving marketed schemes used by individuals and small businesses remain open while HMRC has also struggled to deal with the large number of users of complex ‘partnership loss’ and disguised remuneration schemes, used to shield participants’ other income from tax.
Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that the report was a “well-written and measured contribution to the debate”.
“Focussing on improving the practical response to avoidance is likely to be more cost-effective than knee-jerk legislative changes,” she said. “The report is focussed on individuals and SMEs, and highlights that this is a bigger problem in real terms than large corporates. A small number of boutique firms are tying up significant amounts of HMRC resource. Perhaps there needs to be a ‘polluter pays’ type principle, with the advisers that recommended a scheme being responsible for significant costs if their client loses an avoidance case.”
She added that it was “shocking” that HMRC did not appear to have “the most basic management information” about the costs and effectiveness of its response to avoidance activity.
“HMRC needs to get a grip,” she said. “The length of time taken to resolve issues is wholly excessive and would not be tolerated in a commercial organisation.”
Under the DOTAS rules, HMRC initially only required the disclosure of two types of scheme which it judged to be of particularly high risk. The regime has been expanded over time to include more taxes and more types of avoidance, while further changes proposed in July could see the Government given the ability to publish warnings about schemes that are effectively being mis-sold to taxpayers by less reputable promoters. In addition, a ‘general anti-abuse rule’ (GAAR) which will apply to the main direct taxes and national insurance is set to come into force from next year.