New UK tax penalty proposals put accepted tax planning at risk, says expert

"Enablers" of tax avoidance could be liable for a fine of up to 100% of the tax the scheme's user underpaid, according to an HM Revenue and Customs (HMRC) consultation, under plans to "target all those in the supply chain of tax avoidance arrangements".

But tax expert Fiona Fernie of Pinsent Masons, the law firm behind Out-Law.com, said that the definition of tax avoidance set out in the consultation was "far too broad" as currently drafted.

"The wording suggests that measures will cover not only all schemes counteracted by the General Anti-Abuse Rule (GAAR) or notifiable under DOTAS, but also those which have simply been the subject of a targeted avoidance-related rule or 'unallowable purpose test' contained within a specific piece of legislation," she said. "This is incredibly wide-ranging and the criteria need to be tightened."

"Restricting the proposals to all schemes notifiable under DOTAS, the Disclosure of Tax Avoidance Schemes rules, would be a more sensible approach," she said.

"Some aspects of these proposals go too far and could end up capturing traditionally accepted tax planning," she said.

The consultation sets out details of both a new penalty for those who enable tax avoidance, and changes to the existing penalty legislation which applies to those who use avoidance schemes which have been defeated in the courts. Fernie said that the proposals would have the greatest impact on schemes marketed to individuals, rather than to large companies.

HMRC has proposed a broad definition of "enabling" tax avoidance, covering those "who benefit financially from enabling others to implement tax avoidance arrangements". This includes, but is not limited to, independent financial advisers (IFAs), accountants, company formation agents, banks, trustees and lawyers, according to the consultation. "Safeguards" would be included, to ensure that those who were "unwittingly party to enabling the avoidance in question" would not be subject to the new penalty, according to the consultation.

Each person in the chain found to have enabled tax avoidance could be penalised separately under the new regime. This could include the promoter who had designed the scheme, the IFA engaged to market the scheme on behalf of the promoter, and lawyers and bankers involved in facilitating the actual implementation of the scheme, according to the consultation.

The government has also proposed to give HMRC the right to 'name and shame' enablers penalised under the new regime, "in the interest of alerting and protecting taxpayers to play by the rules and to deter those who might otherwise be tempted to engage in enabling tax avoidance". It has set out very general questions to capture views from the industry on its proposals, including on the approach to sanctions, the definition of 'enabler' and appropriate safeguards.

For taxpayers, the consultation document proposes changes to the way in which tax avoiders are judged to have taken 'reasonable care' to avoid errors in their tax returns. This would make it easier for HMRC to impose penalties when avoidance schemes are defeated. This could be done through a combination of defining the term 'reasonable care' in legislation, and shifting the burden of demonstrating that 'reasonable care' was or was not taken from HMRC onto the taxpayer, according to the consultation.

Tax expert Fiona Fernie said that this proposal in particular was of "significant concern".

"Compliance costs for individuals have soared over recent years, and this would be an unreasonable additional ask," she said. "It is a 'David and Goliath' situation – HMRC has huge resource at its disposal whilst the average, everyday taxpayer does not."

"HMRC can be somewhat rigid when considering what constitutes 'reasonable care' in the current absence of any real definition. If a taxpayer has taken advice from a reputable professional, with no obvious reason to doubt its credibility, HMRC should recognise that for many taxpayers with no tax training that does constitute reasonable care," she said.