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Budget 2017: Tax litigation and investigations

ANALYSIS: Although the UK Budget announced 18 new measures in relation to tax disputes and investigations, they were not all new. The most significant proposals include a new 12 year assessment time limit for offshore matters and measures to tackle VAT evasion by sellers on online marketplaces.24 Nov 2017

My initial view about Budget 2017 was that it was light on announcements in relation to litigation and investigations – and I was going to comment that the chancellor had resisted the clamour for ‘more’ action in response to the ‘scandal’, or largely non-event, that was the Paradise Papers.

The Budget paper 'Tackling tax avoidance, evasion and non-compliance' highlighted 100 measures introduced since 2010; an additional £160 billion protected and collected since 2010, and mentioned the spearheading of the global campaign for tax transparency. Then it announced 18 new measures.

The first eye-catcher was the extension of assessment time limits for all offshore matters to 12 years, from the usual four years, or six years in cases of carelessness. The 20 years for fraudulent conduct was left undisturbed.

If anyone was in any doubt that HMRC recognises that, despite the Paradise Papers ‘noise’, offshore centres are not in fact teeming with service providers willing to help their clients engage in evasion, this is the proof.

Most of the non-compliance which the common reporting standard will uncover is going to be technical in nature or the result of genuine mistakes. HMRC has therefore cleverly bought itself double the time to analyse, track down and pursue such non-compliance and increase the amount it can yield.

It also underlines the further blurring of the line between planning, avoidance and evasion – in this case, through closing the space between morality and criminality in tax, by reducing the gap between fraud and avoidance assessment time limits from 14 years (20 to six) to just eight years (20 to 12).

A consultation is planned for spring. What is not yet clear is whether the time limits will be retrospective. My instinct is that they won’t be, because it would mean HMRC would be able, overnight, to reopen old years, such as 2006 to 2012. The last precedent in this area was the removal of the need for HMRC to prove negligence or fraud to make 20 year assessments for taxes lost through ‘failure to notify’ chargeability. The new rules, given effect by 2008's Finance Act, removed the conduct condition altogether, but they only apply to periods on or after 31 March 2010. However, in this day and age, and with the ferocity of online campaigns, precedents such as that have less meaning, so who knows what will happen…

Other measures of real note, even though very narrowly targeted, are the proposed new measures to tackle VAT evasion by sellers on online marketplaces:

  • Finance Act 2016 introduced (VATA 1994 s 77B) joint and several liability provisions, which make the operator of an online marketplace liable for unpaid VAT liabilities of an overseas seller in respect of whom HMRC had served a notice on the operator. This will be extended to UK sellers as well, reflecting that overseas sellers were sidestepping the rules by incorporating shell UK companies.
  • More notably, the government plans, without consultation, to extend joint and several liability to the operator in circumstances where it knew or should have known that a particular overseas seller should have been registered for VAT but wasn’t, i.e. absent any notification from HMRC. This is a huge extension of the principle of joint and several liability. Current VAT rules provide for joint and several liability based on a knew or should test in respect of certain prescribed goods, but those rules apply only to businesses directly making a supply of the goods, rather than a third party to that supply chain, as is the case here.
  • Operators will also have to ensure that VAT registration numbers displayed by sellers on the website are valid, and the government is also calling for evidence on whether operators do enough to ensure tax compliance of the users of their marketplaces.

In fact not all of the 18 ‘new’ measures are new. A handful were updates on initiatives previously announced, such as the proposals for applying a reverse charge in the construction sector. Meanwhile, the requirement to notify HMRC of offshore structures is now being taken forward in conjunction with the OECD and the EU. This makes sense as the UK is spearheading the transparency drive and rules such as the common reporting standard, which also shine a light on offshore structures.

Whatever the government does to tackle avoidance and evasion, some campaigners will never accept that it has done enough. Those campaigners may be disappointed that there was nothing extending the ambit of the register of trusts, or forcing our offshore territories to make their company registers publicly available, or any mention of the long mooted public register for the ultimate beneficial owners of UK real estate. The campaigners may, however, be pleased to see that HMRC will be given an extra £155 million to help to ‘address a range of avoidance and evasion activity, including tackling enablers and facilitators of tax fraud’.

I believe there is a lot to be read into this reference to enablers and facilitators. If tax evasion is to be eradicated, the final piece in the jigsaw is the role that big business has to play and its response to the Criminal Finances Act 2017 facilitation offences. These offences and the tax evasion facilitated are crimes of dishonesty – but the question of what is dishonest is decided by a jury. It takes years for today’s conduct to make it into court, so who knows what standards the public will be holding the representatives of corporates to in five to 10 years’ time. Is your business ready for that?

Jason Collins is a tax disputes expert at Pinsent Masons, the law firm behind Out-Law,com. This article first appeared in Tax Journal 25 November 2017 and is reproduced with permission.