When HM Revenue & Customs’ director General Dave Hartnett vowed to wipe out all forms of tax avoidance by 2008, one of the major weapons in the HMRC arsenal he would have been counting on was the disclosure regime. The regime obliges tax advisers to disclose to the taxman any tax avoidance schemes marketed to clients, allowing HMRC to close any loopholes exploited by such schemes almost immediately.

By all accounts this mechanism has done its job well. By September 2004,161 financial disclosures had been made to HMRC over the preceding two months; by July 2006 this had fallen to 17 over the preceding four months, suggesting that fewer and fewer avoidance schemes were being peddled.

It is now almost commonplace for the pre-Budget or Budget to be accompanied by a series of anti-avoidance laws put in place to block tax planning tricks that surfaced as part of the disclosure regime.

Ahead of the 2006 pre-Budget report, for example, chancellor Gordon Brown pulled the plug on billions of pounds of tax avoidance when he closed six corporate tax avoidance schemes, introduced a targeted anti-avoidance rule for capital losses and nullified stamp duty land tax avoidance. How did the chancellor know that these were the areas he had to target? The disclosure regime, of course.

Yet for all its success and effectiveness, the regime has not given HMRC and the Treasury complete satisfaction. In the same pre-Budget report that boasted of the billions netted for Brown by the disclosure regime, he announced that its scope was to be extended even further. The tax profession and government are currently consulting on what the character of the disclosure regime will be.

One thing is certain: the new regime will have a major impact on tax is administered in the future.

Slipping the net
So why have HMRC and the Treasury decided that the old disclosure regime is not as rigorous as it should be? According to Francesca Lagerberg, national tax partner at Grant Thornton, it was not catching all the schemes it was meant to.

‘It would appear the some individuals have been taking strong legal advice that they do not need to disclose certain schemes. The authorities are introducing tougher measures to catch these schemes,’ says Lagerberg.

Chris Tailby, director of HMRC’s anti-avoidance group, says as much himself. He says some advisers, most of them operating as low profile tax boutiques, were blatantly ignoring HMRC calls for information under the disclosure regime.

‘Powers are needed to deal with a minority of promoters who apply avoidance techniques to the regime itself,’ he says. ‘Not surprisingly, the minority comes largely from those promoters who specialise in aggressive schemes.’

Advisers, too, acknowledge that while most of the tax industry complies with the disclosure regime, a small band of around 100 ‘renegade’ advisers continue to thumb their nose at the disclosure rules.

‘I can sympathise with what HMRC is trying to do,’ says Bernard Sweet, corporate tax director at Chiltern. ‘We have to comply with the disclosure regime and would expect all other firms to do the same so that there is a level playing field.’

But although the compliant majority have voiced their support for HMRC in its bid to clamp down on aggressive, non compliant boutiques, the way the taxman plans to extend its disclosure regime powers has caused concern and fear.

Here is what HMRC is proposing. The government wants to grant the taxman the power to allow authorities to obtain information if there are reasonable grounds to suspect that an adviser is not making the required disclosures.

These new powers will be administered via the special commissioners, who will be responsible for approving any information requests made by HMRC.

Trapping the innocent
What advisers are worried about is that such powers could be used to squeeze firms already making the appropriate disclosures. As the proposed rules stand, once the special commissioners have approved an HMRC request, an adviser has no right of appeal to the special commissioners. The only option available for an appeal is a costly and onerous judicial review.

‘This is a classic chicken and egg situation,’ says PricewaterhouseCoopers tax partner John Whiting. ‘HMRC wants to find out if you should be disclosing a scheme, but the only way to do that is to force you to disclose.’

There is also concern that the extended powers will allow HMRC to rule by press release. As part of the new regime HMRC will audit disclosure regime compliance. To obtain a clean audit, advisers will have to demonstrate they have complied with all HMRC disclosure regime guidance.

The implication is That HMRC can change disclosure regime guidance at any time but still require advisers to take account of the change. This allows HMRC to give any announcement the force of law without having to introduce actual legislation.

Not far enough
Perhaps even more frustrating for compliant advisers is that the extended powers may not even net the renegade advisers they are targeting. It turns out that the proposed new powers will not apply to offshore operators, advisers with legal professional privilege or any tax planning done in-house.

The limited scope of the changes has fired concerns of even more red tape, while being ineffective as to its purpose.

‘It is feared that the measures proposed will create an administrative burden for compliant firms and only catch a small number of the firms that are refusing to comply,’ says Bill Dodwell, head of tax policy at Deloitte.

How HMRC and advisers take the situation forward is difficult to see. Both sides agree that the renegades need to be brought to heel. HMRC wants to ensure that it is notified of any exotic scheme as early as possible, while advisers are eager to stop competitors from gaining an unfair advantage by flouting the rules.

The authorities maintain that the extended powers they want to clamp down on renegade firms are proportionate and necessary. ‘This power will benefit the compliant majority by creating a level playing field and is a proportionate response by government to frustrate those determined to avoid paying their fair share,’ says paymaster general Dawn Primarolo.

Tax advisers, however, remain concerned that the new powers are too far-reaching and will not catch the firms that are actually flouting the disclosure regime in the first place.

HMRC and the tax industry both want the same thing, yet finding the balance to achieve this common aim while still keeping both parties satisfied and comfortable is going to be very testing.

Profile of a disclosure regime renegade
Everyone has been talking about the renegade advisers who refuse to comply with the HMRC’s disclosure regime. Here is a short look at what characterises such firms.

SIZE: Renegade firms are typically small and very niche. HMRC director general Dave Hartnett has gone so far as to describe them as ‘spivvy’. The firms seem to focus on serving private clients or small business. A favourite word to describe them is ‘boutique’.

ATTITUDE: Bold and fearless. The non-compliant firms have been only too happy to tell visitors from HMRC to ‘go away’. Tax officials have also claimed that the non-compliant firms have deliberately obstructed them by filling in forms incorrectly and filing documents at the wrong tax office. If renegade firms can delay the discovery of a tax scheme, then they will not hesitate to do so.

TYPE OF TAX PLANNING: According to Hartnett, those firms that refuse to comply with the disclosure rules specialize ‘in promoting the kind of tax avoidance schemes others would not touch’. Renegade firms are aggressive and hungry to avoid as much tax as they possibly can no matter how risky their schemes.