TAX AVOIDANCE and the use of scheme products have been with us for many years. The Rossminster company, which provided tax mitigation products in the 1970s, is regarded as the precursor of present-day commercial tax avoidance industry.
The Disclosure of Tax Avoidance Schemes legislation (DOTAS) sees tax mitigation schemes flagged up to HM Revenue & Customs, which then issues that scheme with a number indicating it is aware of it.
The use of the DOTAS mechanism to catch schemes earlier seems to be the government's and HMRC's answer. However, all is not what it seems.
There are fundamental flaws in the DOTAS legislation that would suggest it is unworkable.
This is because the way DOTAS is written is subjective. Therefore, the whole system of DOTAS is flawed in its application. I have correspondence with HMRC's Anti-Avoidance Group (Intelligence) to this effect.
So the question to be posed is: if DOTAS is unworkable, should tax advisors notify HMRC?
After all, tax barrister Patrick Cannon observed HMRC has the powers to attack aggressive tax avoidance schemes.
Therefore, if this is the case, is DOTAS no more than a mechanism to enable government to generate more tax by way of penalty? Furthermore, we have the Aaronson paper on a GAAR which is a very positive and helpful contribution to the question of tax avoidance.
In 2006, Cannon summarised the European Court of Justice decision in the case between Halifax and Commissioners of Customs & Excise (CCE) in 2006 as applying the concept of "abuse" where the taxpayer obtains a tax advantage which is contrary to the purpose of the relevant legislation and objective factors show that obtaining that advantage is the essential aim of the transaction.
The difficulty is, in a case where the "abuse" doctrine applies, the transaction concerned must be redefined so as to establish the situation that would have prevailed in the absence of the transactions constituting abusive practice.
The Ramsay principle – which says tax must be charged where a scheme has no purpose other than to avoid tax – applies not just in law, but across the whole spectrum of all legislative principles.
Neither the doctrine of abuse nor the Ramsay principle are confined to tax and VAT law. In fact, Ramsay itself did not introduce a new doctrine operating within the special field of revenue statutes. Instead, as Lord Nicholls put it in 2005, "it rescued tax law from being some island of literal interpretation and brought it within generally accepted principles".
Draft Tax Avoidance Schemes (Prescribed Description of Arrangements) regulations 2006 were issued on 27 April 2006 and, as Patrick Cannon observed, should be subject to serious amendment.
The puzzling thing was – why was it issued at all, if the existing system was working well?
As a result of Halifax and other cases, HMRC's efforts had in the main been successful by 2006. Avoidance was down and disclosure of schemes was down as well.
HMRC developed a doctrine depending upon the presence or absence of certain indices. Accordingly, you have avoidance where there are artificial, tax-motivated transactions, a mismatch between the economic outcome, and the tax outcome and/or artificiality – even a perversity in interpreting legislation.
Some areas – such as mitigation expressly given by the legislation, cases of genuine uncertainty, error or negligence in submitting tax returns and fraudulent evasion – are clearly not avoidance.
In 2010, DOTAS, although not coming under the heading of HMRC powers, received attention in that year's budget. The DOTAS hallmarks (contained in the Finance Act 2004) were amended with new provisions:
• New trigger point to be introduced for the disclosure of actively marketed schemes;
• The inclusion of a requirement for a person who introduces a client to a notifiable scheme to provide HMRC with the name and address of the promoter who provided it with details of the scheme;
• An increase in the penalties for failure to comply; and
• A requirement for promoters to provide HMRC with periodic information about clients who implement a notifiable scheme.
This is all part of the government's desire and determination to ensure that everyone pays the right amount of tax and to ‘outlaw' avoidance schemes which it regards as unacceptable. It is particularly targeted at those taxpayers wishing to steer clear of the 45% (and, previously, 50%) tax rates.
The government is aiming to increase the pressure on advisors who market abusive schemes which artificially reduce tax, such as paying loans in lieu of salaries through shell companies. The plans include naming and shaming, published warnings about schemes being mis-sold, making it easier to identify contrived planning and its promoters.
There is also going to be a strengthening of the DOTAS rules, giving HMRC greater powers to force promoters of any aggressive avoidance schemes to name its users, and impose penalties more easily for failure to provide information.
The proposals follow the recent furore over avoidance that involved more than 1,000 wealthy individuals – including the comedian Jimmy Carr – being castigated in the media for the use of the Jersey-based K2 Scheme.
The government intends to modify the Finance Act 2004 in its application in certain circumstances, meaning a promoter who made disclosures before April 2010 of arrangements involving the "transfer of rights" legislation will have to make further disclosures if the arrangement(s) continues to be made available.
But those modifications will have to be significant if they are to nullify the subjective nature of DOTAS and create a workable law.
Mike Kerridge B.Sc FCA is a chartered accountant for MJ Kerridge & Co.
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