The disclosure regime: feel the force

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.