Treasury’s ‘tougher consequences for avoidance promoters’ look soft to contractor advisers

Contractor advisers who replied to a HMT consultation on tougher consequences for avoidance promoters sound subdued by its two proposals, despite backing it in principle. 

The first proposal from HM Treasury is to make a criminal offence any failure by a promoter to comply with a ‘stop’ notice issued in respect of tax avoidance arrangements.

The second proposal is to expedite the disqualification of directors of limited companies involved in promoting tax avoidance, “many” of whom ‘operate as umbrella companies.’  

'Disrupt promoters'

In the six-chapter consultation, Tougher consequences for promoters of tax avoidance, the Treasury also says that as measures, the two will “help HMRC to disrupt promoters.”  

The document adds that the measures “will also make it riskier for promoters to continue to promote tax avoidance arrangements particularly when they have been served with a legal notice telling them they must stop selling a particular scheme.”

But criminalising the act of ignoring a stop notice was marked down by HMRC dispute advisory WTT Group, on the very day that the proposal was tabled in Spring Budget 2023.  

Yesterday, while sounding understanding of officialdom’s rationale, the advisory suggested that there’s nothing in the now-closed, still visible consultation to change its mind. 

'Very nimble'

“We understand that HMRC has to investigate and be sure of their position. Equally we know that many promoters are very nimble and with something like a mini-umbrella in particular, they can set up, sell their wares and close before HMRC has reacted,” WTT Group said.  

“The latest proposals say that notices will target individuals and their entities. That is welcome. 

“There is a need to be aware of some names, involved in the schemes of the past, who now operate indirectly via their influence on others. That is a much more difficult issue to counter. There is no easy answer to how to stop somebody operating in the shadows.” 

'Controlling mind'

Aware the shadows are where the “controlling mind” of the schemes lurk, HMT says the promoter is often a limited company acting as an umbrella, in a bid to ‘conceal their involvement.’ 

“[We’ve heard of promoters] often inserting stooge or intermediate shadow directors who distance the promoter from the company,” HMT further acknowledged. 

“These stooge directors can be anyone willing to include their name in the company’s papers or act as an officer of the company. They might not always have full understanding of the company’s activities but they still play an important role in the promoter’s activities.” 

'Winding up in the public interest'

Cue the second proposal -- for HMRC to act more quickly to disqualify directors of companies involved in promoting tax avoidance, thereby “removing them from the avoidance market and preventing them from setting up new companies.” 

Lofty aims aside, the plan is to let HMRC initiate director disqualification proceedings against avoidance promoters "winding-up in the public interest," and those disqualified from a ‘live’ company. 

But the Revenue needs to take into account the problem of young, inexperienced, or otherwise vulnerable individuals being recruited as nominee or stooge directors, says the LITRG. 

“Nominee or stooge directors can be used by tax non-compliant umbrella companies to disguise true ownership,” says the Low Incomes Tax Reform Group’s Victoria Todd. 

“People who have been recruited as directors for a fee and who aren’t really the ones in charge but are just desperate for the money, could find themselves caught up in this, with the problem being that disqualification has wide ramifications that can seriously impact on their lives.” 

'More action, fewer consultations'

However, Professional Passport is more concerned about the impact on the ordinary taxpayer, saying what is needed is “more action and fewer consultations”. 

“We clearly welcome any moves to reduce the promotion of tax avoidance arrangements, but HMRC has been slow to act thus far, some might say negligent,” the contractor compliance organisation alleged.  

“For far too long, the schemes have been allowed to thrive with the architects getting away scot-free whilst their victims have been punished. 

“HMRC has failed to act quickly enough over the years and looking to introduce more punitive measures for these criminals is simply a case of shutting the stable door after the proverbial horse has bolted.” 

Reflecting on his reply to the consultation before it closed last week, Professional Passport’s CEO Crawford Temple said he hoped the government would now “listen to the experts,” as many have submitted answers to the Treasury’s 11 questions.  

Emphasising HMT needs to listen, Mr Temple suggested prior warnings about IR35 fell on deaf ears, as the “off-payroll [rules]” have “fuelled” the growth of schemes -- as “industry predicted,” he said. 

'Struck down with legislation, only for those very same rules to provide parameters'

To WTT Group, the Intermediaries legislation perfectly illustrates the problem that the taxman is up against, almost as if stuck in a loop.

WTT’s tax director Graham Webber explained to ContractorUK: “History shows us that there is an arms race between HMRC and promoters -- one type of scheme will be struck down with legislation, but those very same rules provide parameters for the next [arrangement].

“It’s a battle that HMRC will struggle to win. Even before IR35 arrived in 2000, HMRC realised this and that set of rules, then and now, have failed to prevent abuse.” 

'Radical'

Webber believes the solution is more “radical” than the consultation’s proposal duo -- but the Treasury is at least half-right given that the solution is also two-fold. 

“First, define avoidance,” Mr Webber, himself a former taxman began. “A constant frustration for our clients is that they were ‘assured,’ and had KC opinions, that the scheme they were offered was ‘legal’.  

“Avoidance is legal. Perhaps the time has come for an intermediate definition between evasion – illegal -- and avoidance? And second -- all end-clients and intermediaries and providers should have to apply for and achieve a stamp of HMRC-approval.” 

'Meet the standard'

The tax office has long-advised that it does not approve schemes or firms, partly because ‘compliant’ today can become ‘non-compliant’ tomorrow, if changes are made subsequent to securing approval.

But reminiscent of the days when umbrella companies were granted dispensations, HMRC-approval is probably the way forward, as it would address both the reputable and the rogue.

Appealed WTT’s Mr Webber, almost as if pitching directly to HMRC: “Force those who would offer structures to comply and to obtain an HMRC-approval [while] making those who sell or make fees from non-compliant schemes guilty of a criminal offence. [Then HMRC could] prevent non-compliant schemes by defining and naming those who meet the standard.”