Consultation outcome

Tougher consequences for promoters of tax avoidance - summary of responses

Updated 18 July 2023

Foreword

The promotion of tax avoidance deprives our vital public services of the funding they need and can leave taxpayers with unexpected tax bills. This government is committed to clamping down on promoters of tax avoidance. As a Treasury Minister who, in a previous career, used to prosecute tax fraudsters for HMRC, this is an issue which I take very seriously.

Making tax fairer is one of my priorities as Financial Secretary, and a key part of this is tackling tax avoidance and those who promote it. The government has a strong record in this area: the amount of revenue lost to marketed tax avoidance has fallen from an estimated £1.5 billion in the tax year 2005 to 2006 to £0.5 billion in the tax year 2021 to 2022. The government further strengthened the measures to tackle the promoters of tax avoidance in Finance Acts 2021 and 2022, including powers to publicly name promoters and their schemes, helping taxpayers steer clear of promoters and schemes.

The government is continuing with its commitment to crack down on promoters of tax avoidance. As the Chancellor announced at Spring Budget, we have consulted on two new measures which build upon and strengthen the robust action already taken. These measures will help HMRC to tackle promoters more quickly by making it easier to disqualify directors of companies found promoting tax avoidance. The introduction of a criminal sanction will also make it riskier for promoters to continue to promote tax avoidance arrangements where they have been served with a legal notice telling them they must stop selling a particular scheme.

The government welcomes the support for these measures expressed in response to the consultation, and respondents’ recognition of the need for continuing strong action to tackle avoidance. The government also understands the need for strengthened HMRC powers to be proportionate and balanced. We have ensured the proposed measures contain appropriate safeguards which protect individuals’ rights while still enabling HMRC to respond effectively.

The government is now consulting on draft legislation to implement the measures outlined in this document and intends to legislate for them in the next Finance Bill. These measures represent an important next step in our commitment to clamp down on promoters.

Clamping down on promoters is just one part of this government’s strategy to tackle tax avoidance, however, and we recognise the concerns respondents raised in relation to umbrella companies and standards in the tax advice market more widely. Alongside this, the government is consulting on proposals to regulate umbrella companies and tackle tax non-compliance, following a Call for Evidence that suggested bad practice in the umbrella company market is causing harm to workers, businesses and taxpayers. The government is also exploring options to improve the wider regulatory framework in the tax advice market, while taking quick action to address consumer protection concerns about repayment agents.

I am grateful to all those who have taken the time to respond to the consultation document. Your responses have been considered carefully. I am particularly grateful that professional advisors, representative bodies and individuals were willing to work constructively with HMRC on the proposals, contributing thoughts and ideas on how to tackle tax avoidance.

Victoria Atkins MP

Financial Secretary to the Treasury

1. Executive summary

Tax avoidance involves bending the rules of the tax system to try to gain a financial advantage never intended by Parliament. It deprives our public services of the funding they need. Most tax avoidance schemes do not work and may leave those who use them with an unexpected tax bill, plus interest and penalties, on top of the fees paid to the scheme promoter.

Tackling promoters of tax avoidance schemes and ensuring they face tougher consequences for their actions continues to be a priority for the government. At Spring Budget on 15 March 2023, the government announced that it would consult on two new measures:

• a criminal offence for promoters of tax avoidance who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme; and
• a power that would enable HMRC to expedite the disqualification of directors of companies involved in promoting tax avoidance, including those who control or exercise influence over a company.

The consultation “Tougher consequences for promoters of tax avoidance” was launched on 27 April 2023 and closed on 22 June 2023.

The government received 19 written responses and met with 8 external stakeholders.

Most respondents to the consultation were supportive of the proposed measures and the majority were in favour of taking strong action against promoters of tax avoidance schemes. There was a general consensus that the government should continue to take a robust approach to those who devise, promote or sell tax avoidance schemes. Although some respondents commented that the numbers impacted would be small, they recognised that HMRC must be willing to use these powers where appropriate to underpin the desired deterrent effect.

There was general support amongst stakeholders for prosecuting promoters who failed to comply with a stop notice, in appropriate cases. Respondents welcomed the fact that these proposals are focussed on promoters of tax avoidance schemes and do not target legitimate businesses and taxpayers.

Several stakeholders used their responses to make wider points about how non-compliant umbrella companies selling disguised remuneration avoidance schemes were being tackled and called for the regulation of umbrella companies and the raising of standards in the tax advice market. The government has recently published the response to the Call for Evidence on umbrella companies and is currently consulting on options to tackle non-compliance in the umbrella company market. The government is committed to raising standards in the tax advice market and HMRC is considering options for dealing with agent misconduct and improving taxpayers’ access to redress when agents’ standards fall short.

Draft legislation on these measures is also being published today giving stakeholders the opportunity to comment on it. The government will carefully consider any comments and make any appropriate amendments to the draft legislation. The consultation on the draft legislation closes on 12 September 2023.

2. Introduction

This document sets out the government’s response to the consultation on “Tougher consequences for promoters of tax avoidance”, which ran from 27 April 2023 to 22 June 2023.

The consultation document asked for views on the following proposed new measures:

• a criminal offence for promoters of tax avoidance who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme; and

• a power that would enable HMRC to expedite the disqualification of directors of companies involved in promoting tax avoidance including those who control or exercise influence over a company.

The government is grateful to everyone who took the time to participate in the consultation process. As part of this exercise, HMRC met with 8 external stakeholders. The consultation posed 11 questions. A total of 19 written responses were received from:

• 13 professional and representative bodies
• 5 other businesses
• 1 individual

Chapters 3 and 4 of this document cover the two measures outlined above. Each chapter summarises the responses given to the questions posed in the consultation and sets out the government’s response.

New criminal offence for promoters who fail to comply with a Promoters of Tax Avoidance Scheme (POTAS) Stop Notice

The government will introduce legislation in the next Finance Bill to create a stronger deterrent for those considering continuing to promote a tax avoidance scheme subject to a POTAS Stop Notice.

The proposal consulted on would enable HMRC to consider opening a criminal investigation as soon as promotion in breach of a Stop Notice occurs. Creating a new criminal offence for promoters failing to comply with a Stop Notice would provide the strongest possible deterrent against non-compliance.

The new sanction will sit alongside existing civil penalties for non-compliance with a Stop Notice and will be reserved for the most serious cases, where HMRC needs to send a strong deterrent message or where civil interventions are not likely to be effective.

Respondents to the consultation were broadly supportive of the proposal and in favour of taking strong action against promoters of tax avoidance schemes. The majority of respondents felt that introducing this new criminal offence would help to deter promoters from continuing the promoting of schemes covered by a Stop Notice.

Some respondents sought assurances that there is effective governance in place around the issuing of Stop Notices and emphasised the importance of having strong safeguards in place, given the potential for criminal convictions. While the proposal is targeted at a small group, the government acknowledges that robust safeguards are essential and further detail of the governance and taxpayer safeguards are set out in chapter 3.

Expediting the disqualification of directors of companies involved in tax avoidance

The government will introduce legislation in the next Finance Bill to expedite the disqualification of directors and other individuals who control or exercise influence over a company that is involved in the promotion of tax avoidance.

The intention is that HMRC would be able to initiate proceedings against promoters of tax avoidance in the following circumstances:

• disqualification of a director following a winding-up in the public interest
• disqualification of a director of a ‘live’ company (disqualification not following a winding-up under section 85 of Finance Act 2022)

Those that commented on the director disqualification measure had no objections to HMRC expediting the disqualification of directors, and those who control or exercise influence over companies, involved in promoting tax avoidance.

Two stakeholders raised concerns about young, inexperienced or vulnerable individuals being recruited as stooge directors for a fee and then being caught by both measures (the director disqualification measure in particular). They were concerned that some of these people might not be fully aware of what they have signed up for or of the consequences of being a director of a company involved in tax avoidance. These points are covered in more detail in chapter 4.

The proposal consulted on would enable HMRC to act quickly to disqualify directors of companies involved in promoting tax avoidance and disrupt the companies’ business model, removing the directors from the avoidance market and preventing them from setting up new companies.

Background

The government is committed to tackling promoters of tax avoidance. Measures introduced in recent Finance Acts and robust action taken by HMRC have been effective in driving many promoters out of the avoidance market. HMRC’s wider strategy for tackling avoidance has seen the tax gap arising from marketed avoidance reduce from an estimated £1.5 billion in the tax year 2005 to 2006 to £0.5 billion in the tax year 2021 to 2022.

HMRC continues to take robust action against promoters of tax avoidance under its existing powers, including those legislated in Finance Act 2021 (FA21) and Finance Act 2022 (FA22). HMRC also has individuals under live criminal investigations for offences relating to arrangements promoted and marketed as tax avoidance.

The government wants to go further in disrupting the business models of the promoters who remain in the market. The new measures announced at Spring Budget 2023 build on the changes made in FA21 and FA22. The government’s action in this area sends a clear message that promotion of tax avoidance schemes is not acceptable, and that this government will continue to take necessary action to tackle promoters, including those that have control or exercise influence over the schemes being marketed.

The majority of advisers adhere to high professional standards. The new measures are not aimed at professionals who help taxpayers fulfil their obligations to pay the right amount of tax at the right time. Instead, they are targeting promoters of tax avoidance schemes who damage the integrity of the tax system and leave taxpayers with significant bills.

The government recognises that the measures are strong sanctions, which would have a significant impact on anyone they were applied to. The government wants to ensure that any new powers and sanctions are proportionate and applied appropriately. It is satisfied that these measures are well targeted at those who persistently promote tax avoidance, whose obligations are clear. They are an appropriate response and will act as a strong deterrent. HMRC decisions to take action under these measures will be subject to robust processes outlined in this document and safeguards will be in place to provide taxpayers with an opportunity to challenge HMRC’s view. While HMRC will initiate action under these provisions, decisions on sanctions will ultimately be decided by the courts.

The government is grateful for all of the contributions received. Having considered the feedback from respondents, the government is proposing to proceed with these measures, subject to a number of changes, which are detailed below.

3. A new criminal offence for promoters who fail to comply with a POTAS Stop Notice

Overview

The consultation proposed introducing a new criminal offence for a failure to comply with an HMRC POTAS Stop Notice.

A Stop Notice is a legally enforceable notice given by an authorised HMRC officer to any person who they suspect of promoting relevant arrangements. The HMRC officer will be a Senior Civil Servant and independent of the investigation into the tax scheme. The Stop Notice may only be issued where certain conditions are met including that the authorised HMRC officer considers that the scheme is likely not to deliver the tax advantage claimed.

A person subject to a Stop Notice is prohibited from promoting arrangements of the kind described in the Notice. A recipient of a Stop Notice is required to give copies of the Notice to other persons who are subject to it, for example someone who controls an entity which is the recipient of the Stop Notice, and must also comply with certain other obligations.

The new measure aims to tackle those promoters who choose to continue promoting schemes covered by a Stop Notice in the face of an obligation to cease. The proposed changes would create a new strict liability offence: a failure to comply with a Stop Notice would be a criminal offence regardless of the person’s intent. HMRC would be able to consider opening a criminal investigation as soon as promotion in breach of a Stop Notice occurs. This would be the case, regardless of any dispute about the effectiveness of the tax scheme between HMRC, the promoter and the scheme users.

The new sanction would apply to any person subject to a Stop Notice. The offence would only be committed where there is evidence that there has been promotion in breach of a Stop Notice taking place on or after Royal Assent of Finance Bill 2023. From Royal Assent the criminal offence would apply in relation to all live Stop Notices, meaning that Stop Notices issued prior to Royal Assent which remain live would be in scope.

Promoters would only be liable for the proposed criminal offence where they do not have a reasonable excuse for breaching a Stop Notice. They would have the opportunity to present evidence of a reasonable excuse to HMRC in support of this and subsequently to the tribunal if agreement is not reached with HMRC. The proposal consulted on does not seek to alter the underlying rules and obligations of the Stop Notice regime. The existing safeguards would continue to apply, including:

• the decision to issue a Stop Notice being made by a HMRC officer of SCS grade who is independent from the investigation of the tax scheme
• the right of the promoter to request withdrawal of the Stop Notice and where a withdrawal request is rejected, the right to appeal that decision to the Tax Tribunal
• where an appeal is made to the Tax Tribunal, the right of the promoter to request suspension of the Stop Notice
• where civil penalties for non-compliance with the Stop Notice are issued, the right to appeal those penalties to the Tax Tribunal

If HMRC or the tribunal decide to withdraw a Stop Notice, they can specify an earlier date from which the withdrawal can take effect. In these circumstances, the Stop Notice would cease to have effect from the specified earlier date and the promoter would not be liable for any breaches of the Stop Notice occurring after this date.

The new sanction will sit alongside existing civil penalties for non-compliance and will be reserved for the most serious cases, where HMRC need to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate.

While HMRC may undertake a criminal investigation and gather the evidence, the decision to prosecute would ultimately lie with the relevant prosecuting authorities.

To reflect the seriousness of failing to comply with a Stop Notice, the government proposes that conviction for the offence would result in an unlimited fine and/or a custodial sentence of up to 2 years.

The consultation posed a number of questions about this proposal.

Question 1. Do you agree that focussing a criminal offence on the continued promotion of a scheme covered by a Stop Notice will help to deter promoters?

The majority of respondents welcomed the proposal for a new criminal offence measure and the government’s commitment to tackle promoters of tax avoidance.

One respondent commented:

Making the failure to comply with a Promoters of Tax Avoidance Schemes (POTAS) stop notice, a criminal offence, demonstrates a strong strategic tax system. This means that as well as existing civil penalties for non-compliance, HMRC can open a criminal investigation as soon as promotion in breach of the stop notice had occurred. It also indicates the government’s determination to crack down on all forms of non-compliant tax behaviour and to take persistent action.

Another respondent held the view that the proposal creates a clear distinction in the government’s view of those promoting schemes and the schemes’ users.

Some stakeholders felt that the proposal strengthens the existing framework and would help deter those considering continuing the promotion of schemes covered by a POTAS Stop Notice. Others expressed reservations about how often the measure would be applied and the strength of the deterrent effect.

There were some concerns around how the proposed offence would deal with promoters situated outside the UK. Two respondents held the view that where an offshore promoter uses entities based in the UK to facilitate the promotion and marketing of their schemes, the UK entities should also be made criminally liable. They felt that this would increase the deterrent effect and make it more difficult for promoters based offshore to promote their products to the UK market.

The importance of publicising the enforcement of the new power was emphasised by a number of respondents.

Several stakeholders wanted further clarification about the potential criminal sanctions under the proposed new measure.

Question 2. Do you agree that the twofold approach of civil penalties and a criminal offence will provide a comprehensive deterrent for promoters?

The majority of respondents agreed that the addition of a criminal offence to the existing framework of civil penalties would create a stronger system of deterrents.

Some stakeholders reiterated concerns around how the proposed criminal offence would be applied to promoters based offshore.

While agreeing that a twofold approach would add flexibility, one stakeholder emphasised the need for applying both civil and criminal sanctions at an appropriate scale.

Other comments included:

The combination of civil penalties and a criminal offence – with an open appeal against a Stop Notice not being sufficient reason for non-compliance with the Notice – appear viable and reasonable.

The government’s response

The government welcomes the views of respondents about the prospective impact of introducing this new criminal offence. The government’s view is that the existing Stop Notice civil penalties will remain crucial to enforcing Stop Notices. They can be a substantial and effective deterrent in themselves and allow HMRC to secure a financial penalty more quickly than a criminal fine or custodial sentence pursued through a criminal prosecution. Criminal investigations would be reserved for the most serious cases and / or, for example, where civil interventions have been ineffective. Introducing a new criminal offence whilst maintaining the civil penalty will ensure maximum deterrence to promoters. In response to questions about the effectiveness of the deterrent, the government believes this maximum deterrence can be upheld by HMRC seeking prosecutions for the most serious cases, to send a strong deterrent message.

The government is of the view that it is important for the proposed offence to target both those who would be recognised in law as directors, whether or not formally appointed, but also any others who control or exercise influence over a promoter company subject to a Stop Notice. The government agrees with the responses that suggest publicising the new offence would increase its deterrent effect. The government plans to make those potentially impacted by this proposed offence aware of it before it comes into force.

Regarding the responses received about sentencing provisions for this offence, the government recognises it is important to consider carefully what sentencing provisions would be appropriate for this new offence. The government believes the possibility of a custodial sentence for those guilty of the offence would strengthen the deterrent effect and that an unlimited fine and/or prison term of up to 2 years would be a proportionate approach. The aim of this measure is to drive compliance with the Stop Notice regime.

The government notes respondents’ concerns regarding tackling promoters who base themselves offshore. The new offence would apply to all promoters of tax avoidance who are subject to a Stop Notice. That includes those based offshore and those based in the UK who may be promoting relevant arrangements on their behalf. The UK has one of the world’s largest networks of tax treaties and exchange agreements and HMRC regularly uses this to exchange information with other countries’ tax authorities. This includes asking for information to help with investigations into tax avoidance schemes and the companies and agents who promote them.

There is a suite of powers available to tackle promoters of tax avoidance. HMRC will continue to deploy these, using the best option to target different arrangements.

Question 3. In the circumstances set out in the example provided, as Mr A is significantly influencing the continued promotion activity, do you agree that Mr A is in scope of the criminal offence?

• X Ltd is a promoter that is subject to a Stop Notice. X Ltd claims to have stopped promoting
  • Mr A controls X Ltd and is also subject to the Stop Notice
  • A new entity, Y Ltd, is set up with a former employee of X Ltd as a director. Mr A exerts significant influence over Y Ltd
  • X Ltd fails to pass on the notice to Y Ltd and is liable to a civil penalty for this failure
  • Y Ltd promotes the same or similar scheme to that described in the Stop Notice but having not been given a copy of the Stop Notice claims to be unaware of the need to stop selling

Respondents agreed that Mr A has control and influence over both companies and would be within the scope of the new criminal offence.

A respondent welcomed the proposal to deal with promoters who hide behind other business structures and entities but felt that continued work is necessary to tackle those individuals who seek to evade justice by exploiting the notion of control and influence.

The government’s response

The government welcomes respondents’ agreement that the promoter Mr A would be within the scope of the new criminal offence and has introduced a provision in the proposed legislation to address this scenario.

The government has considered further how to deter promoters from arranging their activities to attempt to circumvent the proposed offence. To address this, the government are making provision in the legislation that if a recipient of a Stop Notice (A) fails to give a copy of the Notice to another person (B) who is subject to it and B continues to promote the scheme contrary to the Notice, then A would still have committed an offence even if it did not directly promote relevant arrangements in breach of the Stop Notice.

Question 4. Do you agree that these other obligations, where they do not relate to continued promotion, should not be subject to the criminal offence?

Most respondents felt that focusing the proposed criminal offence on the continued promotion of a scheme rather than on other obligations under a POTAS Stop Notice would be most appropriate. These other obligations relate to the provision of information both to HMRC and to clients and intermediaries linked to the recipient of the Stop Notice.

One respondent suggested that a criminal offence should also be considered for a failure to comply with other Stop Notice obligations in the most serious cases.

The government’s response

The government is grateful for the responses and agrees that the focus of the criminal offence should be where there is continued promotion of the specified scheme and not on other obligations.

Safeguards and protections

Question 5. Do you agree that these safeguards provide the right level of protection for those who may face potential criminal prosecution?

There was a mixed reaction to the safeguards set out in the consultation document. Some respondents held the view that the outlined provisions and safeguards are appropriate and reasonable. Others sought assurances that existing Stop Notice governance is sufficiently robust and stressed the importance of having strong internal governance. They felt that a higher level of scrutiny will be needed once a Stop Notice can lead to a criminal conviction and suggested introducing additional protections and safeguards to ensure independent oversight.

There were some concerns around the severity of a strict liability criminal offence and the possibility of a promoter receiving a criminal record in respect of arrangements that are subsequently found by the Court not to be avoidance. Some respondents sought assurances that tax professionals providing legitimate tax planning advice would not be caught by the proposed new measure. Two respondents suggested having the ability to retract any criminal record should the Stop Notice be overturned upon appeal, or if the courts subsequently rule that the scheme delivers the promised tax result and was not avoidance.

Comments included:

…the right balance needs to be struck between HMRC having an effective criminal deterrent and ensuring that robust legal safeguards are in place.

The government’s response

The government is grateful for the views expressed. It notes the concerns raised by some respondents about the level of safeguards proposed in relation to the criminal offence.

The government’s view is that the existing Stop Notice safeguards are robust, well established and understood, and meet HMRC Powers and Safeguards criteria, including proportionality and consistency.

The safeguards of the existing Stop Notice regime would continue to apply to Stop Notices issued after the criminal offence has been introduced. These include a right for the promoter to request HMRC withdraw a Stop Notice and the right to appeal to the Tax Tribunal where HMRC reject this request for withdrawal.

The government believes that the responsibility of deciding to issue Stop Notices should continue to rest with authorised HMRC officers. In recognition of the potential significant consequences of a Stop Notice, HMRC Commissioners have determined that an authorised officer for these purposes must be a Senior Civil Servant and independent of the investigation into the avoidance arrangements.

The new criminal offence will be reserved for the most serious cases, where HMRC needs to send a strong deterrent message or where civil investigations are ineffective. Any criminal investigation would be subject to HMRC’s governance and oversight for criminal investigations, the guidance covering this is published on GOV.UK: HMRC’s criminal investigation powers and safeguards.

Where HMRC proceeds with a criminal investigation, it would still be for the relevant prosecuting authority to decide whether to bring a charge based on the evidence and whether prosecution would be in the public interest. If the prosecutor decided to proceed to prosecution, HMRC’s case would have to be proved in court to secure a criminal conviction. If a guilty verdict were found, the court would determine the appropriate fine and / or custodial sentence.

The government believes it is important to balance the rights of promoters of tax avoidance who receive Stop Notices and the objective of protecting taxpayers by preventing the promotion of avoidance schemes. Being involved in an avoidance scheme can leave taxpayers with an unexpected tax bill, plus interest and potentially penalties, on top of fees they have paid to the promoter. It is important that HMRC are able to act quickly to issue Stop Notices to protect taxpayers from these consequences and that there should be a strong deterrent to make sure the Notice is complied with promptly, even if the scheme is later found to work. The government believes that the existing governance and safeguards for Stop Notices strike the right balance between the rights of promoters and enabling HMRC to act quickly to protect taxpayers.

The government acknowledges respondents’ views concerning the risk of being prosecuted for failing to comply with a Stop Notice in respect of arrangements which are subsequently found not to be avoidance. The government wishes to emphasise the importance of complying with a Stop Notice even where, exceptionally, a court subsequently rules that the scheme was not avoidance. Stop Notices have to be issued at the earliest possible opportunity in order to maximise their effectiveness in protecting taxpayers. Where HMRC is satisfied that the requisite conditions are met, it is right that the Stop Notice be complied with even if on later scrutiny a court finds the scheme delivers the tax advantages. This approach is an effective way to protect the largest number of taxpayers.

4. Expediting the disqualification of directors of companies involved in tax avoidance

Overview

The consultation document outlined proposals to expedite the disqualification of directors and other individuals who control or exercise influence over a company involved in the promotion of tax avoidance. This would allow the government to strengthen HMRC’s ability to tackle the remaining promoters still in the market who persist in promoting tax avoidance schemes.

Director disqualification is the process whereby an individual is barred by the court from being a director of a company, or from acting in the promotion, formation, or management of a company for a period of time. The period, which can be up to 15 years, is determined by the court.

An undertaking is a process by which a director has agreed any misconduct and voluntarily disqualifies themselves thereby avoiding court action. Undertakings have the same legal effect as a disqualification order and carry the same consequences if breached. Under these measures, undertakings will remain available to directors.

The consultation proposed that HMRC would be able to bring disqualification proceedings against promoters of tax avoidance in the following circumstances:

Disqualification of a director following a winding-up in the public interest – Section 85 FA22

HMRC would apply for a disqualification order at the same time as presenting the winding-up petition to the court. Directors and those who control or exercise influence over a company would be disqualified on application by HMRC, as a direct consequence of the company being wound up under section 85 of Finance Act 2022.

Disqualification of a director of a ‘live’ company

HMRC would apply for a disqualification order against directors of a company (and those who control or exercise influence over a company) involved in promoting tax avoidance that has not been wound up under section 85 of Finance 2022. The court would be able to grant the disqualification order on the grounds that the conduct of the directors is unfit.

Under these measures, the current safeguards would be preserved. These include the ability for the director to defend themselves in court, appeal a court decision to disqualify them and seek leave of the court to act as a director whilst disqualified.

These measures would maintain the current civil and criminal sanctions for those breaching a disqualification order or helping disqualified directors. These are a criminal sanction resulting in imprisonment, a fine or both, and a civil sanction of personal liability for certain company debts.

These measures would apply to directors and other individuals who have control or exercise influence over a company involved in promoting tax avoidance and operating against the public interest on or after Royal Assent of Finance Bill 2023-24. When deciding whether to apply for a disqualification order to the court HMRC would be able to consider information available to it, including any activity by the company, the directors and other individuals prior to Royal Assent.

The consultation asked a number of questions about these proposals.

Question 6. Do you agree that allowing HMRC to consider and bring disqualification proceedings against directors and those who control or exercise influence over a company involved in promoting tax avoidance will help deter and tackle tax avoidance?

The majority of respondents welcomed the proposals and generally agreed that expediting director disqualification proceedings would help to deter and tackle tax avoidance and enable HMRC to act more quickly to disqualify directors of companies involved in promoting tax avoidance, removing them from the avoidance market and preventing them from setting up new companies.

Some respondents felt that the new measure would not be a sufficient deterrent on its own, that financial sanctions would be needed as well, and suggested that the civil sanctions and financial penalties already in effect under the FA21 and FA22 were a stronger deterrent.

In addition, a number of specific single comments by respondents were made in response to this question, which are outlined below:

• Expressed the view that pursuing disqualification at the same time as the winding-up petition could delay the public interest winding-up proceedings. They felt that this may be exacerbated in circumstances where the subject of the disqualification proceedings is someone who is ‘indirectly in control or exercising influence’, as establishing their influence would be a fact specific and evidence intensive exercise.

• Agreed that the proposed measure would make it difficult for UK companies to operate without the directors that have been subject to disqualification. However, they had some reservations about how the disqualification action would apply to non-UK companies operating in the UK tax avoidance market and entities such as Limited Liability Partnerships (LLP) that are constituted differently to companies and therefore do not require directors to operate.

• Expressed concern that if both HMRC and Insolvency Service have roles in relation to director disqualification, activities may be duplicated, or other inefficiencies may arise.

• Felt that there are challenges around gathering evidence to get to the controlling minds and difficulty around the ability to enforce disqualifications when it comes to shadow directors and controlling minds due to their unofficial capacity within a company. They felt that these individuals would continue to operate in the shadows but at least there would be criminal sanctions if they continued to operate once disqualified.

• Asked how often this power would be used by HMRC, “given the severely constrained resources HMRC must contend with”.

Comments included:

Where there is a significant breach of the anti-avoidance regimes and it is in the public interest to do so, absolutely agree that HMRC should act quickly to present a winding-up petition to the court and that any company’s significant breach of the anti-avoidance rules warrants consideration for disqualification of the company’s directors. The proposals to help expedite this process would be beneficial in ensuring HMRC takes action quickly.

Moving quickly will directly disrupt the business models of promoters who use stooge and intermediate shadow directors and, in turn, this may deter other individuals from becoming directors of companies involved in promoting tax avoidance. It is also good to see that the government intends to ensure these proposals target those who would be recognised in law as directors, whether or not formally appointed.

The government’s response

The government is grateful for the views expressed.

The government’s view is that these measures will enhance HMRC’s ability to disrupt the activities of promoters of tax avoidance. HMRC will be able to act more quickly to disqualify directors of companies and partners of limited liability partnerships, entities which are both covered in the existing legislation: Finance Act 2022 and the Company Directors Disqualification Act 1986. The measures will place tougher consequences on those that promote tax avoidance, removing them from the market and preventing them from setting up new companies. Moving more quickly will directly disrupt the business models of promoters who use stooge and intermediate shadow directors. The measures may also deter other individuals from becoming directors of companies involved in promoting tax avoidance.

To address the concern that seeking disqualification of those who were indirectly in control might delay the company’s winding up, the government proposes that where HMRC has already taken action under the proposal to apply for disqualification at the same time as winding up, HMRC could return to the court with a subsequent disqualification application for any directors or individuals who control or exercise influence over the company, who were not included in the original application. This would ensure that if, subsequent to the winding up, HMRC uncovers evidence of such individuals, it would be able to bring disqualification action quickly under the original application.

HMRC will continue to use dedicated, expert compliance professionals to investigate promoter entities and make challenges under these new powers. Furthermore, HMRC has been working closely with the Insolvency Service on draft legislation to ensure that these measures complement the existing legal framework including how information is exchanged between the two organisations, to reduce the risk of any duplication of investigative effort or action post disqualification.

Question 7. What other factors should HMRC take into account when considering a director disqualification?

Two stakeholders raised concerns about vulnerable individuals, recruited as nominee or stooge directors for a fee, being caught by these measures, particularly where they might not be fully aware of what they have signed up for or of the consequences of being a director of a company involved in tax avoidance.

Two respondents felt that given that there are already other grounds for disqualification under the Company Directors Disqualification Act (CDDA) 1986, factors for disqualification under these measures should be confined to failures to comply with tax avoidance rules and should not be expanded to include a promoter company’s general lack of compliance with other tax legislation.

Comments included:

…it is incumbent on HMRC to ensure due diligence is maintained in order to understand if a director is aware of their role, particularly given the potential ramifications as a consequence of being disqualified as a director, including both reputational and financial.

There is already a comprehensive list of factors included in the consultation document. We believe that evidence would need to show that any director subject to the disqualification exercised control or influence over the company’s affairs.

The government’s response

The government welcomes the views of respondents on additional factors.

The government consider it is appropriate to consider all relevant factors when deciding whether to apply for a disqualification order to the court. This could include, for example, the evidence which formed the basis for the winding up of a company. Every case will be assessed on its merits and the available evidence. HMRC will take into account all relevant factors in considering if disqualification is warranted against a director. However, part of the purpose of the proposal is to discourage people from acting as stooge directors of promoter companies and so mere ignorance of a director’s obligations or a company’s activities would not, by itself, be a reason for HMRC not to take action.

Question 8. Do you have any suggestions for ensuring these proposals deal effectively with those who directly or indirectly control or exercise influence over a company, for example shadow directors?

Most respondents welcomed the fact that the proposals target those exercising direct or indirect control or influence over companies promoting tax avoidance and offered some suggestions for dealing with such individuals.

One stakeholder suggested close collaboration between HMRC and professional bodies to ensure that any individuals involved in malpractice face expulsion, and engagement with other government departments and agencies to share expertise was also suggested. HMRC already makes referrals to professional bodies and works closely with other governments (see government’s response below).

Comments included:

Publication of disqualifications should be an effective deterrent….it would make sense to initially target the well-known promoters, aiming for a high-profile case to be one of the first subject to new rules. This will also deter others.

HMRC could consider the same approach as currently applies to the regime relating to the disqualification for competition infringements as set out in sections 9A to E of the CDDA. This includes shadow directors as per S9E of the CDDA.

The government’s response

The government is grateful for all comments and suggestions.

The measures will have no effect on directors of companies not involved in tax avoidance and the very many tax practitioners who adhere to high professional standards. HMRC recognises that there may be challenges in gathering evidence to demonstrate to the satisfaction of the court that an individual is exercising control or influence over a company.

HMRC makes referrals to professional bodies where there is evidence to suggest a breach of their professional standards. HMRC also works closely with other government departments / agencies in taking action against those involved in promoting tax avoidance schemes.

HMRC has explored different approaches for tackling those directors involved in promoting tax avoidance including considering how provisions in the current disqualification legislation, such as section 9A-E of CDDA, can best target those individuals who control or exercise influence over a company. Further comments as part of the technical consultation would be welcomed.

The CDDA allows for disqualification action to be taken where a director or individual who has control or exercises influence over a company is convicted of an offence in connection with the promotion, formation, or management of a company. The government‘s view is that this would include where an individual is convicted of a criminal offence for failure to comply with a Stop Notice, but will consider if this needs to be made clear in the draft legislation.

Disqualifications of directors are published in the Companies House Disqualified Directors Register which is available to see publicly. In addition, HMRC will explore opportunities for publishing details of future disqualifications under its existing powers, to raise awareness of the risks of getting involved in the promotion of tax avoidance.

HMRC has and will continue to engage with relevant executive agencies and government departments to ensure that the post disqualification process for disqualifications related to tax avoidance dovetails into the existing disqualification process to ensure efficiency and effectiveness. For example, currently the Companies House Disqualified Directors Register includes the details of directors disqualified by the courts. HMRC has been working closely with the Insolvency Service and Companies House to ensure that any directors disqualified under these measures would be included in the Companies House Disqualified Directors Register which is maintained and updated by Companies House.

Undertakings

Question 9. Should undertakings form part of HMRC’s approach to director disqualification?

An undertaking is a process by which a director has agreed any misconduct and voluntarily disqualifies themselves thereby avoiding court action. Most respondents agreed that undertakings should form part of HMRC’s approach to director disqualification. The overall feeling was that undertakings available to directors under existing director disqualification legislation should be maintained under these measures.

One respondent commented that the independent report of the Insolvency Practitioner that the Insolvency Service receives is an important aspect of undertakings, which would not exist for HMRC disqualifications. As such, they felt that undertakings should not be an option open to HMRC.

Comments included:

…as undertakings are currently part of the Insolvency Service disqualification process, and HMRC is not proposing to change the process itself so much as streamline it …, it is logical and fair that undertakings should continue to form part of the approach to director disqualification should this consultation document’s proposal become law.

While undertakings may be appropriate in certain cases, they also have the potential to result in injustice. For example, under the current system of disqualification, the costs of seeking appropriate advice and defending proceedings at Court can in practice mean that individuals accept undertakings in circumstances where the case for unfitness is not necessarily made out against them.

The government’s response:

The government is in favour of undertakings being an option available under the proposed legislation. Undertakings have the same legal effect as a disqualification order and carry the same consequences if breached. They are an important mechanism which would allow HMRC to provide this option in certain circumstances for directors facing potential disqualification action under these measures. This would also mean that the director has the option to agree their misconduct thereby avoiding potential court costs and time. The government is satisfied that the proposals for the HMRC authorising officer provide sufficient independence for decisions about which cases to take forward for potential disqualification (see Safeguards section below).

Sanctions for breaching a disqualification

Question 10. Do you consider the current sanctions for breaching a disqualification or undertaking are sufficient for tax avoidance-related disqualifications?

Most respondents agreed that the current sanctions that currently apply to breaches of a disqualification order or an undertaking are sufficient for HMRC-related tax avoidance disqualifications.

Although this does not relate to sanctions for breaching a disqualification but rather to the disqualification tariffs themselves, one respondent felt that mid to top level tariffs (6-10 years, and 10-15 years respectively) should apply to HMRC-related tax avoidance disqualifications to act as an effective deterrent.

Comments included:

We agree that the current sanctions that are available and applicable for breaching a disqualification order/undertaking appear to be appropriate and have the advantage of already being well understood by practitioners and the Courts.

The government’s response:

Existing sanctions for breaching a disqualification order or helping disqualified directors include a criminal sanction resulting in imprisonment of up to 2 years, a fine or both, and a civil sanction of personal liability for certain company debts.

The government’s view is that the current sanctions for breaching a disqualification, which are decided by the court, are sufficient and robust. As such, under these measures, it does not propose to make any changes to them or introduce new ones to the existing legal framework.

Safeguards and protections

Question 11. Do you consider the current safeguards outlined above are sufficient and provide adequate protections for directors? If not, what additional safeguards could be introduced?

Most respondents agreed that the current safeguards are robust and sufficient in providing protection for directors facing disqualification action. Some sought external or independent oversight of disqualification action being taken against directors and emphasised the need for HMRC to have robust internal governance for when disqualification action is being considered.

One respondent expressed the view that court proceedings offered very little protection to vulnerable individuals recruited as nominee or stooge directors and felt that HMRC should give serious consideration before action is taken against these individuals who may have little knowledge or understanding of the day-to-day operations of the company.

Comments included:

…is content that the established legal safeguards at 2.25 and 3.37 are consistent with the HMRC Powers Review and would apply to directors recognised in law (de facto as well as de jure), and other individuals exerting indirect control or influence.

We think that it is important that the safeguards and protections under the expedited disqualification process include the right to make representations, to appeal decisions, and the ability to apply to Court for leave to act as a director. We are also pleased to see the acknowledgement in the proposal that HMRC needs to have robust internal governance, and as mentioned above the Court therefore plays a crucial role in the safeguarding process. We suggest any appeals and representations be reviewed by a panel within HMRC to ensure consistency. We also consider that there ought to be a strict time limit for the panel’s response.

The government’s response:

The government is grateful for the views expressed.

The government’s view is that the existing safeguards are robust, well established and understood by the courts and meet the HMRC Powers Review criteria, including proportionality and consistency. The government proposes to preserve the current customer safeguards which include the ability for the director to defend themselves in court, appeal a court decision to disqualify and seek leave of the court to act as a director whilst disqualified.

These safeguards would apply to directors who are recognised in law (such as stooge directors), whether formally appointed or not, and other individuals who directly or indirectly control or exercise influence over a company.

Furthermore, the government recognises the importance of HMRC having strong internal governance for cases being considered for disqualification and as stated in the consultation, HMRC proposes that an authorising officer, independent of the investigation team, consider all the facts and make the final decision as to whether HMRC should apply for a disqualification order to the court.

Annex A: List of stakeholders consulted

Institute of Directors

Association of Accounting Technicians

Professional Passport

NASUWT

Association of Taxation Technicians

Chartered Institute of Payroll Professionals

Association of Professional Staffing Companies

Chartered Institute of Taxation

TaxAid

The City of London Law Society

Insolvency Lawyers’ Association

Tax Watch

Institute Of Chartered Accountants in England & Wales

Low Incomes Tax Reform Group

Institute of Financial Accountants

PayePass

The Association of Independent Professionals and the Self-Employed

DWF Law LLP

The Law Society of England and Wales

One individual