Tougher consequences for promoters of tax avoidance

Question 1

Summary

Accepted Answer

Subject of this consultation

Proposals for making the failure to comply with a Promoters of Tax Avoidance Schemes (POTAS) Stop Notice a criminal offence.

Proposals to expedite the disqualification of directors of companies who are involved in the promotion of tax avoidance, including those who control or exercise influence over a company.

Scope of this consultation

The government is seeking views on proposals for a new criminal offence to apply to promoters who continue to promote tax avoidance schemes specified in a ’Stop Notice’ issued by HMRC. The consultation document sets out the scope of the policy and explores how it may be best implemented.

The government would also like to receive views on various proposals for expediting the disqualification of directors of companies who are involved in promoting tax avoidance including those who control or exercise influence over such a company.

Who should read this

The government would like views from members of the public, representative bodies, advisers and promoters, as well as businesses and individuals who may have received marketing material, taken advice about, or used arrangements which seek to avoid tax. 

Duration

This consultation runs from 27 April 2023 to 22 June 2023.

Lead official

The lead official is Tony Zagara of HM Revenue and Customs (HMRC).

How to respond or enquire about this consultation

HMRC welcomes views from stakeholders, representative bodies and all other interested parties.

Responses to the consultation should be sent to ca.consultation@hmrc.gov.uk. Please note that the mailbox will not accept emails larger than 10mb.

Where appropriate, HMRC will be happy to meet with stakeholders to discuss the policy objectives and any specific concerns they may have.

Additional ways to be involved

HMRC welcomes meetings with interested parties to discuss these proposals.

After the consultation

The government will analyse the consultation responses and publish its response later this year.

Getting to this stage

This consultation builds on HMRC’s promoter strategy, announced at Spring Budget 2020, the changes to existing anti-avoidance regimes introduced in Finance Act 2021 and the new measures to clamp down on promoters of tax avoidance introduced in Finance Act 2022.

Previous engagement

This is the first consultation on the specific proposals described in this consultation document. The government consulted before introducing the new Stop Notice rules in Finance Act 2021 and it has previously consulted on the question of whether there should be an HMRC power to disqualify directors involved in tax avoidance as part of the consultation ‘Clamping down on promoters of tax avoidance’ in 2021.

Question 2

Foreword

Accepted Answer

This government has a strong record of tackling promoters of tax avoidance. HMRC has worked vigorously to tackle promoters of tax avoidance and reduce their scope for selling avoidance schemes that damage the public finances and can leave taxpayers with unexpected tax bills. As a result of HMRC’s concerted action, 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 £0.4 billion in the tax year 2020 to 2021.

In this time many promoters and enablers have left the avoidance market. But this government continues to take persistent action to deter, disrupt and otherwise frustrate promoters of tax avoidance. That is why the government introduced measures in Finance Acts 2021 and 2022 to strengthen HMRC’s ability to pursue promoters, including powers to publicly name promoters and their schemes, enabling taxpayers to be warned about the risks of getting involved in avoidance.

As announced at Spring Budget 2023, the government is consulting on two new measures which build upon and strengthen the robust action taken thus far. These measures will not only help HMRC to disrupt promoters but 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.

Clamping down on promoters is just one part of this government’s strategy to tackle the problem of marketed tax avoidance. In the coming weeks we will be publishing a response to the call for evidence on tackling non-compliance in the umbrella companies’ market, where corporate structures can be exploited to enable tax avoidance. We will also publish alongside the response to the call for evidence, a consultation on tackling non-compliance in the umbrella company market. This goes hand in hand with the government’s determination to crack down on all forms of non-compliant tax behaviour. At Spring Budget, the government closed a capital gains tax avoidance loophole and announced it would double the maximum sentences for the most serious examples of tax fraud, fulfilling a commitment to do so.

These proposals do not target legitimate tax advisers and taxpayers. They are instead targeted at a determined group of promoters who profit by attempting to sidestep the rules often leaving taxpayers with significant tax bills.

These new proposals will make it harder for promoters to operate and provide tough new sanctions for those who do not comply with the rules. With this consultation, taxpayers, advisors and businesses have an opportunity to contribute their views to the government’s next steps to tackle promoters of tax avoidance. Your views will aid effective policy design and ensure appropriate safeguards are in place to protect legitimate tax advisers.

Victoria Atkins MP
Financial Secretary to the Treasury

Question 3

1.  Introduction

Accepted Answer

1.1. Tax avoidance is bending the tax rules to seek to gain a financial advantage never intended by Parliament. It often involves contrived or artificial transactions that serve little or no purpose, other than seeking to reduce the amount of tax someone pays. Tax avoidance deprives important public services of the funding they need.

1.2. Significant progress has been made in tackling marketed tax avoidance. As a result of government and HMRC action including clamping down on promoters of tax avoidance, the estimated tax gap arising from marketed avoidance has reduced from an estimated £1.5 billion in the tax year 2005 to 2006 to £0.4 billion in the tax year 2020 to 2021.

1.3. Notwithstanding the progress made, there are currently around 20 to 30 active promoter organisations, some based offshore and hiding behind complex corporate structures. The majority of tax avoidance schemes they promote do not work. Taxpayers who enter into them often end up paying large tax bills for the tax they always owed, typically having already paid out substantial fees to scheme promoters or other intermediaries.

1.4. Some promoters have left or have significantly reduced their activity in the market while new promoters have entered the market; this is largely the reason why the numbers have been broadly the same over the last few years while the amount of tax lost has reduced. Typically, promoters have a network of related businesses, controlled directly or indirectly by the promoter, which are involved in promoting their avoidance schemes.

1.5. Promoters are rarely members of professional bodies, and they will take every opportunity to sidestep the rules, rarely co-operating with HMRC, so that they can continue to sell their schemes. They do not always tell taxpayers that they are in an avoidance scheme and seldom adequately explain the risks of entering tax avoidance schemes. Individuals are legally responsible for their own tax affairs and ensuring the correct amount of income tax and National Insurance contributions (NICs) are paid on their income. Being involved in an avoidance scheme can leave taxpayers with an unexpected tax bill, plus interest and potentially penalties, on top of the fees they have paid to the promoter.

1.6. Tackling promoters of marketed tax avoidance schemes is a priority for the government. In March 2020 HMRC published a strategy for tackling promoters, setting out a range of approaches to disrupt the promoter market, reducing both the supply of and demand for avoidance schemes. This included making changes to existing anti-avoidance regimes, enabling HMRC to obtain more information about promoters earlier and to act against them faster. As part of the strategy HMRC is working with partner bodies to combat promoters of avoidance. For example, HMRC works with the Advertising Standards Authority, with whom it issued a joint Enforcement Notice in November 2020 setting out what promoters should and should not include in their advertising material.

1.7. Whilst there are no criminal offences specific to the promotion or operation of mass marketed tax avoidance schemes, there is a range of offences which might be committed by those who promote tax avoidance schemes or advise on their use. These can include tax specific offences such as cheating the public revenue or the fraudulent evasion of income tax or VAT, as well as general offences such as the offence of fraud or breaches of laws intended to protect consumers from unfair commercial practices. It is also an offence to attempt these offences, conspire to commit these offences, or to aid, abet, counsel or procure, these offences.

1.8. Since 2016, more than 20 individuals have been convicted for offences relating to tax evasion or fraud where arrangements have been promoted and marketed as tax avoidance. These have resulted in over 100 years of custodial sentences being ordered and 9 years of suspended sentences. HMRC also has individuals under live criminal investigation for offences relating to arrangements promoted and marketed as tax avoidance.

1.9. Following the publication of HMRC’s strategy for tackling promoters the government consulted on two packages of measures to strengthen HMRC’s existing powers to tackle promoters and to further enhance HMRC’s ability to pursue promoters more quickly than before. These packages were introduced by the government in Finance Acts 2021 (FA21) and 2022 (FA22).

1.10. FA21 included changes to tackle promoters that enable HMRC to:

issue a notice to a promoter of a tax avoidance scheme, giving them the opportunity (within 30 days) to explain why the scheme is not notifiable to HMRC and if no adequate explanation is given, issue a Scheme Reference Number (SRN) to the promoter. The SRN requires those involved in the scheme’s supply chain to inform individuals who have bought the scheme that these individuals must notify HMRC that they are users of the scheme
publicly name promoters who have received an SRN so that HMRC is able to warn taxpayers of the risks and help those already involved to get out of avoidance
issue POTAS Stop Notices to prohibit the promotion of a tax avoidance scheme
use information powers to check whether a person is or may become liable to an enablers penalty (an enabler is any person who enabled a taxpayer to use abusive tax arrangements that were later defeated) and to issue an enablers penalty at an earlier stage

1.11. The new legislation introduced in FA22 gave HMRC the power to:

freeze promoters’ assets to prevent them dissipating or hiding their assets before paying penalties issued by a Tribunal as a consequence of breaches of their obligations under anti-avoidance legislation
make UK entities that become liable to anti-avoidance penalties for facilitating the promotion of tax avoidance by offshore promoters liable to a further penalty up to the total value of the fees of all those involved in the development and sale of the avoidance scheme
present winding-up petitions to a court to close down companies and partnerships involved in the promotion of tax avoidance where it is in the public interest to do so
name promoters, the websites they use and the schemes they promote at the earliest possible stage, so that HMRC can share that information publicly to further warn taxpayers of the risks and help those already involved to get out of avoidance

1.12. To date HMRC has published the details of 27 promoters and 31 tax avoidance schemes. Publishing this information supports taxpayers to make informed choices and to steer clear of or exit tax avoidance. Since the new legislation came in, as at 17 February 2023 10 promoters have received stop notices, which require the promoter to stop promoting a specified scheme or those similar to it.

1.13. The measures outlined in this document build on the changes made in FA21 and FA22 and send a clear message that this government is not complacent and will continue to take necessary action to tackle promoters of tax avoidance including those that have control or exercise influence over the schemes being marketed.

1.14. The government recognises that most tax advisers adhere to high professional standards and are an important source of support for taxpayers. The new proposals outlined in this document are not aimed at professionals who help taxpayers fulfil their obligations to pay the right amount of tax at the right time, including those who support taxpayers to get out of avoidance and pay the tax they owe. They are aimed at a persistent and determined group of promoters of tax avoidance who seek to exploit every opportunity to personally profit by attempting to sidestep the rules. The government is determined that these promoters face tougher consequences for the harm they cause to the public finances and to the individuals that use the schemes they promote, who often end up with big tax bills on top of the substantial fees already paid out to the promoters.

1.15. Most current marketed tax avoidance involves disguised remuneration (DR) schemes, which claim to avoid income tax and NICs on a worker’s earnings. They normally involve paying earnings in the form of a loan or other payment to the individual, which is unlikely to be ever repaid. More detail about the avoidance market and actions taken to tackle promoters can be found in the Use of marketed tax avoidance schemes report (MTAR). Most DR avoidance involves the use of an umbrella company. The measures announced in this consultation would apply to umbrellas and their directors where the relevant conditions are met.

1.16. The government is also considering how best to tackle non-compliance more widely in the umbrella company market. The government published a call for evidence in November 2021 seeking views and further evidence to support the government’s understanding of the reasons businesses and individuals use umbrella companies and to support the development of potential policy interventions to prevent non-compliance within the market. A response to the call for evidence will be published in the coming weeks. The government will also publish alongside the response to the call for evidence, a consultation on tackling non-compliance in the umbrella company market.

1.17. The Spring Budget announced the government’s intention to consult on two new measures:

a criminal offence to apply to promoters of tax avoidance who fail to comply with a Stop Notice issued in respect of tax avoidance arrangements
proposals to expedite the disqualification of directors of companies involved in promoting tax avoidance, including others who control or exercise influence over such companies

1.18. The proposals build on and complement the measures introduced in Finance Acts 2021 and 2022 and reinforce the government’s commitment to take further action to tackle promoters. This document sets out how the two measures would interact with existing regimes and how they would further deter promoters from promoting tax avoidance schemes at the expense of taxpayers and the Exchequer.

1.19. The government welcomes the positive engagement of the many compliant professionals during the July 2020 and March 2021 consultations and their help in shaping those measures. This consultation looks again to those same groups and other contributors such as Select Committees, All Party Parliamentary Groups and other Parliamentarians to ensure that the measures are appropriately targeted and have the right safeguards in place.

The structure of this consultation document

1.20. The document is structured as follows:

Chapter 1 (this chapter) sets out the background and the progress being made to tackle promoters of tax avoidance
Chapter 2 sets out proposals for introducing a criminal offence to apply to promoters who promote tax avoidance schemes specified in Stop Notices
Chapter 3 sets out proposals to expedite the disqualification of directors of, including others who control or exercise influence over, companies that promote tax avoidance.
Chapter 4 provides an assessment of the impacts for both measures
Chapter 5 provides a summary of all the questions raised in this document

Question 4

2.  A criminal offence for promoters for failing to comply with a Stop Notice

Accepted Answer

Background

2.1. The POTAS regime was introduced in 2014 with the aim of changing the behaviour of promoters of tax avoidance schemes. It is designed to encourage promoters to be transparent with HMRC about the schemes they are promoting and stop them from promoting schemes that HMRC believes do not work. The regime gives promoters the opportunity to change their behaviour voluntarily, but those who choose not to comply face an escalating series of sanctions.

2.2. The POTAS legislation includes provision for ‘Stop Notices’ which, following the changes made in FA21, allow HMRC to issue a promoter with an enforceable notice to stop selling a scheme. Stop Notices apply to those who receive a notice and others who become subject to the notice. The purpose of a Stop Notice is to bring an immediate cessation of all promotional activity of the scheme covered by the Stop Notice, to prevent both further take up and continued use of the scheme. A Stop Notice makes it unlawful for a person subject to the notice to continue to promote the scheme in question. Failure to comply with the obligations imposed by a Stop Notice can lead to substantial civil penalties.

2.3. HMRC is using Stop Notices to tackle promoters and disrupt their business model. HMRC has published details of a number of these notices on GOV.UK. They are an important tool in preventing promoters from continuing to sell schemes. HMRC’s experience is that some promoters may still not be deterred by financial penalties for failing to comply with a Stop Notice. The government wishes to strengthen the consequences for those who continue to promote a tax avoidance scheme subject to a Stop Notice. Creating a criminal offence would both reinforce the importance of the Stop Notice and act as a strong deterrent against non-compliance.

Current position

2.4. A Stop Notice is a legally enforceable notice given by an authorised HMRC officer (who must be a Senior Civil Servant and independent of the investigation into the tax scheme) to any person who they suspect of promoting arrangements. The notice may only be issued where the arrangements meet certain conditions, including that the authorised officer believes that the scheme is likely not to deliver the tax advantage claimed. The recipient becomes ‘subject to a Stop Notice’. A person becomes subject to a Stop Notice if:

they are the recipient of the notice
they are a company or partnership that the recipient of the notice controls or has significant influence over
they control or have significant influence over a company or partnership that is the recipient of the notice
a relevant transfer in relation to the promoting activity is made to them by the recipient of the notice (for example, where promotion activities relating to a scheme are moved from one promoter company that is subject to a Stop Notice to another company, that second company would also become subject to the Stop Notice)

2.5. A Stop Notice requires the recipient and other persons subject to the notice (as set out at paragraph 2.4) to immediately stop promoting:

arrangements of the kind it describes, or that have a similar form or effect to arrangements of that description
any proposal for such arrangements

2.6. Promotion includes both the marketing of the scheme to potential new users and the ongoing management and administration of existing arrangements.

2.7. A Stop Notice also requires the persons subject to the notice to comply with certain other obligations (see annex B for the full list). For example, the recipient of the notice must supply certain information to HMRC and taxpayers and must give a copy of the notice to the other persons who are subject to it. This is intended to ensure that all parts of the promoter’s organisation are required to collectively stop promoting the scheme. The way that a Stop Notice is applied is detailed in the example below:

HMRC identify a tax avoidance scheme being promoted by A Ltd and undertake an investigation to establish the facts about the scheme.
An authorised officer considers the scheme, believes the scheme will not deliver the tax advantage claimed and meets the criteria to issue a Stop Notice.
A Ltd is issued with a Stop Notice requiring them to stop promoting the scheme.
B Ltd is a 100% subsidiary of promoter A Ltd and carries out marketing and arranges contracts of employment between A Ltd and users of an avoidance scheme.
Both A Ltd and B Ltd are covered by the Stop Notice and if either continues to promote the scheme they will have breached the Stop Notice.
A Ltd is also required to give B Ltd a copy of the notice and tell HMRC that they have done so. Failure to do so would be further non-compliance with the Stop Notice by A Ltd.

2.8. The person receiving the Stop Notice can make a request to the authorised officer for it to be withdrawn. The authorised officer must consider the request and decide whether or not to withdraw the notice. If the request to withdraw it is declined, the person has the right to appeal that decision to the Tax Tribunal. If the person appeals to the Tax Tribunal, they can also make a request to the authorised officer for the Stop Notice to be suspended.

2.9. Once a person is subject to a Stop Notice, they must comply with it in full unless it is suspended or withdrawn (either by HMRC or by a decision of the tribunal or court). Where there is ongoing litigation of the underlying tax arrangements, the conditions of the Stop Notice must still be adhered to.

2.10. There are a number of civil penalties that can be charged for failure to comply with a Stop Notice, ranging from a penalty of £5,000 for each failure to provide HMRC with information about a relevant client in relation to the scheme in a quarterly return, to a penalty of up to £1m for continuing to promote arrangements meeting the description in the Stop Notice (see annex B for further details). The example below describes the types of penalties that a promoter could face for failure to comply.

Promoter C (known to HMRC) and Promoter D (unknown to HMRC) are promoting an avoidance scheme.
The authorised officer considers the scheme and C is given a Stop Notice.
C continues to promote the scheme, managing the arrangements of the existing 100 users and enrols five new users after receiving the Stop Notice. C does not tell the new users they are subject to a Stop Notice.
C is required to provide a copy of the Stop Notice to D and to tell HMRC about D but does not do so.
C is also required to file a quarterly return to HMRC with details of all users of the scheme. C files a blank (and therefore incorrect) quarterly return to HMRC five days late.
Promoter C is potentially liable for penalties of up to £740,000 consisting of:
- an initial penalty of £100,000 for continued promotion
- five penalties of £5,000 for promoting the scheme to each new user
- five penalties of £5,000 for failing to inform each new user of the scheme that they are subject to a Stop Notice
- a penalty of £10,000 for failing to pass the Stop Notice to D
- a penalty of £25,000 for failing to tell HMRC about D
- A penalty of £5,000 for submitting an incorrect quarterly return
- A penalty of £25,000 (£5,000 per day) for submitting the quarterly return five days late
- 105 penalties of £5,000 for failure to provide information about each relevant client in the quarterly return

2.11. The level of civil penalties reflects the seriousness of the promoter continuing to promote the scheme despite having received a Stop Notice. The promoter can appeal to the Tax Tribunal against the penalties issued.

Proposed changes

2.12. The government wants to ensure that the strongest possible deterrent is in place to ensure promoters comply with a Stop Notice and stop promoting their arrangements. The proposals here do not seek to change the underlying rules and obligations of the Stop Notice regime, including the existing civil penalties for non-compliance. The intention is to add as a new sanction a criminal offence for failure to comply with a Stop Notice.

2.13. The principal focus of the new offence is to tackle the continued promotion of those avoidance schemes covered by a Stop Notice. This would mean for example, where a promoter enrolled a new user into the scheme after the issue of the Stop Notice, they would be committing a criminal offence as that would represent continued promotion of the scheme. This would be the case, regardless of any dispute about the effectiveness of the tax scheme between HMRC, the promoter and the scheme users. If the promoter continued to promote a scheme covered by a Stop Notice that the courts subsequently found did deliver the promised tax advantage, the criminal offence would have already been committed.

2.14. The message for promoters is a clear one: under these proposals if a promoter continues to promote a scheme covered by a Stop Notice they will be committing a criminal offence and could face prosecution.

2.15. This offence would apply to any person or company subject to a Stop Notice, for example, those persons described in paragraph 2.4 would be committing a criminal offence if they promote the scheme, as set out in paragraphs 2.5 and 2.6 above. These proposals 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 company.

2.16. The government proposes to achieve this by introducing a new ‘strict liability’ criminal offence, where a failure to comply with the Stop Notice would be a criminal offence regardless of the person’s intent. By making the criminal offence a strict liability offence HMRC would be in a position to consider opening a criminal investigation as soon as promotion in breach of the Stop Notice had occurred. HMRC would need to evidence that there was continued promotion of the scheme covered by the Stop Notice.

2.17. The promoter would have the opportunity to argue that they had a reasonable excuse for not complying with the Stop Notice and present evidence to HMRC or the courts to support this. However, mirroring the existing civil regime, certain reasons would not constitute a reasonable excuse. For example, an open appeal against the Stop Notice would not constitute a reasonable excuse. Similarly, ongoing litigation of the tax avoidance scheme would also not be regarded as a reasonable excuse. Legislating in this way would ensure that the offence focuses clearly on continued promotion. It will reinforce the importance of complying with the Stop Notice, further inhibiting the promotion of the scheme to taxpayers.

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

2.18. As noted in para 2.12, the new offence is intended to sit alongside the existing provision for penalties for those who continue to promote schemes specified in Stop Notices, giving HMRC flexibility to choose whether to pursue a civil penalty or open a criminal investigation. The expectation here is that the decision would be made in line with HMRC’s existing criminal investigation policy and processes, reserving criminal investigation for the most serious cases, where HMRC needs to send a strong deterrent message or where civil interventions are not effective.

2.19. Given not all cases will warrant criminal investigation, it is important to retain the existing civil penalties. These allow HMRC to secure a financial penalty more quickly than a criminal fine or custodial sentence pursued through a criminal prosecution. The civil penalties can be substantial and an effective deterrent themselves, but introducing a new criminal offence whilst maintaining the civil penalty will ensure maximum deterrence to promoters by providing alternative ways for HMRC to tackle the promoter.

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

2.20. HMRC’s experience shows that some promoters use complex company structures to promote their schemes. They control or exert significant influence over the entities in the structure, moving their operations around in order to make it harder for HMRC to identify who is orchestrating the promotion activities and consequently attempt to avoid any obligations imposed upon them.

2.21. In these circumstances, a promoter that is subject to a Stop Notice may claim to have stopped promoting whilst either directly or indirectly influencing another person to continue promoting the scheme covered by the notice. Where HMRC can demonstrate that a person exerts control or has significant influence over the continued promotion of a scheme, the person would be subject to the criminal offence. While it is not always easy to evidence that one person is influencing another, this approach will provide an enhanced deterrent to those promoters who deploy complex company structures to seek to disguise the fact they are ignoring a stop notice.

2.22. The example below shows the kind of situation where HMRC believe a promoter (in this case Mr A) would be within scope of the proposed 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.

Question 3: In such circumstances, as Mr A is significantly influencing the continued promotion activity, do you agree that Mr A should be subject to the new criminal offence?

2.23. The overarching focus of a Stop Notice is to ensure that ongoing promotion activity in relation to the scheme covered by the notice ceases. This is the primary focus of the new offence. However, the Stop Notice also includes other obligations relating to the provision of information both to HMRC and to clients and intermediaries linked to the recipient of the Stop Notice. There are civil penalties in respect of these other obligations, (see annex B for full list of penalties). An example of how these apply is set out at paragraph 2.10 above.

2.24. In so far as these other obligations relate to activities that do not lead to continued promotion of the scheme, it is not proposed to include them within the scope of the criminal offence.

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?

Safeguards and protections

2.25. The government recognises it is important that the right balance is struck between HMRC having an effective criminal deterrent and ensuring that robust legal safeguards are in place. This balance is at the heart of the design principles identified in the HMRC Powers Review of 2005 to 2012 and that they must be:

clear
publicised
accessible
effective
responsive to the nature and purpose of particular powers and sanctions
conformant with human rights and other relevant non-tax legislation

2.26. The new criminal offence would not alter the existing 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 that 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 penalties for non-compliance with the Stop Notice are issued, the right to appeal those penalties to the Tax Tribunal

2.27. The new criminal offence will be reserved for the most serious cases, where HMRC need 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. There are a range of statutory and non-statutory safeguards (including national codes of practice) applying to HMRC’s use of its criminal investigation powers. HMRC has specific policy owners that have oversight of the criminal legislation and powers that HMRC uses. The application of the powers is subject to review by managers and assurance teams that are independent from operational units. This ensures compliance with the safeguards that are built into the legislation and associated codes of practice.

2.28. While HMRC may undertake a criminal investigation and gather the evidence, the decision to prosecute would lie with the relevant prosecuting authorities. Ultimately if the decision is made to seek a criminal prosecution, HMRC would have to prove its case in court to secure a criminal conviction.

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

Question 5

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

Accepted Answer

Policy objectives

3.1. The people behind the promotion of tax avoidance schemes rarely offer their services directly. Instead, tax avoidance schemes are often delivered through limited companies, many operating as umbrella companies. The promoter behind the scheme, or controlling mind, operates through these companies, concealing their involvement in the promotion of their schemes, and often inserting stooge or intermediate shadow directors who distance the promoter from the company. 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.

3.2. In 2022 the government introduced new rules that allow HMRC to take action by presenting a petition to the court to wind up companies involved in promoting tax avoidance. The government now intends to go further and tackle the supply of directors available to promoters. This could include the directors of umbrella companies involved in promoting tax avoidance. Tackling the directors, alongside existing powers to tackle the companies, will act as an additional deterrent to individuals acting as directors in promoters’ companies in a way that helps to promote tax avoidance.

3.3. To achieve this, the government wants HMRC to be able 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. Moving quickly will directly disrupt the business models of promoters who use stooge and intermediate shadow directors and, in turn, may deter other individuals from becoming directors of companies involved in promoting tax avoidance.

3.4. Furthermore, the government intends to ensure that these proposals target 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 company.

Disqualification

3.5. Director disqualification is the process whereby an individual is barred by the court from being the director of a company, or from acting in the promotion, formation, or management of a company, for a specified period of up to 15 years. The key legislation for disqualification is contained in the Company Directors Disqualification (CDDA) Act 1986. Under the Act, the Insolvency Service (INSS), part of the Department for Business and Trade, brings disqualification proceedings on behalf of the Secretary of State against directors of a company. There is separate legislation for Northern Ireland, where the Insolvency Service within the Department for the Economy handles disqualification of directors.

3.6. Being disqualified has far reaching consequences for the individual. As a disqualified individual, a person cannot be a director of any company registered in the UK or an overseas company that has connections with the UK, or be involved directly or indirectly in forming, promoting or managing a company without the court’s permission. In addition, there are restrictions on an individual while they are disqualified, for example individuals might not be able to sit on the board of a charity or school, be a pension trustee, registered social landlord, or act as a solicitor, barrister or accountant.

3.7. If a disqualified individual is, during the period of their disqualification, involved directly or indirectly in forming, promoting or managing a company without the court’s permission, they will have committed a criminal offence and are personally liable for the debts of their company. In addition, those who act on the instructions of a disqualified director would be liable for all the relevant debts of a company where they are involved in the management of the company.

Current position

3.8. It is common for promoters to use complex organisational structures to market tax avoidance schemes and avoid their obligations under current legislation. They will often also take steps that delay and disrupt HMRC’s investigation of their affairs. When HMRC raises challenges, it is not unusual for the company to be closed down or its activity significantly reduced, and new entities set up to continue the promoting activities. Following the changes introduced in Finance Act 2022, HMRC is able to pursue the winding up of a company involved in promoting tax avoidance and operating against the public interest. This ensures that these companies can no longer be used for avoidance but does not prevent promoters from setting up further companies.

3.9. Currently, HMRC must refer to the INSS for potential director disqualification action. INSS will consider the referral, make any necessary investigations and decide whether to bring disqualification proceedings against the directors of a company by applying to the court for a disqualification order. The court will then consider the application and will decide whether to grant the disqualification order.

3.10. There are a number of factors which can delay disqualification action being taken against the directors of a company involved with promoting tax avoidance such as the need to consider wider factors around the actions and behaviours of the director, for example, failures to keep proper accounting records or submit tax returns. The current rules are not specifically aimed at dealing with the actions and behaviours of directors involved in promoting tax avoidance. This means that it is often difficult to apply them quickly to promoters of tax avoidance, even when it is important that HMRC can respond quickly to their activities because the longer the process takes, the longer the person behind the promotion has to sell avoidance schemes.

3.11. The example below sets out an example of the current process which can lead to the disqualification of a director of a company which promotes tax avoidance. For the reasons set out above, this process can take a considerable amount of time even where the evidence of promotion of avoidance is clear.

Mrs A was the director of Promoter Entity XYZ which has been wound up by HMRC. While investigating the activities of Promoter Entity XYZ, HMRC will gather information which will give it reasonable grounds to suspect that the actions of Mrs A make her unfit to be a director as a result, for example, failing to comply with obligations under the promoters of tax avoidance legislation.
HMRC will make a referral to the INSS for them to consider whether it is appropriate to investigate the conduct of Mrs A. After assessing the information that has been provided, the INSS undertake their own investigations and decide whether to adopt the case. INSS have a maximum of 3 years from the date of the insolvency of Promoter Entity XYZ to instigate disqualification proceedings against Mrs A.
HMRC will liaise with the INSS as to the progress of the disqualification investigation and support their investigation. A confidential report on the conduct of Mrs A will also be provided by the Official Receiver who has a statutory duty to investigate the winding up of Promoter Entity XYZ.
If the INSS decide to seek a disqualification order, Mrs A will be given the opportunity to admit her unfit conduct and voluntarily give a disqualification undertaking. Alternatively, Mrs A may dispute the allegations and a hearing will be required to determine the outcome. Subject to the outcome of the hearing, the court will grant the order to disqualify Mrs A from being a director of a company for a specified period.

Proposed changes

3.12. The government wants to strengthen HMRC’s ability to tackle the remaining group of promoters still in the market who persist in promoting tax avoidance schemes. It proposes to do this by expediting the disqualification of directors and other individuals who control or exercise influence over a company that is involved in the promotion of tax avoidance.

3.13. The government proposes that HMRC should be able to initiate director disqualification proceedings against promoters of tax avoidance in the following circumstances:

disqualification following a winding-up in the public interest
disqualification of a director of a ‘live’ company

3.14. Under both proposals, HMRC would need to provide relevant and appropriate evidence to the court when making applications for disqualification as is currently the case for INSS. The director would have the opportunity to respond to HMRC’s case and defend themselves during the hearing. The court would then make the decision whether to grant the order.

Disqualification following a winding up in the public interest

3.15. This would allow HMRC to apply for a director disqualification order to the court at the same time as HMRC is presenting the related public interest winding-up petition to the court under section 85 of the Finance Act 2022. Only companies which are promoters of tax avoidance can be wound up under this measure. This proposal would enable the court to consider both at the same time, expedite the disqualification process and may reduce court time and cost. To grant a HMRC winding up order the court must be satisfied the company was involved in promoting tax avoidance. Therefore, if HMRC satisfied the court that the individual is within the scope of these proposals, then they would be disqualified by the court unless they could demonstrate good reasons that they should not be.

3.16. Currently in winding up cases, the official receiver submits a report to the INSS for them to consider whether to apply for a disqualification order to the court. Under this proposal, this step would be unnecessary as HMRC would already have the relevant evidence to apply for a disqualification order to the court.

Disqualification of a director of a ‘live’ company

3.17. This would allow for HMRC to apply for a disqualification order to the court on the grounds that the director of a ‘live’ company (such as a company not currently in any formal insolvency proceedings) is promoting tax avoidance and operating against the public interest. This would enable HMRC to act quickly and stay on the front foot by disrupting the business activities of promoters. The company cannot continue without a director, and if this were to be the case after disqualification then the company would face being wound up or struck off if no replacement can be found.

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?

3.18. The government’s view is that these proposals will enhance HMRC’s ability to disrupt the activities of promoters of tax avoidance. The current legislation for disqualifying directors also allows for disqualification in a number of additional circumstances. For example, disqualification proceedings can be taken where companies have entered formal insolvency processes, receiverships or a director is convicted of an offence in connection with the promotion, formation, or management of a company.

3.19. In some circumstances, an individual is directly disqualified or barred from being a director without further consideration by the court. For example, someone who is an undischarged bankrupt cannot act as a director of a company or be involved in the promotion, formation or management of a company.

3.20. HMRC will look to explore these other routes to disqualification or disbarment of directors as a potential model to be applied to directors of companies in the context of the promotion of tax avoidance.

Gathering Evidence

3.21. HMRC would need to provide relevant and appropriate evidence to the court. This would include the need for HMRC to evidence that:

that the company was promoting tax avoidance
that the individual was a director or someone exercising control and influence
that the promotion of tax avoidance was against the public interest (including evidence gathered in winding up cases). Under such an approach, HMRC would take into account all of the information it holds including that gathered through investigation to cover all three elements.

3.22. In considering the case for disqualification, to address all three elements described in paragraph 3.21, HMRC would consider a wide range of material such as evidence of any failures and non-compliance with obligations under HMRC anti-avoidance legislation, the nature of the avoidance scheme, the number of users, the fees charged to scheme users, their promotional material, correspondence with other promoters/enablers, previous non-compliant behaviour, compliance or enforcement action taken by HMRC or information received from taxpayers and other government departments, all of which could be used for building the case to consider disqualification.

3.23. Although each case is different and would be assessed on its merits, it is the totality of this evidence that HMRC would use to determine which cases are considered for disqualification. This is not an exhaustive list but some of the factors could include considering where a company has failed repeatedly to respond to HMRC requests for information and where they have failed to comply with the anti-avoidance rules. The final decision on whether to disqualify would remain in the hands of the courts based on whether HMRC had sufficiently made the case for disqualification.

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

Scope – who this would apply to

3.24. This proposal would provide for disqualification of directors involved in the promotion of tax avoidance schemes. This would include any formally appointed director of a company.

3.25. These proposals not only target those who would be recognised in law as directors of companies involved in promoting tax avoidance, whether or not formally appointed, but also those other individuals who directly or indirectly control or exercise influence over these companies, for example shadow directors. The significance of this would be that they would not only be disqualified from being directors of any company (promoting tax avoidance or not) but they also would not be able to directly or indirectly be concerned or take part in the promotion, formation or management of a company.

3.26. There are challenges in gathering evidence to demonstrate to the satisfaction of a court that the individual is exercising control or influence over a company. HMRC continues to explore different approaches for tackling these individuals who try to hide their activities behind others.

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?

3.27. The proposals 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 in their support to taxpayers.

Undertakings

3.28. The INSS can accept an undertaking from a director, which means that the director has agreed any misconduct and voluntarily disqualified themselves, or alternatively await the outcome of the court proceedings which could result in disqualification. An undertaking has the same legal effect as a disqualification order and carries the same consequences if breached.

3.29. HMRC is in favour of including the option of undertakings in relation to disqualifications under this proposal. However, we would like to obtain views on whether this option should be available to directors of companies promoting tax avoidance.

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

Disqualification tariffs

3.30. The current minimum and maximum periods of disqualification are set out in the CDDA. For directors of insolvent companies this ranges between 2 to 15 years depending on the seriousness of the offence. For directors of solvent companies, there is no minimum period of disqualification with the same maximum period of 15 years.

3.31. The period of disqualification (the tariffs) comes from case law and the exact period is determined by the courts as follows:

Lower: 2 to 5 years for misconduct which does not merit a disqualification period in the next bracket. The minimum bracket should be applied where, though disqualification is mandatory, the case is, relatively, not very serious.

Mid: 6 to 10 years for more serious misconduct. The middle bracket should apply for serious cases which do not merit the top bracket.

Top: 10 to 15 years for the most serious misconduct. The top bracket should be reserved for particularly serious cases.

3.32. These existing tariffs are well understood and used by the courts. Under the proposals, the government does not propose making any changes to the current tariffs.

Sanctions for breaching a disqualification

3.33. As described in paragraph 3.6 above, disqualifying a director restricts their ability to set up new companies or control them. There are established and wide-ranging sanctions within the existing legal framework for director disqualification, which are imposed by the court, and these are outlined below. These sanctions would remain in place and apply to the proposed measures outlined above. No changes are being proposed to the existing sanctions as part of this consultation.

3.34. It is a criminal offence to act as a director during the period of the disqualification without leave of the court. The penalties on conviction for acting as a director whilst disqualified are imprisonment for up to two years, a fine or both. A person who is involved in the management of a company while disqualified is also personally liable for all relevant debts of the company. Furthermore, if a person involved in managing the company acts on the instructions of a person who they know has been disqualified, then they too are personally liable for relevant company debts.

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

Safeguards and protections

3.35. These proposals will follow the design principles identified in the HMRC Powers Review which are outlined above at paragraph 2.25.

3.36. Disqualification is a serious outcome which often has long-lasting financial consequences for individuals. It is important that the right balance is struck between enabling HMRC to apply for the disqualification of directors of companies involved in promoting avoidance and ensuring that robust legal safeguards are in place which do not catch those who have acted appropriately.

3.37. The established legal safeguards outlined below, which are part of the existing process for director disqualification, ensure that a person is able to explain, clarify and defend themselves against disqualification action being brought against them:

the director has the right to make representations during the court hearing and present evidence to be considered
the director has the right to appeal the disqualification decision by the court
the director has the right to apply to the court for permission to act as a director if they can show a good reason why they should be permitted to be a director of a specific company, notwithstanding their disqualification

3.38. The government believes that these are robust, well established and well understood safeguards which meet the Powers Review criteria and proposes that the existing safeguards would be mirrored in these new proposals. These safeguards would apply to directors who are recognised in law, whether formally appointed or not, and other individuals who directly or indirectly control or exercise influence over a company.

3.39. The government additionally recognises the importance of HMRC having strong internal governance for cases being considered for disqualification. HMRC will ensure that a robust governance structure is in place for considering whether to bring disqualification action.

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?

Summary of the proposed process for disqualification

3.40. The process for any of these proposals could work as follows:

HMRC gathers the necessary evidence to determine potential disqualification action. If a winding-up order has been granted by the court, much of the relevant evidence will already exist
An authorising officer would consider all the facts and make the final decision as to whether HMRC should apply to the court for a disqualification order
HMRC applies for a disqualification order to the court.
If the court grants HMRC’s application, the directors have 21 days to re-arrange their affairs without being in breach of the disqualification order.

Question 6

4.  Assessment of impacts

Accepted Answer

Summary of impacts

Year	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
Exchequer impact (£m)	negligible	negligible	negligible	negligible	negligible	negligible

Impacts	Comment
Economic impact	These measures are expected to have a negligible impact on the Exchequer. The final costings will be subject to scrutiny by the Office for Budget Responsibility.
Impact on individuals, households and families	If introduced, the measures are expected to have economic and behavioural impacts on the promoters that remain in the tax avoidance market, as well as other entities and individuals that are within their wider promoter structure. For individual users of avoidance schemes, they may be impacted by having fewer schemes to choose from and by the liquidation of non-compliant umbrella companies they may be employed by. Any future impacts resulting from the responses to the consultation will be fully examined and detailed as the policies are developed and via the consultation process. The measures are not expected to impact on family formation, stability or breakdown.
Equalities impacts	HMRC does not hold information about the protected characteristics of promoters or those who facilitate tax avoidance, but it is not anticipated that these measures would have a disproportionate impact on any group with protected characteristics.
Impact on businesses and Civil Society Organisations	There are expected to be no impacts for businesses and civil society organisations at present. Any future impacts identified from the responses to the consultation will be fully examined and detailed via the consultation process. If introduced, the measures are expected to have economic and behavioural impacts on the small group of persistent tax avoidance promoters who currently delay and sidestep the existing anti-avoidance measures.
Impact on HMRC or other public sector delivery organisations	For both proposals, HMRC anticipates that there will be a need for some extra staff resource to ensure the new legislation is implemented as intended. Full details will not be known until responses to the consultation are received. The disqualification measure may have an impact on the Department for Business and Trade (DBT), the Insolvency Service (INSS) and the Insolvency Service in Northern Ireland. HMRC will work with DBT, the INSS and the Insolvency Service in Northern Ireland to develop the proposals. If introduced, both measures are likely to have low impact on the Ministry of Justice (MoJ). HMRC will engage with the MoJ to develop the proposals and quantify the costs involved. The criminal offence measure applies to the whole of the UK; we do not anticipate any differential impacts on the devolved nations. The measure relating to disqualification of directors applies to England, Scotland and Wales; there is a separate insolvency service in Northern Ireland, and we will engage with them to pursue parity across the UK. As these measures are taken forward, we would look to ensure any differences between the court systems are catered for.
Other impacts	A Data Protection Impact Assessment is currently under consideration and the relevant sections will be completed before any measures are implemented.

Question 7

5.  Summary of consultation questions

Accepted Answer

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

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

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?