Guidance

Penalties for facilitating avoidance schemes involving non-resident promoters — section 91 schedule 13 Finance Act 2022

Updated 11 April 2022

Overview

This guidance is based on legislation contained in Finance Act 2022 which introduces a new penalty applicable to UK-based entities who facilitate tax avoidance schemes involving non-resident promoters. The penalty can be for an amount up to 100% of the total fees, or the amounts which are the economic equivalent of fees, received by all entities involved in the promotion of that avoidance scheme. This would include fees paid directly to the non-resident promoter, together with fees paid to any other entities or persons who form part of the promotion structure for the scheme.

It is more difficult for HMRC to investigate avoidance involving offshore promoters and to challenge the behaviours of the persons involved because complex offshore enquiries take much longer and require far more resource than equivalent UK cases.

Schemes involving offshore promoters continue to be marketed and facilitated through a network of willing UK associates. Without the support provided by these UK entities who promote and market schemes and enrol customers to use them, the offshore promoter would not have vital access to the UK market. The new penalty seeks to make it more difficult for non-resident promoters to sell such schemes in the UK, by no longer making it economically viable for UK entities to facilitate the activities of non-resident promoters.

1. Definitions

A person is a promoter in relation to arrangements or a proposal that are relevant arrangements or a relevant proposal under section 234 of Finance Act 2014 if the person does anything that would cause the person to be carrying on a business as a promoter in relation to the arrangements or proposal under section 235 of Finance Act 2014, or, where the person is a member of a promotion structure, to be treated as doing so.

See:

• section 234 of Finance Act 2014 for the meanings of ‘relevant proposal’ and ‘relevant arrangements’
• section 235 of Finance Act 2014 for the meanings of ‘promoter’ and ‘as a promoter’
• schedule 33A of Finance Act 2014 which describes the cases in which a person is a ‘member of a promotion structure’

In the rest of this guidance, references are to ‘tax avoidance schemes’ or ‘scheme’ instead of ‘relevant proposal’, or ‘relevant arrangements’, as defined in section 234 of Finance Act 2014.

Promoters of Tax Avoidance Schemes (POTAS) refers to the legislative framework relating to promoters of tax avoidance in Part 5 of Finance Act 2014.

Non-resident promoter

A non-resident promoter is a person who carries on a business as a promoter and is resident outside the UK.

2. When a penalty arises

A penalty for facilitating an avoidance scheme involving a non-resident promoter (referred to as a ‘further’ penalty) is chargeable on a UK person where the UK person:

• has undertaken activities as a member of the same promotion structure as a non-resident promoter in relation to a tax avoidance scheme promoted by that non-resident promoter (the UK person’s activities are referred to as the ‘original activities’)
• is liable to pay one or more specified penalties in respect of the original activities (these penalties are referred to as ‘the original penalties’)

3. Original penalties

The UK person will become liable to a further penalty if they become liable to pay penalties in one of 2 categories.

First, penalties incurred under:

• Schedule 16 to Finance (No.2) Act 2017(penalties for enablers of defeated tax avoidance)
• para 2(1) of Schedule 35 of Finance Act 2014 for promoting schemes subject to a POTAS stop notice

Second, one or more penalties under the following provisions, provided the total amount that is payable under that penalty or those penalties is at least £100,000:

• Section 98C of Taxes Management Act 1970 (Disclosure of Tax Avoidance Schemes (DOTAS))
• Part 5 of Finance Act 2014 (POTAS) and Schedule 36 to Finance Act 2008 (information and inspection powers) as it has effect in relation to POTAS
• Schedule 36 to Finance Act 2008 (information and inspection powers) as it has effect in relation to enablers of defeated tax avoidance
• Schedule 17 to Finance (No.2) Act 2017 (Disclosure of Avoidance Schemes for VAT and Other Indirect Taxes (DASVOIT))

3.1 When a person becomes liable to pay a further penalty as a result of their being liable for an original penalty

For the purpose of deciding when a person becomes liable for a further penalty for facilitating an avoidance scheme promoted by a non-resident, that person is treated as being liable to pay an original penalty from the time at which:

• notice of the original penalty is given, in cases where the penalty is imposed by HMRC
• the original penalty is determined, in cases where the penalty is determined by the First-tier Tribunal

The time when the liability to the further penalty arises is not affected by whether or not there is an outstanding appeal against the original penalty.

In respect of original penalties that must be at least £100,000 to trigger liability for a further penalty, for the purpose of deciding when that condition has been met, the amount of the original penalty or penalties in question is the amount:

• specified in the notice, where the penalty is imposed by HMRC
• of the penalty determined by the First-tier Tribunal, where the tribunal determines the penalty

The amount of the penalty that is taken into account when determining whether a person is liable for a further penalty for facilitating an avoidance scheme is not affected by whether or not there is an outstanding appeal against the original penalty.

Example

A tax avoidance scheme is designed by a non-resident promoter. The marketing and selling of the scheme are carried out in the UK by A Ltd, a company associated with the non-resident promoter. A Ltd and the non-resident promoter are members of the same promotion structure under Schedule 33A FA2014.

HMRC enquiries lead to a POTAS stop notice being issued to A Ltd, requiring it to cease promoting the scheme. A Ltd continues to market the scheme, and to implement the scheme for clients. A Ltd has breached the stop notice, and as a result HMRC issue a penalty under para 2(1) of Sch35 FA2014. This is an original penalty, and A Ltd appeals against the penalty notice.

HMRC have issued a penalty notice to A Ltd in respect of its activities relating to a scheme promoted by a non-resident promoter. A Ltd is therefore liable to a further penalty for facilitating an avoidance scheme involving a non-resident promoter.

A Ltd’s liability to the further penalty is not affected by A Ltd’s outstanding appeal against the original penalty and an authorised HMRC officer may assess the further penalty.

Example

A UK company, B Ltd, advertises and sells a tax avoidance scheme in the UK under the guidance and instruction of a non-resident promoter. B Ltd and the non-resident promoter are members of the same promotion structure and both fall within the definition of a promoter of the scheme.

HMRC believe that B Ltd should have notified the scheme to them under the DOTAS legislation. After discussions with HMRC, B Ltd submits a form AAG1. Form AAG1 states that the first transaction forming part of the scheme took place 300 days earlier. The scheme should therefore have been notified to HMRC within 5 working days after the date of the first transaction forming part of the scheme.

HMRC apply to the First-tier Tribunal for an initial penalty under s98C (1)(a) (i)TMA 1970 for B Ltd’s failure to notify the scheme under s308(3) FA 2004. Taking account of all relevant factors, the First-tier Tribunal determines an initial penalty of £500 per day for the period of 295 days. The penalty determined is £147,500. This is an original penalty.

The First-tier Tribunal has determined a DOTAS penalty on B Ltd for an amount equal to or greater than £100,000 and therefore B Ltd is liable to pay a further penalty for facilitating the promotion of a non-resident promoter’s avoidance scheme.

4. Amount of penalty

The penalty payable will either be:

• for an amount that is equal to the total value of all consideration received by all persons who, at the time of the original activities, were members of the promotion structure in connection with the facilitated scheme, and any other schemes that are substantially the same as the facilitated scheme

• such lower amount as the authorised HMRC officer who assesses the penalty considers just and reasonable

4.1 Meaning of consideration

Consideration includes fees, remuneration, and any other kind of consideration, however received. The amount of the consideration is to be determined to the best of the information and belief of the person assessing it.

Consideration does not include any amount charged in respect of value added tax (VAT).

Example

A non-resident promoter sold a tax avoidance scheme in the UK through a network of entities and received consideration totalling £200,000 by way of fees from scheme users.

The network of entities includes the designer of the scheme who received £20,000 and the manager of the scheme who received £10,000 for their work in relation to the scheme.

C Ltd also carried out activities to facilitate the scheme in the UK on behalf of the non-resident promoter and received £70,000.

All entities involved are members of the same promotion structure.

HMRC defeat the scheme and determine that C Ltd is liable to pay a penalty under Schedule 16 to Finance (No.2) Act 2017 for enabling abusive tax arrangements that have been subsequently defeated. This is an original penalty in respect of C Ltd’s activities related to the scheme.

C Ltd has become liable to an original penalty in respect of its activities facilitating the promotion of an avoidance scheme by a promotion structure involving a non-resident promoter and is consequently liable to a further penalty. The amount of C Ltd’s further penalty is £300,000. This is the total amount of all consideration received by all members of the promotion structure in connection with the facilitated scheme.

4.2 Consideration paid to another person

Where consideration is paid to another person under an arrangement with a member of a promotion structure, it is treated as received by the member for the purposes of calculating the amount of the penalty.

Example

A UK entity, D Ltd, facilitates a tax avoidance scheme on behalf of a non-resident promoter by carrying out marketing activity in the UK. A separate management company, E Ltd, is set up in the UK by those who control the non-resident promoter to manage the scheme. D Ltd, E Ltd and the non-resident promoter are members of the same promotion structure.

The non-resident promoter receives £250,000 in fees from the scheme users.

D Ltd receives consideration of £100,000 for marketing the scheme.

E Ltd receives £50,000 for managing the scheme. Under an arrangement, E Ltd transfers £25,000 of this amount to an associate who resides outside the UK and is not a member of the promotion structure.

D Ltd incurs an original penalty in relation to its activities marketing the scheme and is liable to pay a further penalty for facilitating a tax avoidance scheme as part of a promotion structure involving a non-resident promoter.

The total amount of the further penalty is £400,000 which includes the amounts paid under arrangements between E Ltd and its associate. The £25,000 is treated as received by E Ltd for the purposes of calculating the penalty.

4.3 Apportioned on a just and reasonable basis

Consideration attributable to 2 or more different transactions is to be apportioned on a just and reasonable basis.

Consideration may need to be apportioned, for example, where the person who is subject to a further penalty was paid a global amount for a single activity which contributed both to the promotion of the scheme and to something else.

4.4 Consideration purporting to be given for different elements or separate transactions

All consideration that is in substance attributable to the promotion of the scheme in question is to be taken into account when calculating a penalty.

5. Procedure for assessing penalty

Where a person is liable for a penalty an Authorised Officer may assess the penalty. The penalty must be assessed within 2 years of information sufficient to enable the assessment first coming to the attention of HMRC.

An Authorised Officer is a person that has been authorised to assess penalties under this legislation by the Commissioners for HMRC. For the purposes of this legislation, Authorised Officers will be Senior Civil Servants who are independent from the investigation into the scheme and the entities involved in facilitating the scheme.

When an Authorised Officer assesses the penalty, they must notify the person who is liable for the penalty. The penalty assessment will also state the:

• amount of the penalty
• date on which it is issued and the time within which any appeal against the penalty assessment may be made
• date by which the penalty should be paid

5.1 Payment date

Once a penalty for facilitating an avoidance scheme involving a non-resident promoter has been assessed, it must be paid within 30 days beginning with the day on which the notification of the penalty is issued, unless the person appeals the penalty.

Subject to express contrary provision in Schedule 13 Finance Act 2022, a penalty assessment is to be treated in the same way as an assessment for tax for procedural purposes and may be enforced as such.

5.2 Supplementary assessment

An Authorised Officer may make a supplementary assessment in respect of a penalty where:

• after the penalty was first assessed consideration is received by anyone who was a member of the promotion structure at the time of the original activities
• the Authorised Officer considers it just and reasonable to make a supplementary assessment on the basis of information received after the penalty was first assessed

5.3 Penalty amendments

HMRC may amend the assessment if it is based on an assessment of consideration received by a person that HMRC subsequently find to have been excessive. HMRC may amend the assessment so that it is based on the correct amount.

HMRC amendments:

• do not affect the date by which the penalty must be paid
• may be made after the last day on which the assessment in question could have been made

6. Appeals

A person may appeal against a decision of an Authorised Officer to make a penalty assessment. A person may also appeal against a decision of an Authorised Officer as to the amount of a penalty assessment.

An appeal must be made within 30 days beginning with the day on which the notification of penalty was given and is to be treated in the same way as an appeal against an assessment to the tax to which the facilitated scheme relates.

Appeals must:

• be in writing, and signed by the appellant
• quote the appellant’s name or business name, and their tax reference number
• provide a full explanation of the reasons for the appeal

If the appeal is made to HMRC and the person bringing the appeal disagrees with HMRC’s response, they can ask:

• HMRC to review their decision
• for the tax tribunal (meaning the First-tier Tribunal or Upper Tribunal) to determine their appeal
• for alternative dispute resolution to be considered

The person is not required to pay a penalty whilst it is under appeal. On an appeal against a decision of an Authorised Officer to impose a penalty, the tribunal may:

• affirm the Authorised Officer’s decision to impose a penalty
• cancel the Authorised Officer’s decision to impose a penalty

On an appeal against a decision of an Authorised Officer as to the amount of the penalty, the tribunal may:

• affirm the Authorised Officer’s decision as to the amount of the penalty
• substitute for the Authorised Officer’s decision another one that the Authorised Officer had the power to make

7. Provisions of the Taxes Management Act (TMA) 1970

Subject to the other provisions of Schedule 13 Finance Act 2022, the following provisions of TMA 1970 apply in the same way for penalties for facilitating avoidance schemes involving non-resident promoters as they apply for the purposes of the Taxes Acts:

• section 108 — responsibility of company officers
• section 114 — want of form or errors not to invalidate assessments
• section 115 — delivery and service of documents

8. Application of information and inspection powers

The legislation applies Schedule 36 Finance Act 2008 for the purposes of checking a relevant person’s liability to a penalty for facilitating an avoidance scheme involving a non-resident promoter in the same way as it applies for checking a person’s tax position, and modifies it appropriately.

A relevant person is any person an officer of HMRC has reason to suspect is or may be liable to a penalty for facilitating an avoidance scheme involving a non-resident promoter.

More information about the application of Schedule 36 in general can be found in the HMRC Compliance Handbook.

9. Application

The legislation will apply from 24 February 2022, which was the date of Royal Assent of Finance Act 2022. A person can only become subject to a further penalty under the legislation where the original penalties by reference to which the further penalty falls to be assessed relate only to activities carried out on or after Royal Assent.

As set out at section 4 of this guidance, the amount of a further penalty will be equal to the total value of all consideration received by all persons who, at the time of the original activities, were members of the promotion structure in connection with the facilitated scheme. This can include consideration received by members prior to Royal Assent.

Example

Prior to Royal Assent, F Ltd is a member of a promotion structure in relation to an avoidance scheme involving a non-resident promoter. The total amount of consideration received by all members of the promotion structure in relation to the scheme prior to Royal Assent is £275,000.

The promotion structure continues to operate the scheme post Royal Assent, with F Ltd beginning to manage the scheme in the UK. The total amount of consideration received by all members of the promotion structure in relation to the scheme post Royal Assent is £375,000.

F Ltd’s management activities in relation to the scheme result in HMRC issuing a penalty to F Ltd. This penalty relates only to activities F Ltd has carried out on or after Royal Assent and is an original penalty. As a result, F Ltd becomes liable to a further penalty for facilitating an avoidance scheme involving a non-resident promoter.

The amount of F Ltd’s further penalty will be £650,000, or such lower amount as the Authorised Officer who assesses it considers just and reasonable. The £650,000 amount includes the consideration received by all members of the promotion structure in relation to the scheme both before and after Royal Assent.

10. Joint and several liability of directors

Schedule 13 Finance Act 2020

There are certain circumstances in which HMRC is entitled to give joint liability notices to directors, shadow directors and other individuals connected to a company. A joint liability notice will make the individuals jointly and severally liable for amounts the company owes to HMRC.

The legislation applies where a company is subject to an insolvency procedure or there is a serious possibility of it becoming insolvent. HMRC may take action under the powers that Schedule 13 Finance Act 2020 confers on them in relation to a penalty under any of the specified provisions if there is a serious possibility that some or all of the penalty will not be paid and all of the other statutory conditions are met.

Section 91 of Finance Act 2022 extends the scope of Schedule 13 Finance Act 2020 to include a further penalty payable under Schedule 13 Finance Act 2022. Therefore, HMRC would be entitled to give a joint liability notice to, for example, a director of a UK company which is charged a penalty for facilitating an avoidance scheme involving a non-resident promoter, where the company is subject to an insolvency procedure and there is a serious possibility the penalty will not be paid.