Guidance

How the serial tax avoidance regime applies to persons linked to avoiders

Published 12 January 2018

Overview

There are separate specific rules to deal with the situation where the taxpayer is a company which is a member of a group, where the taxpayer has associates, or the taxpayer is a member of a partnership.

There are separate rules for corporate groups, associates and partnerships.

Corporate groups

Under paragraph 46 schedule 18 Finance Act 2016, HMRC must give a warning notice to other group members where a company that suffers a relevant defeat is a member of a group.

Warning notices must be issued to all current group members who were members of the group at the time that the warning notice was given to the company that incurred the relevant defeat.

HMRC does not need to issue a separate warning notice to each group member and can issue a single combined warning notice to the company that incurred the defeat, which will be treated as having been issued to all current group members.

All group members will have their own warning period begun or extended and each will be required to submit annual information notices.

HMRC can permit members of the same group of companies to send in combined information notices.

If a company uses avoidance arrangements and suffers a defeat whilst in a warning period, then warning notices issued to it (or treated as being issued to it because HMRC issued a single warning notice covering all current group members in respect of avoidance arrangements used by other group members in the warning period) will be taken into account when determining:

• whether it may be named
• the rate of penalty for which it is liable in respect of that relevant defeat
• whether it should be subject to restrictions on direct tax reliefs

Warning notices issued to a company as a result of relevant defeats incurred by other group members cannot result directly in HMRC charging that company penalties, or in a restriction of its direct tax reliefs.

A company can only incur a penalty or have its direct tax reliefs restricted if it has used arrangements which are the subject of a relevant defeat.

If one group member has its reliefs restricted following a defeat of arrangements it used, then it will not be able to surrender group relief to other group members during the restricted period, and other group members will not be able to claim group relief from that member during the restricted period.

If any group member suffers a relevant defeat and HMRC is permitted to name the group member, then HMRC may publish information about the trading name of the group and details of the name, address, registered office and business carried out by every company which is then a member of the group.

Warning notices previously issued - where a company joins a group

Under paragraphs 46 (3), (4) and (5) schedule 18 Finance Act 2016, if a warning notice is given to any company (Company A) which is a member of a group in respect of a relevant defeat of avoidance arrangements it used, then warning notices must also be given to all the current members of that group under paragraph 46(2) schedule 18 Finance Act 2016.

All the members of the then current group (including Company A) will be treated as if they had been given any warning notice which had previously been issued to any then current group member (including Company A) at any time, where the warning period is still in force,even if it was issued before the company joined that group.

This will have an impact on determining the warning period (as extended if appropriate) in relation to each company which is or becomes a member of the group, and will be taken into account in determining whether any company in the group has been given 2 or more warning notices, in respect of defeats of other arrangements used in the warning period, for the purposes of penalties, naming and restriction of reliefs.

However, if the only reason a company would be liable to a penalty or a restriction of relief notice, is because it used avoidance arrangements in a warning period that arose from a warning notice given to another group member before they joined the group, then the penalty or restriction relief notice will not take effect.

Example of whether a penalty is due on a company joining a group

Company A, which is not in a group for the purposes of STAR, incurs a relevant defeat on disclosure of tax avoidance scheme (DOTAS) arrangements in December 2019.

It gets a warning notice on 15 January 2020 and its warning period ends on 15 January 2025. Company A has to submit annual information notices to HMRC during that warning period in relation to Company A.

Company P owns Company Q, together forming the PQ group. Company P buys Company A on 1 August 2020 (at a time when Company A is under warning). Company A continues to be under warning and obliged to submit annual information notices to HMRC during its warning period in relation to Company A.

However, Company P and Company Q are not treated as being under warning when Company A joins the group, and do not have to submit annual information notices to HMRC, as there have been no defeats incurred by any of the companies at a time when they were a member of the P and Q group.

On 1 May 2023 Company P incurs a relevant defeat on DOTAS arrangements which it entered into on 1 May 2019, which reduced its Corporation Tax liability for the year ending 31 December 2019, and were ‘used’ on 31 December 2020 (the filing date for its company tax return) during the warning period relating to Company A but not during a warning period in relation to Company P.

Company P incurs the relevant defeat at a time when Company Q and Company A remain members of the same group as Company P.

As a result of Company P’s relevant defeat on 1 May 2023 then a warning notice:

• is issued to Company P under paragraph 2 schedule 18 Finance Act 2016, bringing it within STAR with a warning period which will expire on 1 May 2028
• is issued to Company Q under paragraph 46(2) schedule 18 Finance Act 2016, bringing it within STAR with a warning period which will expire on 1 May 2028
• is issued to Company A under paragraph 46(2) schedule 18 Finance Act 2016 so that its warning period will expire on 1 May 2028
• previously given to Company A at a time before it joined the group will be treated as having been given to Company P and Company Q under paragraph 46(3) schedule 18 Finance Act 2016

However, Company P will not be treated as liable to a penalty in respect of the first defeat of arrangements used by a group member at a time when it was a member of the group, because at the time that Company P used the defeated avoidance arrangements it was not in a warning period.

Although Company A’s warning notice on the previous defeat before it joined the group is treated as having been given to Companies P and Q, Company P cannot be treated as using the arrangements during a warning period for the purposes of deciding whether it’s liable to pay a penalty.

As shown in the example, a company using arrangements during a warning period that is solely attributable to a warning notice given to a current group member, at a time before that member joined the group, will not be liable to pay a penalty (see paragraph 46(5) schedule 18 Finance Act 2016).

However, a warning period arising from a warning notice given to a current group member, before they joined the group can increase the rate of penalty due from a group company in respect of a relevant defeat.

Example of the rate of penalty due on a company joining a group

Company Z, which is not in a group for the purposes of STAR incurs a relevant defeat (defeat 1) and enters a warning period on 1 August 2018, due to end on 31 July 2023.

In June 2018, Company Z enters into DOTAS arrangements in respect of Corporation Tax which it uses in its tax return filed on 31 December 2019. Company Z uses the arrangements in the warning period commencing on 1 August 2018.

Companies F, G and H are in a corporate group and have been trading as FGH group for many years.

Company Z joins the FGH corporate group on 1 January 2021. Company Z continues to be under warning and required to submit information notices to HMRC, but not companies F, G and H.

On 30 June 2021 (when Company Z is now a member of the F/G/H/Z group) Company Z’s arrangements entered into in June 2018 and used on 31 December 2019 are the subject of a relevant defeat (defeat 2).

Company Z is issued a warning notice in respect of defeat 2 extending its warning period to 30 June 2026.

Companies F, G and H are also issued with warning notices.

In addition companies F, G and H are now to be treated as if warning notices had been given to them in respect of Company Z’s defeat 1, so that retrospectively they will be treated as having been under warning since 1 August 2018.

Following the issue of the warning notice in respect of Company Z’s defeat 2, Companies F, G and H will be required to submit information notices to HMRC in addition to Company Z, even though they themselves have not been the subject of a relevant defeat.

However, companies F, G and H will not retrospectively be regarded as having been required to deliver information notices in respect of the period 1 August 2018 to 30 June 2021.

Company Z is liable to a penalty of 20% of the value of the counteracted advantage in respect of defeat 2, because the defeated arrangements were used by Company Z when it was in a warning period. None of companies F, G or H are liable to a penalty in respect of defeat 2.

Company F enters into DOTAS arrangements in the year ended 31 December 2018, which are reported in its company tax return for that year, filed on 31 December 2019, so treated as ‘used’ on 31 December 2019. Company F incurs a relevant defeat of these arrangements on 30 June 2022 (defeat 3), and is given a warning notice to extend its warning period so that it ends 5 years from 30 June 2022.

A warning notice is also given to all other group members (G H and Z). The warning period for each of companies in the group (F, G, H and Z) which was deemed to have begun on 1 August 2018 is extended to end on 30 June 2027.

Company F is not liable to a penalty on defeat 3. The arrangements of the subject of defeat 3 were used by Company F, at a time when neither it nor any of the then group members were subject to a warning period. The fact that on Company Z’s defeat 2, Company F was treated as being subject to a warning period since 1 August 2018, is ignored for these purposes.

Company G enters into avoidance arrangements on 1 January 2022, which affect its tax liability for the year ended 31 December 2022, and reports these on its Company Tax return filed on 31 December 2023, the date on which it is treated as ‘using’ the arrangements.

It incurs a relevant defeat (defeat 4) of those arrangements on 1 May 2026 and is given a warning notice which applies to each group member (F, G, H and Z) on 1 June 2026, extending the warning period for each group member to 1 May 2031.

Company G was in a warning period (the warning period from Company Z’s defeat, defeat 2 on 30 June 2021 as extended by Company F’s defeat 3 on 30 June 2022) when it used its arrangements on 31 December 2023, because it was given a warning notice at the same time as Company Z for defeat 2 and company F for defeat 3.

Company Z’s warning notice on defeat 1 is treated as having been given to Company G, which begins a warning period for Company G on 1 August 2018.

As Company G is in a warning period by virtue of Company Z’s defeat (defeat 2) and Company F’s defeat (defeat 3) at the time that Company G used the arrangements, the subject of defeat 4, the provision which says that no penalty will be payable if the warning period arises from a notice given to a company before it joined the group (see paragraph 46(5) schedule 18 Finance Act 2016), does not have any effect.

Accordingly, Company G is treated as having been given 2 relevant prior warning notices (that given for Company Z’s defeat 2 and that for company F’s defeat 3), in the warning period arising from Company Z’s defeat 1 beginning on 1 August 2018.

Company G is liable to a penalty of 60% of the value of the counteracted advantage in respect of defeat 4, under the rules for paying a penalty and the rate of penalty (see paragraph 30 schedule 18 Finance Act 2016).

As this is the third relevant defeat for avoidance arrangements used in the same warning period, Company G and the other group members may be named. If all the relevant defeats involved the misuse of direct tax reliefs, then Company G could also be issued with a restriction notice following defeat 4.

When a company leaves a group, if it had been given a warning notice whilst a group member only because it was a member of that group, then that warning notice ceases to have effect for that company when it ceases to be a member of the group.

Example of a company leaving a group

Companies L, M and N are in a corporate group. Company L incurs a relevant defeat on 1 March 2019 (defeat 1), and a warning period commences on 1 May 2019.

Company M leaves the group on 1 December 2019 and incurs a relevant defeat on 31 July 2022 (defeat 2), in respect of arrangements it used in relation to its company tax return for the year ending 31 December 2020, filed on 31 December 2021.

Paragraph 46(7) schedule 18 Finance Act 2016 provides that the warning period which had effect for Company M, in respect of Company L’s defeat 1, ceases to have effect when Company M leaves the group.

Therefore Company M is not liable to a penalty on the defeat it incurred on 31 July 2023, because it is not treated as being in the group warning period when it used the arrangements on 31 December 2021.

Meaning of group and company

2 companies are members of the same group if one is a 75% subsidiary of the other, or both are 75% subsidiaries of a third company.

A company is a 75% subsidiary of another if at least 75% of its ordinary share capital is beneficially owned, directly or indirectly, by the other.

Company means a body corporate or unincorporated association, but does not include a partnership, a local authority or a local authority association.

There are further circumstances, where the trustees of an authorised unit trust can be treated as a company. These are given in section 1121 chapter 1 part 24 Corporation Tax Act 2010.

Representative member of a VAT group

Under paragraph 45 schedule 18 Finance Act 2016, a VAT group registration is treated as if it were a person for the purposes of STAR.

This means the relevant defeats on a group’s VAT returns are dealt with separately from any other relevant defeats incurred by other group members (including those non-VAT relevant defeats of the company which is the representative member of the VAT group), even if the membership of the VAT and corporate groups is the same.

The VAT group is regarded, for STAR purposes, as having continued existence even when the representative member changes.

Members of a VAT group registration are all jointly and severally liable for the VAT liabilities of the group, including any penalties, including a STAR penalty.

Example

Companies A, B and C are in a corporate group. They’re also in a VAT group, and Company A is the representative member.

On 1 May 2019 DOTAS arrangements used by Company B are defeated. Companies A, B and C are issued with a warning notice and enter a warning period. On 1 September 2020 disclosable VAT arrangements used on the group’s VAT return during the warning period are defeated.

This second defeat is treated as applying to Company A in its capacity as representative member of the VAT group but not otherwise, and not to Company B or any of the other members of the group in their own capacity. This means no penalty is due if this is the first relevant defeat of disclosable VAT arrangements used by the VAT group.

The relevant defeat will, however, result in the issue of a warning notice to Company A in its capacity as representative member of the VAT group and it will thereafter be required to submit annual information on behalf of the VAT group.

If other disclosable VAT arrangements are used on the VAT group return in the warning period of the VAT group beginning with the issue of that warning notice to Company A in its capacity as representative member of the VAT group, and are defeated, then Company A in its capacity as representative member of the VAT group will be liable to a STAR penalty, and the other members of the VAT group will be jointly and severally liable for that penalty.

Associated persons

Under paragraph 47 schedule 18 Finance Act 2016, there are special rules to deal with the situation where there are persons associated with a taxpayer who incurs a relevant defeat.

Taxpayer with one or more associates incurs a relevant defeat

Where a taxpayer has associates, the obligation for HMRC to give a warning notice to the taxpayer is extended to include the taxpayer’s associates.

It does this by treating associates of the taxpayer, who has incurred a relevant defeat, as having also incurred a defeat for the purposes of HMRC’s duty to serve warning notices.

This applies to all persons who were associated with the taxpayer at the time that the warning notice is given to the taxpayer.

The requirement does not apply if the associated person is then in the same corporate group as the taxpayer, because the requirement to issue such an associate with a warning notice is already covered by the group rules.

Scope of legislation applying to associates

The information included in a warning notice given to an associate is narrower than that for a warning notice to a taxpayer, who has themselves incurred a relevant defeat. In this case, the warning notice only needs to explain the effects of the paragraphs regarding the warning period, annual information notices and naming.

The warning notices given to associates cannot result directly in HMRC publishing their names. However, they will count towards the 2 prior warning notices required before HMRC can publish the name of a person who suffers a relevant defeat, in respect of avoidance arrangements used by that person.

If a person receives a warning notice only because they are associated with a person who has incurred a relevant defeat, then the warning notice to the associate will be ignored for the purposes of the rules on penalties and restriction of relief.

Example of an individual who controls two companies

An individual, Z, controls Company A and Company B by virtue of owning the entire issued share capital of both companies.

Company A incurs a relevant defeat of new arrangements on 1 June 2018, and warning notices are given on 30 June 2018 to company A, and to Company B and to Z, which commence warning periods for each of them which expire on 30 June 2023. Each of them is required to submit information notices to HMRC during the warning period.

Company B incurs 2 relevant defeats of new arrangements on 30 June 2020, in respect of new arrangements used on 30 September 2019, and warning notices are given to Company B and to Company A and Z, extending their warning periods and the requirement to submit information notices to 30 June 2025.

Company B incurs no penalty in respect of those defeats, because they were not used by Company B in a warning period in relation to Company B, other than one begun by a relevant defeat of arrangements used by its associate, Company A.

Z uses new arrangements on 20 June 2022 which are defeated on 5 June 2027. Z, and Companies A and B, are given warning notices beginning a new warning period on 30 June 2027, which will expire on 30 June 2032.

Although Z used the defeated arrangements during a warning period, Z is not liable to a penalty in respect of this defeat, as Z did not use the arrangements in a warning period in relation to Z, other than one begun or extended by a relevant defeat of arrangements used by its associates.

Similarly even if all arrangements misused direct tax reliefs, no restriction notice can be issued to Z. However, as there had been 2 earlier uses during the same warning period of avoidance arrangements which had been the subject of a relevant defeat, Z may be named by HMRC following the defeat of Z’s arrangements.

Meaning of associated

Under paragraph 48 schedule 18 Finance Act 2016, 2 persons are associated if either:

• one of them is a body corporate controlled by the other
• they are both bodies corporate under common control

Two bodies corporate are under common control if both are controlled by either:

• one person
• between 2 and 5 individuals
• any number of individuals carrying on business in partnership

For these purposes a body corporate is taken to control another body corporate if either it’s:

• empowered by statute to control the other’s activities
• the holding company of the other within the meaning of section 1159 and schedule 6 Companies Act 2006

If an individual or individuals would be the holding company if they were a body corporate, then they are taken to control a body corporate.

Partnerships

Under paragraphs 18(6) and 49 schedule 18 Finance Act 2016, the first time a partner incurs a relevant defeat because of a tax advantage arising by virtue of Condition A (GAAR) or Condition C (DOTAS arrangements), and the partnership return has been made on the basis that the arrangements resulted in a tax advantage, then all relevant partners are treated as having incurred that relevant defeat.

HMRC’s obligation to serve a warning notice is then extended to give a warning notice to all relevant partners.

Where a partner incurs a relevant defeat by virtue of Condition B (follower notices), in a case involving a partnership follower notice in relation to a partnership return, and the partnership return has been made on the basis that a tax advantage arises to that partner, then all relevant partners are treated as having incurred that relevant defeat.

HMRC’s obligation to serve a warning notice is then extended to give a warning to all relevant partners.

In applying these provisions, relevant defeats incurred by a partner that are only because they are associated with some other person are ignored.

Relevant partners are persons who were partners in the partnership at any time in the period which the partnership return relates to. However, relevant partners do not include anyone who would otherwise incur a relevant defeat in connection with the subject matter of that partnership return.

These rules mean that when HMRC defeat new avoidance arrangements used in a partnership return, the defeat will be taken into account when considering STAR sanctions for both the partners incurring the defeat and the relevant partners.

HMRC can only charge a penalty on, or restrict the use of direct tax reliefs by the partners whose tax position was affected by a relevant defeat.

However, for all partners who are given a warning notice, the relevant defeat will count towards the number of relevant defeats to be taken into account when HMRC is calculating any penalties due, in respect of relevant defeats of their use of avoidance arrangements, as well as for applying the rules on restricting their direct tax reliefs. The defeat will also be taken into account for the STAR sanction of publishing details.

Full details can only be published for the partner with the relevant defeat, but HMRC may also, depending on the circumstances, be able to publish the names of all relevant partners in the partnership.

Example of partnerships using DOTAS arrangements

R, S and T are in partnership as RT Partners. Their partnership return for the year ending 5 April 2020 uses DOTAS arrangements generating an expected tax advantage that only R benefits from, and R submits a Self Assessment return on this basis.

On 1 December 2021 R incurs a relevant defeat, and S and T are also treated as incurring relevant defeats. S and T are therefore given warning notices at the same time that R gets a warning notice, on 15 December 2021. R, S and T will therefore be required to submit annual information to HMRC.

On 1 May 2022 S incurs a relevant defeat relating to new DOTAS arrangements in relation to his own tax affairs, and used in the warning period arising from R’s defeat of arrangements used in the partnership return for the period ended 5 April 2020, and is therefore liable to a penalty under STAR, in respect of the use by S of the new DOTAS arrangements.

U joins the partnership on 1 June 2020, and on 1 August 2022 incurs a relevant defeat on new DOTAS arrangements used in relation to his own return, during the warning period from R’s defeat.

He’s not liable to a penalty, because he was not a partner in the reporting period to 5 April 2020, when R’s defeat was incurred and was therefore not a relevant partner in relation to R’s defeat.

Paragraph 18(6) schedule 18 Finance Act 2016 provides that if HMRC is able to name a taxpayer who has incurred a relevant defeat and that person is, at the time of that relevant defeat, carrying on a trade or business in partnership, the information which may be published includes the trading name of the partnership and the name and address of the other members of the partnership.

This applies whether or not:

• they are relevant partners in relation to the relevant defeat in question,
• the relevant defeat relates to arrangements used in a partnership return relating to the partnership

Meaning of partnership and partnership return

A partnership for the purposes of STAR is where 2 or more persons in partnership carry on a trade, profession or business. Limited liability partnerships are specifically included.

‘Partnership return’ means a return under section 12AA of the Taxes Management Act 1970.

Partnership information notices

When there is a relevant defeat incurred by a partner, in relation to a partnership return by virtue of Condition A (GAAR) or Condition C (DOTAS arrangements), or by virtue of Condition B (follower notices) in a case involving a partnership follower notice, and the partnership return was made on the basis that a tax advantage arises to a partner, the ‘appropriate partner’ is required to give HMRC annual written ‘partnership information notices’ about the partnership’s use of DOTAS arrangements.

This is in addition to any information notices that must be filed by the partners themselves.

The information period is the period of 5 years beginning with the day after the day of the relevant defeat of a partner. HMRC will nominate a partner in the partnership as the ‘appropriate partner’, who is to be responsible for giving the partnership information notices.

If a new information period begins during an existing information period, the existing information period is extended to end 5 years beginning with the day after the day of the relevant defeat for the new information period.

This extended period is treated as a single information period for partnership information notices. An information period will end the day that the partnership ceases.

A partnership is treated as the same partnership, notwithstanding any change in membership if any person who was a member before the change remains a member after the change.

Partnership information notices - sub-periods

Under paragraph 51 schedule 18 Finance Act 2016, partnership information periods are split into sub-periods.

The first sub-period in any information period begins with the first day of the information period, and ends with a day specified by HMRC, which will usually be the filing date for the relevant partnership tax return, for example 31 January in the case of online returns.

HMRC may choose a different date if they think it’s appropriate. The remainder of the information period is divided into further sub-periods, each of which begins immediately after the end of the preceding sub-period and is 12 months long, except for the last one, which, if that would be shorter, ends at the end of the partnership information period.

The partnership must give HMRC their information notice no later than 30 days after the end of the sub-period to which it relates.

Content of partnership information notice

Under paragraph 51 schedule 18 Finance Act 2016, a partnership information notice must state whether or not:

• any partnership tax return that was, or was required to be, delivered in the sub-period was made on the basis that a ‘relevant tax advantage’ arises
• there’s been a failure to deliver a partnership return in the sub-period

A relevant tax advantage means a tax advantage which particular DOTAS arrangements enable, or might be expected to enable a person who is, or has been, a partner in the partnership to obtain.

If the partnership has made a return due in the sub-period on the basis that the DOTAS arrangements are effective and result in a relevant tax advantage, then the information notice must:

• explain (on the assumptions made for the purposes of the return) how the DOTAS arrangements enable the tax advantage concerned to be obtained
• describe any variation in the figures required to be included on the return, resulting from the DOTAS arrangements

Partnership supplementary information notice

Under paragraph 51 schedule 18 Finance Act 2016, HMRC may give a written notice to a partnership requiring them to provide HMRC a written supplementary information notice if they fail to deliver a return that is due for delivery in a sub-period.

The notice will set out any matters which the partnership was required to set out in a partnership information notice if they had delivered the return in that sub-period, and state the period within which the partnership must comply with the notice.

Failure to comply and extension of information period

Under paragraph 52 schedule 18 Finance Act 2016, HMRC may extend the information period by written notice if the partnership fails to comply with the requirements regarding the submission of information notices or supplementary information notices.

The extended information period will end on the last day of the period of 5 years beginning with the earlier of the:

• day by which the annual or supplementary partnership information notice should have been given
• day on which the partnership gave the defective information notice to HMRC
• time when the information period would have expired were it not for the extension, if earlier than the date above

Partnerships - special provisions about taxpayer emendations

Under paragraph 52 schedule 18 Finance Act 2016, the STAR partnership rules include a provision to ensure that amendments to the partnership return, resulting from an unprompted disclosure regarding DOTAS arrangements made by the representative partner or their successor, are not treated as relevant defeats. Such amendments are referred to as taxpayer emendations.

The rules apply specifically to amendments that vary or otherwise affect the calculation of any amount in the partnership statement.

This is the part of the partnership return that shows the share for a particular partner of any income, loss, consideration, tax or credit for the period.

For the amendments to be ‘taxpayer emendations’, the disclosure must be:

• a full and explicit disclosure of an inaccuracy in the partnership return
• made at a time when neither the person making the disclosure, nor the partner whose share of any amount in the statement is affected, had reason to believe that HMRC were about to begin enquiries into the partnership return

*[STAR] : serial tax avoidance regime *[GAAR]: General Anti-Abuse Rule