FOI release

Section 8 - Powers to tackle tax avoidance

Published 23 April 2020

Below we set out more detail on the Promoter of Tax Avoidance Schemes (POTAS), APN and Follower Notice regimes.

Promoters of Tax Avoidance Schemes

The Promoters of Tax Avoidance Schemes (POTAS) was introduced in Finance Act 2014 to change the behaviour of a small and persistent minority of promoters of avoidance schemes who are not transparent with HMRC. The regime is focused on the highest risk promoters – those who commonly design, market and implement schemes that overwhelmingly do not work, rely on non-cooperation with HMRC and which may also rely on concealment and mis-description to achieve the tax advantage for their clients.

HMRC has a dedicated POTAS team that leads enquiries into promoters and co-ordinates interventions covering the promoter’s own tax affairs, their schemes, the entities they use and the intermediaries who sell the schemes. The team actively use POTAS to encourage promoters to change their behaviour voluntarily, where this does not work POTAS provides an escalating series of sanctions to require them to change that behaviour, supported by information powers and penalties.

It is important to note that POTAS works alongside other anti-avoidance measures, including the Enablers Penalty Regime and DOTAS, to increase the risks associated with promoting and enabling tax avoidance schemes.

Follower Notice and Accelerated Payment Notice

Follower Notices (FNs) and Accelerated Payment Notices (APNs) were introduced in Finance Act 2014. The policy intent of APNs is to change the economics of avoidance by moving disputed funds from the avoider to the Exchequer while the dispute is resolved. Any tax enquiry or appeal remains in train and is not affected by the APN. If a customer was ultimately successful in showing that no tax is due any APN would be repaid to them with interest.

The purpose of FNs is to discourage avoiders from spinning out their dispute with HMRC when the avoidance scheme they have used has been shown to fail in another party’s litigation.

Our experience was that where a lead case has been finally defeated in the courts, other users of that scheme were very reluctant to settle. They would highlight often spurious distinctions between their arrangements and those in the lead case. Frequently, such users would pursue appeals as far as the First-Tier Tribunal, often conceding immediately before the hearing. This would have enabled them to hold onto the disputed tax for as long as possible and wasted tribunal time. Given limited tribunal capacity, it can take several months before a suitable tribunal date is found, this could delay settlement and payment for a significant period.

Both regimes aim to discourage people from entering into avoidance in future, as well as encourage settlement of cases on hand.

More detail can be found on GOV.UK

In particular:

• the policy purposes of the measure can be found in the introduction, plus paragraph 1.1 for FNs and 2.1.1 and 2.1.2 for APNs
• conditions for issue can be found at paras 1.3 for FNs and 2.2 for APNs
• details on the right to make representations are at 1.11, plus 1.18.9 for partnerships (FNs); and 2.6, plus 2.16.9 for partnerships (APNs)
• appeals against penalties can be found at 1.16, plus 1.18.10 partnerships (FNs); and at 2.12.5 for APNs

Promoters

We thought it would be useful to provide some more information on the avoidance market and HMRC’s approach to avoidance, including policy measures designed to tackle promoters and enablers.

Overview of market and HMRC approach

We have seen a shift in the behaviours of those promoting avoidance schemes over the last few years. This has moved to a smaller group of promoters determined to profit from marketing tax avoidance, while more reputable agents and tax advisers have largely moved away from this area.

Changes in legislation to address those promoting and enabling tax avoidance schemes, the introduction of Accelerated Payments and Follower Notices, as well as HMRC’s success in litigating avoidance have been significant factors in this shift.

We have seen:

• a reduction in the number of new avoidance schemes disclosed under the Disclosure of Tax Avoidance Scheme (DOTAS), which has fallen from around 600 in 2005 to 2006 to 16 in 2018 to 2019
• a smaller pool of promoters who are purposefully not making voluntary disclosures in an attempt to make our compliance effort more difficult, also significantly because it will bring schemes users into the APN regime. In 2018 to 2019 of the 16 DOTAS notifications, 11 were as a result of proactive interventions from HMRC to persuade the promoters to notify

Promoters are increasingly registered offshore, do not deal with HMRC directly and are solely web based in their marketing. Many of the key players now remain pretty constant but operate though a succession of vehicles which can be short-lived and disappear before HMRC has had a chance to challenge the scheme.

While the profile of the avoidance scheme marketplace has narrowed in breadth, the profile of the scheme user has changed enormously towards a higher volume of less affluent users, raising the stakes in tackling those promoting and marketing tax avoidance schemes.

Our approach focuses on upstream activity, identifying new avoidance schemes and tackling the supply chain to disrupt promoters business model. This includes:

• in 2019 to 2020, HMRC will double the resources we devote to tackling promoters
• we are using and piloting a range of approaches to identify new avoidance schemes, including profiling employer real time information (RTI) returns and web-based research
• we are clamping down on promoters who try and avoid disclosing their schemes under DOTAS - over the past 2 years HMRC has litigated more than 10 promoter businesses for failure to disclose a scheme under DOTAS, with around 20 others disclosing schemes following challenge, to avoid litigation. Further cases will be litigated during 2019 to 2020
• six cases have been heard, all in relation to disguised remuneration avoidance arrangements. The 4 decisions received so far have all confirmed HMRC’s view that the schemes are notifiable under the DOTAS regime, with decisions awaited in the further 2 cases. Penalty action is considered in all cases that HMRC win
• the Promoters of Tax Avoidance (POTAS) and the Enablers legislation are intended to change behaviours and deter promoters and others from selling avoidance schemes, but we will apply the sanctions where needed. We have issued conduct notices in a handful of cases, which allow us to actively monitor promoters. On challenge other promoters have chosen to cease their promoter activity entirely
• while it is too early for Enablers penalties to have been charged yet (the penalty only applies to transactions that occurred after 16 November 2017 and when HMRC has investigated and defeated the scheme) we are currently challenging a number of arrangements, seeking to apply penalties at the earliest opportunity. The Enablers’ legislation is having an impact, with some promoters having publicly announced that they will not offer any further schemes
• we take a holistic approach to tackling promoters. We are investigating over 100 promoters and others involved in tax avoidance with the majority of these linked or closely associated with in the region of 20 key entities. As appropriate, HMRC challenges on each include one, more or all of the following: DOTAS, POTAS, Enablers as well as enquiries into individuals or companies’ tax returns
• we are working with partner agencies, for example:
  • we have made 3 successful complaints to the Advertising Standards Authority (ASA) about misleading advertising. These rulings have seen certain misleading content on websites taken down. We have identified further instances of, in HMRCs view, promoters breaching ASA guidelines and HMRC will be submitting complaints in respect of these. We have also started writing to a number of promoters referencing earlier ASA decisions following HMRC complaint and have already achieved a positive outcome
  • following our engagement, the accountancy profession, which represents two thirds of the advisory community, tightened up their code of conduct (the ‘Professional Conduct in Relation to Taxation’ – PCRT). This has been key to the shift of more reputable agents away from promoting tax avoidance

Reducing the demand for avoidance schemes is also key to disrupting the promoter’s business. As part of this, we are:

• piloting different approaches to contacting customers directly and earlier where our data suggests they might have started to use an avoidance scheme to support them withdrawing from the scheme, before they have built up significant tax liabilities. For example, in the last 18 months we have sent over 1,500 letters directly to individual users to nudge them towards compliant behaviours
• seeking to identify new schemes quickly and respond swiftly. For example, we published Spotlight 49 in response to loan busting schemes designed to get around the loan charge. We ran a paid-for ad campaign which significantly increased traffic to the Spotlight (by 760% compared with the previous month) and warn people against using it
• working with accountancy and taxation professional bodies in developing products aimed at specific groups eg to raise awareness of the risks of tax avoidance schemes and deter people from using them

HMRC is committed to publishing a Promoter Strategy by 31 March 2020. The Promoter Strategy will articulate HMRC policy, operational and communication strategies for promoters

HMRC is also undertaking an evaluation of the implementation of powers granted to HMRC since 2012, which includes anti-avoidance legislation such as the General Anti-Abuse Rule (GAAR)and the POTAS regime. The evaluation is due to report in early 2020.

We are doubling the resource we devote to tacking promoters, profiling Real Time Information (RTI) data and working with partner agencies. Additionally, we are reviewing our existing powers (Promoters of Tax Avoidance Schemes (POTAS), Disclosure of Tax Avoidance Schemes (DOTAS), enablers etc), to ensure they support earlier interventions in the supply chain of avoidance schemes and further disrupting the business model of promoters.

To date 6 disguised remuneration arrangements have been litigated under the DOTAS legislation with the courts deciding in HMRC’s favour in 4 (Root2, Hyrax, ISH and EDF) and decisions awaited in a further 2 cases. In addition, and as a consequence of HMRC challenge, a further 18 arrangements were voluntarily notified by promoters rather than face the Tribunal. The vast majority of these notifications were of disguised remuneration schemes.

Five significant promoters of disguised remuneration schemes have ceased promoting avoidance schemes. One major promoter of loan schemes publicly stated they would cease. Two significant players have both ceased and are encouraging their users to settle. Both would have faced action under POTAS had they not ceased.

However, as the profile of the avoidance scheme marketplace has narrowed in breadth, the profile of the scheme user has changed enormously towards a higher volume of less affluent users, raising the stakes in tackling those promoting and marketing tax avoidance schemes.

Currently, Counter Avoidance is investigating over 100 promoters and other enablers involved in avoidance, with the vast majority of those enquiries involving disguised remuneration. These challenges include one or, in all probability, more than one of the following:

• Para 24 and/or S9A enquiry into the Promoter Company and key personnel
• VAT enquiry into the Company
• DOTAS enquiry
• challenge under POTAS
• challenges involving HMRC standards for agents , GAAR, Enablers legislation
• where appropriate referral to HMRC’s fraud investigation directorate

Legislation

A range of policy measures have been introduced since 2013, including: the Accelerated Payments regime (2014); Follower Notices (2014); the GAAR (2013); a tough regimes of penalties and monitoring requirements for high risk promoters (the Promoters of Tax Avoidance Scheme ‘POTAS’ rules (2014), and serial tax avoiders (2015).

In 2017, a tough new financial penalty was introduced of 100% of the fees earned by any person who knowingly enables a tax avoidance arrangement that is later defeated by HMRC (referred to as the Enablers Penalty Regime’). The Enablers Penalty Regime applies to defeated abusive tax arrangements where enabling took place on or after 16 November 2017.

Legal professionals

Put simply a promoter for the application of DOTAS and POTAS is a person who designs, organises or manages, or markets avoidance schemes. An enabler is anyone who knowingly facilitates and enables the use of an abusive arrangement that is later defeated. There are 5 types of enabler in the Enablers Penalty Regime, an enabler can be a designer, manager, marketer, enabling participant or financial enabler. You will see from this that a promoter will always be an enabler.

A regulated legal professional can be a promoter or enabler on their own terms but also an enabler if they have knowingly given advice on an abusive tax arrangement. There is extensive guidance on GOV.UK on the definition of enabler and how someone providing legal advice can be an enabler.

Promoters ceasing activity

Despite HMRC successes in litigation and in inducing disclosures the progress in tackling the DR market of avoidance schemes is challenging, as a determined group of promoters are still finding sufficient scope to profit from marketing their schemes, before we are always able to take action. We are now focused on 14 scheme promoters, many of whom are offshore.

When a promoter claims to be offshore, this poses additional challenges for HMRC. In a number of cases, we are challenging whether or not the promoter is genuinely resident offshore or is still resident in the UK.

In addition, we regularly exchange information with Fiscal Authorities from across the world. This helps to provide the evidence to challenge offshore Promoters. Non-Resident promoters do fall within the POTAS and Enablers Regime but enforcement is difficult.

Under DOTAS, offshore promoters should notify their scheme but if they do not, then the obligation to notify can fall on any person in the UK who satisfies the definition of promoter for DOTAS, or the users of the avoidance scheme. Our preferred approach in these cases is to use our powers to obtain information from those in the supply chain, for example, the enablers of the avoidance scheme who have a presence onshore.

Go to section 9: Compliance action.