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New powers for HMRC: fair and proportionate? Contents

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Chapter 3: Tackling promoters of mass-marketed tax avoidance schemes

13.In our 2018 report on the evolution of HMRC powers, we highlighted the need for HMRC to take effective action against those engaged in the promotion of tax avoidance schemes.8 The same point was made by Sir Amyas Morse in the Independent Loan Charge Review (ILC Review),9 which was set up by the Government to examine the impact of the 2019 loan charge on affected taxpayers.10 The ILC Review, published in December 2019, referred to evidence of more than 20,000 new usages of loan schemes since the loan charge was announced in 2016 and that, in the first half of the 2019–2020 tax year alone, there were approximately 3,000 new users.11 The ILC Review told the Government it must tackle promoters of disguised remuneration schemes.12

14.In response to the ILC Review, the Government confirmed its determination to continue to tackle promoters and announced it would introduce new measures intended to reduce the scope for promoters to market avoidance schemes.13

15.Further detail of the new measures was provided in March 2020. The Government confirmed that the relevant provisions would be in the Finance Bill 2020–21, and published the policy paper Tackling promoters of mass-marketed tax avoidance schemes, setting out its overall strategy for combatting the continued marketing of such schemes.14 As part of its “new promoters” strategy the Government issued two calls for evidence. One, on raising standards in the tax advice market, is discussed in Chapter 3. The other, on tackling disguised remuneration schemes, seeks input on options for possible future action by the Government to stop these schemes15 and is relevant to the issues discussed in this chapter.

16.Draft provisions for these measures was published in the draft Finance Bill in July 2020 accompanied by a Stage 2 consultation document in which the Government asked interested parties for feedback on whether the measures are appropriately targeted.16 The outcome of that consultation is not yet known. However, on 12 November 2020 the Financial Secretary to the Treasury announced that, in 2021, the Government would consult on further measures designed to tackle promoters of tax avoidance that would build on the proposals in the draft Finance Bill.17

17.These further measures, which the Government says will include powers under which HMRC can shut down promoters who sidestep the existing rules, are outside the scope of this report.

18.We welcome the Government’s continued focus on tackling promoters of tax avoidance schemes through the Finance Bill measures and the related calls for evidence. Aggressive tax avoidance is unfair on those taxpayers who follow the rules. However, it is critical that the Government takes effective action against the people who promote aggressive tax avoidance.

Background

19.The measures in the draft Finance Bill mainly amend three legislative regimes designed to deter the marketing of tax avoidance schemes. These regimes are the Disclosure of Tax Avoidance Schemes rules (DOTAS), first enacted in 2003; the Promoters of Tax Avoidance Scheme rules (POTAS), introduced in 2014; and the enablers rules, which came into effect in November 2017.18 The consultation document19 includes a summary of how these regimes generally operate and the issues that HMRC has faced in applying them to promoters. It details the amendments proposed to these regimes that the Government says should enable HMRC to deal more effectively with those promoters who frustrate HMRC’s attempts to apply the regimes to them.

20.HMRC highlights three particular areas of difficulty in applying the existing rules to promoters. First, some promoters are failing to provide details of the schemes they promote under DOTAS, which means that HMRC itself has to find out about those schemes to be able to take action. Second, where HMRC takes action, the safeguards—including the right of appeal to a tax tribunal—that were properly built in to these regimes can be used by promoters to delay that action having effect (potentially for several years given the time involved in bringing a tribunal case), during which time promoters can continue to sell their schemes to users. Finally, as and when action can be taken by HMRC, some promoters will then close down their business, but then start a new business to resume their activities, meaning that HMRC has to start again as and when that new entity comes onto its radar.

21.The measures the Government proposes are intended to deal with all three areas of concern. An overview of the existing regimes and the proposed changes is in Box 1.

Box 1: Disclosure, promoters and enablers of tax avoidance schemes

Disclosure of tax avoidance schemes (DOTAS) Under the existing DOTAS rules, a promoter of a tax avoidance scheme is generally required to provide information about the scheme to HMRC who will issue a scheme reference number (SRN). Users of the scheme are required to include the SRN in their tax return. A number of promoters have failed to notify HMRC of schemes. Under existing rules, HMRC can apply to the tax tribunal for an SRN to be issued if this is the case. HMRC says that this is a lengthy process during which a promoter can continue to market its scheme. The draft Finance Bill measures are intended to help shorten that period, enabling HMRC to issue SRNs earlier. Promoters of tax avoidance schemes (POTAS) Under the POTAS rules, HMRC may impose conditions on the activities of a promoter. In addition, once a tax avoidance scheme has been defeated by HMRC, HMRC can issue a stop notice which tells a promoter to stop selling it. The draft Finance Bill provisions are intended to counter the behaviour of some promoters who, as a notice is about to be issued, close down the relevant business, before starting again in a new company. This ‘phoenixism’ has made it difficult to apply the POTAS rules effectively. The changes should allow HMRC to apply POTAS to companies controlled by the same person as if they were effectively ‘one’ company. Enablers of tax avoidance schemes The enablers rules apply to anyone involved in the tax avoidance supply chain whose role can be said to ‘enable’ the use of a tax avoidance scheme (whether by promoting or helping design the scheme or being involved in its implementation). Once HMRC have successfully defeated the scheme, an enabler can be charged a penalty of an amount equal to the fees received for ‘enabling’. The changes proposed to the enablers rules allows HMRC to bring action under these rules, both to obtain information about schemes and to impose penalties at an earlier stage (in particular it will be able to take action without having to wait for all users of a scheme to be defeated).

22.Being able to act more quickly and reduce the number of people caught up in schemes is clearly desirable in principle. However, this means managing the risk of acting too quickly to avoid action being taken against the wrong people. There is therefore a need for appropriate checks and balances. The Government clearly faces difficulties in identifying a proportionate response to the issues HMRC has faced to date.

23.Although the loan charge is outside the scope of this inquiry, the evidence we received in 2018 suggested that HMRC has spent considerable time and resources focusing on individuals who participated in disguised remuneration schemes, while some of those who promoted such schemes have continued to be able to profit from their activities. We question whether HMRC has struck the right balance between focusing on individuals who used these schemes and the promoters of such schemes. HMRC must prioritise taking effective action against promoters.

24.We accept that HMRC has faced some significant challenges in applying the existing rules, given the steps taken by promoters to frustrate their efforts. We are, however, concerned that it is only now that HMRC is proposing changes we are told are needed to ensure existing rules apply effectively. Nevertheless, we welcome the action being taken by HMRC to rethink its approach to promoters in light of its experience.

The tax avoidance marketplace

25.HMRC has said that the main types of avoidance scheme currently being promoted are disguised remuneration schemes20 which (if effective) would lead to avoidance of income tax and National Insurance Contributions.21 Some examples of disguised remuneration schemes, taken from HMRC’s Spotlights, are set out in Box 2. Although the Government has not published a figure for the tax gap attributable to such schemes, it has said that around £0.6 billion of the estimated tax gap for tax year 2018/19 was attributable to income tax, national insurance contributions and capital gains tax.22 As we said in our 2018 report into HMRC’s powers, disguised remuneration schemes are an example of unacceptable tax avoidance.23

26.HMRC says that it is aware that 20 promoters have left the market in recent years as a result of the measures in place, particularly POTAS. This is clearly a welcome development, and our witnesses told us that credit should be given to HMRC for its work in reducing the tax avoidance tax gap.24 However, HMRC acknowledges that there are still a number of promoters active in the UK market25—it estimates 20–30 promoters—and, between April 2019 and May 2020, it identified 45 schemes in circulation.26 Based on the Government’s evidence to the ILC Review, it appears that a not insignificant proportion of users of those schemes are joining schemes for the first time.27

27.HMRC’s evidence to the ILC Review describes how the tax avoidance market has changed in recent years.28 Its evidence also says that the market has moved towards targeting a higher volume of less affluent users.29 Our witnesses told a similar story.30 For example, the Low Incomes Tax Reform Group (LITRG) told us that, although some users of disguised remuneration schemes are still “voluntary adopters”, others “are often completely unaware that they are in any kind of scheme or, if they are, they have been convinced it is legitimate”.31 This accords with evidence submitted by individuals affected by the loan charge in connection with our 2018 inquiry, where we found that some of those who had engaged in such schemes did so at the direction of their employer, and without being given an opportunity to enter into a more normal employment contract.32

28.LITRG also told us that, at the lower income end of the market, these schemes still proliferate, often driven by employers seeking to avoid PAYE obligations and employer national insurance contributions.33 Where individuals on lower incomes, who are taxed at the basic rate of income tax, end up in such a scheme, Tax Watch told us that they are unlikely to receive any financial benefit once the promoter has taken its fees: the saving in such cases instead falls to the employer, often a form of umbrella company.34 When the scheme is successfully challenged, HMRC told us it “will always seek to recover the tax from the employer wherever we can” when it is the employer that put their employee into the scheme. It added, however, that if the employer disappeared, then it would “need to pursue the tax” from the employee.35

29.Numerous schemes continue to be openly advertised online.36 The opportunism and audacity of some of these promoters is perhaps best illustrated by their recent targeting of staff returning to the NHS to assist in its response to the pandemic with a scheme that HMRC set out in Spotlight 54.37 Although some witnesses described these promoters as being under the radar,38 the need to market schemes and build business means “it [is] depressingly easy to find these companies”.39 For example, Tax Watch found a scheme (and its promoter) after a 3-minute “secret shopper” internet search. It seems that, in any event, these promoters are not necessarily under HMRC’s radar: the Financial Secretary to the Treasury had “no doubt” that HMRC was fully aware of who many of these promoters were.40

Box 2: Examples of disguised remuneration schemes

The following examples of disguised remuneration scheme are based on particular schemes publicised by HMRC in its Spotlights: HMRC’s view is that these schemes do not work, in that all payments received by the worker are taxed as salary. Disguised remuneration scheme involving a loan to the employee An employer pays the worker the national minimum wage. Under a separate arrangement, the employer makes a payment of £10,000 to an offshore trust set up for the benefit of the worker and their family (an employee benefit trust). The trustees, who are independent of the employer, have discretion in relation to using the payment received from the employer to benefit the worker. The worker asks to borrow money from the trust and the trustees decide to lend £7,500. The loan is repayable on demand—and if not demanded, on the death of the worker. The worker receives the national minimum wage plus the cash amount lent under the loan. The employer says that the loan by the third party trustees is not taxable as salary. Disguised remuneration scheme involving a loan then repaid with betting winnings A worker becomes employed by an umbrella company, through which they provide services to company A. The umbrella company receives £10,000 from company A, but only pays the worker the national minimum wage. It also makes a payment to an employee benefit trust set up for the benefit of the worker. The trustees lend the worker £7,500, repayable on demand. The worker then enters into a ‘bet’ with the trustees which the worker is very likely to win. The worker wins £7,500 under the bet, and asks the trust to use the winnings to repay the loan: the end result is that the worker receives £15,000 (through the loan and winnings) but pays out £7,500 (winnings to repay the loan), and so ends up with a net £7,500 in addition to the national minimum wage. The umbrella company says the cash winnings used to repay the loan are not taxable as salary.41 Disguised remuneration scheme involving loyalty rewards which are ‘cashed in’ A worker is employed by an umbrella company and receives the national minimum wage. The umbrella also agrees to advertise the worker’s services on a job board operated by a third party—and the third party awards ‘loyalty points’ to the worker for allowing their details to be on that board. After a certain time, the worker ‘cashes in’ their loyalty points. The worker ends up receiving the national minimum wage from the umbrella company plus the cash for the loyalty points. The umbrella company says that the ‘cashing in’ of the loyalty points by the worker is not taxable as salary.42

30.During our 2018 inquiry we received a significant amount of written evidence from individuals affected by the loan charge, a specific measure brought in to combat a particular type of disguised remuneration scheme. At that time, we expressed concern that HMRC appeared to be prioritising recovery of tax from individual users over taking action against promoters.43 We received further evidence on this subject during our current inquiry,44 highlighting the continuing need for Government to tackle—and be seen to tackle—promoters of such schemes.

31.The Financial Secretary to the Treasury assured us the Government was committed to driving these promoters out of business, and told us that the reduction in the avoidance tax gap was due to effective action that HMRC had taken against promoters to date.45 Describing their activities as “vicious and wrong in every way”, he said that the Government would not hold back from further measures where needed to “bring promoters to justice”.46 He told us that: “People have to feel that you are not just going after people who owe tax but going after the promoters and the enablers who may be trapping them”.47 We also heard that, if those who promote these schemes are seen as getting away scot-free, confidence in the integrity of the tax system is damaged.48

32.The evidence received in our 2018 inquiry concerning the loan charge showed how individuals can become involved in disguised remuneration schemes without being aware of their true nature—and the harm and distress, both financial and emotional, that then results where the scheme is challenged. We are troubled that these types of scheme continue to proliferate, and that many of those people unwittingly caught in these schemes are on lower incomes. The continued sale and marketing of disguised remuneration schemes, most recently to returning NHS workers earlier this year, shows the need for the Government to act more effectively, using the full range of measures at its disposal, if it is to be able to close these schemes down.

33.As was the case with the loan charge, it seems that the involvement of some individuals in these schemes is at the instigation of their employer, and solely for their employer’s benefit. The Government should prioritise action against such employers, to stop the growth in lower paid workers at risk of being targeted by scheme promoters. HMRC also needs to learn from the loan charge experience and do more to protect individual taxpayers, particularly those on lower incomes, from being unwittingly caught up in such schemes.

HMRC’s use of existing measures

34.Our witnesses were generally supportive of the action the Government has taken against promoters.49

35.Looking at the specific regimes with which the draft Finance Bill is concerned, we note that HMRC reports a significant reduction in the number of schemes reported under DOTAS in recent years, although it acknowledges that in some cases promoters are failing to notify schemes.50 In relation to POTAS, which allows HMRC to issue various notices to identified promoters, HMRC says that no monitoring notices have been issued (and only a handful of conduct notices have) but we were cautioned that this does not necessarily mean the rules were ineffective—as one witness put it, “in some cases, the mere existence of the power puts people off”.51 HMRC has said that the enablers legislation is having an impact, even though no penalties have been charged; as the legislation is still very new, further time is needed before conditions for penalties are met in particular cases.52

36.Some witnesses suggested that more time be given to seeing how some of its more recent existing powers “settled down”53 before HMRC added more powers to its armoury, or at least that HMRC should await the outcome of the powers implementation evaluation review. However, there was recognition that, as one witness put it, HMRC is engaged in a “game of cat and mouse”54 with promoters who appear to be able to sidestep or otherwise frustrate HMRC’s efforts under the existing rules, whether in the ways set out in the consultation document or by moving offshore, which makes tackling them more difficult.55 Criticism of HMRC’s effectiveness by witnesses tended to be directed at its perceived failure to bring criminal proceedings or to use non-legislative measures in this area (both of which we comment on below), rather than how it used its powers under these three regimes.

37.Though HMRC reports that its existing measures are effective in persuading promoters and those that help them to leave the market, witnesses told us that the remaining hard core is an “exceptionally difficult nut to crack”.56

38.We are disappointed that, notwithstanding the various powers HMRC has accumulated in recent years, a number of promoters—the so-called ‘hard core’—remain in business, despite HMRC knowing who these promoters are. Action against this remaining core of promoters must be a priority.

Scope of the new measures

39.The Government has stated that, although the new powers provided to HMRC in the draft Finance Bill are far-reaching, they are not aimed at tax advisers who adhere to high professional standards.57 The consultation document asked for stakeholder feedback on whether the measures were, as the Government considered, appropriately targeted.

40.Our witnesses included representatives of professional bodies who responded to the consultation. Although they were reassured by the public statements that their members were not the target of these measures,58 they were concerned about how the rules were drafted. Fiona Fernie of the Tax Investigations Practitioners Group (TIPG) told us:

“Although the proposals strengthen the Revenue’s powers to deal with promoters, they also strengthen its ability to deal with a lot of people, because they are so widely drafted”.59

41.This was echoed by the Law Society of England & Wales, which saw a risk that the rules could capture “an awful lot of advisers who are advising in the mainstream”60 and asked if HMRC could use its knowledge of the remaining promoters to target the rules more effectively.61 The Institute of Chartered Accountants in England and Wales (ICAEW) asked whether “good” advisers could be excluded.62

42.There were concerns that HMRC had lowered the bar significantly for some of the measures, basing them on “suspicion” of particular conduct. Will Silsby of ATT thought that, as an ex-HMRC inspector, this was “not so much a question of lowering the bar as removing it completely” given that suspicion was part of the job.63 We were told that, given the degree of subjectivity involved, it was important that appropriate governance and safeguards were put in place to ensure that use of these powers was limited to achieving the Government’s stated policy objectives.64

43.A number of witnesses65 told us of their concern that a breach of DAC6, the new cross-EU tax disclosure regime, had been included as a trigger for HMRC being able to take action under POTAS; the Chartered Institute of Taxation (CIOT) referred to “previous assurances from HMRC that DAC6 compliance would not creep into other regimes”.66 DAC6 was described as a “very difficult piece of legislation … with traps for the unwary”, and capable of applying to commercial arrangements where there is no tax avoidance. 67

44.In the consultation on changes to the enablers rules, HMRC raised the possibility of making the new penalty regime retrospective to when the rules originally came in (November 2017) on the basis that “where there are clearly abusive tax arrangements which have been enabled … there is a case for saying that issuing penalties to the enablers who sold the scheme should not be delayed”.68 The Financial Secretary to the Treasury told us that the Government took retrospection “very seriously” and so had consulted on this measure, receiving useful feedback.69 The professional bodies who gave evidence to the inquiry did not consider that the case for retrospection had been made,70 noting the “high bar” that applied to justify retrospective legislation.71

45.We agree that HMRC needs to ensure that the new measures cannot be gamed by promoters trying to argue that they are not within scope. However, these new HMRC powers must also reflect the design principles established by the 2012 Powers Review and, in particular, need to be appropriately targeted at the few they are intended to affect.

46.We recommend HMRC revisits the triggers for POTAS to minimise the risk of these rules affecting bona fide professional advisers. Specifically, we question whether DAC6 should be a trigger for a POTAS, particularly given the assurances HMRC appears to have given stakeholders that DAC6 would not feed into other areas of the UK tax code.

47.Retrospective legislation should only be introduced in exceptional circumstances, and the case for doing so must be clearly made. Although we acknowledge our witnesses’ concerns about the proposed retrospective changes to the enablers rules, we consider that, in this case, retrospective action is justified; a robust response is important in demonstrating HMRC’s willingness to tackle promoters effectively. In taking any such action, HMRC must apply symmetry to taxpayers and promoters; neither should be pursued for actions before HMRC found they were illegitimate, but both should be held accountable for their actions after that point.

Likely effectiveness of the new measures

48.The Financial Secretary to the Treasury told us that the Government is looking to solve the ongoing operation of promoters “by every legal and administrative means we can” in order to “drive these people out of business”.72 The new measures are designed to give HMRC new powers with which to do this. Mary Aiston, Director of counter-avoidance in HMRC’s Customer Compliance Group, told us that the measures reflect HMRC’s determination to be as effective as possible in tackling promoters, disrupting their business and getting to them more quickly.73

49.In many cases, the measures are a response to specific promoter behaviours employed to prevent or defer action being taken by HMRC under the existing rules, often based on the safeguards provided for in existing legislation.

50.To try to tackle the problem, the draft Finance Bill measures concern these legal processes and safeguards available under the regimes. Richard Wild of CIOT told us, for example, that the changes to POTAS should mean “that HMRC can actually apply the measures it wanted to apply when they were introduced back in 2014”.74

51.Witnesses were clear that no one measure by itself would have much impact; the new measures needed to be considered cumulatively.75 Even then, witnesses were unsure whether proposed changes would have a material effect on those promoters still active in the UK;76 we were told that measures “could” make life sufficiently more difficult so that some promoters would leave the market.77 The Law Society of England & Wales warned of the risk of promoters continuing to try to circumvent these regimes given that they appeared to operate at the “margins of legality” in any event.78 Fiona Fernie of TIPG considered that the number of promoters “might go down to 15 to 25 instead of 20 to 30”,79 whilst the Association of Taxation Technicians (ATT) said that, unless something radical was done, there will always be promoters:

“It is unsurprising, of course, that those whose business is to find ways around the legislation can also find ways around anti-promoter legislation.”80

52.Witnesses had differing views on which of the measures were most likely to help in combating avoidance schemes. One witness highlighted the changes to the DOTAS rules that should make it easier for HMRC to issue SRNs where it identified a scheme.81 Another described changes to the POTAS rules to allow HMRC to look beyond a particular company to the people who control it as helpful in combating ‘phoenixism’ (where, in response to HMRC action, a promoter closes down one business and then starts again with a new company).82 Others singled out measures designed to allow HMRC to intervene earlier in the life cycle of an avoidance scheme, by issuing a stop notice under POTAS or publishing the ‘name’ of a scheme (and its promoter), in order to try to “stop the schemes before they get out of hand”,83 as useful weapons to add to its armoury.

53.Although the evidence we heard suggests the proposed measures to target promoters are worth pursuing, we are unconvinced that they will be sufficient to drive the hard core out of business. The Government should continue to look for new approaches to tackling promoters.

54.The Government should keep the efficacy of measures under review, and not hesitate to respond swiftly if there is evidence that the hard core of promoters are continuing to frustrate HMRC’s ability to stop the marketing of tax avoidance schemes.

Safeguards

55.Witnesses were clear that the new powers had to be accompanied by adequate safeguards for those within their scope. The importance of proportionality was raised by a number of witnesses, who were concerned about the discretion given to HMRC in relation to some of the new powers. For example, Lydia Challen of the Law Society of England & Wales told us:

“Because of the width of the drafting … and the risk of mission creep, relying on the Revenue to exercise self-restraint and apply the powers only to the 20–30 it is really targeting is something we are rather concerned about.”84

56.One of a number of concerns was that, under certain of the new powers, it seemed that HMRC was to be judge, jury and executioner. For example, in relation to POTAS and DOTAS, HMRC can take certain action85 where it “suspects” or “has reasonable grounds to suspect” the relevant conditions are met. Taking that action is the first step in allowing HMRC to name a person as a promoter. Although the recipient has a right to make representations to HMRC before it is named, it seems that these will be made to a more senior officer in same HMRC team.86 The recipient can then appeal to a tribunal87 but will remain named as a promoter at least until the appeal has been decided. Incorrectly ‘naming’ a person as a promoter would cause significant reputational damage and an internal review may not necessarily provide sufficient protection regardless of how robust the internal governance process is.

57.HMRC told us that it needs the ability to name a person as a promoter at this earlier stage to be able to warn the public about the scheme, and that strong internal governance processes would be in place, with published guidance explaining how these powers are intended to be used.88

58.Our witnesses were not necessarily convinced that the proposals struck the right balance between HMRC and taxpayer, particularly given the subjectivity involved in HMRC determining whether it had reason to believe or not.89 Witnesses felt that oversight of HMRC’s exercise of its powers was key.90 Although some witnesses focused on the importance of strong internal processes, others suggested an independent body should be set up.91 One suggested that the legislation should be amended so that HMRC’s ability to act would be based on “reasonable grounds” rather than just “reason to believe”.92 It may be that, in considering responses to the consultation, the Government accepts the case for change on some, if not all, of these areas.

59.In our 2018 report we recommended that new powers should be accompanied by a right of appeal against the exercise of the power and not just against the underlying tax liability. This is not the case in the draft Finance Bill clauses. Although we acknowledge that at some point a right to appeal may be available, this will generally only be available later, by which point the relevant person will have had to deal with the consequences of HMRC’s exercise of its new power, including being named as a promoter. Whilst we appreciate HMRC’s concerns about promoters abusing safeguards, we regret that the measures do not include anything more than HMRC discretion as the means of protecting mainstream advisers from being caught.

60.‘Naming and shaming’ is an important weapon in tackling the hard core of promoters; shining a light on their activities is key to ensuring HMRC’s warnings are effective. But it should only be used where clearly justified. The Government should revisit the safeguards in the draft Finance Bill to balance more effectively the importance of being able to name promoters against the risk of identifying the wrong people.

Tackling promoters differently by reducing supply: criminal prosecution

61.The measures in the Finance Bill link mainly to administrative action available to HMRC to prevent the selling of the schemes, with sanctions for non-compliance generally limited to financial penalties.93

62.A few witnesses questioned whether financial penalties alone were a sufficient deterrent, suggesting that HMRC should bring more criminal prosecutions against promoters. The Law Society of Scotland were not aware of any concerted effort by HMRC to prosecute those repeatedly involved in selling aggressive schemes, and suggested that this should change.94 Tax Watch said that starting a criminal investigation should be HMRC’s default response on discovering a new scheme.95

63.When asked about its strategy for taking criminal action, HMRC said that since 2016 it has successfully prosecuted 20 individuals for involvement in schemes marketed as tax avoidance, and that a further nine individuals were arrested in tax year 2019–20 for selling schemes that purported to get round the loan charge.96 HMRC told us:

“In tackling a promoter, HMRC will always consider the opportunity to go down the route of investigating with a view to a criminal prosecution for fraud”.97

64.However, HMRC explained that bringing a criminal prosecution against a promoter was not feasible in many cases because of the need to prove dishonesty: “a promoter asserting that a tax treatment is successful that … a tribunal decides does not stand up is not of itself sufficient to demonstrate fraud”.98 The Financial Secretary to the Treasury made the same point, adding that difficulties in bringing a successful prosecution, as well as the length of the process, meant that criminal sanctions may in any event be of limited deterrence.99 Some witnesses agreed that under the current system criminal proceedings are “expensive, time-consuming and difficult to prove”.100 The Loan Charge All-Party Parliamentary Group expressed reservations as to whether criminal action was generally the solution to the continued promotion of schemes.101

65.Where possible, HMRC should pursue criminal action against promoters, including against those who have sold schemes in the past to which the loan charge applied. This could be a valuable deterrent, and we recommend that more publicity is given to these cases.

Tackling promoters differently by reducing demand: non-legislative approaches

66.Witnesses generally agreed that there was a limit to what could be done by legislative measures against the hard core of remaining promoters, but felt that there were non-legislative approaches which could be explored more fully.

Reducing demand—communication

67.We heard that more needed to be done to inform taxpayers about the risks of disguised remuneration schemes, including providing early warning of particular schemes that HMRC becomes aware of and intends to challenge.102 There was concern that HMRC appears to have a blinkered approach to communication, reflected in a reluctance to change how they approach communicating with the public, even though current methods do not appear to be effective.103

68.A focus on the demand side of the tax avoidance market was seen as an “important way forward” in combating the continued marketing of the schemes,104 with Richard Wild of CIOT telling us that “there should be simpler messages transmitted in a more mainstream way”.105 Witnesses referenced the need to ensure that, when a promoter approached a taxpayer with a scheme, they knew enough to “set alarm bells ringing”.106

69.Witnesses were clear that reliance on HMRC Spotlights was not enough.107 As one put it: “the average taxpayer has never heard of Spotlights, would not know where it was and would not know where to look for it”.108 In our 2018 report on the powers of HMRC, we commented that Spotlight publications “are neither well-known or well-read”.109 HMRC recognised that Spotlights are not written for mass-market communication and is exploring other methods of communication, including via social and other media.110

70.One suggestion was that HMRC publish a list of schemes which they were investigating that could be easily found through an internet search, with such messaging reinforced through campaigns on traditional and social media.111 Another witness proposed including details of the promoter in any anti-scheme publicity, as that was what a taxpayer was likely to search for online.112

71.HMRC recognised that communication is key.113 The Financial Secretary to the Treasury said he continued to press HMRC to make sure taxpayers were aware of the danger; there were plans for much more activity in relation to public communication later this year.114 However, behavioural experts had warned HMRC against “accidentally implying that tax avoidance is more widespread than it really is”115 because of a perceived risk that taxpayers may think they are missing out on something everyone else is doing.116 We queried this notion with the Financial Secretary, who assured us of his agreement that the message about the dangers should be communicated by every possible means.117

72.Witnesses highlighted the importance of direct communication with taxpayers when HMRC suspects a scheme has been used.118 This was echoed by evidence from an individual who had been sold a disguised remuneration scheme in the past, who emphasised the need for HMRC to communicate in a timely way119—a point we made in our 2018 report.120 Institute of Chartered Accountants Scotland (ICAS) told us of a pilot scheme being run by HMRC to identify possible scheme users through use of real-time information reported under PAYE, who it will then contact.121 Witnesses saw this as a helpful development and hoped that it would be expanded.122

73.Taxpayers need to have better information about schemes so that they can see through a promoter’s sales pitch and recognise when they are being sold an aggressive tax avoidance scheme. A page on a website telling taxpayers how to identify a tax avoidance scheme is insufficient. HMRC must find ways to communicate directly with taxpayers; for example, there could be a single-page warning notice each year as part of its standard communications on self-assessment filing obligations.

74.HMRC should be capable of planning a communications campaign to provide such warnings, without these warnings acting as a perverse incentive to take part in these schemes. It could look at what other agencies have done for guidance—for example, the Financial Conduct Authority’s communications regarding unscrupulous pensions advisers.

Reducing demand—employers

75.Witnesses told us that some individuals continue to be pushed into disguised remuneration schemes by umbrella companies; one said that action was needed to “stamp out [disguised remuneration] schemes at each stage of the worker supply chain”.123 One option was to regulate the umbrella companies.124 LITRG suggested that HMRC could use existing powers, such as requiring security deposits for PAYE debt, to protect the Exchequer.125 Both ICAS and the Law Society of Scotland suggested that employment agencies providing staff to government departments or other public sector bodies should be required to give assurances that they are not involved in disguised remuneration schemes.126

76.HMRC is “thinking very widely” about steps that can be taken to protect individuals from unscrupulous employers, referencing ongoing work with the Advertising Standards Agency to remove misleading advertisements.127 We note that the call for evidence on disguised remuneration schemes asks for evidence on how to tackle employment agencies and umbrella companies that use such schemes.128

77.Although the call for evidence on tackling disguised remuneration schemes is welcome, it is disappointing that it has taken until now for the Government to seek external input on tackling these schemes, given the high public profile of this issue in recent years.

78.We recommend that the Government collaborates with relevant specialists to decide what further steps could be taken to prevent disguised remuneration schemes being used by employment intermediaries. A first step would be to ensure that no government or public sector body contracts with an intermediary operating a disguised remuneration scheme, and to publicise this requirement along with the protocols that public bodies are expected to follow.

Reducing demand—improved working with professional bodies

79.HMRC told us that it works closely with the accountancy and taxation bodies in areas including effective communications for their clients focused on highlighting the risks in using tax avoidance schemes.129 However, the Law Society of England & Wales and the Law Society of Scotland said that HMRC should provide more information on schemes it was concerned about to the professional bodies, so that they could disseminate the information to their members.130

80.The CIOT told us:

“The professional bodies have a vested interest in driving those people out of the marketplace because, for want of a better term, they drag us down.”131

81.The Law Society of England & Wales reported that members had told them that HMRC did not engage effectively with offers of information about promoters’ activities.132 This is disappointing, particularly as HMRC says it encourages people to provide details of schemes they know about so that HMRC can investigate.133 Witnesses suggested that HMRC improve its systems for receiving reports of tax avoidance schemes134—we were told that an internet search for “how can I tell HMRC about a tax scheme” failed to link to any relevant details.135

82.To be effective, the new measures depend on HMRC becoming aware of new schemes. We recommend that HMRC creates a dedicated tax avoidance reporting service which enables taxpayers and advisers to report schemes easily. HMRC should work with its communications team to ensure a high level of search engine optimisation for any online reporting service. Any information that helps close down a scheme or promoter should be highlighted by HMRC, with details anonymised.

Call for evidence on raising standards of tax advice

83.In March 2020 the Government published a call for evidence on raising standards in the tax advice market.136 This was in response to the recommendation of Sir Amyas Morse’s Independent Loan Charge Review that “the government must improve the market in tax advice and tackle the people who continue to promote the use of loan schemes.”137 The call for evidence was specifically linked with the consultation and draft legislation on tackling promoters of tax avoidance and the call for evidence on disguised remuneration discussed above.

84.The timetable for responses to the call for evidence was extended because of the COVID-19 pandemic. The Government issued a summary of responses on 12 November 2020, in which it set out how it proposes to take matters forward.138

85.The call for evidence ranged widely across different kinds of tax advice and tax services. It extended beyond the promotion of tax avoidance to the sort of advice and services which individuals and businesses seek on a regular basis to assist with meeting their tax obligations.

Promoters of tax avoidance schemes

86.Over the last 20 years there have been changes in the way tax avoidance schemes have been promoted. Most reputable tax advisers have now largely withdrawn from these activities. HMRC has succeeded in forcing many operators out of the market. Although the promotion of disguised remuneration schemes continues despite all the counter-action which has been taken, this is a specialist area which is best tackled directly by targeted measures such as those in the draft Finance Bill and by good communications to alert potential users to the risks involved.

87.Will Silsby of ATT told us: “he professional bodies, without being complacent about the wider picture of standards in the tax market, have tended to see tackling promoters and enablers as a completely separate issue”.139

88.Frank Haskew of ICAEW said: “We still do not know whether, even if you had a fully regulated market, it would necessarily drive out that sort of behaviour [promoting tax avoidance] … those people are not providing tax advice; they specifically say they are not tax advisers. We need to get to those people, but whether regulation is the answer is not clear”.140

89.LITRG said that, “there should be a more targeted approach at the intermediaries in this space … in the context of unrepresented taxpayers and disguised remuneration schemes, one must recognise that the advice that is being given, if it is being given at all, comes from the employment intermediary, but neither the employment intermediary nor the individual taxpayer sees that as an occasion where tax advice is being given … you have to place your emphasis on the other approach, which is to stamp out disguised remuneration schemes at each stage of the worker supply chain”.141

Mainstream tax advice and services

90.On tax advice and services more generally, our main focus was the 30 per cent of tax advisers who are not members of professional bodies. We heard differing views about how the risks posed by this unregulated sector should be addressed and consumers protected. LITRG had responded to the call for evidence, arguing in favour of mandatory professional body membership.142 ATT’s response included a road map designed to bring non-members of professional bodies within the scope of the bodies.143 Introducing a new form of regulation would be a big step which would require detailed consultation and an extended transitional period.

91.ATT were also interested in the idea floated in the call for evidence of a public register of tax advisers, which could encompass both tax advisers who are members of professional bodies and ones who are not.144 Another idea with some support was to require all tax advisers to have professional liability insurance, which would give their clients some protection.

92.Lydia Challen of the Law Society of England & Wales told us: “One of the issues about tax advice is that, frankly, it is expensive to provide well, because tax is so complicated. It [regulation] would not necessarily increase access to tax advice for the low paid”.145

93.LITRG were also concerned about people on low incomes. They and ACCA argued that it was wrong to assume the low paid had simple tax affairs and they had an equal need for high-quality advice. Tom Henderson told us:

“There needs to be a structured provision of non-profit tax advice. The publicly available guidance needs to be as good as it can be. HMRC staff need to be well trained. Funding for charitable organisations needs to be well-targeted. … [HMRC] needs to get better at signposting other sources of independent advice, such as the tax charities Tax Aid and Tax Help for Older People”.146

Lydia Challen agreed that there should be more emphasis on, and resources for, charities that advise the low paid.147

94.On guidance, Jason Piper of ACCA said: “We and the other professional bodies would be delighted to help [HMRC] work better on material that can be handed out and shared”.148

Response to call for evidence

95.In its response to the call for evidence in November 2020,149 the Government outlined four steps it proposes to take:

• Raising awareness of HMRC’s Standard for Agents and reviewing HMRC’s powers to enforce the Standard;
• Consulting on a requirement for tax advisers to have professional indemnity insurance;
• Working collaboratively with the professional bodies to understand the role they play in supervising and supporting their members and raising standards; and
• Tackling the high costs to consumers of claiming refunds.

96.We welcome the Government’s response to the call for evidence on raising standards in the tax advice market. However, in light of evidence we have heard, we are surprised that the Government has chosen to move straight to consultation on a single proposal (professional indemnity insurance). This seems inconsistent with the Government’s declared approach to tax policy making, and it should reconsider this.

Conclusions

97.It has not been possible in this inquiry to do justice to this far-reaching and complex subject. Many witnesses thought that the call for evidence raises two separate issues: the need to counter the promotion of tax avoidance schemes by promoters and intermediaries such as umbrella companies and employers; and whether the 30 per cent of tax advisers supplying day-to-day tax advice and services who are not members of professional bodies should be regulated. In the former case, we made recommendations earlier in this chapter.

98.We support greater protection for those currently using unregulated tax advisers, and recommend that the Government consults on options for how they might be regulated. We also recommend that HMRC works closely with the tax professional bodies on non-legislative action which can be taken in the interim to help taxpayers source reliable tax advice (such as a register of tax advisers) and to improve advisory material. HMRC should also consider what more it could do to support charities who provide tax advice.

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