Chapter 7: Dealing with Promoters of Tax Avoidance
Background
226.In July 2023, the Government published draft legislation to deal with promoters of tax avoidance schemes. The Government described these measures as being targeted at: “the most persistent and determined promoters.”342
227.The draft legislation contained two measures. The first creates a new criminal offence where promoters who have received a ‘stop notice’ from HMRC requiring them to stop promoting a particular scheme, fail to comply and continue to promote that scheme without a reasonable excuse. The second confers on HMRC a new power to apply to the court directly to disqualify directors of a company involved in promoting tax avoidance, including other individuals who control or exercise influence over such a company (so-called ‘shadow directors’).
228.Previously, if HMRC wanted to have a director disqualified it had to refer the matter to the Insolvency Service—it could not apply to the court itself. Under the draft legislation, HMRC would be able to make an application directly to the court where it considers it would be in the public interest to do so, in one of two circumstances: 1) following an order winding up the relevant company, or 2) where tax avoidance is being promoted. Where the application follows a winding up order, disqualification is mandatory—the court will have no discretion.
229.The Government had earlier consulted on these proposals in a consultation document published in April 2023: Tougher consequences for promoters of tax avoidance.343 The measures build on anti-avoidance legislation in the Finance Acts 2021 and 2022. The Finance Act 2021 introduced stop notices, which are designed to halt the sale of a scheme prior to that scheme being challenged in court.344 When a stop notice is issued, HMRC publishes details of the promoter and the scheme to make people aware both of the scheme itself and of the fact that HMRC is challenging the scheme. Failure on the part of the promoter to comply with a stop notice attracts a range of civil penalties.345
230.The Finance Act 2022 empowered HMRC to publish additional information about tax avoidance schemes that it considers do not work in order to deter potential users from getting involved in these schemes and to alert existing users to the risks of continuing to use them.346
231.HMRC told us that there are currently: “around 20-30 active promoter organisations.”347 Very few stop notices have been issued to promoters since June 2021: as of 7 December 2023, only 16 had been issued, one of which had ceased to have effect.348 HMRC told us that, as of the end of August: “no penalties have been charged for continued promotion of a scheme covered by a Stop Notice.”349
New criminal offence for promoters
232.Witnesses were generally supportive of the draft legislation. They recognised the difficulties HMRC faced in dealing with a hard core of promoters who had not been deterred from their activities by previous Finance Act measures. Mr Dodwell, who is also a member of HMRC’s advisory General Anti-Abuse Rule panel (though he did not give evidence in that capacity), highlighted the importance of having: “as many deterrents as possible against promoters of quite aggressive tax avoidance.” He added that: “stop notices are really important as part of that” as they: “shut down the market for aggressive tax avoidance.” Mr Dodwell explained that, while this may be challenging for HMRC to deal with, adding criminal sanctions: “will make it even harder for anyone to ignore a stop notice, and carry on marketing their aggressive avoidance scheme.”350
233.Joshua Toovey of the Association of Independent Professionals and the Self-Employed agreed and spoke of: “the devastating impact on … families’ lives” when schemes were challenged and shown not to work, and it is: “right that the Government [is] now looking at going to the source of this issue rather than going after contractors themselves, who quite often are unaware that they are inadvertently falling foul of these tax avoidance rules.”351
234.Witnesses acknowledged how much HMRC had already achieved. Ms Cattell told us that: “we are now down to a very small hardcore of promoters; a great many of them have been driven out of the market already by the previous measures which have been taken.” She highlighted the: “huge reduction in the sort of marketed tax avoidance schemes that stop notices are aimed at,” 352 and that the part of the tax gap relating to marketed schemes had been reduced from £1.5 billion in 2006 to £0.5 billion in the latest tax gap report, published in June 2023.353
235.ICAS also referred to action taken by the professional bodies to ensure that their members did not get involved in tax avoidance schemes which it said had: “also played a part.”354 ICAS referred to the Professional Conduct in Relation to Taxation, which sets standards for tax professionals and states that:
“Members must not create, encourage or promote tax planning arrangements or structures that: i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation; and/or ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.”355
236.Witnesses also referred to an earlier call for evidence, Raising standards in the tax advice market, published in March 2020. This considered whether tax advice should be regulated and suggested that professional regulation might also have a part to play in countering the use of mass-marketed schemes.356 ATT felt that, if the provision of tax services in the UK was subject to professional regulation, many of: “the issues surrounding the promotion and marketing of tax avoidance schemes would not arise—or at least could be countered more swiftly and effectively” and the measures needed: “to be considered in the wider context of the Government’s commitment to raising standards in the tax advice market.”357
237.Mr Jones emphasised the importance of publicity to the deterrent effect of the measures, as these are: “effective only if they are well known.”358 In that regard, ICAS suggested that more might be done to deter potential users from getting involved in schemes in the first place. Ms Cattell said that: “HMRC has some very good communications on its website that are aimed at schemes being promoted to agency workers, contractors and people working for umbrella companies.” She noted that: “unrepresented taxpayers probably do not find that material” and suggested that HMRC could: “try to give this more publicity and write directly to people it thinks are getting involved in these schemes.”359
238.Ms Cattell also suggested that the Government use its rules for public procurement to limit the market for schemes:
“If there were rules in place for public sector procurement that meant public sector bodies could not engage with any agency or umbrella company that was using these disguised remuneration schemes, that would be really helpful in stopping people from getting drawn into them in the first place, which would be very beneficial.”360
239.Some witnesses, while supportive of the proposals in principle, questioned the timing, suggesting that it might have been better to wait until there had been more time to assess the effectiveness of civil sanctions rather than progressing so swiftly to the creation of a criminal offence. Lydia Challen of the Law Society of England and Wales expressed concern about the timing of the measures given that the: “civil measures have not been properly tested yet.”361 She added that the civil sanctions regime is: “quite onerous; its financial penalties can be very substantial. … It seems to us that introducing a strict liability criminal offence, which is what these measures propose, before the existing regime has been tested is a bit disproportionate at this stage.”362
240.When we raised this point with the Financial Secretary, he said that, while civil penalties can work in many cases: “the criminal element elevates it to show how important the issue is and how seriously we take it.” He highlighted the importance of: “the signalling … as well as the process,” adding that the Government: “will carefully monitor the situation and see how it goes.”363
Concerns
Effectiveness: offshore promoters
241.A widely expressed reservation was whether the legislation would be effective against promoters who operate offshore.364 CIOT said that the efficacy of the criminal offence would: “largely depend on how realistic promoters believe the prospect of criminal conviction is.” Adam Craggs of Reynolds Porter Chamberlain LLP (RPC) agreed—unless there were prosecutions: “the deterrent effect, which is generally the purpose of any sort of criminal action, is lessened and weakened.”365
242. ATT told us that, depending on the jurisdiction in which the offshore promoter is based: “it may not always be possible to enforce a criminal penalty without the necessary reciprocal agreements. The criminal offence is therefore unlikely to discourage persistent offshore promoters.”366 In the summary of responses to the consultation the Government said:
“The UK has one of the world’s largest networks of tax treaties and exchange agreements and HMRC regularly uses this to exchange information with other countries’ tax authorities. This includes asking for information to help with investigations into tax avoidance schemes and the companies and agents who promote them.”367
243.However, Ms Challen told us that, in order to prosecute someone who is overseas, her: “understanding is that you would need to extradite that person.” She noted that this would be possible in certain jurisdictions but would be challenging and time-consuming for HMRC. In addition: “one of the principles for extradition is that there has to be dual criminality: it has to be a criminal offence [both] here and in the jurisdiction where the person is based.” This is unlikely in most cases as this is a: “relatively niche procedural offence.”368
244.Mr Craggs told us that, in some of the cases he has seen: “the promoters have deliberately ensured that they are in places like Northern Cyprus [which is not recognised by the UK], so it would be very difficult to extradite them.”369 ICAEW raised concerns that: “If the measure does not prove effective, the impact could be to drive promoters overseas.”370
245.When we raised these concerns with HMRC, Doug Stoneham, Deputy Director, Policy and Technical, in the Counter Avoidance Directorate, recognised that: “it is an area of concern” but added:
“We feel that introducing the new powers in the stop notice measure and the disqualification measure gives us greater scope … to utilise the network of tax treaties …. It is also worth suggesting that the vast majority of avoidance cases, or avoidance schemes coming through, that we see are still related to disguised remuneration schemes, where there will almost always be a UK footprint in place so that the UK company is able to offer employment services as part of that process.”371
246.Given the difficulties inherent in extradition, in particular in the case of territories with which the UK does not have extradition agreements, we remain concerned about how the legislation aimed at dealing with the promotors of tax avoidance schemes can be applied to offshore promoters.
247.We recommend that, during the passage of the Finance Bill, the Government provides greater clarity about how the legislation will be effective against promoters of tax avoidance schemes that are based offshore.
Safeguards
248.Witnesses felt that the draft legislation would add significantly to HMRC powers, but without the additional safeguards that they would expect in relation to criminal sanctions. ATT said that it was: “concerned that safeguards initially designed to support a civil penalty have not been strengthened to take account of the proposed ‘strict liability’ criminal offence, potentially leaving some exposed to a criminal record with little recourse.”372 There was particular concern about the fact that decisions on stop notices were taken wholly internally by HMRC without independent oversight. As CIOT told us, this means that: “something can be a crime on HMRC’s say-so, given that a decision to issue a stop notice will rest entirely with HMRC with no external oversight,” and that: “simply relying on [HMRC’s] goodwill and good sense is not a sufficient safeguard against a (potentially arbitrary) criminal charge.”373
249.We received a number of suggestions about how improved oversight could be built into the legislation. Mr Craggs suggested that: “there should be independent judicial scrutiny and review before one of these notices gets issued, given the potential criminal liability,”374 adding that: “there should be authorisation by the Upper Tribunal and, ideally, by a High Court Judge.”375 Ms Challen suggested that the adoption of a penal notice to a court order would make it: “clear to the recipient that breach of the order will lead to a criminal sanction.”376 ICAEW considered that stop notices: “should be issued by a body that reflects the seriousness of a criminal offence measure. For example, it could be added to the list of responsibilities of HMRC’s Tax Dispute Resolution Board (or the Tax Assurance Commissioners).”377
250.Mr Stoneham told us about the: “safeguards in place within HMRC in relation to issuing a stop notice in the first place”. He added that HMRC: “recognise that there are some concerns here and we are planning to publish a document setting out the various safeguards that are in place.”378 In his letter of 12 December 2023379, the Financial Secretary provided a chart showing the process diagrammatically380.
Figure 1: HMRC Stop notice process
Letter from Nigel Huddleston MP Financial Secretary to the Treasury to Lord Leigh of Hurley Chair of the Economic Affairs Finance Bill Sub Committee (12 December 2023): https://committees.parliament.uk/publications/42711/documents/212323/default/
251.We note that previous Finance Bill Sub-Committees have recommended that, where HMRC is granted additional powers, these should be accompanied by safeguards.381
252.We agree with witnesses that the creation of a criminal offence for the promotors of tax avoidance schemes requires greater safeguards, including effective, independent oversight of the stop notice and subsequent criminal prosecution processes, to be built into the legislation.
Stop notices under appeal to the tax tribunal
253.The policy note issued in July 2023 said that: “failure to comply with a stop notice would be a criminal offence,”382 regardless of any dispute about the effectiveness of the tax scheme. Even if the courts subsequently found that the scheme subject to a stop notice did deliver the promised tax advantage, if the stop notice was not complied with: “the criminal offence would already have been committed.”383
254.ICAEW said that it was concerned that the criminal offence measure: “could result in a person being prosecuted for failing to comply with a stop notice despite that stop notice being struck down by the tribunal.” It suggested two possible remedies: “the criminal offence case is referred to the Crown Prosecution Service when the person does not comply with the stop notice, but if the person wins their appeal against the notice then the case is not taken to court.” Alternatively, the draft legislation could be amended: “to specifically state that a person has a reasonable excuse if they successfully appeal a stop notice.”384
255.In the course of our inquiry, there was an exchange of correspondence between CIOT and HMRC in which HMRC set out how, in practice, this issue could be dealt with at the time of the appeal against the stop notice.385 Commenting on this, Ms Challen explained to us that she understood HMRC to be saying that:
“ … if the tribunal orders that the stop notice should cease to have effect, it can order that with retrospective effect. If it ordered it back to the date on which it was issued, HMRC’s argument appears to be that it would effectively cut off the legs of the criminal offence because there is no stop notice.”386
256.She added that: “That is likely to be a very debatable legal point” and: “could go to the Supreme Court to work out the right answer … It is obviously open to Parliament to legislate for that situation.”387
257.Greater clarity is needed about the position where a stop notice is under appeal, and that appeal may be successful. It cannot be right for someone to be at risk of criminal prosecution as a result of a stop notice that the tribunal then strikes down.
258.We recommend that there be independent oversight, external to HMRC, of the issuing of stop notices leading to criminal prosecution. While there are different ways of approaching this, our preference would be for these to be authorised by the tax tribunal.
259.Criminal proceedings should not be taken in circumstances where a stop notice is under appeal and so may be overturned by the tax tribunal. We therefore recommend that the legislation be amended to put this beyond doubt.
Disqualification of directors—who should be targeted?
260.Another concern was the targeting of the legislation relating to the disqualification of directors would disproportionately and unfairly affect so-called ‘stooge directors’ who, CIOT told us, were: “young, inexperienced or otherwise naïve/unsophisticated individuals … recruited … to front non-compliant umbrella companies.”388
261.Ms Challen agreed that: “there are directors of some of these companies who are …. recruited via advertising on social media and paid an amount of money to operate effectively as a letterbox.” She explained that ‘stooge directors’ may be either naïve or actively misled by the real promoters and that: “these people need protecting under this legislation and perhaps from the effects of the legislation.”389
262.Witnesses were concerned that disqualification as a director might be an unreasonably harsh penalty in such cases. ICAEW said that: “the measure prevents the individual becoming a director of any company, not just one carrying on the promotion of tax avoidance.”390 Ms Challen pointed to the: “significant effect of director disqualification on someone’s wider life”, also noting the absence of any discretion for the court to take account of individual circumstances where an application for disqualification followed the winding up of the relevant company:
“The court must disqualify. That is a wholly exceptional situation in the regime for company director disqualification … It seems to us that the court must have the opportunity to review that at each point, to work out whether the person is unfit to be a director.”391
263.Echoing Ms Challen’s point about the wider impact of disqualification on an individual’s life, CIOT said that HMRC must not: “make examples of people who have been recruited as directors for a fee and who are not really the ones in charge but are just desperate for, or tempted by, the money.”392
264.ICAEW argued for the draft legislation to include a further safeguard: “to protect directors of companies who were not involved personally in tax avoidance. Such a safeguard could allow directors to demonstrate that they had no knowledge of the promoter of the company concerned.”393 CIOT considered that the best approach was for: “HMRC only [to] seek disqualification in cases where they have identified the ‘controlling mind’ behind the company.”394
265.As with the proposed criminal sanction, our witnesses told us that the measure would need to be well publicised for it to be effective as a deterrent. CIOT suggested that HMRC: “explore how the Department for Business and Trade and Companies House can be involved in publicising the measure and educating directors about the risks and responsibilities”. This could be included in the: “information Companies House provides to newly appointed directors,” and the Government: “could consider generating media interest, in conjunction with HMRC and Companies House.” CIOT emphasised that this would need to be done on a regular basis to reach people who are asked to be ‘stooge’ directors in the future.395
266.In response, the Financial Secretary said: “We want to make sure that the right people are targeted here.” He acknowledged that some of these directors may be: “naïve, young individuals who are trapped or taken advantage of, and this can be pretty harsh treatment for them,” but: “anybody taking on these roles has a responsibility to know what they are letting themselves in for.” He did suggest, however, that there may be: “a mechanism for a bit of leniency in the processes and in any criminal sanctions at a later stage.”396
267.We recommend that HMRC do more to publicise the risks of involvement in avoidance schemes to potential and actual users, employing more direct communication channels than just GOV.UK, including social media, as well as traditional media outlets such as advertising, the press, and the broadcast media.
268.We recommend that the legislation on disqualification of directors is amended to afford protection to ‘stooge directors’ by targeting it more narrowly at the ‘controlling minds’ behind the promotion activities. Although there are different ways of doing this, one possibility would be to take into account the extent of a director’s knowledge or involvement in the company’s activities in deciding whether they had a ‘reasonable excuse’ as provided in the legislation.
Disqualification in the Public Interest
269.The draft legislation said that HMRC can apply for a disqualification order if it appears that: “it is expedient in the public interest for such an order to be made.”397 We asked witnesses how the ‘public interest’ should be interpreted in reaching decisions about applying for disqualification of directors.398 CIOT said:
“Presumably this would include cases where a promoter has a track record of not complying with requests or notices from HMRC, cases where a promoter persists in promoting new schemes despite being involved in previous failed schemes and assessing what harm their actions have caused those taxpayers caught up in their scheme(s) and the tax system in general.”399
It added that, in relation to the director disqualification measure: “the level of culpability of the director concerned should also be considered” and noted that, if it appears that the individual recruited as a ‘stooge’: “has little or no knowledge or involvement in the promotion of the scheme, that would tend to suggest that disqualification may not be an appropriate sanction.”400
270.ICAS suggested a few key factors that could be considered when determining whether prosecution is in the public interest:
“ … firstly, persistent involvement in the promotion of schemes and secondly, the adoption of the behaviours outlined in the 2023 consultation and the previous consultation Clamping down on promoters of tax avoidance401 to try to delay or sidestep action from HMRC. Another factor to be considered could be the targeting of lower paid and unrepresented taxpayers by promoters.”402
Itpressed for further steps to be taken: “to prevent lower paid, unrepresented taxpayers from being drawn into these schemes in the first place.” Where promoters have targeted these individuals: “it would be in the public interest for this to be taken into account by prosecuting authorities, when considering whether to bring a charge403.”
271.When deciding whether to apply for a disqualification order in the ‘public interest’, HMRC must assess the extent of the director’s culpability and knowledge of the tax avoidance scheme in question, and whether there is a history of persistent involvement in such schemes, or of a failure to comply with stop notices.
272.We recommend that HMRC publish the criteria it intends to apply when deciding whether disqualification is in the public interest.
Resources
273.Some witnesses had doubts about HMRC’s capacity to take on the extra work involved in applying these new sanctions. Mr Craggs told us that he interacts with HMRC every day and that his personal view is that HMRC: “needs to be given far more resources than it has and is incredibly stretched… In particular in the criminal context where investigations take far more resources than a civil inquiry and cost more.”404
274.Isabel d’Inverno of the Law Society of Scotland agreed: “HMRC is really struggling to do what it is supposed to be doing at the moment. Having to undertake these additional areas, which are quite complex, would be challenging.”405 ICAS was concerned that, without additional resources for HMRC, these measures could lead to the: “further deterioration of core services.”406
275.The Financial Secretary said: “We do … redeploy, enhance and increase resources … additional deployment was announced in the Autumn Statement, as were additional resources in HMRC to focus on compliance and fraud.”407
276.We are concerned that, in the context of its present difficulties, HMRC lacks the capacity to undertake the extra work entailed by these measures to deal with promoters of tax avoidance schemes.
277.We recommend that resourcing within HMRC for these measures be kept under review so that any lack of capacity can be remedied as quickly as possible.
342 HMRC, ‘Tougher consequences for promoters of tax avoidance’ (23 November 2023): https://www.gov.uk/government/publications/dealing-with-promoters-of-tax-avoidance/tougher-consequences-for-promoters-of-tax-avoidance [accessed 2 January 2024]
343 HMRC, ‘Tougher consequences for promoters of tax avoidance’ (18 July 2023): https://www.gov.uk/government/consultations/consultation-tougher-consequences-for-promoters-of-tax-avoidance/tougher-consequences-for-promoters-of-tax-avoidance--3 [accessed 2 January 2024]
348 HMRC, ‘List of tax avoidance schemes subject to a stop notice’ (21 December 2023): https://www.gov.uk/government/publications/named-tax-avoidance-schemes-promoters-enablers-and-suppliers/list-of-tax-avoidance-schemes-subject-to-a-stop-notice [accessed 2 January 2024]
353 HMRC ‘Measuring tax gaps tables’ (22 June 2023): https://www.gov.uk/government/statistics/measuring-tax-gaps-tables [accessed 22 January 2023]
355 ICAEW, Professional conduct in relation to taxation (1 March 2019): https://www.icaew.com/-/media/corporate/files/technical/tax/pcrt/pcrt.ashx?la=en [accessed 2 January 2024]
356 HMRC, ‘Call for evidence: raising standards in the tax advice market’ (19 March 2020): https://www.gov.uk/government/calls-for-evidence/call-for-evidence-raising-standards-in-the-tax-advice-market [accessed 2 January 2024]
367 HMRC, ‘Tougher consequences for promoters of tax avoidance’ (18 July 2023): https://www.gov.uk/government/consultations/consultation-tougher-consequences-for-promoters-of-tax-avoidance/tougher-consequences-for-promoters-of-tax-avoidance--3 [accessed 2 January 2024]
379 Letter from Nigel Huddleston MP Financial Secretary to the Treasury to Lord Leigh of Hurley Chair of the Economic Affairs Finance Bill Sub Committee (12 December 2023): https://committees.parliament.uk/publications/42711/documents/212323/default/
380 See Figure 1.
381 Economic Affairs Committee, New powers for HMRC: fair and proportionate? (4th Report, Session 2019–21, HL Paper 198)
382 HMRC, ‘Tougher Consequences for promoters of tax avoidance’ (23 November 2023): https://www.gov.uk/government/publications/dealing-with-promoters-of-tax-avoidance/tougher-consequences-for-promoters-of-tax-avoidance [accessed 2 January 2024]
383 HMRC, ‘Tougher Consequences for promoters of tax avoidance’ (23 November 2023): https://www.gov.uk/government/publications/dealing-with-promoters-of-tax-avoidance/tougher-consequences-for-promoters-of-tax-avoidance [accessed 2 January 2024]
385 CIOT, ‘Dealing with Promoters of tax avoidance’ (31 October 2023): https://www.tax.org.uk/ref1198 [accessed 2 January 2024]
388 Letter from CIOT to Lord Leigh of Hurley Chair of the Economic Affairs Finance Bill Sub Committee (14 November 2023): https://committees.parliament.uk/publications/42710/documents/212322/default/
392 Letter from CIOT to Lord Leigh of Hurley Chair of the Finance Bill Sub Committee (14 November 2023): https://committees.parliament.uk/publications/42710/documents/212322/default/
397 HMRC, ‘Dealing with promoters of tax avoidance’ (23 November 2023): https://www.gov.uk/government/publications/dealing-with-promoters-of-tax-avoidance [accessed 2 January 2024]
398 Finance Bill Sub-Committee, ‘Finance Bill Sub-Committee launch call for evidence’ (13 September 2023]: https://committees.parliament.uk/committee/230/finance-bill-subcommittee/news/197409/finance-bill-subcommittee-launch-call-for-evidence/ [accessed 02 January 2024]
401 HMRC, ‘Clamping down on promoters of tax avoidance’ (23 March 2021): https://assets.publishing.service.gov.uk/media/605ccc17e90e07260e390b3a/Clamping_down_on_promoters_of_tax_avoidance_-_consultation.pdf [accessed 2 January 2024]