Will 2021 see HMRC pursue promoters of tax avoidance, as well as higher taxes?

This post is part of our Entrepreneurial team’s regular series of blogs.

“A cardinal principle”. A flash of red, the sweep of a cardinal’s cassock across the page; the invocation of churches, religion, a sense of immutable, unchanging and unquestionably ‘right’ things. It was a pleasant surprise to find some colour in the HMRC document on tax avoidance[1], which was otherwise written in ‘plain English’.

Interestingly, usage of “cardinal” peaked in the 1760s and has now slumped to 1/20th of that peak, with a particularly strong decline in the last hundred years. Because things do change, have changed, and are changing. Tax avoidance was once largely seen as socially acceptable, as opposed to tax evasion. Think about the Duke of Westminster and his gardener in the 1930s, carefully stepping across the schedules of the income tax Act by seeing only clear and crossable cliff edges drawn by the wording (and having the court – the House of Lords – bless the resulting reduction of the Duke’s surtax bill). Now, think about Amazon or Google – or any big enterprise – having to heed not only the explicit wording of the tax legislation, but also its purpose, as well as the “keep off the grass” (no matter how careful each step) signs of public outcry and HMRC’s (and the courts’) direction of travel, along with a host of anti-avoidance (or, more evocatively, “anti-abuse”) rules. There’s a choppy sea now between the cliff edges.

That’s not all that’s changed. Tax avoidance has filtered down. No longer the preserve of dukes and others able to afford bespoke tax advice, tax saving schemes are now often targeted at the mass-market – one very 2020 example being the targeting of NHS staff (many returning to work in the wake of COVID), with the promise by scheme promoters that they can pay less tax on their employment income. In a way that is legal, promoters promise – it’s not tax evasion. “Look”, they say, “here’s a QC opinion saying it works, and it’s got an HMRC number – it’s registered with HMRC.” HMRC states it wants to educate these taxpayers on the risks of becoming involved with such schemes – risks of HMRC challenge: tax costs, penalties, legal costs. But public anger is directed more at the promoters. They are seen as taking advantage of low paid groups: clap for carers, not chase them for tax, not charge them scheme fees and disappear with the profits when HMRC comes knocking.

HMRC has benefitted greatly from the change in attitudes that has seen tax avoidance become less and less acceptable. For many people, avoidance now blurs into evasion; both are ways of paying less than “your fair share” of tax, with the distinction just depending on whether or not you can afford tax advice to find a technical way to step around the rules rather than get caught up in them. HMRC must now take the next step of taking on promoters, especially repeat offenders. Pursuing taxpayers who are dependent on employment income is relatively easy – they generally aren’t going far. Pursuing promoters who take large profits from selling tax avoidance schemes will be more difficult. HMRC is consulting on proposed new legislation that will give it additional information and prosecution powers to deal with promoters. Logically, the lost tax, or the profits of the scheme, could be sought from the promoters.

A change in mindset may also be required by HMRC. The “cardinal” principle that HMRC referred to in the consultation document was that taxpayers alone are responsible for their own tax affairs – hence HMRC wanting to educate them to avoid promoters, and hence HMRC pursuing them and not promoters. However, given the complexity of the tax system today, that cardinal principle has to be under serious strain. Even very many of the most business-savvy individuals struggle to understand its complexities or rationale, and their involvement in their own tax affairs is limited to passing information to their tax advisor. Given that, it is understandable that those who are not involved in business (or in interpreting voluminous and complex tax legislation) in their day job would wish to do the same, and so be attracted by promoters claiming to understand the system and be able to save them tax.

The complexity and rationale of the tax system is a subject for another day (and another HMRC consultation or two!). For now, HMRC is analysing the feedback to its consultation document. Let us hope that HMRC recognises that, just as has happened to date with the evolution of opinion on avoidance, public perceptions of fairness and responsibility in relation to tax continue to change.  If new powers to deal with promoters do come into being, HMRC will have new tools to enable it to adapt and take a stronger stance in actively pursuing promoters and their profits, rather than clinging too firmly to a cardinal principle that may no longer be as hallowed as it once was. 2021 may then herald a pursuit by HMRC of both further tax revenues (due to widely anticipated tax rate rises) and of serial promoters of tax avoidance.

[1]https://www.gov.uk/government/consultations/tackling-promoters-of-tax-avoidance