Included in the government’s Finance Bill is a section entitled “Avoidance” which deals with new powers being granted to HMRC to combat “promoters of tax avoidance schemes” (POTAS), a term from the Finance Act 2014. It deals with HMRC’s powers under the POTAS regime which enables HMRC to prevent persons promoting tax avoidance arrangements, to require them to maintain acceptable conduct and to monitor them if they don’t comply. Some of these new powers are both sweeping and exacting for anyone who might end up rightly or wrongly on the receiving end of them. They are targeted at the most persistent and determined promoters and enablers of tax avoidance and designed to clamp down on the supply of tax avoidance arrangements. So, can the vast majority of practitioners who are well within the lines and compliant with their codes of conduct just flick over these pages of the Bill?
"...Some of these new powers are both sweeping and exacting..."
Before we can talk about what the new rules are, we need to know where they apply. After all, these new powers may have little relevance outside of an extremely niche group. They may not yet apply to anybody at all, being merely intended to act as a deterrent. So, in order to cover the new rules, we have to go back a few years to the Finance Act 2014, Part 5, s.235(2) to (5), where a “promoter of tax avoidance schemes” is first defined. Here we find that a promoter is a person carrying on a business in the course of which they promote or have promoted a relevant proposal or relevant arrangement. So far so good. But what is a relevant proposal? And how does one promote it?
The definition of a relevant proposal can be found in s.234. In short, a relevant proposal is a proposal for relevant arrangements. That is to say, an arrangement which enables or might be expected to enable any person to obtain, or to expect to obtain, a tax advantage, and obtaining that tax advantage is the main or one of the main benefits that might be expected to arise from the arrangement. A tax advantage here is defined broadly and includes increased relief, repayment, avoidance, reduction, deferral, advancement, or repayment of tax. It also includes any avoidance of an obligation to deduct or account for tax. Arrangement has its normal broad meaning. There is no requirement for the arrangement to be legally enforceable. Any kind of collaboration whatsoever that gives or could be expected to give any kind of tax benefit as its main goal qualifies under FA 2014. And for the sake of completeness, we ought to note that the taxes on which an advantage can be gained for these purposes include all of the major ones: Income Tax, CGT, Corporation Tax, Petroleum Revenue Tax, IHT, SDLT, SDRT, ATED, and National Insurance. It also includes indirect taxes such as VAT in some niche circumstances.
So, we know what a relevant proposal is. The next question is what counts as promoting a relevant proposal. Again, the rules are broad and sweeping, and a person becomes a promoter by one of three actions, covered in s.235(2). Firstly, if a person “is to any extent responsible for the design of the proposed arrangements” they are a promoter. Secondly, if a person “makes a firm approach to another person in relation to the relevant proposal with a view to making the proposal available for implementation” by any person they are a promoter. And thirdly, if a person “makes the relevant proposal available for implementation by other persons” they are a promoter. They are a promoter of a relevant arrangement if they are, at any time, a promoter for a relevant proposal which becomes a relevant arrangement or are responsible for the design, organisation, or management of arrangements which comprise a relevant proposal. A proposal can therefore be bespoke or of general application. If you put together a particular proposal or arrangement in order for a particular person to gain a tax advantage, you may be considered a promoter, whether or not there is a glossy brochure or a packaged product.
The second point is one which bears a little more investigation: what is a ‘firm approach’? In short, it is an approach with regards to a relevant proposal which communicates specific information about the proposal when the proposal has already been “substantially designed”. It must be made with a view towards the approached person entering into transactions which form part of the arrangement underlying the proposal, and the information must include an explanation of what tax advantage can be obtained from the proposed arrangements. So far, so straightforward. However, “substantially designed” must also be defined, and it is, at s.235(5), where it is explained that an arrangement has been substantially designed at any point where a person who wished to obtain a tax advantage might reasonably consider entering into transactions of the nature discussed or not substantially different in nature.
The definition of promoter has been amended by regulation to exempt certain persons from the rules with effect from 17 July 2014. The first of the two exempt categories are companies that provide services in connection with the relevant proposal or relevant arrangements to other companies in the same group but do not provide any such services outside the group during the prior three years. This makes sense when you think of the corporate group on an entity basis. The second category are advisers who did not provide any tax advice in relation to the relevant arrangements or could not reasonably be expected to know that the advice was provided in connection with a relevant proposal or relevant arrangements.
With this information in mind, we can move on with a firmer understanding of the existing framework to which the latest Finance Bill seeks to add. In my next post I’ll look at why further rules regulating this area were deemed necessary, and then after that I’ll examine the nature of the new powers granted to HMRC in the latest Finance Bill.