Disclosure of tax avoidance schemes - New powers proposed to investigate failure to disclose

The Pre-Budget Report included an announcement that the Government was planning to consult on a new power to investigate a tax avoidance scheme where there are reasonable grounds to believe that a promoter has failed to comply with its statutory disclosure obligations.

HMRC has identified over 100 entities where there is evidence of involvement in promoting schemes of a type that it would expect to be disclosed - but have not been. Although this represents only a minority of promoters, HMRC currently has no specific powers to enquire into the failure to disclose a scheme.

If HMRC obtains information that indicates that a notifiable scheme may not have been disclosed, the normal practice is for HMRC to approach the promoter and invite explanation as to why the scheme has not been disclosed. Some promoters have provided explanations. Others tell HMRC nothing more that they have systems in place to identify whether or not their products are notifiable and that they are satisfied the particular scheme is not. Such promoters will generally claim to hold Counsel's opinion that the scheme is not notifiable, but do not explain why the scheme is not notifiable.

Promoters have no obligation to provide HMRC with information concerning a scheme that is not notifiable. Even where preliminary enquiries indicate that a scheme is very probably notifiable, HMRC has no powers to investigate the apparent failure to notify directly and contemporaneously. Evidence may be obtained indirectly later through enquiries into tax returns of persons who are found to have used the scheme, but this is a long and uncertain process and at best the delay subverts the purpose of disclosure, namely to obtain information early.

HMRC does have the power to ask the Special Commissioners to apply a penalty to a promoter for failing to notify a scheme. There is an initial penalty of £;5,000 for each failure to disclose, followed by an additional penalty of up to £;600 per day until the failure is remedied. However, HMRC does not believe that penalty proceedings are a satisfactory way of resolving disputes as to whether or not a scheme is notifiable.

The consultation document Ensuring Compliance with the Tax Avoidance Disclosure Regime was published by HMRC on 18 December. A three-stage procedure is proposed, although any one could be used in isolation:

• preliminary enquiries as to whether a scheme is notifiable
• an order that a scheme is notifiable
• requests for further and better particulars about the detail of a scheme.

The purpose of the preliminary enquiries would be only to determine whether a scheme is notifiable, not to obtain information on how the scheme works. However, it would not be sufficient for a promoter simply to say that legal advice has been obtained to that effect or that it falls into one of the hallmark categories; a full explanation would be required.

The main powers that are proposed are disclosure orders issued by the Special Commissioners. They would require HMRC to demonstrate to the Commissioners satisfaction that (1) there are reasonable grounds to believe that a scheme is notifiable or that (2) there is evidence to prove that it is notifiable. There are likely to be higher penalties imposed than those shown above for non-compliance in the second of these situations.

The supplementary particulars provision would enable HMRC to issue a formal notice requiring the promoter to provide specific information or documents. The existing penalties would apply in the event of non-compliance.

Comments on the issues raised in the consultation document are welcomed, with a deadline of 12 March 2007.

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Further information:
Ensuring Compliance with the Tax Avoidance Disclosure Regime

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