House of Commons Library

Tax avoidance: recent developments

Published Wednesday, April 26, 2017

In recent years concerns as to the scale of mass marketed tax avoidance schemes have led to three major initiatives to undermine this market, and encourage a sea change in attitudes, both in the accountancy industry and its customers: the Disclosure of Tax Avoidance Schemes regime (DOTAS); the General Anti-Abuse Rule (GAAR); and the system of follower notices & accelerated payments. Following these initiatives the Government has continued to introduce provisions to tackle both tax avoidance and tax evasion, including measures in the Spring Budget 2017. This note provides an introduction to the issue of tax avoidance, looking in detail at the development of follower notices and accelerated payments, before discussing the current Government’s approach.

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In recent years tax avoidance has been the subject of considerable public concern, although there is no statutory definition of what tax avoidance consists of. Tax avoidance is to be distinguished from tax evasion, where someone acts against the law. By contrast tax avoidance is compliant with the law, though aggressive or abusive avoidance, as opposed to simple tax planning, will seek to comply with the letter of the law, but to subvert its purpose. As Treasury Minister David Gauke has observed, there is a distinction between tax planning and tax avoidance, “although there will be occasions when the line is a little blurred.”[1]

In recent years HM Revenue & Customs has produced estimates of the tax gap - the difference between tax that is actually collected and that which is ‘theoretically due’:

  • The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law) ... An equivalent way of defining the tax gap is the tax that is lost through non-payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attack.[2]

In October 2016 HMRC published revised estimates, which put the total tax gap at £36 billion for 2014/15.[3]  HMRC’s tax gap analysis also provides a breakdown of the gap by reference to the different types of taxpayer behaviour that lead to a shortfall in receipts, though as HMRC note, the “estimates give a broad indication of behaviours and are calculated using assumptions and judgment.” This analysis suggests that the annual cost of tax avoidance in 2014/15 was £2.2 billion.[4]

UK tax law is specifically targeted rather than purposive: in tackling the exploitation of loopholes in the law, governments have legislated against individual avoidance schemes as and when these have come to light.  Often the response to this legislation has been the creation of new schemes to circumvent the law, which in turn has seen further legislation – an ‘arms race’ between the revenue authorities and Parliamentary counsel on one side, and on the other, taxpayers aided and abetted by the legal profession.  In recent years concerns as to the scale of mass marketed tax avoidance schemes have led to three major initiatives to undermine this market, and encourage a sea change in attitudes, both in the accountancy industry and its customers: the Disclosure of Tax Avoidance Schemes regime (DOTAS); the General Anti-Abuse Rule (GAAR); and the system of follower notices & accelerated payments.

Over the past twenty years many commentators have suggested having legislation to counter tax avoidance in general: by providing certainty for both sides as to the tax consequences of any transaction, a ‘general anti-avoidance rule’ might dissuade the most egregious efforts to avoid tax, encourage taxpayers and legal counsel to redirect their energies to more productive activities and allow the authorities to simplify the law without fear of it being systematically undermined. In the late 1990s the Labour Government consulted on an anti-avoidance rule before deciding against it. Concerns over the scale of tax avoidance rekindled interest in the idea, though in its 2004 Budget the Labour Government announced a new ‘disclosure regime’ as an alternative, whereby tax avoidance schemes would be required to be disclosed to the revenue departments.[5]  Under ‘DOTAS’ accountants, financial advisers and other 'promoters' selling tax avoidance schemes are required to notify the tax authorities of any new scheme they are to offer to taxpayers. Each scheme is given a reference number which, in turn, taxpayers have to use in their tax return, if they have used it. HMRC have used this information to track the take-up of avoidance schemes, challenge individual schemes in the courts if HMRC have assessed that they do not work in the way the promoter claims, or to address unintended loopholes in the law that some schemes seek to exploit.

In its first Budget in June 2010 the Coalition Government announced it would consult on a general anti-avoidance rule, and commissioned a study group, led by Graham Aaronson QC, to consider the case. In his report, published in 2011, Mr Aaronson recommended a narrowly focused rule targeted at ‘abusive arrangements’ only, and following a consultation exercise, in December 2012 the Government announced the introduction of a General Anti-Abuse Rule (GAAR) in 2013.[6]

Finally, in 2014 the Coalition Government announced the introduction of a system of follower notices & accelerated payments.[7]  Broadly speaking, in cases where someone is in dispute over their assessment, HMRC may issue a ‘follower notice’ if this arises from the use of an avoidance scheme that is either the same or has similar arrangements to one that HMRC has successfully challenged in court. Taxpayers must settle their affairs, or pay a penalty. HMRC may also issue a notice for an accelerated payment, where the taxpayer is required to pay the disputed sum ‘up front’, before their assessment had been definitively decided – either by the taxpayer agreeing HMRC’s assessment, or the courts making a final judgement in their case. Taxpayers do not have the right to appeal HMRC’s decision to the Tribunal. 

Controversially, the Government announced these arrangements would apply to outstanding disputes for past tax years, and that HMRC would also issue demands for accelerated payments in relation to avoidance schemes notified under ‘DOTAS’. Despite concerns as the ‘retrospective’ nature of the new regime, the new rules were debated and agreed, with only minor amendments, in July 2014.[8]

Following these initiatives the Government has continued to introduce provisions to tackle both tax avoidance and tax evasion, including measures in the Spring Budget 2017.[9]  This note provides an introduction to the issue of tax avoidance, looking in detail at the development of follower notices and accelerated payments, before discussing the current Government’s approach. Two other notes look at the Labour Government’s assessment of a general anti-avoidance rule and the establishment of DOTAS,[10] and the Coalition Government’s decision to introduce a GAAR.[11]

Notes : 

[1]     HC Deb 12 July 2010 c706

[2]     Measuring Tax Gaps 2013, October 2013 p6. The department’s work on the tax gap is collated on Gov.uk

[3]     HMRC press notice, UK tax gap falls to 6.5% as HMRC targets the dishonest minority, 20 October 2016

[4]     Measuring Tax Gaps 2016, October 2016 p11

[5]     Budget 2004, HC 301, March 2004, p202. Guidance on DOTAS is on Gov.uk    

[6]     Autumn Statement, Cm 8480 December 2012 para 1.178. Guidance on the GAAR is on Gov.uk

[7]     Budget 2014, HC 1104, March 2014 para 1.198-201

[8]     The legislation now forms part 4 (ss199-233) of the Finance Act 2014. Guidance on follower notices & accelerated payments is on Gov.uk.

[9]     Spring Budget 2017, HC 1025, March 2017 para 3.42-49. For an overview of recent developments see, Chartered Institute of Taxation, The state of play on tax evasion and avoidance, 2 March 2017

[10]    Tax avoidance: a General Anti-Avoidance Rule – background history (1990-2010), CBP2956, 13 April 2016

[11]    Tax avoidance : a General Anti-Abuse Rule, CBP6265, 14 April 2017

Commons Briefing papers CBP-7948

Author: Antony Seely

Topic: Taxation

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