Article first appeared in White Collar Crime Portal, November 2013
The introduction of the General Anti-Abuse Rule (GAAR), when taken together with the HMRC’s increasingly proactive approach towards aggressive tax avoidance and evasion cases, has shifted boundaries. It is not difficult to see how failed aggressive tax avoidance arrangements can become the subject of a criminal prosecution today when, at the time when the taxpayer entered into them, he did not think he was acting dishonestly.
"… I regard tax evasion and - indeed - aggressive tax avoidance - as morally repugnant. We've increased both the resources and the number of staff working on evasion and avoidance at HMRC…" George Osborne, 2012 Budget Speech.
While tax avoidance and tax evasion are sideshows in national economic terms , public debate (usually ill-informed) about whether something is 'acceptable tax planning', 'avoidance', 'aggressive tax avoidance', or 'evasion' has been growing over the past decade [see "Defining Taxpayer Responsibility: in Support of a General Anti-Avoidance Principle", Judith Freedman  BTR No. 4 at 33], and has exploded in the past year or so.
HMRC and the DPP have persuaded ministers to allow vastly more resources (an extra £917 million over five years from 2010) to be spent pursuing 'aggressive tax avoidance' and 'evasion'. As a result practitioners have seen significant legislative changes and also some significant behavioural changes in interventions by HMRC, in these areas over the past two years.
The challenge that legal practitioners face in trying to advise our clients is in discerning whether something is within or without the tax code, and if the latter, whether pursuing the course suggested would render the client liable to civil penalty or criminal penalty. This is a quite different question from whether something is politically or morally acceptable. We can, and do, advise our clients that lawful but aggressive techniques that reduce their tax bill may expose them both to HMRC challenge and to public opprobrium if that HMRC challenge proceeds to the Tribunal. But we cannot cease to represent our clients because they choose to engage in lawful but aggressive tax avoidance.
What we can do now is advise our clients that tax avoidance is unlawful in certain situations where that was not the case hitherto. HMRC has recently described 'avoidance' as 'bending the rules of the tax system to gain a tax advantage that Parliament never intended' [Measuring Tax Gaps, 2013]. What this means is a challenge to tease out, but it is now essential for us to do it, because since 17 July 2013 it is, incontrovertibly, no longer the case that “…every man is entitled if he can to order his affairs so that the tax attracted under the appropriate Act is less than it otherwise would be…" [per Lord Tomlin in Duke of Westminster v CIR  AC1]. On that date a general anti-avoidance rule ("GAAR") was introduced to prevent the use of 'clever loopholes' to increase reliefs or avoid tax imposts.
The GAAR applies to tax arrangements. 'Tax arrangements' are defined in section 207(1) Finance Act 2013. Would it be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements? If the arrangement is entered into on the advice of an accountant, tax adviser, or independent financial adviser, in response to the query, "do you have anything that might help reduce my tax bill this year?" this will automatically be the case (we will return to this seemingly innocent query later) but there will be many other circumstances in which this is also true.
Once one has concluded that this is a 'tax arrangement', section 207(2)-(6) Finance Act 2013 apply. It is necessary to consider whether the steps suggested are a reasonable course of action in relation to the relevant provisions, that is, one has to compare the intent of the provisions with the intent of the arrangement. Are there contrived or abnormal steps which have the effect of exploiting any shortcomings in the legislation? Can the arrangements reasonably be regarded as a reasonable course of action in the context of the legislation? If the legislation does not anticipate arrangements resulting in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes; or arrangements resulting in deductions or losses of an amount for tax purposes significantly greater than the amount for economic purposes; or arrangements resulting in a claim for the repayment or crediting of tax (including foreign tax) that has not been, and is unlikely to be, paid; then that would indicate that the arrangements contemplated are abusive.
If the arrangements are abusive they are unlawful. It would be hard to see how an adviser's serious concern that an arrangement fell foul of the GAAR could lead to later criminal charges for the taxpayer in circumstances where the arrangement was fully disclosed in the white space on the tax return. It would be a different matter, I suggest, where no mention is made of such an arrangement in the white space on the tax return.
Aggressive tax avoidance that is not abusive is not unlawful, although HMRC would like it to be. However, in the recent past, HMRC has been getting considerably exercised about asymmetric relief, where the taxpayer wins both ways, i.e. either makes a real profit or receives tax relief far in excess of the cash sum invested (which can happen with a variety of investment opportunities including many BPRA investments). HMRC get particularly annoyed about investment opportunities where the leveraged element is not actually invested in the business opportunity concerned (as is the case with many film investment opportunities). The reality is that HMRC are often right to look suspiciously at dramatically tax efficient planning or investment ideas, for a number of reasons.
First, there may be a fraud at the heart of the idea, as with the Landscape of Lives tax film scheme case. It will usually be the case that the investors will be unaware that there is any fraud here.
Secondly, promoters or investors may have been so cynical in their approach to a planned 'business' that they never expect or intend it to make a taxable profit- in which case any claim to tax relief should fail as there is no intention to trade with a view to profit.
Thirdly, even where neither the first or second reason applies, the implementation of the scheme may so poor as to render the scheme ineffective, in which case there would not be any evasion, but the aggressive avoidance would fail.
HMRC has recently described evasion as 'illegal activity, where registered individuals or businesses deliberately omit, conceal, or misrepresent information in order to reduce their tax liabilities'[Measuring Tax Gaps, 2013]. 'Criminal attacks' (smuggling and MTIC fraud) and the 'hidden economy' (ghosts and moonlighters) are separated out from 'evasion' in this nomenclature.
These three terms, however, encompass at least nine different offences:
- Cheating the Revenue (contrary to the common law)
- Fraudulent Evasion of Income Tax (section 144 Finance Act 2000)
- False Accounting (section 17 Theft Act 1968)
- False Statement for VAT Purposes (section 72(3) Value Added Tax Act 1994 ("VATA"))
- Fraudulent Evasion of VAT (section 72 (1) VATA)
- Conduct amounting to an offence (section 72 (8) VATA)
- Evasion of Excise Duty (section 170 Customs and Excise Management Act 1979 ("CEMA"))
- Improper importation of Goods (section 50 CEMA)
- Taking Steps with a view to Fraudulently Evading Excise Duty (section 170B CEMA)
I will touch only the first of these here. HMRC and the CPS are both fond of 'cheat'. This is probably because it is easier to get a conviction than with the statutory offences. All the prosecution have to prove is that the defendant had dishonest intent to defraud the revenue. The defendant does not have to have succeeded in doing so, and they do not have to have committed an actual act of deception (see R v Mavji (1987)). In may also be in part because there is no limit on the sentence that can be given for it. In R v Ravjani (2012), a missing trader intracommunity fraud ("MTIC") case, the defendant was charged with, and convicted of, cheat and received a sentence of 17 years. If he had been charged with a statutory offence under section 72 VATA 1994 the maximum sentence would have been 7 years.
It is often said that if a tax efficient investment seems too good to be true, then it probably is. But this will not usually be because there is a fraud at the heart of the idea, the first of my reasons for HMRC to review that matter given above. It is more likely to be about whether the taxpayer is really looking at it as a tax efficient business opportunity, or whether they are in fact looking at it as a tax planning scheme. Take the innocent-sounding question the taxpayer asked above, "do you have anything that might help reduce my tax bill this year?" HMRC might conclude that the taxpayer is explicitly interested in reducing their tax bill; that the taxpayer was accordingly interested in 'loss schemes'; that when the taxpayer thereafter entered into marketed tax efficient business opportunities (that, as these things tend to do, ultimately generated large losses which the taxpayer sought to offset against their income) the taxpayer was not trading with a view to profit; and that when the taxpayer claimed a trading loss on their tax return they were not telling the truth; and that the taxpayer was accordingly attempting to cheat the public revenue.
This is pushing the boundaries out a long way, but the money is there for HMRC to push the boundaries out, and this is a real example of the kind of approach that HMRC is now taking. They are aggressively intervening in the businesses of purveyors of tax efficient investments, and trawling documents for just these sorts of exchanges. Ten years ago there was no possibility that they would have considered doing this. Five years ago it would have been very unusual save for situations where there was an outright fraud at the heart of the investment opportunity. It would have been dealt with as a COP8 - HMRC simply didn’t have the resources for anything more targeted. Now, however, they do; and so over and above any refusal by HMRC to accept the tax consequences of a leveraged investment opportunity, if there is evidence that the taxpayer has been looking at it as a 'scheme', then the taxpayer runs the risk of HMRC alleging cheat, and having a very uncomfortable interview under caution.
My conclusion, then, is this. Some tax avoidance is now unlawful- although without dishonest intent it still does not render a taxpayer liable to criminal penalties. What constitutes 'tax evasion' has not changed. Dishonesty is still the key element. What has changed here is the funding available to HMRC; the likelihood of HMRC challenging a taxpayer they consider might have been dishonest (as opposed to waiting until they are certain); the chance of HMRC choosing to send the file to the CPS rather than offering COP9 if they conclude a taxpayer has been dishonest; and the chance of the CPS deciding that a prosecution should ensue if they agree.
 In 2011/12 the Government spent £695bn. Net tax receipts were £543bn and current receipts were £569bn. Taking the latter figure, expenditure exceeded income by some £126bn. On 11 October 2013, HMRC published "Measuring Tax Gaps 2013" which stated that the 'tax gap' for 2011/12 was £35bn. Tax evasion was estimated at £5.1bn, or 4% of the spending gap, or 0.7% of expenditure; tax avoidance was estimated at £4.0bn, or 3.2% of the spending gap, or 0.6% of expenditure; criminal attacks as £4.7bn, or 3.7% of the spending gap, or 0.7% of expenditure; the hidden economy as £5.4bn, or 4.3% of the spending gap, or 0.8% of expenditure. Despite all the political rhetoric (from all political parties) about 'austerity', the present administration has been running a deficit against revenues unparalleled in peacetime. This would still be the case, even if there was no avoidance or evasion at all, and everyone in the UK accepted HMRC's calculations of the tax due. In a magical world in which every penny of the whole tax gap was not only acknowledged to be due, but also was collected, the deficit would still have been £91bn for 2011/12.
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