Will the UK government's latest measures targeting promoters of tax avoidance and fraud be effective?

In this article, which is based on an article published in Issue 4 2024 of the British Tax Review, Adam Craggs considers whether the UK government's latest measures targeting promoters of tax avoidance schemes and tax fraud will be effective.

Introduction

At the Spring Budget 2023, the government announced additional measures, building on existing measures, to further target promoters of tax avoidance schemes and tackle tax fraud. Promoters of tax avoidance schemes are defined as persons who carry on a business as a promoter in relation to arrangements, or proposals for arrangements that enable, or might be expected to enable, any person to obtain a tax advantage, and the main benefit, or one of the main benefits, that might be expected to arise from the arrangements is the obtaining of that advantage.¹ The government consulted on the new measures and published draft legislation on 18 July 2023.² The measures, contained within sections 32 to 34 of the Finance Act 2024 (FA 2024), received Royal Assent on 22 February 2024. They create a new, strict liability criminal offence, provide additional powers for His Majesty’s Revenue and Customs (HMRC) and introduce an increased maximum custodial sentence for those convicted of tax fraud.

The success, or otherwise, of these measures can of course only be determined after sufficient time has elapsed to allow an in-depth analysis of the practical effects of the measures. However, there is reason to consider that these measures may not achieve their aim. This article will review the potential effectiveness of the new measures against the backdrop of concerns raised by various professional bodies such as the Chartered Institute of Taxation (CIOT) and the Association of Taxation Technicians (ATT).

What do these measures seek to achieve?

At their heart, these measures seek to target promoters of tax avoidance schemes to deter individuals from devising, selling or promoting such schemes as well as deter taxpayers from participating in tax avoidance schemes. The new measures are intended to build on and complement existing measures aimed at dealing with promoters of tax avoidance schemes.³ For example, it is recognised that HMRC have experienced some difficulty in dealing with a hard-core sub-group of promoters who have not been deterred from their activities and have sought ways to circumvent the existing measures.⁴ This latest set of measures represents an attempt by the government to strengthen its approach to dealing with promoters of tax avoidance schemes.

There appears to be general support for these measures amongst professional bodies. Both the ATT and CIOT have confirmed their support for government measures aimed at those who continue to devise, promote or sell tax avoidance schemes.⁵ However, both organisations have cautioned against the manner of implementation of these measures and suggested various changes to improve their effectiveness. The ATT and CIOT have expressed concerns that there should be more safeguarding of individuals that could now be exposed to a criminal record as a result of the “strict liability” criminal offence.⁶ These measures formed part of an enquiry undertaken by the House of Lords during the Bill stage and the House of Lords, Economic Affairs Committee (HLEAC) published its report on the draft Finance Bill 2023–24 (which included the measures relating to promoters of tax avoidance and sentencing for tax fraud) on 1 February 2024.⁷ In its report, the HLEAC agreed with many of the concerns expressed by professional bodies such as the CIOT and ATT and other witnesses (including the writer), who had given evidence before it on the practical implementation of the measures and their overall effectiveness. The government acknowledged and accepted many of the recommendations made by the HLEAC in its report, but rejected others, such as recommendations intended to provide greater clarity on the practical implementation of the measures including, for example, the suggestion to provide protection to “stooge directors”.⁸ This is discussed further below.

New criminal offence for failing to comply with a stop notice

Section 34 FA 2024, inserted a new section 277A into the Finance Act 2014 (FA 2014), which deals with promoters of tax avoidance schemes — referred to as the Promoters of Tax Avoidance Schemes (POTAS) rules. Under section 277A FA 2014, promoters that fail to comply with a prescribed stop notice obligation may be guilty of a criminal offence.

Stop notices were introduced in the Finance Act 2021 (FA 2021) and took effect from 10 June 2021.⁹ Under those measures, an authorised officer of HMRC can issue a stop notice where they suspect that the recipient (R) promotes, or has promoted, arrangements of a description specified in the notice or proposals for such arrangements.10 A stop notice immediately prohibits R, and the entities to whom R must give the notice, from promoting the tax avoidance scheme specified in the notice (or schemes with similar form or effect).¹¹ Further, R must provide HMRC with regular returns of information.¹² HMRC can publish details of the promoter and the scheme in order to make people aware of both the scheme itself and of the fact that it is under challenge by HMRC.¹³ Prior to the changes introduced by section 34 FA 2024, failure to comply with the POTAS rules could potentially result in civil consequences. Specifically, in the context of stop notices, R could be liable to a penalty for a failure to comply with the notice.¹⁴ The penalty could be up to a maximum of £100,000 in respect of one or more failures relating to a particular stop notice and £5,000 for each person to whom the arrangements (or proposals for such arrangements) of a description specified in the stop notice were promoted.¹⁵ 

Under section 277A FA 2014, a new criminal offence is introduced where R, without reasonable excuse, continues to promote a scheme or fails to provide a copy of the stop notice to another person (P) and P continues to promote the scheme. There is no statutory definition of what constitutes a reasonable excuse, but section 277A(3) FA 2014 prescribes three circumstances that do not constitute a reasonable excuse: (i) insufficiency of funds (unless attributable to events outside of R’s control); (ii) reliance on others (unless R took reasonable care to avoid the failure); and (iii) if R is a monitored promoter, reliance on legal advice where either the advice was not based on a full and accurate description of the facts, or the conclusions in the advice that R relied on were unreasonable.¹⁶ In addition, where R had a reasonable excuse for a failure, R must remedy that failure without unreasonable delay after the excuse ends.¹⁷ There are parallels between these reasonable excuse provisions and the way 'reasonable excuse' has been applied in other parts of the tax code, for example, in the context of penalties imposed by HMRC for failure to notify a charge to tax,¹⁸ or for late payment of tax.¹⁹ 

Conviction for failing to comply with a stop notice can result in an unlimited fine and or a custodial sentence of up to two years and could also lead to director disqualification.²⁰ The offence applies to any failures which take place on or after 22 February 2024 (the date the Finance Bill 2024 received Royal Assent) regardless of when the stop notice was issued.

Safeguards—no independent scrutiny before issuance of a stop notice

A criminal conviction represents a severe sanction for anyone subject to a stop notice. Whilst it is no doubt hoped that the possibility of a criminal conviction for those who do not comply with a stop notice will have a greater deterrent effect, a stop notice that can have serious criminal consequences for the recipient should not be issued lightly and should be subject to appropriate safeguards.

Despite concerns raised by bodies such as the CIOT,²¹ and the HLEAC,²² arguably, insufficient safeguards are in place to protect the rights and interests of those who receive such a notice. In particular, there is no independent scrutiny of whether it is appropriate, in all the circumstances, for HMRC to issue a stop notice.

In its response to the HLEAC, HM Treasury has published details of certain safeguards which are in place in relation to the issuing of stop notices.²³ For example, a stop notice can only be issued by an Authorised Officer (AO). An AO is a senior civil servant who, although within HMRC, is outside the Counter-Avoidance business unit of HMRC and therefore is independent of the investigation into the avoidance scheme in question. There is also a right to appeal the issue of a stop notice (considered further below). In addition, although HMRC will identify and investigate cases, it is the independent prosecuting authorities that ultimately decide whether to pursue a criminal prosecution.²⁴ 

Whether the AO is sufficiently independent to enable them to be able to provide independent and objective oversight and determine whether the conditions for issuing a stop notice are met, particularly in circumstances where R could be subject to criminal sanctions, is debatable. It has been suggested by the CIOT that it would have been preferable if the issuance of a stop notice was subject to judicial scrutiny by an independent tribunal or court, such as the Upper Tribunal (Tax and Chancery Chamber).²⁵ Regrettably, the government chose to ignore this suggestion.

Criminal liability possible even if the scheme is the subject of civil challenge

A criminal sanction for failing to comply with a stop notice can be imposed notwithstanding that there may be ongoing litigation relating to the stop notice.²⁶ This could be litigation concerning the effectiveness of the scheme or where R applies to HMRC to withdraw the stop notice and the request is denied, following which R appeals HMRC’s refusal to the First-tier Tax Tribunal (FTT).²⁷ The effect of the new measure is that it ignores any related civil litigation with the consequence that R can be prosecuted and convicted of a criminal offence, notwithstanding that there is on-going civil litigation where a tribunal/court may ultimately determine that the scheme is effective or where R is pursuing litigation to have the stop notice withdrawn.²⁸ Anyone involved in tax related litigation will be aware that such litigation may be ongoing for a prolonged period of time before the dispute is finally determined.

This measure creates a significant degree of uncertainty. It might have been preferable for any criminal proceedings associated with a stop notice not to be commenced, or at least be stayed, until any related civil litigation is finally determined. This was indeed the recommendation of the HLEAC.²⁹ Somewhat surprisingly, the government declined to accept this recommendation, which would have ensured that criminal proceedings would not be commenced where there was related on-going civil litigation.

HMRC have suggested, in correspondence with the CIOT, that the tribunal/court in the civil proceedings could order a stop notice to cease having effect with retrospective effect to the date it was issued, the implication being that such an order would also prevent any criminal sanctions because there would never have been a stop notice to which criminal sanctions could be attached.³⁰ However, whether such an order would have this effect is uncertain and the legislation is silent on the point. Ultimately, the position may have to be tested before the courts which may mean the incurring of significant professional fees for those involved. The current lack of clarity of the interaction between the civil consequences and criminal consequences of failing to comply with a stop notice is unsatisfactory. The Institute of Chartered Accountants in England and Wales has suggested two options to deal with this issue.³¹ First, the Crown Prosecution Service could delay taking a case to court where a stop notice has been appealed. Secondly, the legislation could have been amended to create a new 'reasonable excuse' defence in circumstances where R has successfully appealed a stop notice.³² It would have been helpful if the interaction between criminal and civil action had been provided for in the legislation, in line with the recommendation of the HLEAC. That would have removed the uncertainty and put the matter beyond doubt.

Will the new powers be effective in deterring offshore promoters?

One of the biggest challenges facing HMRC in its fight against the tax avoidance industry is promoters of tax avoidance schemes who are based offshore. In theory, international treaties could be used by HMRC in respect of such promoters but there are likely to be practical difficulties for HMRC, not least because some of the jurisdictions in which promoters operate do not have appropriate treaties with the UK. There must therefore be some doubt as to whether the new measures will act as an effective deterrent to promoters based in such jurisdictions. Even in those jurisdictions where a treaty with the UK is in place, in practice, the exchange of information between HMRC and the relevant authority will inevitably take time and scarce HMRC resources.

The measures may also be ineffective in relation to offshore promoters because prosecution of such promoters would require extradition proceedings against the individuals concerned. Such proceedings can be challenging and time-consuming for HMRC. In order to extradite a person from another jurisdiction to stand trial in the UK, there normally has to be dual criminality, meaning that the relevant criminal act has to be an offence both in the UK and in the jurisdiction from which the person is to be extradited. This may create an insurmountable difficulty for HMRC in respect of many jurisdictions given the particular nature of the offence of failing to comply with a stop notice. If offshore promoters cannot be easily prosecuted for the new offence, this will significantly reduce the deterrent effect in respect of such promoters. Indeed, the new measures may even encourage promoters who are currently based in the UK to relocate to jurisdictions where it would be difficult, if not impossible, for them to be extradited to the UK to stand trial.

Will the new powers lead to successful prosecutions?

If the government’s stated intention of deterring individuals from promoting tax avoidance schemes is to be realised, it will be necessary for successful prosecutions to be brought using the new powers. If HMRC fail to instigate successful prosecutions, or they are brought too slowly then, as with the Criminal Finances Act 2017,³³ the deterrent effect of these measures will lessen overtime. Given HMRC’s limited resources, there must be a real risk that few, if any, prosecutions will be brought under the new powers in the short to medium term. For example, evidence suggests that HMRC’s success rate at securing prosecutions in relation to tax fraud has been declining.³⁴ In relation to stop notices, HMRC have said they intend to use such notices in the most serious cases where HMRC considers it needs to send a strong deterrent message, or a civil investigation would be insufficient. Given their finite resources, HMRC are likely to focus on those promoters who are prolific or are involved in promoting schemes which involve large sums. However, if these measures are to have the desired deterrent effect, HMRC will have to bring successful prosecutions sooner, rather than later, and cannot afford to wait too long.

HMRC’s power to apply for directors to be disqualified

Section 33 and Schedule 13 FA 2024,³⁵ permit HMRC to apply for a director’s disqualification order against a person under the Company Directors Disqualification Act 1986 (CDDA 1986) where that person is connected with the promotion of a tax avoidance scheme.³⁶ Under these provisions, HMRC may apply directly to a court which has jurisdiction for the purposes of the Insolvency Act 1986, such as the High Court, to disqualify directors of a company where it considers that it is 'expedient in the public interest' for such an order to be made in one of two circumstances: (i) following an order winding up the relevant company; or (ii) where tax avoidance is being promoted, in both cases, including in relation to individuals who control or exercise influence over such a company (so-called 'shadow directors').³⁷ The court must make a disqualification order (it has no discretion) in applications following a winding up order. Where a disqualification order is sought in relation to the promotion of a tax avoidance scheme, the court has a discretion in deciding whether to make the order. The maximum period of disqualification is 15 years.³⁸ Prior to the enactment of these provisions, HMRC could not apply to the court itself for a director’s disqualification order and had to refer a case to the Insolvency Service if it wished to have a person disqualified from being a director.

What test will HMRC apply before seeking disqualification?

Whilst the government considers it appropriate for directors who have been found to promote tax avoidance schemes to be disqualified from being a company director, such a significant step should not be undertaken lightly. Section 8ZG CDDA 1986, provides that HMRC may apply for a director to be disqualified if it is 'expedient in the public interest' to do so. The legislation does not expand on the factors that should be considered when determining whether this test is satisfied. The HLEAC recommended that, when deciding whether to make such an application, HMRC should assess the extent of the director’s culpability and knowledge of the tax avoidance scheme in question, and whether there is history of persistent involvement in such schemes, or a failure to comply with stop notices.³⁹ The HLEAC also recommended that HMRC publish the criteria it intends to apply when deciding whether disqualification is in the public interest.⁴⁰ 

In its response to the HLEAC, the government declined the opportunity to set out in legislation the factors that would be considered by HMRC when deciding whether to seek a director’s disqualification order, stating that it was important not to constrain the way the provision operates.⁴¹ It explained that HMRC will look at a wide range of factors which may include, for example, the actions and behaviours of individuals and their failure to discharge their duties and obligations, evidence of any failures and non-compliance with obligations under the government’s anti-avoidance legislation, previous non-compliant behaviour, compliance or enforcement action taken by HMRC or information received from taxpayers and other government departments.⁴² It also said that HMRC will work with the Insolvency Service/the Department for Business and Trade on how best to make further information about this new power available to the public.⁴³ At the time of writing, further information has not been published on the circumstances in which HMRC will exercise this new power.

Whilst it might be argued that HMRC, when deciding whether to make an application to disqualify a director connected to the promotion of a tax avoidance scheme, has too much discretion, some comfort can be taken from the fact that an application for a director’s disqualification order must be determined by a court, which provides a degree of independent judicial scrutiny of HMRC when exercising its broad discretion. However, as the legislation has been drafted in wide terms, it remains to be seen how the courts will treat such applications from HMRC. Again, as in the context of stop notices, there would be greater certainty if the specific factors to be considered by HMRC, when exercising its discretion in relation to this provision, had been set out in the legislation itself or in published guidance.

No protective measures for 'stooge' directors

The new measure does not afford any protection for 'stooge' directors who are, on occasion, recruited to front companies which are involved in the promotion of tax avoidance schemes. Such directors are often young people who have been targeted because they are naïve and unsophisticated individuals. The government has chosen not to include any specific protection for such directors. It has stated that the measure needs to apply to those willing to act as stooge directors in order to discourage them from becoming involved with tax promoters in the first place. In the view of the government, there are already sufficient safeguards in place to protect such individuals.⁴⁴ For example, the government considers that there is relevant information and guidance already available on gov.uk which supports directors in understanding their duties and obligations. Be that as it may, the fact remains that some individuals who may have become involved unwittingly with a tax promoter and had no real involvement in the decision-making process of the company concerned, may nonetheless find themselves having to respond to an application by HMRC for a director’s disqualification order.

The increase in the maximum sentence for tax fraud

Section 32 FA 2024, makes amendments to various provisions in the tax code to increase the maximum sentence for tax fraud from seven to 14 years. This change applies to, for example, offences relating to the fraudulent evasion of income tax in the Taxes Management Act 1970⁴⁵ and the fraudulent evasion of plastic packaging tax in the FA 2021.⁴⁶ This increase in the maximum sentence for certain tax fraud offences demonstrates the government’s continued focus on tax fraud and is indicative of the hard line it is taking in relation to those who commit tax fraud.⁴⁷ 

As with the other measures discussed above, whether this increase in the maximum sentence for certain tax fraud will have the desired deterrent effect will largely be dependent on the length of sentence the courts impose in practice on those convicted of tax fraud offences. The Crown Prosecution Service (at HMRC’s behest) normally rely on the common law offence of cheating the public revenue, when prosecuting individuals for tax evasion. Those convicted of this offence can be subjected to an unlimited fine and/or life imprisonment. This does raise the question of whether this increase in the maximum sentence for certain statutory tax evasion offences was necessary. In the writer’s experience, the criminal courts rarely impose a prison sentence of greater than seven years for a tax fraud offence, even in those cases where a defendant has been successfully prosecuted for the common law offence of cheating the public revenue. With regard to the new maximum sentence of 14 years, the courts will require guidance on when this maximum sentence should be applied. In the absence of such guidance, the government may find the courts are reluctant to impose this maximum sentence.

Conclusion

If these new measures are to be effective and have the desired effect, HMRC will need to utilise its new powers and this will require a willingness on the part of senior management within HMRC and, crucially, HMRC will have to be provided with sufficient funding to enable it to properly discharge its public functions.

It is regrettable that the government has chosen not to incorporate some of the reasonable and proportionate recommendations made by various interested bodies which would have improved the effectiveness of the measures whilst at the same time ensuring a more certain legal framework with appropriate safeguards.

Footnotes

¹ Finance Act 2014 (FA 2014) ss.234–236.
² HMRC, Avoidance: power of HMRC to apply for disqualification order: draft clauses (Issue date of draft clauses 18 July 2023), https://www.gov.uk/government/publications/dealing-with-promoters-of-tax-avoidance/draft-legislation-avoidance-accessible-version [Accessed 11 June 2024].
³ HMRC, Avoidance: power of HMRC to apply for disqualification order: draft clauses (Issue date of draft clauses 18 July 2023).
⁴ House of Lords, 2nd Report of Session 2023–2024, Research and development tax relief, HMRC data requirements, promoters of tax avoidance and sentencing for tax fraud (Economic Affairs Committee, 1 February 2024), HL Paper 52 (Session 2023–24).
⁵ Letter of 20 June 2023 from the ATT to HMRC; Letter of 12 September 2023 from the CIOT to HMRC.
⁶ Letter of 20 June 2023 from the ATT to HMRC; letter of 12 September 2023 from the CIOT to HMRC.
⁷ House of Lords, 2nd Report of Session 2023–2024, Research and development tax relief, HMRC data requirements, promoters of tax avoidance and sentencing for tax fraud (Economic Affairs Committee, 1 February 2024) HL Paper 52 (Session 2023–24).
⁸ Letter of 3 May 2024 from HM Treasury to the Economic Affairs Finance Bill Sub Committee, https://committees.parliament.uk/publications/44623/documents/221650/default/.
⁹ Finance Act 2021 (FA 2021) s.121.
¹⁰ FA 2014 s.236A.
¹¹ FA 2014 s.236B.
¹² FA 2014 s.236C; the return must contain the following information: the number of relevant clients of R in the relevant period to which the return relates, the client’s name and address, the unique taxpayer reference number (if any) allocated to the client by HMRC, the client’s national insurance number (if any) and any name by which any such arrangements or proposal is known or is marketed.
¹³ FA 2014 s.236H.
¹⁴ FA 2014 s.274 and Sch.35.
¹⁵ FA 2014 Sch.35.
¹⁶ FA 2014 s.277A(3).
¹⁷ FA 2014 s.277A(3)(c).
¹⁸ Finance Act 2008 Sch.41.
¹⁹ Finance Act 2009 Sch.56.
²⁰ FA 2014 s.280; Finance Act 2024 (FA 2024) Sch.13.
²¹ Letter of 12 September from the CIOT to HMRC.
²² House of Lords, 2nd Report of Session 2023–2024, Research and development tax relief, HMRC data requirements, promoters of tax avoidance and sentencing for tax fraud (Economic Affairs Committee, 1 February 2024) HL Paper 52 (Session 2023–24).
²³ Letter of 3 May 2024 from HM Treasury to the Economic Affairs Finance Bill Sub-Committee.
²⁴ The Crown Prosecution Service in England and Wales and the Procurator Fiscal Service in Scotland.
²⁵ Letter of 12 September 2023 from the CIOT to HMRC.
²⁶ FA 2014 s.280.
²⁷ FA 2014 ss.236D, 236E.
²⁸ FA 2014 ss.236D, 236E.
²⁹ House of Lords, 2nd Report of Session 2023–2024, Research and development tax relief, HMRC data requirements, promoters of tax avoidance and sentencing for tax fraud (Economic Affairs Committee, 1 February 2024) HL Paper 52 (Session 2023–24).
³⁰ Letter of 20 October 2023 from HMRC to the CIOT.
³¹ "Representation 58/23: Tougher consequences for promoters of tax avoidance" (ICAEW, 21 June 2023), https://www.icaew.com/-/media/corporate/files/technical/icaew-representations/2023/icaew-rep-058-23-tougher-consequences-for-promoters-of-tax-avoidance.ashx [Accessed 11 June 2024].
³² “Representation 58/23: Tougher consequences for promoters of tax avoidance” (ICAEW, 21 June 2023).
³³ There has not been a single prosecution under the Criminal Finances Act 2017 for the corporate offences of failure to prevent the criminal facilitation of tax evasion.
³⁴ House of Lords, 2nd Report of Session 2023–2024, Research and development tax relief, HMRC data requirements, promoters of tax avoidance and sentencing for tax fraud (Economic Affairs Committee, 1 February 2024) HL Paper 52 (Session 2023–24).
³⁵ FA 2024 s.33 and Sch.13.
³⁶ A director’s disqualification order prevents a person from being a company director.
³⁷ Company Directors Disqualification Act 1986 (CDDA 1986) s.8ZF and s.8ZG.
³⁸ CDDA 1986 s.8ZF(4) and s.8ZG(5).
³⁹ House of Lords, 2nd Report of Session 2023–2024, Research and development tax relief, HMRC data requirements, promoters of tax avoidance and sentencing for tax fraud (Economic Affairs Committee, 1 February 2024) HL Paper 52 (Session 2023–24).
⁴⁰ House of Lords, 2nd Report of Session 2023–2024, Research and development tax relief, HMRC data requirements, promoters of tax avoidance and sentencing for tax fraud (Economic Affairs Committee, 1 February 2024) HL Paper 52 (Session 2023–24).
⁴¹ Letter of 3 May 2024 from HM Treasury to the Economic Affairs Finance Bill Sub-Committee.
⁴² Letter of 3 May 2024 from HM Treasury to the Economic Affairs Finance Bill Sub-Committee. 
⁴³ Letter of 3 May 2024 from HM Treasury to the Economic Affairs Finance Bill Sub-Committee. 
⁴⁴ Letter of 3 May 2024 from HM Treasury to the Economic Affairs Finance Bill Sub-Committee. 
⁴⁵ Taxes Management Act 1970 s.106A(2)(b).
⁴⁶ FA 2021 s.77(3)(d)(i).
⁴⁷ HMRC, Doubling the maximum prison term for the most egregious examples of tax fraud (18 July 2023), https://www.gov.uk/government/publications/increasing-the-maximum-prison-term-for-tax-fraud/doubling-the-maximum-prison-term-for-the-most-egregious-examples-of-tax-fraud [Accessed 11 June 2024].