Partner Article

Guy Lachlan – Corporate Commercial Solicitor at Clough & Willis - Behold: the tax man cometh.

Tax avoidance is legal. Tax evasion is illegal. But for a number of years the categories have been gradually converging as successive governments seek to prevent taxpayers arranging their tax affairs in artificial ways in order to escape or reduce their liability to pay taxes.

The most recent move attacks not the schemes themselves, but rather the source of tax avoidance: the accountants, lawyers and bespoke tax advisers who devise avoidance schemes and sell them to their client tax-payers.

For governments, any move to counter tax avoidance chimes in popularity with the general public whose appetite for action is generated when examples are highlighted in the press and particularly when they involve famous people. Remember Sir Philip Green and his ownership of BHS? The insolvency of that company in 2016, leaving a substantial employee pension deficit, became notorious after it was revealed that his shares had been registered in the name of his wife who was resident in the tax haven of Monaco. The shares had received around £400m in dividends during his tenure of ownership.

In its Press Release for the Finance Bill 2021-22 the government stated that the Bill when passed would aim at:

“Clamping down on promoters of tax avoidance by reducing the scope for promoters to market tax avoidance schemes, disrupting their activities and supporting people more to steer clear of and leave tax avoidance arrangements.”

Clause 84 of the Bill enables HMRC to determine if it is in the public interest for protecting the public revenue that a promoter of tax avoidance schemes should be wound up. If they do determine that it is, they can petition the court for winding up of the promoter on the just and equitable ground.

Of course, given that HMRC’s function is to maximise the public revenue, anything that hampers its function will inevitably be deemed not in the public interest and therefore in the public interest that it should be stopped. So by definition all such promoters will be in their sights.

It will be immediately apparent that the test of “public interest” will be open to challenge in the courts by a promoter, including an application for judicial review. Judicial Review is actually built into the HMRC manuals already: their internal manual “Appeals reviews and tribunal guidance” specifically refers to the ability of the taxpayer to apply for judicial review where there is no right of appeal to the tribunal, particularly where the exercise of a right of discretion was not exercised properly. However, the situation presently envisaged does not concern a taxpayer which is in dispute with HMRC over whether tax is due or not. The new scenario is quite different: it is whether HMRC can close down a 3rd party because it is in the public interest to do so.

The right of the courts to close down businesses formed for an illegal purpose has always existed. The present proposal is not that the business (the seller or deviser of tax avoidance schemes) is carrying on an illegal business but simply that HMRC doesn’t want it to continue in operation.

So, what is different about the change proposed? HMRC already attacks particular tax avoidance schemes. Now it is attacking the manufacturers and promoters of them. They will be likely to seek judicial review of HMRC’s decisions – result? Uncertainty as each case is decided by a judge on its particular circumstances.

But here is the interesting bit: Dominic Raab, the Justice Secretary, stated on 5th December that legislation will be introduced next year to reduce the scope of the courts to review and reverse the decisions of ministers – i.e. under judicial review. It remains to be seen whether the intention is to extend this to decisions by government agencies such as HMRC.

Whilst critics of the government may raise concerns over any attempt to restrict freedoms which are currently upheld by the courts through judicial review, there are unlikely to be many among them who would want to champion the rights of tax avoidance scheme promoters to defy HMRC with the attendant delays and costs to the public purse that judicial reviews involve.

A real sting in the tail for the anti-avoidance industry would be an amendment to the Company Directors Disqualification Act 1986. This has not so far been mentioned. At present the CDDA only applies if a defendant has been convicted of an indictable offence. A tweak to that statute to include the directors of a company wound up on the application of HMRC under the proposed legislation would be likely to wipe out promoters of tax avoidance schemes permanently at a stroke.

This was posted in Bdaily's Members' News section by Clough & Willis Solicitors .