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Guest post: Tax avoidance penalties – a few notes of caution

Last week the government published a consultation document which took two big steps to tackle two different, but related, problems. The first addresses misbehaviour by taxpayers who tend to hear what they want to hear and disregard the rest.

Assume you’re a taxpayer and you have a dodgy tax adviser who tells you that if you engage in a piece of tax planning you can declare your tax liability to be 10 when it would otherwise be 100.

Of course you want to believe him – and so you don’t take the care you should to check whether he’s telling you the truth. What he is telling you is convenient for him to tell you (he charges a fee) and it’s convenient for you to hear it (it reduces your tax liability).

As things stand, if the tax planning doesn’t get challenged, you save 90. If it is challenged successfully you are back where you started, owing 100.  This penalty regime is designed to ensure that you ask the questions you should before you put 10 rather than 100 on your return; to give you reason to exercise caution when confronted by a tax adviser whispering sweet nothings into your ear. If the government’s proposals are adopted, you might end up paying 190 rather than saving 90.

The second regime tackles that dodgy tax adviser. And those he takes advice from. And those he relies on to execute his scheme. Banks, accountants, solicitors, advisers, IFAs, trustees, and even barristers. The consultation document describes these as ‘enablers’ of tax avoiders.

Very often these individuals are subject to no regulation. It’s remarkable but true that you have to be regulated to be a dental hygienist but you don’t have to be regulated to offer tax advice. So there can be a complete absence of regulatory control of some enablers.

But the real issue is this. A tax adviser gets his fee for telling you that you can declare 10 rather than 100. He’s in the money from the start. And if you should happen to sue him later, he might have wound himself up, or he might shelter behind the advice given by a barrister, or he might point to the small print in the scheme documentation telling you that (despite the fact he’s charging you a fee) you must take your own tax advice.

So he gets handsome reward and very often without any personal accountability for the consequences. This state of affairs can encourage abysmal behaviour by highly paid professionals – some examples of which I set out here.

And for the taxpayers who are led astray – and many young men and women have made fortunes from their abilities as performers or footballers and lost them in consequence of a decision no worse than a poor choice of financial adviser – this asymmetry is both unavoidable and profoundly unfair. And it places huge pressure on HMRC and on tax collection.

So the problems are very real problems.

And the solutions in the consultation document are very real solutions. We must await the draft legislation – it can sometimes deliver less than is promised by the publicity grab of the consultation document. But my instinct is that, for behaviour within the compass of the consultation document, these measures will prove to be a real game-changer. (Indeed, they may well go too far – but that is a point for another day.) So, looked at in the round, I applaud them.

But let me strike a few notes of caution.

First, the measures look to be targeted primarily at individual rather than corporate avoidance. Individual tax avoidance – the data suggests – is yesterday’s problem. But the same cannot be said to be true of corporate avoidance. I’d like to see an extension of the targeted avoidance behaviour to corporate profit shifting.

Second, the proposed legislative solutions are consistent with the overall pattern of behaviour of the government. That pattern is to ‘resolve’ often quite difficult, and factually nuanced, problems with legislation rather than with feet-on-the-ground resource. Legislation can be a good tool, but it’s also a blunt tool and it can lead to unfair or otherwise poor outcomes. Over time, our tax system suffers. HMRC is profoundly under-resourced – and legislation can go some way towards protecting against the consequences but not all the way.

Finally, government needs to do much, much more to address the opacity that surrounds its efforts to tackle avoidance. Until we can see that HMRC is tackling avoidance – until we know that Google or Facebook or Uber is paying the ‘right’ amount of tax – people are going to remain sceptical about the efforts that are, or are perceived to be, being made by HMRC. Until government tackles this issue, however many legislative steps it takes, I am afraid we are going to go on being sceptical about its conduct. I have addressed that issue at length here.

Jolyon Maugham QC (pictured) is a barrister practising from Devereux Chambers. He blogs at Waiting for Godot – Musings on Tax and can be found tweeting here.