Tackling Disguised Remuneration

Disguised remuneration schemes come in many varieties, but often involve the employer paying a contribution to a third party, such as an Employee Benefit Trust (EBT), instead of paying remuneration directly to the employee. The Government is to bring forward a package of changes to tackle the use of disguised remuneration schemes, the first part being introduced in Finance Bill 2016 with a targeted anti-avoidance rule to take effect from 16 March 2016. There will be further legislation in Finance Bill 2017.

GAAR Penalties

Finance Bill 2016 will introduce a new tax-geared penalty for cases which have successfully been challenged under the General Anti-abuse Rule (GAAR). The penalty will be 60% of the value of the tax advantage that has been counteracted by the GAAR. The penalty will be triggered when a taxpayer submits a return, claim or other document to HMRC, and will become chargeable at the point when HMRC have successfully counteracted the arrangements under the GAAR.

The existing inaccurate returns penalties will apply in GAAR cases but the combination of both penalties will never exceed 100% of the tax that otherwise would have been due. This is subject to the inaccurate returns enhanced penalties for offshore matters.

The GAAR penalty will apply to tax arrangements entered into on or after the date of Royal Assent to Finance Act 2016.

Finance Bill 2016 will also make two procedural changes to the GAAR.

Company Distributions and Transactions in Securities

For transactions entered into on or after 6 April 2016, the transactions in securities rules are to be strengthened and a targeted anti-avoidance rule (TAAR) is to be introduced. Both of these measures are intended to restrict the opportunities for shareholders to convert to capital what might otherwise be paid as an income distribution (most commonly a dividend). The TAAR will in certain circumstances treat a distribution from a winding-up as if it were an income distribution.

Deterrents for Offshore Tax Evasion.

Finance Bill 2016 will increase minimum civil penalties for deliberate offshore tax evasion, require greater levels of disclosure for penalty reductions, remove protection from naming for unprompted disclosures, and allow the naming of individuals who hide their evasion behind companies and other entities. An additional penalty will be introduced for serious cases of deliberate offshore evasion, equivalent to up to 10% of the underlying asset value. The changes will come into force from Royal Assent to Finance Act 2016.

Civil Sanctions for Enablers of Offshore Tax Evasion

New civil penalties and naming provisions will be introduced for individuals and businesses who have deliberately assisted taxpayers to hide assets and taxable income and gains outside the UK to evade their UK tax responsibilities. The penalties will only apply where the enabler’s behaviour was deliberate and the evader has received a penalty relating to offshore tax non-compliance. The penalty for the enabler can be up to 100% of the tax evaded and naming will be reserved for the most serious enablers. The measure will apply from a future date to be appointed.

Criminal Offence for Offshore Tax Evaders

Finance Bill 2016 will introduce a new strict-liability criminal offence for individuals who have income or gains outside the UK and fail to notify HMRC of their liability to pay tax on that income or those gains, fail to submit a return or submit an inaccurate return. The offence will only apply where the tax underpaid exceeds a threshold, to be set at an amount of not less than £25,000 of tax lost per tax year.

Serial Avoiders

Finance Bill 2016 will enable HMRC to send a notice to the user of a tax avoidance scheme, when the scheme is defeated, putting the recipient on warning for a period of five years. During this time, taxpayers will be required to notify HMRC each year that they have not used any further avoidance schemes or, if they have, to give full details of the schemes and the amount of the tax advantage the schemes are asserted to deliver.

A series of increasing penalties will apply where the taxpayer uses any further avoidance schemes, which HMRC defeat, during the five-year period. The measure will have effect from 6 April 2017.