New penalty regime for tax avoidance non-compliance

Monday, November 29th, 2010

In a consultation document issued at the time of the 2009 Pre-Budget Report, HMRC sought views on a number of proposed changes to the statutory Disclosure of Tax Avoidance Scheme rules.  They were originally introduced by means of the Finance Act 2004 but have been developed extensively since then and now apply to income tax and NICs, corporation tax, capital gains tax and stamp duty land tax.

The consultation document described five amendments that HMRC wished to make to the disclosure rules, in particular to prevent scheme promoters from avoiding or delaying disclosure.  If scheme promoters can find ways of circumventing tax legislation, they can also find ways around the disclosure rules!

Four of the five proposed amendments were included in section 56 and Schedule 17 of the Finance Act 2010.  One of the five amendments introduces much higher penalties for non-disclosure and, in addition to changes made in the Finance Act 2010, Regulations have now been made that are effective from 1 January 2011.

In five of the six cases where HMRC sought to impose an initial penalty on a promoter for failure to disclose, the promoter prolonged the investigation before admitting the default, disclosed the scheme, and paid the maximum £5,000 initial penalty without a formal hearing before the Tax Tribunal.  The £5,000 penalty is a minor cost when compared with the potential profits from the scheme.

The new penalty regime from January 2011 allows a Tax Tribunal to impose a daily penalty of between £600 and £5,000 where disclosure is not made within 10 days after an order for disclosure is made.  However, if the Tax Tribunal believes that the aggregate of the daily penalties is inappropriately low, the penalty can be increased to an amount not exceeding £1 million.  The Treasury also has powers, currently unused, to increase the level of the new penalty further if non-disclosure continues.

Further information:

The Tax Avoidance Schemes (Penalty) (Amendment) Regulations 2010

Explanatory Memorandum to the Tax Avoidance Schemes (Penalty) (Amendment) Regulations 2010

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