David Gauke, Exchequer Secretary to the Treasury, said that changes to the Disclosure of Tax Avoidance Schemes (DOTAS) rules would make it easier for HMRC to find out about who is using an avoidance scheme to artificially reduce their tax liability. It could also allow the Government to publish warnings about schemes that are effectively being mis-sold to taxpayers by "less reputable promoters".
HMRC currently publishes 'buyer beware' style warnings aimed at the potential users of certain schemes that incorporate certain features as part of the 'Spotlights' section on its website.
The DOTAS rules, introduced in 2004, have closed off around £12.5 billion in tax avoidance activities to date, according to Government figures. A total of 2,289 avoidance schemes have so far been disclosed to HMRC under the rules, leading to over 60 changes in tax law to stop the avoidance.
Announcing a consultation http://www.hmrc.gov.uk/avoidance/tax-avoidance-schemes.pdf (34-page / 141KB PDF) on changes to the rules, Gauke said that the document was the latest piece of work by the Government intended to "make life difficult" for those who had found artificial ways to reduce their tax bills.
"These schemes damage our ability to fund public services and provide support to those who need it," he said. "They harm businesses by distorting competition. They damage public confidence. And they undermine the actions of the vast majority of taxpayers, who pay more in tax as a consequence of others enjoying a free ride."
Tax avoidance is not illegal, but involves using existing laws to gain an advantage that the Government never intended. According to the consultation document, tax avoidance frequently involves "contrived, artificial transactions that serve little or no purpose" other than to reduce tax liability.
Tax law expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, warned that the proposals could increase the "backlog" of unsettled schemes awaiting investigation from HMRC.
"HMRC is faced with a huge task on legacy avoidance schemes, and the proposed changes should allow it even greater access to the schemes being sold," she said. "It has always been difficult to distinguish acceptable tax planning from unacceptable tax avoidance, and with HMRC taking a much tougher approach on tax planning schemes potential users, especially those who are high profile, need to be more careful than ever to ensure that they understand what they are buying – the risks as well as the rewards."
Potential users should, she said, take independent advice and make sure a scheme is above board before purchasing a product.
"These schemes get packaged up nicely, and are promoted as technical products with a full legal opinion," she said. "However, potential users need to remember that those promoting the schemes have a vested interest in people actually using them, especially where the promoter is based outside of the UK."
She added that "strict taxpayer confidentiality" could no longer be guaranteed given the current level of "public disquiet" in relation to tax avoidance, regardless of whether HMRC was ultimately given the power to 'name and shame' individuals found to be using avoidance schemes.
The Government is currently consulting on the creation of a 'general anti-abuse rule' (GAAR), which will apply to the main direct taxes and national insurance. A "narrowly-focussed" GAAR could potentially come into force from 1 April 2013 as a result of the consultation.