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When does failed tax planning become criminal?

When does failed tax planning become criminal?

A senior HMRC official has often been quoted as suggesting that “the difference between avoidance and evasion is the thickness of a prison wall”. Whether or not apocryphal, and despite its metaphoric appeal, this does not really help anyone to understand what differentiates failed tax planning (or failed “avoidance”) from behaviour that might amount to criminal conduct.

In 2016, the promoters behind Greystone Financial Services were found guilty for their part in a £2.2 million fraud. The scheme involved clients investing in a film partnership and recovering tax rebates by making claims for their share of the partnership’s trading losses. However, the investors needed to be active in the trade in order to qualify for the full amount of relief. When HMRC investigated the records it found evidence suggesting that the promoters may have exaggerated the activity of the partners by creating false records. The false records were found to be part of a deception that resulted in HMRC being cheated and led to the promoters going to prison. It was the dishonesty and deception that turned a (failed) tax avoidance arrangement into criminal tax evasion.

In the past, tax planning arrangements were arguably simpler and therefore easier to implement. A series of anti-avoidance provisions has changed the landscape for tax avoidance arrangements. This includes Disclosure of Tax Avoidance Schemes, General Anti-Abuse Rule, Disguised Remuneration Rules, Targeted Anti-Avoidance Rules, and other measures.

Employment Benefit Trust (EBT) tax planning may provide a useful illustration of how this changed landscape may be problematic in this context. The advent of the Disguised Remuneration legislation in December 2010 stopped EBT arrangements from working by triggering a PAYE/NIC charge if certain relevant steps occurred. Some arrangements were designed to avoid a relevant step under the new rules by inserting additional steps, changing the flow of money, introducing new non-cash assets for use as rewards, swapping debt or creating a commitment to make payments at a future date. Such changes inevitably made planning arrangements more complicated. Some arrangements involved ostensibly non-commercial, even abstract, reasoning behind transaction steps.

Steps which do not feel “real” (or even comprehensible) to the participants are likely to be more difficult to implement in the real world. This can lead to errors in execution and perhaps for some a temptation to gloss over them and even misrepresent what actually happened. This is one way how greater complexity could lead to behaviour which may be viewed as (or may actually be) dishonest and potentially criminal. We have seen HMRC target these risk areas in recent investigations.

In summary, tax planning (including avoidance) may fail because the Tribunals or Courts decide that the law does not apply as intended to the facts, although those facts were true and honestly presented. This would result in additional liabilities to tax, interest and potentially penalties in the event that reasonable care had not been taken; but not a prison sentence. But if the true facts were not honestly presented, with the intention of deceiving HMRC to secure a tax benefit that was not due, then that could well turn failed tax planning and avoidance into criminal tax evasion.

In light of this, our recommendations would include the following: be wary of unnecessary complexity; take the time and effort to understand arrangements; take advice, especially when faced with uncertainty over complex tax and other laws; exercise diligence in carrying out transaction steps; review the position post-implementation; and, perhaps most importantly, document and present the facts honestly, resisting any temptation to deceive HMRC.

If you are concerned about any of the issues raised or would like to discuss any aspects, please contact us.