Tax avoidance, evasion and Budget predictions

Executive Summary

We already know some of the intended changes being introduced in this years budget to combat avoidance and evasion although it is likely there will be more. In addition, after a relatively peaceful tax investigation year during COVID, what are HMRC going to do in the new tax year?

There are predictions from the alignment of capital gains to tax rates to those for income tax, higher value added tax to smooth out business rates, increase to corporation tax, a potential wealth tax, increased duties on tobacco and alcohol, reduction to NIC, and environmental incentives.

The fear of increased taxes now may be wrongly placed given that coming out of the past year requires businesses and the economy to be stimulated. If as a result of this budget the average household can’t spend, it would mean any high street or hospitality sector recovery will be undermined. If the Chancellor can stimulate the economy resulting in increased GDP over the long term, the Revenue collected will increase. This type of stimulation would prevent the impact of the inevitable increased taxes to repay the UK’s debt.

The announcement of business support measures including extending furlough and a VAT cut for hospitality firms continuing whilst there are ‘Covid’ restrictions, means that the Government are aiming to keep the economy stimulated. However, those restrictions are set to end by June at the earliest.

During times of economic uncertainty and financial hardship, tax avoidance and tax fraud generally increase. HMRC has increased its ability to detect tax avoidance and tax evasion and there is no sign that a different approach will be adopted. If anything, the measures to be confirmed at this Budget illustrate a strengthening in armoury:

  • HMRC civil information powers
    New legislation will introduce an ability for HMRC to require financial institutions to provide information when requested about a specific taxpayer without the need for approval from the independent tribunal. HMRC would issue a Financial Institution Notice requiring the provision of information for the purpose of checking the tax position of a taxpayer and used for debt collection purposes.
  • The hidden economy
    New rules will affect certain licenses granted by public bodies. The licenses would be conditional on compliance with tax obligations.
  • New follower notice penalty regime
    Follower notices are issued to users of tax avoidance schemes to encourage the settlement tax liabilities. Currently, a penalty of up to 50 percent of the disputed tax may apply if the taxpayer continues to contest the position. Measures will amend the regime to make it more proportionate – penalties will be no more than 30 percent in most cases, with a 50 percent penalty applied only where a court or tribunal decides that a taxpayer’s appeal:
    • stands no reasonable prospect of success;
    • there has been an abuse of process; or
    • the taxpayer has acted unreasonably in bringing or conducting the proceedings.

There are likely to be many more measures introduced in this Budget or subsequent ones given the conservatives 2019 general election manifesto promised a new law on tax avoidance and evasion, which would:

  • Increase the maximum prison term for tax fraud to 14 years.
  • Create a single HMRC anti-evasion unit covering all duties and taxes.
  • Consolidate anti-avoidance and anti-evasion measures and powers.
  • Introduce new measures to end tax abuse in the construction sector.
  • Crack down on illicit tobacco packaging.
  • Combat profit-shifting by multinational companies.

Furthermore, it would appear that the Let Property Campaign and the Requirement to Correct did not encourage anywhere near the quantum of disclosures anticipated. This is likely to mean that there are still a considerable amount of property owners and/or persons holding offshore assets that have tax irregularities but who have not come forward. HMRC use considerable resources investigating taxpayers making the recovery of taxes a time consuming and costly exercise. It is more efficient to encourage taxpayers to appoint a professional advisor to assist them make a full disclosure of tax irregularities. The days of incentivising a disclosure through discounted penalties etc. are gone so the following measures are more likely:

  1. Link a higher penalty to those within the remit of the Let Property Campaign that do not register to disclose before a certain date.
  2. Link any increase in sentence term for tax fraud to the offshore criminal offence or increase the sentence possible as a result of the offence.
  3. A more proactive and less draconian measure for those with offshore assets could be to offer an amnesty whereby and tax irregularities are settled and where the assets are brought onshore the penalty is mitigated.

Regardless of any Budget changes, HMRC will continue to target the use of avoidance schemes, property owners, those with offshore assets, employment status, those who wrongfully claimed furlough, those who wrongfully accessed Covid support loans and of course the hidden economy.

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