Ethical and Anti-Avoidance Considerations

The General Anti-Abuse Rule (GAAR) was introduced in Finance Act 2013 to counter ABUSIVE tax arrangements. It is a STATUTORY anti-avoidance rule applying to most UK taxes.

Scope of GAAR:

• Income tax
• Corporation tax
• Capital gains tax
• Inheritance tax
• Stamp Duty Land Tax
• National insurance contributions
• Diverted profits tax
• Apprenticeship Levy, Petroleum Revenue Tax, Annual Tax on Enveloped Dwellings

NOT within GAAR: VAT (has its own Halifax principle); pensions-specific anti-avoidance; customs duties.

The "double reasonableness test":

• Arrangements are ABUSIVE if they "CANNOT REASONABLY BE REGARDED AS A REASONABLE COURSE OF ACTION"
• Double "reasonable" is deliberate — sets a HIGH BAR for HMRC to establish abuse
• Evaluated against the legislative intent — what Parliament intended the tax provisions to do
• Conservative test — recognises legitimate planning

Factors considered:

• Whether the arrangements achieve results contrary to the clear legislative intent
• Whether there are contrived steps with no commercial purpose
• Whether the arrangements exploit shortcomings in legislation
• Whether similar schemes have been previously defeated or criticised

GAAR process:

1. HMRC identifies possible abusive arrangement
2. HMRC refers to the GAAR Advisory Panel (independent body of 8 members, mostly tax experts)
3. Panel considers arguments from taxpayer and HMRC
4. Panel issues OPINION: whether arrangements are "reasonable" or "unreasonable" course of action
5. If panel opinion is "UNREASONABLE": GAAR can apply — HMRC may counteract the tax advantage
6. If panel opinion is "REASONABLE": HMRC should not apply GAAR (though not absolutely binding)
7. Taxpayer can appeal via normal tax tribunals if dispute continues

Consequences if GAAR applies:

• Tax advantage COUNTERACTED — adjust the tax position on just and reasonable basis
• Additional tax, interest, plus possibly penalties
• 60% GAAR penalty on top of any inaccuracy or default penalties
• Taxpayer names may be published in HMRC's "Defeated Schemes" list

GAAR in practice — features:

• Used SPARINGLY — HMRC prefers specific anti-avoidance where available
• Several successful Advisory Panel opinions since 2013 — most have favoured HMRC on clearly artificial schemes
• "Reasonableness" assessed by the Panel (not HMRC alone) — provides safeguard
• Litigation following GAAR has established precedents

GAAR vs. specific TAARs:

• Many parts of tax legislation have TARGETED anti-avoidance rules (TAARs) — e.g., s.75A FA 2003 (SDLT); settlements rules; transfer of assets abroad
• GAAR is a BACKSTOP — applies when specific rules don't catch something
• GAAR does NOT override specific reliefs that are being used as Parliament intended

DOTAS (Disclosure of Tax Avoidance Schemes):

Requires PROMOTERS of tax avoidance schemes (and sometimes users) to DISCLOSE the arrangements to HMRC. Introduced 2004; expanded since.

Who must disclose?

• Primary obligation: PROMOTERS (those who design, market, or organise tax avoidance schemes)
• Secondary obligation: USERS, where no UK promoter exists (e.g., scheme designed offshore; user is a corporate)
• Tax professionals may be "promoters" if they create/organise scheme-based arrangements

DOTAS applies when arrangements meet specific "hallmarks":

General conditions:

• Arrangements would be expected to enable any person to obtain a TAX ADVANTAGE
• The tax advantage is, or might be expected to be, a MAIN BENEFIT of the arrangements

Specific hallmarks (any one triggers disclosure):

• Premium fees: promoter's fee is linked to the tax saving (contingent fees)
• Confidentiality: promoter wishes the scheme to remain confidential from HMRC or competitors
• Standardised tax products: scheme is pre-packaged, not bespoke
• Loss schemes: specific loss-generating arrangements
• Leasing arrangements: specific leasing-based schemes
• Various specific hallmarks for employment, pension, inheritance tax, SDLT, financial products

DOTAS mechanics:

• Promoter completes DOTAS submission to HMRC
• HMRC assigns a Scheme Reference Number (SRN)
• Promoter gives SRN to all users
• Users must include SRN on their tax returns (income tax, CT, CGT, etc.)
• HMRC can track all users of the scheme

Penalties for DOTAS non-compliance:

• Promoter failure to disclose: up to £600/day (£5,000 initial, up to £1 million in extreme cases)
• User failure to report SRN: up to £5,000
• Ongoing failures: daily penalties

POTAS (Promoters of Tax Avoidance Schemes):

• Targets promoters with POOR COMPLIANCE HISTORY
• HMRC can issue Conduct Notice requiring improvements in behaviour
• If ignored or breached: Monitoring Notice — promoter publicly named and subject to HMRC scrutiny
• Penalties for breaching notices: substantial (£1m+ possible)

Enablers Legislation (Finance Act 2017):

• Targets PERSONS WHO ENABLE or facilitate tax avoidance
• Not just promoters — also includes advisers, consultants, lawyers, accountants, intermediaries
• Penalties on enablers of DEFEATED tax avoidance schemes
• Penalty amount: 100% of the enabler's FEE received for the defeated scheme
• Effect: disincentivises professionals from providing enabling services

Who is an "enabler"?

• Designers — created the scheme
• Managers — organised the scheme
• Marketers — promoted the scheme
• Enablers of the arrangements — those whose involvement was key to the scheme's operation
• Financial enablers — provided funding or guarantees

Defence for enablers:

• Reasonable belief that the scheme would succeed
• Appropriate professional scepticism exercised
• Did not knowingly participate in abuse

Disclosure of Tax Avoidance Schemes — VAT (DOTAS-V):

• Separate regime for VAT-specific schemes
• Similar principles — hallmarks, reporting, SRNs
• Less commonly invoked than DOTAS for direct taxes

Besides statutory rules (GAAR, DOTAS, TAARs), UK courts have developed JUDICIAL ANTI-AVOIDANCE doctrines. These apply alongside statutory provisions.

The Ramsay principle:

• Originated in W.T. Ramsay v Inland Revenue Commissioners [1981] — House of Lords
• Courts should look at the REAL ECONOMIC EFFECT of transactions, not just individual legal steps
• A PRE-ORDAINED SERIES of transactions designed purely for tax purposes can be treated as a COMPOSITE whole
• Artificial inserted steps may be IGNORED in determining the tax consequences

Ramsay in operation:

1. Identify the "big picture" economic outcome
2. Identify any artificial steps inserted purely to achieve a tax advantage
3. "Look through" the artificial steps to the underlying economic reality
4. Apply tax law to the real transaction, not the contrived form

Modern application:

• Ramsay has evolved into a PURPOSIVE APPROACH to statutory interpretation
• Courts ask: did the arrangements achieve what the statute was INTENDED to apply to, or did they seek to avoid that?
• Revived by cases like Barclays Mercantile Business Finance v Mawson [2005] and subsequent
• Often applied alongside, not instead of, statutory rules

The Halifax principle (VAT-specific):

• Originated in Halifax plc v Commissioners of Customs & Excise [2006] — European Court of Justice
• Where arrangements are designed essentially to obtain a TAX ADVANTAGE contrary to the purpose of the VAT Directive, they can be recharacterised
• EU doctrine (now carried into UK law post-Brexit)
• Applies specifically to VAT (not income tax or CT)

Two-step Halifax test:

1. Would the arrangements result in a tax advantage that would be CONTRARY to the purpose of the VAT Directive if accepted?
2. Is it objectively apparent that the ESSENTIAL AIM of the arrangements was to obtain that tax advantage?

If both met: HMRC can recharacterise — treat transactions as if they did not include the artificial elements.

Differences between judicial doctrines and GAAR:

Practical import for planners:

• Even if a transaction survives GAAR and specific TAARs, Ramsay (purposive interpretation) may still apply
• Courts increasingly look at OVERALL economic effect
• Structured arrangements with no commercial reality are vulnerable at multiple levels
• Contrast: commercial transactions with incidental tax benefits generally safe

PCRT is the joint code of UK professional accountancy bodies (ICAEW, ACCA, CIOT, ATT, AAT, STEP, ICAS) governing tax work. Mandatory for members.

Structure:

• Fundamental Principles — five principles from the IESBA/ICAEW Code of Ethics
• Five Standards for Tax Planning — specific to tax (added 2017)
• Specific Guidance — engagement letters, dealings with HMRC, irregular tax position, conflicts

Five Fundamental Principles (applied to tax):

Five Standards for Tax Planning (PCRT 2017):

Standard 1 — Client Specific:

• Tax planning must be SPECIFIC to the client's facts and circumstances
• "Off-the-shelf" schemes applied without client-specific analysis generally NOT acceptable
• Advice must consider the client's actual commercial context, objectives, and risk tolerance

Standard 2 — Lawful:

• Members must act LAWFULLY and with INTEGRITY
• Advise within the law at all times
• Do not facilitate illegal arrangements (evasion)

Standard 3 — Disclosure and Transparency:

• Tax position must be FULLY DISCLOSED to HMRC as required
• No arrangements designed to DELIBERATELY conceal or obfuscate
• DOTAS notifications made correctly
• Complete and accurate information in returns

Standard 4 — Advising on Tax Planning Arrangements (the KEY standard):

• Members must NOT CREATE, ENCOURAGE, OR PROMOTE arrangements that:
• (a) Set out to achieve results CONTRARY to the clear intention of Parliament in enacting legislation; OR
• (b) Are HIGHLY ARTIFICIAL or CONTRIVED; OR
• (c) Seek to exploit SHORTCOMINGS in legislation

Standard 5 — Professional Judgement and Appropriate Documentation:

• Members must use professional judgement consistently
• KEEP ADEQUATE RECORDS of advice given and decisions made
• Document the rationale for recommendations
• Considerations: commercial context, client objectives, risks identified

Where does Standard 4 draw the line?

Consequences of PCRT breach:

• Professional body disciplinary action (ICAEW)
• Range from reprimand to exclusion from membership
• Reputational damage
• Potential civil liability to clients
• Enablers penalty if scheme defeated

Tax arrangements fall along a SPECTRUM. Understanding where a proposed arrangement sits helps determine its acceptability.

The spectrum (from lawful to criminal):

1. Planning: using tax reliefs as Parliament intended
2. Aggressive planning: using reliefs in complex ways; may exploit ambiguity
3. Abuse: arrangements contrary to legislative intent; GAAR-worthy
4. Evasion: illegal concealment or misrepresentation (criminal)

1. Legitimate planning — always acceptable:

• Pension and ISA contributions — explicit legislative incentives
• Capital gains tax planning using AEA, spouse transfers
• Business asset disposal relief (BADR) on qualifying sales
• Inheritance tax lifetime giving within annual exemption; PET rule
• EIS, SEIS, VCT investments (legislated incentives)
• Choice of business medium; timing of disposals
• Transfer between spouses (legislative spouse provisions)

2. Aggressive planning — needs careful analysis:

• Using reliefs in unusual ways or combinations
• Structuring transactions to maximize relief eligibility
• Offshore arrangements with moderate commercial purpose
• Timing of income/gains to shift between years/rates

Red flags for aggressive planning:

• Absence of genuine commercial purpose beyond tax savings
• Artificial complexity that doesn't match the commercial reality
• Contrary to the "spirit" of the legislation
• Reliance on technicalities that Parliament likely did not intend

3. Abuse — prohibited:

• Arrangements that ONLY work if the tax system is used contrary to its purpose
• Pre-ordained series of transactions with no commercial effect but tax consequences
• Creation of artificial losses or reliefs
• "Magic" results not intended by Parliament
• Subject to GAAR; PCRT Standard 4 prohibition; Ramsay principle; potentially TAARs

Examples of abusive schemes (historical):

• Offshore employer-funded retirement benefit schemes (EFRBS)
• Film partnership schemes — artificial losses
• "Bed and breakfasting" losses (pre-30-day rule)
• Circular transactions creating paper gains/losses
• Partnership SDLT schemes (pre-s.75A tightening)
• Employee benefit trust schemes (pre-2011)

4. Evasion — criminal:

• Deliberate CONCEALMENT or MISREPRESENTATION
• Undeclared income; false expenses; hidden assets
• Criminal offence — up to 7 years' imprisonment (HMRC investigations can extend to 20 years)
• Criminal Finances Act 2017: corporate offence of failing to prevent tax evasion facilitation
• Proceeds of crime — money laundering obligations (SAR to NCA)
• PCRT absolutely prohibits; member must cease to act

The duty to the wider tax system:

• Advisers have duties to CLIENTS — best legitimate advice for their circumstances
• But ALSO duties to:
  • The profession — maintain reputation and ethical standards
  • The wider tax system — don't undermine public confidence
  • The law — no facilitation of illegal acts
• When these duties conflict: PROFESSIONAL STANDARDS + LAW TRUMP CLIENT WISHES
• Aggressive planning that undermines the tax system causes long-term harm

The "would you publish this?" test:

• Useful informal test: would you be comfortable if your planning was PUBLISHED in the press?
• Aggressive schemes exposed in media: significant reputational damage to clients and firms
• "Nothing to hide" arrangements: confident advice
• "Quiet arrangements" that can't be disclosed: warning sign

Ethical issues arise frequently in tax advisory practice. Below are common scenarios and recommended approaches.

Scenario 1: Client wants aggressive planning:

"My friend has a scheme that saves 60% on CGT — involving offshore structures and trusts. Can we do this for me?"

Approach:

1. Review the scheme details carefully
2. Assess against PCRT Standard 4 — is it highly artificial or contrary to legislative intent?
3. If abusive: REFUSE to advise; explain why (GAAR risk, enablers penalty, PCRT breach)
4. Offer legitimate alternatives that achieve similar economic outcomes (BADR, gift relief + PET combination, SEIS/EIS reinvestment)
5. Document the advice given, including refusal of aggressive planning

Scenario 2: Error in past tax return discovered:

"I realised I understated my rental income last year by £20,000. What should I do?"

Approach:

1. Encourage the client to DISCLOSE to HMRC — unprompted disclosure significantly reduces penalties
2. Use HMRC's Let Property Campaign or similar disclosure facility
3. Quantify the unpaid tax, interest, and potential penalties
4. If client refuses to correct: advise in writing; if persisting refusal on significant amounts = potential tax evasion → consider ceasing to act + submit SAR to NCA
5. Document the advice and the client's decisions

Scenario 3: Conflict of interest:

You're advising Husband on divorce tax planning. Wife asks you (separately) to also advise her.

Approach:

1. Identify the conflict — divergent interests in a divorce context
2. Assess whether the conflict can be managed (Chinese walls, separate teams, separate partners)
3. In most divorce cases: cannot act for both parties adequately
4. Obtain INFORMED CONSENT if proceeding with safeguards — likely refused in divorce
5. Decline to act for Wife (or Husband) and refer her to another firm
6. Maintain confidentiality about Husband's affairs

Scenario 4: Money laundering suspicion:

A new client presents unexplained cash deposits totalling £500,000 in their accounts. When asked, they offer vague explanations.

Approach:

1. Continue due diligence — request specific evidence of the source of funds
2. If source cannot be verified or explanations don't add up: SUSPICION of money laundering
3. Submit Suspicious Activity Report (SAR) to the National Crime Agency (NCA)
4. DO NOT TIP OFF the client — tipping off is a criminal offence under POCA
5. Consider whether to continue acting — may need NCA consent if continuing
6. Document the decision-making process

Scenario 5: Pressure from senior partner:

A partner in your firm tells you to sign off on aggressive tax advice that doesn't meet PCRT Standard 4. The partner claims it's "within the letter of the law" and the client will leave if not helped.

Approach:

1. Professional standards OUTRANK employer demands
2. Raise concerns with the partner IN WRITING — document the discussion
3. If concerns not addressed: escalate to firm's ETHICS PARTNER or MANAGING PARTNER
4. If the firm persists: consider REPORTING to the professional body (ICAEW)
5. Consider WHISTLEBLOWING if illegal activity (protected under Public Interest Disclosure Act 1998)
6. Ultimate step: LEAVE the firm if ethical compromise continues
7. Individual liability: YOU could be subject to enablers penalty or professional discipline if you sign off on prohibited arrangements

Scenario 6: Client requests confidentiality on a clearly-illegal arrangement:

"This is all confidential — I don't want HMRC to know about this offshore account."

Approach:

1. Confidentiality is NOT ABSOLUTE
2. Legal requirements (SAR obligations) OVERRIDE confidentiality
3. If suspicion of money laundering (including tax evasion proceeds): SAR required
4. Do NOT promise absolute confidentiality
5. Explain the legal framework and professional obligations
6. If client won't provide full transparency: CEASE TO ACT
7. Submit SAR as appropriate; do not tip off

Scenario 7: Referring client to another firm:

A client has engaged an overseas adviser who promotes aggressive schemes. Client asks you to handle UK tax compliance for those schemes.

Approach:

1. Review the schemes against PCRT Standard 4
2. If compliance work would mean OUR firm is tacitly endorsing an abusive arrangement: decline
3. If purely mechanical compliance (no endorsement): may proceed, but document the position
4. Consider risk of becoming an "enabler" of defeated schemes — penalty exposure
5. Note: PCRT doesn't stop us doing compliance; it stops us creating/promoting abusive schemes. But if our compliance LEGITIMISES the scheme in the client's eyes: that's different

General principles for ethical scenarios:

• Document everything — contemporaneous notes protect you
• Consult colleagues — don't make lonely decisions on difficult cases
• Use ICAEW ethics helpline — for confidential advice on dilemmas
• Prefer withdrawal over compromise — ceasing to act is always an option
• Advise clients in writing — if they choose against your advice, at least you've documented the professional view
• Know the SAR obligations — when in doubt, submit
• Never tip off — criminal offence

The role of the tax adviser has evolved significantly in the post-BEPS era.

Traditional view vs modern view:

Why the shift?

• Public pressure: tax avoidance by multinationals and wealthy individuals increasingly scrutinised
• Media coverage: "Panama Papers", LuxLeaks, etc. expose schemes
• Political responses: BEPS Action Plan, Pillar One and Two, specific country laws
• Enabler penalties: professional firms face direct sanctions
• Reputation: clients don't want association with tax scandals; firms don't either

The "duty to the wider system":

• Tax is the mechanism by which societies fund public services
• Widespread avoidance undermines confidence and can force higher rates on compliant taxpayers
• Advisers have a role in maintaining the integrity of the system
• Not merely neutral technicians — they shape what's considered acceptable

Record-keeping obligations:

• Keep records of advice given, decisions made, and client instructions
• Contemporaneous file notes for significant discussions
• Written confirmation of key advice via email or letter
• Engagement letters updated for significant new work
• Records kept for AT LEAST 6 YEARS (longer for significant matters or ongoing retention)

Whistleblowing:

• Public Interest Disclosure Act 1998 (PIDA) protects whistleblowers in the UK
• "Protected disclosure" conditions: good faith; disclosure to appropriate person (employer, professional body, authority); reasonable belief in the content
• Protection from dismissal or detriment
• Whistleblowing may sometimes be REQUIRED (where criminal activity or significant wrongdoing)
• ICAEW provides guidance on whistleblowing to members

Public reputation of tax profession:

• Post-2010: increased public scrutiny of tax arrangements of celebrities, sports stars, multinationals
• "Moral" judgments increasingly applied alongside legal analysis
• Firms now publish "tax transparency" policies
• Clients expect advice to withstand public scrutiny

Personal liability for professionals:

• Enablers penalties: 100% of fees received on defeated scheme
• DOTAS penalties for failure to disclose schemes
• POTAS conduct/monitoring notices
• Tax agent dishonest conduct penalty up to £50,000
• Criminal liability for facilitation of evasion (Criminal Finances Act 2017)
• Civil liability to clients for negligent advice
• Professional disciplinary action

Firms' responses (modern firm policy):

• Tax committees reviewing all aggressive planning proposals
• Standardised engagement letter carve-outs (won't do certain categories)
• Ethics training mandatory for all staff
• Published tax responsibility statements
• Concurrence from multiple partners on significant opinions
• External legal opinion for complex or borderline matters

How to think about difficult cases:

1. Is the arrangement CLEARLY LEGITIMATE? (Use of legislated reliefs)
2. Does it have GENUINE COMMERCIAL PURPOSE beyond tax?
3. Would you be COMFORTABLE with public scrutiny?
4. Does it align with the LEGISLATIVE INTENT?
5. Is your firm willing to stand behind it?
6. Can you justify it to a tribunal, a professional body, and the public?
7. If any of these give pause: REFRAIN from involvement

Closing thought:

Tax planning is a legitimate and valuable professional service. Clients have every right to structure their affairs to minimise tax within the law. But the profession's credibility — and its continued ability to provide useful advice — depends on EACH adviser maintaining high standards. Aggressive planning benefits a few; it costs the profession as a whole. Modern tax advice is best practised with commercial insight, technical excellence, and unwavering ethical standards.