The serial tax avoidance legislation was introduced in Finance Act 2016 to allow HMRC to penalise taxpayers who repeatedly enter into abusive tax avoidance schemes. It does not apply to schemes which an individual, partnership, company or associate entered into before 15 September 2016 and which were defeated before 6 April 2017.

The guidance explains that once a scheme has been defeated, HMRC will issue users with a warning notice that will remain in place for five years. During this ‘warning period’ individuals are required to provide detailed information about any tax avoidance schemes they use.

If someone is already in a warning period and HMRC issues another warning notice, then that extends their warning period by up to a further five years.

A tax avoidance scheme is defined as including arrangements that are disclosable under the Disclosure of Tax Avoidance Schemes (DOTAS) legislation; a scheme that is disclosable, or has been disclosed, under the VAT Avoidance Disclosure Regime (VADR) legislation; tax arrangements where HMRC has issued a follower notice; and tax arrangements where HMRC has issued a notice of final decision, stating that the tax advantages arising from the scheme are to be counteracted under the General Anti-Abuse Rule (GAAR).

Individuals are deemed to have used a tax avoidance scheme if they send in a tax return or claim that relies on a tax avoidance scheme to reduce their liability to tax, or to increase tax reliefs; or if they fail to meet their tax obligations as a result of a tax avoidance scheme - for example, by not registering for VAT when required.

The guidance says that any tax avoidance scheme will be regarded as ‘defeated’ when the counteraction taken by HMRC becomes final, although the exact nature of those actions will depend on the type of scheme. The final point is reached when the adjustments made to the individual’s tax position, and any additional tax resulting from those adjustments, can no longer be varied – either on appeal or otherwise.

Once a scheme is defeated and an individual is sent a warning notice, over a five year period they are required to supply specific information to HMRC each year. This includes details of any tax avoidance scheme they have used during that year, and which is disclosable under DOTAS, or is which is disclosable, or has been disclosed, under VADR.

The individual must provide explanations of why they think the scheme or schemes achieve the intended tax advantage, or avoid an obligation in relation to tax that they would otherwise have. They must also provide details of how much tax would be payable if they had not used the scheme, or the scheme does not achieve the tax advantage that it tries to achieve, whichever applies.

Anyone who enters into a scheme on or after 15 September 2016 (known as a ’new scheme’) and who also uses the scheme during a warning period, could face sanctions, with the penalties calculated as a percentage of the counteracted advantage. The counteracted advantage is normally the additional tax due, but the guidance says HMRC will explain more about this at the time.

The first defeat of a new scheme used in a warning period will attract a penalty equal to 20% of the value of the counteracted advantage, which rises to 40% for a second defeat, and will be 60% for a third or any subsequent defeats.

If HMRC defeats three new schemes which have all been used during the same warning period, then it may publish the individual’s name and other details to identify them as a serial tax avoider. If each of those schemes involves the misuse of direct tax reliefs, HMRC will issue a ‘relief restriction notice’ to stop the individual from claiming, or making use of direct tax reliefs for three years.

The guidance says that anyone who wants to settle their tax affairs on the basis of no longer wanting to use an avoidance scheme can do so, and the defeat will not count for the purposes of the serial tax avoidance legislation.

However, this only applies if the individual has no reason to believe that HMRC has started or is about to start, a check of their tax affairs; the arrangements are not counteracted under the GAAR afterwards; and they have not been sent a follower notice for the arrangements.

The guidance says special rules apply or members of a partnership that has used a defeated avoidance scheme; companies in a group of companies, where one of the companies has used an avoidance scheme that has been defeated; and associates of a person who has used a defeated avoidance scheme.

For the serial tax avoidance legislation, two people are associates if one of them is a body corporate (for example, a company) controlled by the other, or if they are both bodies corporate under common control.

If HMRC defeats a new avoidance scheme that was used in a partnership tax return, it  may publish the names of all partners in the partnership, and may also restrict their direct tax reliefs. HMRC will only charge a penalty on the partners whose tax position was affected by the defeat, but for all partners, the defeat will count towards the number of defeats they have had when HMRC is considering charging them penalties and restricting their direct tax relief.

In the case of groups of companies, if one has a warning notice the names of the others may be published, although they will not be charged penalties or stopped from claiming reliefs.

The warning notices given to associates will not result in their names being published, nor do they count towards the number of defeats for the associates in cases where HMRC is considering penalties or restricting direct tax reliefs. However, they will count towards the two warning notices required before HMRC can publish their names.

There is no right of appeal against HMRC’s decision to issue a warning notice, but individuals can appeal to an independent tribunal if they are charged a penalty, or given a relief restriction notice, and they disagree with HMRC’s decision.

Anyone who uses a new scheme during a warning period which is then defeated is not liable to pay a penalty for the ‘relevant failure’ if they have a reasonable excuse. However, HMRC’s guidance makes clear that lack of funds or relying on third party advice would not be considered as reasons.

Compliance checks: serial tax avoidance - warning notices CC/FS38 is here.