New rules have recently been introduced in the UK to combat complex or artificial tax avoidance arrangements. These rules apply to ‘enablers’ of defeated ‘tax avoidance’ arrangements. Where the rules apply, penalties will be imposed on the enabler and they can also be ‘named and shamed’. These new rules have important implications for the shipping industry.
An ‘enabler’ is very widely defined and includes:
- a person who designs or advises on avoidance arrangements;
- persons who organise and manage the arrangements;
- anyone who makes the arrangement available or who explains the tax advantages to the taxpayer in order to induce them to enter into the arrangements;
- an enabling participator who enters into the arrangement and without whose help the tax advantage could not be obtained.
Importantly, these rules are also relevant for ‘financial enablers’, including banks, who provide a financial product, such as a loan, where the loan is used to participate in defeated tax avoidance arrangements. The rules apply where the person providing the financial product knew, or could reasonably be expected to know, that a purpose of the other party obtaining the financial product was to participate in such arrangements.
Defeated ‘tax avoidance’ arrangements are arrangements which have been, or would be, defeated by the existing general anti- abuse rule (the ‘GAAR’). It isn’t yet clear how the GAAR will be applied by the courts; however where arrangements are regarded as contrived, or have an element of artificiality, the GAAR could apply. Penalties will be equal to the fees received.
These changes have a number of implications for both professional advisers and banks, including those in the shipping industry. Professional advisers in the UK are expected to limit themselves to advising on straightforward tax planning where there is no artificiality and no contrived arrangements, and will be reluctant to organise or manage any artificial arrangements which avoid UK tax. They will need to decide where they consider the dividing line falls between acceptable and unacceptable planning. In some cases arrangements are likely to be clearly artificial and clearly fall foul of these rules. However it will not always be a straightforward matter to decide whether these rules do or could apply. More importantly, banks and other finance providers to shipping now have to consider whether if they provide funding, for example, this will ‘enable’ the borrower to enter into a tax planning arrangement that is regarded as unacceptable. Depending on the circumstances they may need a tax opinion that these rules do not apply. This could cause delays and difficulties in obtaining funding.
These new rules are part of a series of measures designed to prevent aggressive tax planning, by ensuring that professional advisers, banks and other entities do not encourage or assist in implementing such arrangements. However this does cause difficulties in deciding where the dividing line falls.
In the case of tax evasion (which is illegal), as opposed to tax avoidance, it is now a criminal offence to fail to prevent tax evasion. Under this new legislation, a company or partnership, regardless of where it was formed or incorporated, will be liable for the actions of its employees and other ‘associated persons’ who intentionally facilitate tax evasion either in the UK or that is connected to the UK. It covers all taxes. However a business will not be liable if it can evidence that it has put reasonable procedures in place to prevent tax evasion, or it was not reasonable to expect the business to have such procedures in place. This is particularly relevant for sectors such as banking, however it could also be relevant for shipping. For example this could cover the deliberate understatement of taxable profits in the UK.
All stakeholders in the shipping industry need to be alert as to the changed UK environment in regards to aggressive tax planning.