Overview of the proposals
Whilst most in the tax profession may have viewed as inevitable from early this year when the consultation on accelerated payments and follower notices was released, the draft legislation now seems all but certain to be included in full in the Finance Bill, having had very little debate by the politicians on the Finance Bill Committee. This is particularly disappointing; not least for the fact that the consultation received more than 840 responses from professional advisors right across the spectrum (the previous tax avoidance consultation generated fewer than 30 responses).
We are aware that a number of those firms spent time advising politicians on the ramifications of these proposals, which will undoubtedly be applied against a wide range of tax structures resulting in many individuals, businesses and companies facing severe financial hardship. Whilst the media are happy to paint the picture of tax avoiders getting what they deserve, this is far from the whole story, as this article discusses.
In addition to users of aggressive tax avoidance arrangements, individuals who have invested on the back of government sponsored tax incentives are likely to be affected. These could include investment in designated deprived areas for business property renovation and investment in the British film industry, to name two long standing Treasury stalwarts. As for corporate taxpayers, any company that has entered into any transaction which resulted in a reduction in its corporation tax liability and which is presently under enquiry are similarly potentially affected.
Many individual investors and companies will have had tax repaid as a result of their original claims for tax relief that they believed had been agreed by Her Majesty's Revenue and Customs (HM Revenue and Customs or HMRC) is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support and the administration of other regulatory regimes including the national minimum wage.... More, whilst others will have offset the tax credit against tax that would otherwise have fallen due going back as early 2004.
The reason why we are concerned that these arrangements may be caught is simply because they were usually and quite sensibly, protectively disclosed by the promoter or in the case of corporate transactions, by the user under the Disclosure of Tax Avoidance Schemes (DOTAS) regime and despite the passage of time, they remain under enquiry. Whilst the ball will be in HMRCs court to take action, there is a real prospect of many individuals and companies receiving an accelerated payment notice.
The new legislation will enable HMRC to serve a notice demanding payment of any tax in dispute with only 90 days to pay and with no right of appeal or any other route to delay the requirement to pay. Any individuals who have invested in Business Premises Renovation Allowance (BPRA) or British Film Sale and Leaseback arrangements (section 48 or section 42), or any DoTAS registered arrangement should get in touch to see if they are potentially affected and we will be able to advise you on your potential exposure.
HMRC will also have the ability to issue ‘follower notices’ to individuals or companies who have made any claim for tax relief, that HMRC consider is similar to another case which has been tested in the tax tribunals or the courts and which has resulted in success for HMRC. It matters not, that the particular case on which HMRC are hanging their follower notice may have only been decided at the First Tier Tax Tribunal and is already under appeal. It is also for HMRC to determine where the similarities lie between that case and your own situation.
Individuals and companies in receipt of a follower notice will be required to take ‘corrective action’ by withdrawing their original claim or if proceeding to appeal their claim, settling the disputed tax in the meantime. There is no right to appeal a follower notice, although taxpayers can make a representation stating the amount they believe is due, where this is ultimately proven to be incorrect the individual will be subject to a penalty up to 50% of the denied tax advantage, or potentially reduced to 10% for cooperation. Taxpayers will be liable to a penalty if they do not take the appropriate corrective action within 90 days, or within 30 days of HMRC confirming the notice in response to a representation.
Despite the fact that the new legislation will apply to claims made as early as 2004, the Treasury have denied that the new legislation is retrospective, on the basis that the tax in dispute would have been due and payable in a previous tax year, had the taxpayer not sought to engage in a tax avoidance arrangement. However, someone who has previously engaged in a Treasury sponsored tax incentivised arrangement would clearly argue that at the point of investing in the structure, they were not only legally entitled to offset a tax credit against tax due to effectively withhold payment but indeed that was the whole point of the incentive. The argument becomes even stranger in cases where HMRC have repaid tax deducted at source under Pay As You Earn, for example but if the particular arrangements were disclosed under DoTAS and remain under enquiry, this new legislation will allow HMRC to recoup that tax at least until the enquiry is closed.
This is all about cash collection of course, as these new provisions allow HMRC to collect tax that they consider to be in dispute, whilst their enquiries are continuing. This is without doubt a change in the legislation that applied previously, which provided that the tax was self-assessed by the taxpayer and then adjusted as necessary once the enquiry was concluded.
Even in extreme cases, where the taxpayer anticipated a dispute with HMRC over the tax relief being claimed and expected ultimately that their claim might be unsuccessful, a taxpayer would be liable for interest from the time the tax was originally due. This is of course, on top of the tax in dispute and in very extreme cases, penalties and surcharges could always be applied.
The existing system seemed fair and reasonable to both the taxpayer and the Treasury. Clearly no taxpayer would pay for expensive litigation if they felt their claim would not result in success, thus HMRC already have the ability to force swift payment by denying the relief claimed resulting in only serious taxpayers appealing HMRC’s decision through to litigation in the Courts. Following Royal Assent later this month, there will cease to be any incentive for HMRC to bring their enquiries to a conclusion as the result might be that they end up paying back all the tax collected under this new regime.
No right of appeal
The government have purposely not provided taxpayers in receipt of an accelerated payment notice or follower notice with any right of appeal. They argue that taxpayers using aggressive tax avoidance structures have done so to buy time and therefore any right of appeal will be used to allow avoidance users to continue to enjoy the cashflow benefit for what may be spurious claims.
As soon as the Finance Bill is given Royal Assent we will issue a more in-depth report on how the proposed changes will apply. In the meantime, the government are firmly of the view that these new rules should be utilised in full and have confirmed that HMRC will be publishing a list of disclosed tax avoidance schemes imminently that will be subject to accelerated payment and follower notices before the end of the Summer.
If you would like us to consider whether HMRC have any ability to apply these new rules to your previous tax history, please get in touch.