Tax avoidance schemes: New powers for HMRC to curtail disputes and to collect tax sooner

19th August 2014

Overview

HM Revenue & Customs ("HMRC") have new powers to issue:

• Follower notices; and
• Accelerated payment notices.

These powers are set out in the Finance Act 2014, section 199-233, and Schedules 30-33. The Finance Act 2014 became law on 17 July 2014. The powers are closely linked.

Follower notices: some key features

In outline, HMRC may issue a follower notice to a taxpayer where:

• A tax enquiry is in progress or a tax appeal is pending;
• The enquiry or appeal is based on an assertion by the taxpayer that a tax advantage arises from particular "tax arrangements"; and
• HMRC believe that the arrangements are the same as or similar to those in a decided case, where tax was held to be due.

The taxpayer will then have to settle the dispute promptly (by accepting HMRC's position) or risk incurring penalties of up to 50% of the tax at stake. Importantly, however, no penalty will be due where a tribunal considers it was reasonable for the taxpayer to continue the dispute.

Accelerated payment notices: some key features

HMRC may also issue an accelerated payment notice ("APN") to a recipient of a follower notice. When HMRC do this the taxpayer has to pay the disputed tax to HMRC without waiting for the dispute to be resolved. If the taxpayer wins the dispute the HMRC will pay back the money. Accelerated payment notices ("APNs") apply to arrangements that fall within the Disclosure of Tax Avoidance Scheme ("DOTAS") rules or where the taxpayer is issued with a counteraction notice under the General Anti-Abuse Rule ("GAAR").

Taxes covered and taxpayers affected

The new provisions apply to the following taxes ("relevant taxes"):

• income tax;
• capital gains tax;
• corporation tax (including amounts chargeable or treated as corporation tax);
• inheritance tax;
• stamp duty land tax; and
• the annual tax on enveloped dwellings.

There is provision for further taxes to be added to the list by Treasury order.

Similar provisions relating to National Insurance contributions are contained in the National Insurance Contributions Bill 2014, which has not yet become law.

The new rules affect companies as well as individuals. For example:

• an individual might have invested in an arrangement such as a film partnership; and
• a company might have set up an employee benefit trust.

Clearly a liability to make an accelerated payment may have a major impact on the taxpayer's cash flow, whether the taxpayer is an individual or a company.

Follower Notices in more detail

When HMRC may issue a follower notice

HMRC may issue a follower notice where all the following conditions apply:

• There is an open enquiry into a taxpayer's return or claim, or an open appeal, relating to a relevant tax;
• The return or claim, or the appeal, is made on the basis that a particular tax advantage results from the use of particular tax arrangements (the "chosen arrangements");
• HMRC are of the opinion that there is a "relevant judicial ruling"; and
• No previous follower notice has been given to the person in respect of the same tax arrangements and tax advantage, unless it was withdrawn.

A follower notice must normally be given within 12 months beginning with:

• the date of the judicial ruling; or
• the date of the return, claim or appeal

- whichever is the later.

In the case, however, of judicial rulings made before 17 July 2014, the notice must be given:

• by 17^th July 2016; or
• within 12 months beginning with the date of the return, claim or appeal

- again, whichever is later.

A "relevant judicial ruling" is a final ruling of a court or tribunal, which relates to tax arrangements, where the principles laid down or reasoning given in the ruling would, if applied to the chosen arrangements, deny the asserted advantage or part of it. As well as a ruling made by the Supreme Court, a "final ruling" includes a ruling made by a lower court or tribunal if no appeal is made against it, permission to appeal is refused or an appeal against the ruling is abandoned. Thus a decision of a First Tier Tribunal (whose decisions do not bind other courts or tribunals) can still be a relevant judicial ruling for this purpose.

According to guidance issued by HMRC, if a later case significantly changed the effect of a relevant judicial decision, HMRC would reconsider whether any follower notices and associated APNs should be maintained, withdrawn or modified.

Representations about a follower notice

A recipient of a follower notice may make representations to HMRC within 90 days of the notice being issued, objecting to the notice on specified grounds. HMRC must consider such representations and confirm, amend or withdraw the notice.

"Corrective action" to be taken by the taxpayer

Where a follower notice is given (and not withdrawn), the taxpayer must take steps to correct the "denied advantage" - i.e. so much of the tax advantage asserted by the taxpayer as is denied by the principles laid down or reasoning given in the judicial ruling cited in the Follower Notice. The basic time limit for taking these steps is 90 days from the day on which the follower notice was given. If representations are made and the notice is confirmed (with or without amendment), the time limit is the later of:

• 90 days from the date on which the follower notice was given; or
• 30 days from the day on which HMRC notify the taxpayer of its determination of the representations.

The first step that the taxpayer must take is either:

• where there is an open enquiry, to amend the return or claim to counteract the denied advantage; or
• where there is an open appeal, to take all necessary action to reach agreement with HMRC to relinquish the denied advantage.

The second step is to tell HMRC that the taxpayer has taken the first step and to inform HMRC of the denied advantage and (where different) the additional amount due in respect of tax as a result.

Penalties for non-compliance with a follower notice

If the taxpayer does not take the corrective action within the specified time, the taxpayer is liable to a penalty. The basic penalty is 50% of the value of the denied advantage, though this can be reduced as explained below. Where the taxpayer abandons only part of the denied advantage within the applicable time limit, any penalty is based on the amount not counteracted or relinquished.

The value of the denied advantage is normally the additional amount of tax due or payable resulting from the advantage being counteracted, but there are a variety of rules covering specific situations such as losses and tax deferrals.

A penalty that has not yet been assessed may be reduced to reflect the quality of the taxpayer's co-operation with HMRC. "Quality" includes timing, nature and extent. "Co-operation" for these purposes means one or more of the following:

• Providing reasonable assistance to HMRC in calculating the tax advantage;
• Counteracting the denied advantage;
• Providing HMRC with information enabling them to take corrective action;
• Providing HMRC with information enabling them to enter an agreement with the taxpayer to counteract the denied advantage; and/or
• Allowing HMRC access to tax records to ensure the denied advantage is fully counteracted.

A penalty may not, however, be reduced to less than 10% of the value of the denied advantage.

Partnerships make tax returns and lodge appeals but do not themselves pay tax. For partnerships, therefore, penalties are between 4% and 20% of the income and gains at stake-as opposed to between 10% and 50% of the tax at stake.

The time limits by which HMRC must notify the taxpayer of any penalty are as follows:

• in the case of a follower notice issued in respect of a tax enquiry in progress, no later than 90 days after the enquiry is completed; and
• In the case of a follower notice issued in respect of a pending appeal case, no later than 90 days after the earliest of:
• The date the taxpayer takes the necessary corrective action;
• The date of any final ruling on the appeal, or any further appeal in that case; or
• The date on which the appeal is abandoned.

Appeals against penalties

A taxpayer may appeal to a tribunal against:

• HMRC's decision that a penalty is payable; or
• The amount of any penalty.

The appeal must be made within 30 days of the day on which HMRC notify the taxpayer of the penalty. The penalty does not have to be paid before the appeal is determined.

The possible grounds for appeal against HMRC's decision that a penalty is payable include:

• That a condition for issuing the Follower Notice was not satisfied; or
• That it was reasonable in all the circumstances for the taxpayer not to have taken the necessary corrective action in respect of the denied advantage.

The last mentioned ground of appeal was introduced by way of government amendment while the new legislation was being considered by parliament. It seems extremely important in terms of protecting a taxpayer's right to a fair trial.

Even if a penalty is cancelled, the follower notice to which it related will remain valid, as will any related APN.

Accelerated Payments

Basically the aim of APNs is to remove the cash flow advantage for taxpayers of continuing tax disputes.

Conditions for issuing an APN

HMRC may issue an APN where all of the following conditions apply:

• there is an open enquiry into a return or claim, or there is an open appeal, relating to a relevant tax;
• the return, claim or appeal is made on the basis that a particular tax advantage (the "asserted advantage") results from the use of particular arrangements (the "chosen arrangements"); and
• one or more of the following requirements is met:
• HMRC issue or have already issued the taxpayer with a follower notice in relation to the same return, claim or appeal by reason of the same tax advantage and the chosen arrangements;
• the chosen arrangements fall within the DOTAS rules; and/or
• a "GAAR counteraction notice" is or has already been issued in relation to the asserted advantage (or part of it) and the chosen arrangements in a case where the GAAR advisory panel has considered the matter and given an opinion.

In future taxpayers may think more carefully about whether they are strictly obliged to notify HMRC of arrangements under the DOTAS rules. In the past it may have seemed prudent to err on the side of notification. Now, however, one consequence of notifying HMRC that one is involved in such arrangements is a risk that one might in future be required to make accelerated payments.

Representations to HMRC

After an APN is issued the taxpayer has 90 days to send written representations to HMRC objecting to the APN or the amount specified in it. HMRC must consider those representations and:

• Confirm or withdraw the notice, and/or
• Confirm or amend the amount.

Payment of tax where there is an open enquiry

Where there is an open enquiry, a taxpayer receiving an APN is required to pay the "understated tax". The precise way in which this is calculated or determined depends on the detailed circumstances.

In the case of a tax enquiry where no representations are made, the taxpayer must pay the amount specified in the APN within 90 days from the day on which the APN was given. Where representations are made and the APN is confirmed (with or without amendment), the time limit is the later of:

• 90 days from the day on which the APN was given; and
• 30 days from the day on which HMRC notify the taxpayer of their determination of the representations.

Where inheritance tax is payable by instalments, the due date for an accelerated payment that relates to those instalments cannot be earlier than the due date for paying the instalments to which it relates. In that case the penalty date is adjusted accordingly.

Penalty for late payment

Where an APN has been issued while a tax enquiry is in progress, penalties are charged where an accelerated payment is paid late. The dates and rates are as follows:

• at the end of the payment period, 5% of the unpaid tax;
• 5 months after the end of the payment period, 5% of any remaining unpaid tax; and
• 11 months after the end of the payment period, 5% of any remaining unpaid tax.

Payment of tax pending an appeal

Where there is a pending tax appeal, tax that is the subject of an APN cannot be postponed pending the outcome of the appeal. The effect is that the disputed tax must be paid to HMRC pending the outcome of the appeal. The due dates are the same is in the case of an open enquiry. If the taxpayer is successful, the tax will be repaid. HMRC may, however, apply to the tribunal or court for an order that tax should not be repaid pending a further appeal by HMRC.

Withdrawal, modification or suspension of APN

There are several provisions under this heading. The most important points to make in this context are the following:

• Where an APN is given by virtue of a follower notice, and the follower notice is withdrawn, HMRC must withdraw the APN.
• Where an APN is withdrawn, it is to be treated as never having had effect. Any accelerated payment made in accordance with, or penalties paid by virtue of, the APN are to be repaid.

Particular tax regimes

The rules on APNs are modified for:

• Partnership taxation;
• Stamp duty land tax; and
• The annual tax on enveloped dwellings ("ATED").

As regards partnerships, there is provision for partner payment notices and accelerated partner payment notices instead of APNs.

As regards stamp duty land tax, there are modified provisions covering:

• joint purchasers of land;
• members of a partnership; and
• trustees of a settlement.

As regards the ATED, there are again provisions covering situations where persons are jointly and severally liable for tax.

Final comments

These new provisions appear to be designed to help HMRC to deal with a backlog of tax avoidance schemes. It is important to bear in mind that:

• An APN can only be issued where:
  • a follower notice has been issued,
  • a DOTAS notification is involved, or
  • a GAAR counteraction notice has been issued;
• Follower notices depend on previous relevant judicial rules; and
• A penalty for non-compliance with a follower notice can be resisted on the ground that it is reasonable for the taxpayer to continue with the dispute.

 

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