This fourth and final article in the AccountingWEB series summarising the key measures in Finance Act 2014 focuses on Part 4 (follower notices and accelerated payments) and Part 5 (promoters of tax avoidance schemes). Links are provided to HMRC guidance.
FOLLOWER NOTICES AND ACCELERATED PAYMENTS (PART 4)
Overview (chapter 1)
Chapter 1 of Part 4 (sections 199 to 203) provides an overview of Part 4 and defines several terms.
Chapter 2 (ss 204 to 218) provides for follower notices to be given, and for penalties to be imposed where account is not taken of judicial rulings that “lay down principles or give reasoning relevant to tax cases”. The new rules are designed to “improve the rate at which tax avoidance cases are resolved where the point at issue has, in HMRC’s view, already been decided in another taxpayer’s case,” according to HMRC guidance.
Chapter 3 (ss 219 to 229) provides for accelerated payments on account of tax, and restriction of the circumstances in which payments of tax can be postponed pending an appeal. It also enables a court or tribunal to prevent a tax repayment in order to protect the public revenue. The stated aim is to remove the “cash flow advantage” provided by current rules which allow taxpayers to self-assess the “claimed tax advantage” from an avoidance scheme and hold the money in dispute while the dispute is resolved. HMRC guidance says: “This can take a considerable time as these schemes are often highly complex and a considerable amount of information needs to be obtained from taxpayers and advisers, and litigation may be required to resolve the dispute.”
Follower notices (chapter 2)
Section 204 provides that HMRC may give a follower notice to a person (P), within the time limit imposed by s 204(6), if conditions A to D are met. Broadly, those conditions are met if:
A. a tax enquiry (defined in s 202) is in progress into a return (also defined in s 202) or a claim is made by P in relation to a “relevant tax” (income tax, capital gains tax, corporation tax, inheritance tax, SDLT and ATED – see s 200), or P has made a tax appeal (defined in s 203) in relation to a relevant tax but that appeal has not yet been determined, abandoned or otherwise disposed of;
B. the return, claim, or appeal is made on the basis that a particular tax advantage (“the asserted advantage”) results from particular tax arrangements (“the chosen arrangements”). Section 201 defines “tax advantage” and “tax arrangements”;
C. HMRC is of the opinion that there is a judicial ruling relevant to the chosen arrangements; and
D. no previous follower notice has been given to P (and not withdrawn) by reference to the same tax advantage, tax arrangements, judicial ruling and tax period.
A “judicial ruling” is defined by s 205 as a ruling of a court or tribunal on one or more issues. Such a ruling is “relevant” to the chosen arrangements if it relates to tax arrangements; the principles laid down or reasoning given in the ruling would, if applied to the chosen arrangements, deny the asserted advantage or a part of that advantage; and it is a final ruling (ie. a ruling of the Supreme Court or a ruling of any other court or tribunal in the circumstances set out in s 205(4)).
A follower notice must identify the ruling and provide the other information set out in s 206. Section 207 provides that P has 90 days beginning with the day that the follower notice is given to send written representations to HMRC, objecting to the notice on the grounds that condition A, B or D above was not met; that the judicial ruling was not “relevant”; or the notice was out of time. HMRC must consider the representations and determine whether to amend, confirm, or withdraw the follower notice, and must notify P of its decision.
Sections 208 to 214 provide that P is liable to pay a penalty if the “necessary corrective action” (see s 208(5)-(7)) is not taken before the “specified time” (see s 208(8)) in respect of the “denied advantage” (see s 208(3)).
The penalty is 50% of the value of the denied advantage (or the remainder of the denied advantage where, for example, P amends a return to counteract only part of the denied advantage), valued in accordance with schedule 30 (s 209).
Section 210 provides that HMRC may reduce the penalty to reflect the quality, including the timing, nature and extent, of P’s co-operation with the department. It sets out what amounts to co-operation and provides that the penalty cannot be reduced to less than 10% of the value of the denied advantage.
Sections 211 to 214 deal with assessment of a penalty, the application of penalties arising under both s 208 and other provisions, and appeals against a s 208 penalty.
Section 215 and schedule 31 set out the treatment of partners and partnerships in relation to follower notices, and ss 216 to 218 provide for suspension of a follower notice where a late appeal is made against a “final” ruling, introduce a transitional rule in relation to rulings made before the Finance Act was passed, and set out various definitions of terms used in chapter 2.
HMRC published guidance on follower notices and accelerated payments in July.
Accelerated payments (chapter 3)
Section 219 provides that HMRC may give an accelerated payment notice to a person (P) if conditions A to C are met. Broadly, those conditions are met if:
A. a tax enquiry (defined in s 202) is in progress into a return (also defined in s 202) or claim is made by P in relation to a “relevant tax” (income tax, capital gains tax, corporation tax, inheritance tax, SDLT and ATED – see s 200), or P has made a tax appeal (defined in s 203) in relation to a relevant tax but that appeal has not yet been determined, abandoned or otherwise disposed of;
B. the return, claim, or appeal is made on the basis that a particular tax advantage (“the asserted advantage”) results from particular tax arrangements (“the chosen arrangements”). Section 201 defines “tax advantage” and “tax arrangements”; and
C. a follower notice is given or has been given in relation to the same return, claim, or appeal and by reason of the same tax advantage and the chosen arrangements, or the chosen arrangements are DOTAS arrangements (notifiable arrangements under the disclosure of tax avoidance schemes regime), or a counteraction notice has been given under the general anti-abuse rule (GAAR).
Sections 220 and 221 respectively set out the content that must be included in an accelerated payment notice given (a) while a tax enquiry is in progress and (b) where P has made an appeal, and they provide that the notice must specify the “understated” or “disputed” tax. The amount payable is determined by reference to which of the three circumstances set out in (C) above applies, the aim being to counteract the “denied advantage”.
Section 222 provides that P has 90 days beginning with the day that the accelerated payment notice is given to send written representations to HMRC, objecting to the notice on the grounds that condition A, B or C above was not met, or objecting to the amount specified in the notice. HMRC must consider the representations and determine whether to amend, confirm, or withdraw the follower notice, and must notify P of its decision.
Section 223 deals with the effect of an accelerated payment notice while a tax enquiry is in progress. P must make the accelerated payment to HMRC before the end of the payment period, which is either (a) the period of 90 days beginning with the day on which the notice is given, or (b) if P makes representations, the period of 30 days beginning with the date when P is notified of HMRC’s determination if that period ends later than the period in (a). The payment is treated as a payment on account of the understated tax.
Section 224 amends the rules on recovery of tax not postponed, to introduce a restriction on the power to postpone tax that has been specified in an accelerated payment notice, and s 225 amends a provision dealing with payment or repayment of tax where there is a “further appeal” to provide that a court or tribunal may authorise HMRC to withhold a repayment.
Sections 226 provides that P is liable to pay a penalty of 5% of the accelerated payment if the payment remains unpaid at the end of the payment period. Increased penalties apply in the event of further delay.
Section 227 deals with the withdrawal, modification or suspension of accelerated payment notice.
Section 228 and schedule 32 provide for “accelerated partner payments” and modify the general rules to cater for partnerships. Section 229 defines terms used in chapter 3.
SDLT, ATED and other taxes (chapter 4)
Sections 230 to 233 modify the application of Part 4 for stamp duty land tax (SDLT) and the annual tax on enveloped dwellings (ATED), and confer a power to extend the provisions of Part 4 to other taxes (see “relevant tax” above) by Treasury order. Consequential amendments are set out in schedule 33.
HMRC published guidance on follower notices and accelerated payments, and a list of scheme reference numbers relating to schemes whose users may be charged an accelerated payment. A factsheet is also available.
PROMOTERS OF TAX AVOIDANCE SCHEMES (PART 5)
HMRC estimates that “approximately 20” businesses could be designated as promoters of tax avoidance schemes under the regime introduced by sections 234-283 and schedules 34 to 36, which provide for a “conduct notice” to be applied to certain promoters. Subject to approval by a tribunal, promoters who fail to comply with a conduct notice may be given a “monitoring notice”.
The name of a promoter subject to a monitoring notice may be published by HMRC (see s 248), and the promoter will be required to notify its monitored status to clients (s 249).
HM Treasury said in a Finance Bill explanatory note that the new legislation is “designed to tackle the particular behaviours which have been identified amongst certain promoters of tax avoidance schemes (e.g. failure to comply with DOTAS or respond to HMRC information notices) and in doing so improve the transparency of certain promoters with HMRC with appropriate sanctions if the promoter does not want to comply voluntarily”.
Section 237 and schedule 34 provide, broadly, that an authorised officer who becomes aware that a person (P) who is carrying on a business as a promoter has met one or more “threshold” conditions in the previous three years must determine whether P’s meeting of the condition(s) should be regarded as significant.
If the officer determines that the meeting of the condition(s) should be regarded as significant, then he or she must give P a “conduct notice”, unless it would be inappropriate to do so having regard to the likely impact of P’s activities on the collection of tax. If certain conditions are met, the officer must determine that P’s meeting of the condition(s) is should be regarded as significant.
Sections 234 to 236 define a number of terms for this purpose including “relevant proposal”, “relevant arrangements”, “tax advantage” and carrying on business as a “promoter”.
Sections 250 to 283 deal with related matters including the allocation and distribution of promoter reference numbers, information powers, penalties and offences.
HMRC published detailed guidance on the promoters of tax avoidance schemes legislation during the passage of the Finance Bill. Note that this guidance may not take full account of amendments made prior to Royal Assent.