HMRC is adopting an increasingly aggressive approach to taxpayers who choose to dispute a case involving perceived tax avoidance, explain Kate Ison and Aude Delechat of Berwin Leighton Paisner.
It is estimated that there are currently more than 65,000 open cases involving marketed tax avoidance, many of which date back over four years.
In a number of recent consultation papers, HMRC has proposed a range of controversial measures which will give HMRC power to require a taxpayer to pay disputed tax when HMRC has won another case involving similar facts. However, the power goes beyond simply requiring payment pending the outcome of an appeal. Taxpayers will effectively be forced to concede and accept HMRC’s application of the prior case, with very limited possibility to object or they will face heavy tax-geared penalties if they continue to pursue the dispute.
The measures are intended to make it less attractive for taxpayers to maintain their position in a case involving tax avoidance pending the outcome of any similar litigation, with the aim of clearing the backlog of cases for an under-resourced HMRC.
The current regime
At present, in direct tax disputes there is no requirement for a taxpayer to pay the disputed tax pending any enquiry by HMRC. Where HMRC issues a closure notice or assessment, the starting point is that the taxpayer is then legally required to pay the disputed tax. However, where a taxpayer files an appeal against the assessment, it may request HMRC to postpone payment and collection of any disputed tax pending the decision of the first tier tribunal. Historically, as a matter of practice, HMRC has in general agreed to postpone payments.
HMRC now appears to be concerned that by allowing the postponement of payment of disputed tax, it is enabling taxpayers to prolong disputes unnecessarily. The measures proposed in the consultation paper seek to redress this apparent imbalance.
Under the proposed legislation, HMRC will be able to issue a “failure notice” to a person (P) if:
- an HMRC enquiry is in progress or P has appealed an HMRC assessment but the court has not issued its decision
- P is claiming that a particular tax advantage results from particular tax motivated arrangements
- in HMRC’s opinion there is final judicial decision that is “relevant” to P’s arrangements
Any Supreme Court decision will be final, as will any decision of a lower court that the taxpayer cannot appeal (for example, because they have run out of time).
A decision will be relevant if (in HMRC’s opinion) it relates to (apparently any) tax motivated arrangements and principles are “laid down” in that decision which would, if applied to P’s arrangements, deny the tax advantage claimed by P.
A failure notice must specify the case HMRC is relying upon, why the conditions outlined above are satisfied and the amount of tax payable as a result.
If an enquiry is open the taxpayer must amend their tax return to remove the tax advantage specified in the failure notice. If the taxpayer is appealing an HMRC assessment they must take “all necessary steps to enter into an agreement with HMRC” to give up the tax advantage. In either case the additional tax must be paid within 90 days of the failure notice being issued.
Can the taxpayer appeal against the failure notice?
Apparently not. Aside from asking HMRC to reconsider, the legislation contains no mechanism to appeal a failure notice and there are significant tax related penalties for non-compliance, i.e for pursuing the appeal regardless. The consultation paper is quite clear that the failure notice is not intended to simply move the time at which there is a dispute about the substantive point. The consultation paper states that the taxpayer should concede and will only be able to challenge the notice on limited procedural grounds.
Tax authority or judge?
What if one taxpayer decides not to appeal a poor first tier tribunal decision (of which there are plenty)? As the legislation stands, HMRC will be able to force other taxpayers to accept that decision as binding. The only way to challenge HMRC will be judicial review. However, that could only reverse HMRC’s decision to apply the underlying decision to a particular set of facts, not the poor tribunal decision itself. So any principles “laid down” in that decision, however flawed, will become enshrined as binding authority until a taxpayer with sufficiently different facts can bring a case that overturns them.
Can it get any worse?
Yes. The consultation paper also contains proposals to extend these powers to situations where there is no relevant case for HMRC to rely upon. If these are implemented HMRC would be able to issue a failure notice to a taxpayer who has used a tax avoidance scheme if:
- HMRC has decided to apply the General Anti-Abuse Rule in another case involving that scheme
- the scheme has been disclosed under the regime for the Disclosure Of Tax Avoidance Schemes
In either case it does not seem to matter whether the scheme actually works.
What needs to change?
These proposals are designed to prevent taxpayers who have a remote chance of success (because, for example, the scheme has already failed in another case) from prolonging the dispute for as long as they are able. What the government wants to stop is taxpayers dragging out appeals in these situations simply to hold on to the cash for as long as possible.
However, that problem would be solved if taxpayers were simply required to pay the tax pending the outcome of any such appeal. These powers go too far. Let us hope that the conflicting comments about taxpayers getting their money back more accurately reflect the underlying policy and the legislation that we see in the Finance Bill is significantly improved.