HM Government is introducing controversial legislation in the Finance Act 2014 to force individuals with open tax enquiries with HMRC, relating to perceived tax avoidance, to make immediate upfront payments.
This is the government’s response to a public sense that wealthy taxpayers have engaged in tax avoidance schemes, regarded as aggressive, and benefitted from the cash flow advantage of not paying their fair-share of tax in the course of lengthy tax disputes with HMRC and associated judicial proceedings.
HMRC will now be empowered to go after the money and bring it in quickly, regardless of pending enquiries or extant tax tribunal appeals. From August 2014 HMRC’s use of what are known in the draft legislation as follower notices (FNs) and accelerated payment notices (APNs) is intended to haul in cash to the Treasury over the next twenty months.
The pace of required payment is breathtaking. From the initial FN to payment under the APN the taxpayer could be looking at as little as six months to marshal his or her finances, let alone his or her thoughts. The alacrity with which notices are intended to be issued is by all means draconian.
Upfront payment of disputed taxes pending appeal has long been established in VAT disputes. The underlying rationale is that VAT is a tax on the consumer of goods and services; it was never the trader’s money to hold on to. However, tax on income is ostensibly a tax on endeavour; so, HM Government’s share should be determined on a precise and justified basis in due course, as opposed to the ‘pay now confirm later’ basis apparently reflected by the FNs and APNs.
There is a brisk feel to the relevant sections of the legislation covering FNs and APNs – a sort of legal ‘stand and deliver’. The taxpayer is presented with terse demands to be fulfilled in a short unequivocal timeframe. In short, FNs will be issued to taxpayers whose tax affairs fulfil the following conditions:
1. a tax enquiry is in progress or an appeal has been lodged;
2. the enquiry or appeal relates to an asserted tax advantage;
3. HMRC are of the opinion that there is a judicial opinion that is relevant to the arrangements;
4. no previous FN has been issued to the taxpayer in the same matter.
There is no appeal against the issuing of an FN to an independent tribunal, although representations can be made to HMRC about whether the conditions for the FN have been met. The legislation is deliberately designed to be litigation proof. However, no FNs will be issued more than twelve months after the relevant judicial decision.
On receipt of the FN, the taxpayer must take ‘corrective action’, which involves the taxpayer amending the tax return to counteract the denied advantage or by entering into an agreement with HMRC to relinquish the denied advantage. The taxpayer is then required to notify HMRC of the amount of ‘tax’ due and payable.
They have 90 days to take corrective action or to make representations to HMRC; otherwise they become liable to a penalty of 50 per cent of the tax (which at least is appealable). They then have 30 days to take corrective action after rejection of their representations or also become liable to the penalty.
The payment noose tightens after corrective action. The taxpayer can expect an APN, setting out the amount due before the expiry of 90 days from the APN or 30 days after HMRC’s rejection of any representations.
In the flurry of activity accompanying these notices, some debate will emerge about what is the extent of a judicial decision backing an FN. (For example, is not a First tier tribunal decision only binding on those particular parties?) However, what is clear is that HMRC is geared up for a campaign with a target income for the whole exercise. This will not be a softly softly affair.
Geoff Tack is a senior associate and Jayne Newton is tax investigations director at DLA Piper LINK