HM Revenue & Customs (HMRC) published a consultation document http://abytx.co/1dOAvdc on accelerated tax payments on 24 January 2014. This is part of a number of measures designed to tackle tax avoidance and was published on the same day as the summary of responses http://abytx.co/1gHFjBB to the August 2013 consultation on the new regime for ‘high risk promoters’.
- ‘follower cases’ – open enquiries which HMRC decides turn on ‘the same or substantially the same grounds as a case already decided in the tribunal or court’
- enquiries into schemes which have been disclosed under the disclosure of tax avoidance scheme (DOTAS) rules or the general anti-abuse rules (GAAR).
The main driver behind these proposals is that, generally speaking, HMRC is unable to disallow the disputed tax relief pending the outcome of the enquiry or litigation. This means that the taxpayer has, effectively, a low-interest loan from the Government until the case is settled, which could be a number of years.
The proposals also reflect HMRC’s general trend of using ‘nudge’ policies to influence the behaviour of taxpayers and advisers. Given the need to pay the tax much sooner, it hopes the appetite for such avoidance schemes will be reduced.
Of these two proposals, it is the second which will be of most concern to tax advisers. It is expected to apply from Royal Assent to Finance Bill 2014 and is retrospective in that it can be applied to existing enquiries. Once the payment notice is issued by HMRC, the taxpayer might have as little as 90 days to make the payment or challenge the notice. This may leave taxpayers only nine months away from having to make substantial payments to HMRC and investments may have to be cashed-in (with a potential knock-on tax liability) to release the necessary funds.
This blog post summarises the second proposal. For discussion of the proposals in relation to ‘follower cases’, see the Tolley website http://www.tolley.co.uk/hmrc-to-require-accelerated-tax-payment/. The draft legislation for accelerated tax payments in ‘follower cases’ can be found from page 26 onwards of the consultation document.
Responses must be submitted to the Counter Avoidance Group (firstname.lastname@example.org) by 24 February 2014.
Open enquiries where DOTAS or GAAR applies
HMRC proposes to require accelerated tax payments where the tax arrangement is under enquiry and it has either:
- been disclosed under DOTAS rules
- been challenged under GAAR.
Consultation document, para 4.2
Whilst this is the criteria proposed in the consultation, the Government recognises that many tax avoidance arrangements will not fall into these categories and so plans to keep the conditions under review with a view to extending them. However, whilst the above would be simple to codify, it might be more difficult to legislate extended criteria without encompassing enquiries into tax issues which would not normally be considered to be ‘avoidance’.
Consultation document, para 4.3
No draft legislation has been included with the consultation. However, it is expected to be included in Finance Bill 2014 which will be published in March 2014. Based on the draft legislation released in relation to accelerated tax payments in ‘follower cases’, it seems likely that:
- the onus may be on the taxpayer to tell HMRC the amount of tax due had the taxpayer not entered into the arrangements
- there could be penalties due for late payment of the tax, and
- interest could be due from the original due date in relation to the tax year in question.
The deadline for paying the tax has not yet been decided but the Government favours using the same time scales as for follower cases (ie 90 days from the date of the notice).
Consultation document, para 4.15-4.16
There will be situations where no extra tax is due in the case of a tax arrangement which has been disclosed under DOTAS. In such cases a payment notice would not be appropriate.
Consultation document, para 4.11
However, although it would seem necessary for the taxpayer to have a right of appeal against the notice, in DOTAS cases it is difficult to see the basis upon which such an appeal could be made other than in relation to the amount of tax due under the notice. For those taxpayers who took part in such a scheme and who are subject to an enquiry into this aspect of their returns, it is difficult to see how they could legitimately argue that the payment notice is not valid.
The taxpayer whose tax arrangements did not fall into the DOTAS regime but to which HMRC believes the GAAR applies may have more scope for appealing the notice. This is because it may be more difficult to prove that the arrangements fail the GAAR. We will have to wait for the draft legislation to be released for details of the precise conditions for issue of the notice to comment.
It is assumed that anyone failing to make the accelerated tax payment as a result of receiving a valid payment notice will be subject to the usual debt collection process.
On the basis of the draft legislation in relation to ‘follower cases’, it is likely that the trigger dates for penalties for late payment will be:
|Due date for payment (possibly within 90 days of the payment notice or within 30 days from the confirmation of the payment notice following representations)||5% of the amount that remains unpaid at that date|
|Five months from the due date for payment||5% of the amount that remains unpaid at that date|
|11 months from the due date for payment||5% of the amount that remains unpaid at that date|
As noted above, the due date for payment has yet to be decided.
The consultation document contains no discussion of what will happen if the taxpayer does not have the ready cash to fund the accelerated tax payment.
It is assumed that in these circumstances the taxpayer will be able to approach HMRC with a time to pay proposal. The taxpayer should be prepared to submit detailed financial information (including cash flows and asset statements) to support his proposed payment plan.
These rules are expected to apply from Royal Assent to Finance Bill 2014. It is understood that the law will apply retrospectively to existing enquiries and appeals as well as enquiries and appeals opened after that date.
HMRC is to review all DOTAS schemes in advance of Royal Assent and will issue a list of schemes where payment notices will be issued to the taxpayers involved.
Consultation document, para 4.10, 4.12
On this basis, it would seem reasonable to assume that payment notices will start to be issued either on or shortly after Royal Assent. Since Royal Assent usually happens in July before the summer recess of Parliament, it may be that the first accelerated tax payments in relation to existing enquiries into DOTAS schemes may be due at the end of October 2014.
What if the taxpayer subsequently wins?
This is not directly addressed in the consultation document, however if the tax arrangements were found to work as intended HMRC would have to refund the tax paid (and interest suffered) under these accelerated payment rules. In addition a repayment supplement would be applied.
What do you, the tax adviser, need to do?
Affected taxpayers are likely to need as much notice as possible to make the arrangements needed to release the cash to make the tax payment.
Many investors in schemes subject to the DOTAS rules have to receive a certain rate of return on the money saved via the tax relief in order to make a ‘profit’ from taking part in the scheme. This may mean they have serially invested the money in other schemes, which could compound the amount of tax due under the above proposals as well as make it difficult for them to extract the cash at short notice.
It is suggested that you review your client list to identify those who will be impacted by these proposals and contact them to warn them of the Government’s plans. See the Standard document – letter to clients regarding accelerated tax payments in DOTAS enquiries for sample wording http://www.tolley.co.uk/content/. Consider your fees if you are asked to prepare estimates of the amount potentially due under these proposals.
When advising affected clients remember that you are unable to give advice on disposing of investments unless you are authorised to do so. However, you can advise on the tax implications of selling the investments in question.
Author: Tolley – Tolley is the UK’s only provider of practical tax and accountancy guidance, in-depth reference material, ground-breaking training and learning resources and unique market insight.
Find out more at www.tolley.co.uk