Following last year’s consultation paper, Raising the stakes on tax avoidance, the Autumn Statement 2013 included an announcement regarding legislation to be introduced in Finance Bill 2014 allowing HMRC to target firms promoting high risk tax avoidance schemes and take action against them. There are a number of elements to the legislation, including:
- Accelerated payment of tax in avoidance cases;
- Follower penalties; and
- Obligation for clients of high risk promoters to identify themselves to HMRC.
‘Pay Now’ Notices
While tax avoidance schemes are often used by a large number of individuals, HMRC will take only one or two ‘test cases’ to be heard at court. At present, all users of the scheme in question are entitled to hold onto the disputed tax until such time as the dispute is resolved. This can often, and generally does, take a number of years, during which time the taxpayer will enjoy the cash flow benefit. Indeed, HMRC claim that many taxpayers enter such schemes purely for this reason. The new legislation will require these taxpayers to make an up-front payment of for the tax in question where a particular scheme has already been defeated in the courts, although the Government are due to consult on the scope of widening the criteria for issuing ‘pay now’ notices.
Where a scheme has been found by HMRC to be ineffective and the Tribunal decision has supported this view, notices will be issued to all scheme users advising them that they should amend their returns to reflect the position, or respond to HMRC with their reasons as to why they believe the decision does not apply to them. A tax-geared penalty will be imposed in the event that the taxpayer pursues litigation on the same scheme and is unsuccessful.
High Risk Promoters
Finance Bill 2014 will introduce objective criteria for the identification of ‘high risk’ promoters, including whether a promoter has failed to notify a scheme via DOTAS, or whether HMRC has used an information power in relation to that promoter. The consequences of being designated as a high risk promoter will include a higher standard of reasonable care and reasonable excuse, and an obligation for their clients to identify themselves to HMRC.
The draft legislation is to be issued this month, later than the bulk of Finance Bill 2014 drafts issued in December 2013. The delay in publishing this legislation has been welcomed by the Chartered Institute of Taxation (CIOT) on the basis that such measures require careful consideration and should not be rushed. CIOT President Steven Coleclough stated that:
While a pragmatic solution is required to this problem area, it is vital that HMRC get the definitions of HRPs and ‘follower cases’ right and do not tip the ‘playing field’ nor unfairly target uninformed/misinformed clients of HRPs, particularly the man on the street who is sold a tax scheme, who should be distinguished from a sophisticated investor.