Legislation allowing HMRC to demand upfront payments of tax where certain tax avoidance schemes have been used is to be given Royal Assent on 17 July 2014. Those likely to receive such a demand will include taxpayers who have used tax planning schemes which fall into one of the following categories:
- Arrangements which have been allocated a DOTAS (disclosure of tax avoidance schemes) number.
- Arrangements which have been the subject of a GAAR (general anti abuse rules) counteraction notice
- A scheme similar to one that has been found by the courts to be ineffective and subsequently issued with a ‘follower notice’ requiring the amendment of the relevant return
HMRC have now published a list of the DOTAS reference numbers where accelerated payment notices may be issued.
The notices will require users of the listed schemes to make an upfront payment of the disputed tax before the validity of the scheme itself has been ruled on in the courts. Unlike those accelerated payment notices issued to individuals who have previously received a follower notice (see below), there is no requirement for a similar judicial decision in respect of the scheme in question. All that is required is the inclusion of the DOTAS number on a tax return which is currently under enquiry, including those filed many years prior to these provisions becoming law.
HMRC intend to start issuing the accelerated payment notices in August 2014 and will phase the issuing of the notices to current scheme users over a 20 month period.
Those receiving a ‘follower notice’ will – in addition to having to pay the tax ‘up front’ – have 90 days in which to take ‘corrective action’ i.e. to amend their return to agree to HMRC’s view. Where taxpayers do not wish to do this – e.g. they wish to continue to fight on – a penalty of up to 50% of the disputed tax will be imposed.
Finance Bill 2014 went to Report Stage on 1 July 2014 and a number of amendments were tabled giving taxpayers additional grounds on which to appeal against a follower notice penalty, including the following:
- Where HMRC have failed in some degree in relation to the procedural aspects of the issue of the penalty.
- Where the judicial ruling which the taxpayer is expected to ‘follow’ is not one which is relevant to the arrangements entered into by the taxpayer. While the specific guidance on this is yet to be published it is presumed that the tribunal will not be in a position to determine the penalty appeal until the ongoing appeal regarding the substantive tax issue has also been resolved. It would also seem to follow that where the taxpayer is successful in the substantive appeal, the follower notice penalty should be dismissed on the same grounds.
- Where it was ‘reasonable in all the circumstances’ for the taxpayer to have failed to take the necessary corrective action within the stated time limit and rather continued to pursue the appeal on the substantive issue.
These changes are very welcome as they will provide taxpayers who receive what they perceive to be ‘unfair’ follower notices with some comfort that they will have statutory grounds to dispute a penalty if they choose to fight on. Many people have been very concerned that HMRC would use follower notices as a blunt tool to apply the consequences of every court or tribunal decision which goes in their favour as widely as possible. Taxpayers will still need to be brave to fight on the face of a potential 50% penalty; however, where they are satisfied that they have ‘reasonable’ grounds to do so, they will now at least have an opportunity to persuade a court or tribunal to that view.
For further information regarding accelerated payment notices and follower notices, the implications of these and how to manage the response to HMRC. Please call TaxDesk on 0845 4900509 and ask for John Hood or Isobel Clift.