Budget 2014: A Challenge to Tax Avoidance Schemes by Hannah Southon and Farahnaz Ragi09/05/14
On 19 March 2014, the Chancellor George Osborne unveiled measures to give greater power to HMRC to tackle tax avoidance schemes by making changes to the Disclosure of Tax Avoidance Schemes (DOTAS) rules and introducing new requirements for taxpayers to pay upfront any disputed tax associated with schemes covered by those rules or counteracted under the General Anti Abuse Rule (GAAR), before the question of whether or not the tax is payable has actually been decided by the Courts.
The changes to be brought in at the same time as the Finance Act 2014 are both helpful and harmful to investors who are likely to be targeted by the promoters of such schemes.
The DOTAS rules
The DOTAS rules, which were brought in by the Finance Act 2004, require promoters of tax avoidance schemes to provide early information to HMRC about the schemes if certain criteria (known as ‘hallmarks’ but perhaps better termed ‘red flags’) are met. These could be generic (such as a requirement for confidentiality) or specific to the type of tax at stake, but in general they are signs that a scheme is at risk of being aggressive and of failing to comply with the relevant requirements needed in order to access the target tax reliefs. The promoter also has to provide HMRC with details of any clients who have used their avoidance scheme. Once a scheme has been notified to HMRC, it will issue the scheme with a DOTAS number – this does not mean that the scheme has been approved by HMRC. Any person using a scheme with a DOTAS number is required to disclose that fact on his or her tax return by inserting the relevant DOTAS number. In certain circumstances, e.g. where the promoter is based outside the UK, the scheme user has to disclose it even when it does not have a DOTAS number.
The changes to be introduced to the DOTAS rules by FA 2014 will hopefully protect investors from the less scrupulous promoters of tax avoidance schemes. Promoters who come to HMRC’s attention for one of a number of specified reasons (e.g., those who breach the banking code of practice) will be named and issued with a conduct notice. Breach of a conduct notice may lead to the promoter being monitored by HMRC. HMRC will also be able to name the monitored promoter (including details of why the conduct notice was breached) and required to inform its intermediaries and clients – a warning that using that promoter’s scheme is likely to be high risk. If a potential client still wishes to use the scheme of such a promoter, he or she should be aware that the new legislation gives HMRC greater powers to obtain information from monitored promoters about their schemes and their clients (over and above the pre-existing DOTAS rules) and they will likely be subject to a longer assessing period.
Accelerated payment of disputed tax
More controversially, the proposed new legislation introduces accelerated payment provisions, meaning that HMRC will be able to require from taxpayers payment upfront of disputed tax linked to schemes covered by the DOTAS rules or counteracted under GAAR.
If HMRC consider that a scheme constitutes tax avoidance and that the reliefs being claimed by the taxpayer are not due, it will begin by issuing an enquiry notice and there will then follow a protracted process ultimately culminating in a hearing before the tax tribunals or even exceptionally all the way up to the Supreme Court. The existing position is that, for as long as the effectiveness of the scheme in question is undecided, the taxpayer does not have to pay the tax being claimed by HMRC. The accelerated payment provision will change all that – HMRC will, once the new provisions come into force, be entitled to issue accelerated payment notices, requiring payment of the disputed tax within 90 days, even though the dispute has not been settled in its favour. HMRC will even be able to issue such a notice to a scheme user before a dispute has even begun, if it identifies that the same scheme has already been litigated unsuccessfully (from the taxpayer’s point of view) by another scheme user. In such circumstances it proposes to issue ‘follower’ and accelerated payment notices to all affected taxpayers.
The new regime will also apply to existing, as well as future, avoidance cases.
HMRC believes that the new measures will eliminate the cash flow advantage that it considers scheme users unjustly gain by holding onto the disputed tax pending the outcome of the dispute when that dispute is ultimately decided against them. This is extremely concerning because whilst HMRC will repay the tax with interest if the dispute is eventually decided in the taxpayer’s favour, that may not be sufficient to offset the harm that they have suffered in the meantime. Even more concerning, the Budget also announced an intention next year to introduce further measures enabling HMRC to take the disputed payment directly from the taxpayer’s bank account.
This is more than draconian; a much-voiced opinion amongst accountants, tax experts and legal practitioners is that is forces taxpayers to pay their taxes before they are due and is a breach of the fundamental principle that a person is innocent until proven guilty. We would not be surprised if, in the event that the proposed legislation is brought into force, it is judicially reviewed in the near future.
Hannah Southon is an Associate and Farahnaz Ragi a Paralegal at Harcus Sinclair.