Finance Bill Clauses 192-267 – Accelerated Payment Notices and Follower Notices-A briefing note for the Finance Bill Committee
This briefing note has been prepared to assist members of the Finance Bill Committee in scrutinising Chapter 3 of the Finance Bill, which runs from Clauses 192-267. These clauses introduce a system of Accelerated Payment Notices which will give HMRC the power to demand immediate and upfront payment of any disputed tax where a DOTAS registered arrangement has been used, and before any arguments have been heard in the tax courts. The changes will apply retrospectively over the past ten years.
Members of the Finance Bill Committee will have received representations from many of their constituents highlighting concerns about the impact that upfront demands for disputed tax by HMRC will have on their businesses and personal financial circumstances, as well as the retrospective nature of the clauses. This briefing note outlines the main areas of concern, and suggests amendments that members of the Finance Bill Committee may wish to support.
This paper should be read in conjunction with the additional briefing note which provides a paragraph by paragraph rebuttal of HMRC’s arguments in favour of these proposals and outlines some questions that Finance Bill Committee members may wish to ask the Minister when the clauses come up for debate.
Summary of proposals and relevant Clauses
There are two elements to the changes which will be introduced through the Finance Bill.
· Clause 197 gives HMRC the power to issue a ‘Follower Notice’ by declaring that a taxpayer’s financial arrangements are "the same or similar" to other cases which have been defeated in the courts, and to require the taxpayer to immediately concede defeat and make immediate and upfront payment of any disputed tax, with the amount to be decided upon by HMRC, with no recourse to the courts and no right of appeal.
· Clause 212 gives HMRC the power to issue ‘Accelerated Payment Notices’ in cases where they deem that any DOTAS registered tax arrangement "does not work", and again to demand immediate and upfront payment of disputed tax without any requirement for the court to uphold HMRC’s interpretation of the law. Taxpayers will have no right of appeal, but will only be able to ask for an internal review, and will have to take HMRC to court to challenge the decision or get their money back.
Despite clear rules published by HM Treasury in 2012 -and reiterated recently by the chair of the Treasury Select Committee-which states that ex post facto legislation should be used only in "wholly exceptional circumstances" and where clear warning has been given in advance, the changes outlined in the consultation will apply retrospectively going back as far as ten years.
HMRC will therefore be given the power to demand immediate and upfront payment of disputed tax, with the amount to be decided by them, for any tax planning arrangement registered under DOTAS, or which HMRC believes should have been registered, since 2004. The proposed changes will apply to cases that are currently open or under appeal, creating great unfairness since those who are currently subject to enquiries from HMRC will have been told and given an expectation as to how that process would take place and at what stage payment would be due in the event that they lost.
HMRC has, through the Exchequer Secretary, claimed that the proposals are not retrospective since they do not change an underlying tax amount. However, this is a misleading statement. The legislation will retrospectively change, going back ten years to the introduction of DOTAS, the way in which tax disputes are dealt with, and retrospectively grant new powers to HMRC to demand immediate and upfront payment of any amount of disputed tax that it so decides, without having to take a case to the tax courts. Indeed, the Treasury Select Committee in its report published on 9th May confirmed that these measures were retrospective, noting that: "this policy will retrospectively apply to some of the 65,000 outstanding tax avoidance cases. There may be a case for this policy, but the Government has yet to explain what is wholly exceptional about these cases which justify this retrospective measure."
The retrospective nature of the legislation has also been noted by the tax and legal professions, with the Chartered Institute of Taxation saying "this is in effect introducing retrospective legislation", and King & Wood Mallesons LLP noting that "this retrospective change is being proceeded with despite the strong representations made about it by a number of professional bodies". The Centre for Policy Studies, the Institute of Economic Affairs, the Law Society of England and Wales, the Institute of Chartered Accountants of England & Wales, and the CBI have all criticised this measure as retrospective legislation.
Retrospectively changing the rules half-way through an enquiry is against natural justice and could be open to legal challenge, while the use of unannounced, retrospective changes to tax law in this way damages confidence in the UK as a place to invest and do business and undermines the principles of stability and certainty in the tax system. A ComRes opinion poll commissioned by The Whitehouse Consultancy in April 2014 found that 70% of the British public are opposed to retrospectively changing how tax enquiries are dealt with.
There is a real danger that, if the Finance Bill Committee votes through these proposals without amendment on the basis of reassurances that they are not retrospective, HMRC will have misled Parliament. The legislation should therefore be amended so that the Accelerated Payment Notice and Follower Notice provisions apply prospectively, rather than retrospectively, and only apply to tax planning carried out after Royal Assent has been granted.
The lack of proper scrutiny or appeals process
In order for the Follower Notices provisions to work, it is absolutely vital that HMRC make an unbiased decision as to whether or not a taxpayer’s case is the same or similar to a case that they have already won in the tax courts. However, there is real concern that HMRC will be unable to make such a decision in an impartial and unbiased manner, since their default position is that all taxpayers’ arrangements "do not work", without providing any evidence to substantiate this and often coming to this conclusion before any real or detailed examination has begun of a taxpayer’s affairs.
HMRC’s public statements suggest that they cannot interpret case law and legislation in a truly impartial manner. For example, internal ‘independent reviews’ on substantive issues rarely if ever change the original decision and are often considered without HMRC even attempting to obtain the reason that the reconsideration was requested. It will be very difficult for HMRC, when asked to review an Accelerated Payment Notice internally, to deviate from their standard position that their interpretation is always correct and that the money is always due.
Under the proposals in the Finance Bill, taxpayers will have no right of appeal if they do not agree that the tax case HMRC claims is "the same or similar" is relevant to their case nor if HMRC issue an Accelerated Payment Notice. They can ask for a review to be carried out by HMRC, but if HMRC decides the case is relevant then the accelerated payment must be paid and HMRC will have no incentive to ensure that the taxpayer’s case is resolved speedily or to see it to a conclusion. The legislation should therefore be amended to incorporate the right of appeal to a First Tier Tribunal before any Accelerated Payment Notice has to be paid.
The end of the DOTAS regime
If the proposed requirement on accelerated payment goes ahead, it will essentially mean the end of the DOTAS (Disclosure of Tax Avoidance Scheme) regulations since promoters will no longer use tax planning arrangements that require a DOTAS disclosure. HMRC will be back in the position they were in before 2004, where they only found out about avoidance schemes years after they were first used, and were unable to identify all users due to the lack of a centralised system of detection.
It will also mean that the clients of those promoters who have disclosed under DOTAS and who HMRC do not consider to be "high risk" will be targeted, whilst clients of the "high risk" promoters that did not so disclose will be unaffected. This will have the unintended effect of pushing people away from openly declared and transparent tax planning mechanisms and instead encourage the use of secretive, artificial and aggressive avoidance vehicles marketed by less reputable promoters.
Miscarriages of justice
The proposals as currently drafted have the potential to create great injustice. Although HMRC claim that they win 80% of cases taken to court and so taxpayers subjected to an Accelerated Payment Notice are merely being asked to pay tax that would have to be paid eventually, we understand a very large number of cases where HMRC claim a taxpayer’s financial arrangements "do not work" never even make it to court. HMRC’s litigation and settlement strategy says that they should normally only take to court those cases where they have more than a 50% chance of winning. This means that APNs could be issued in a large number of cases where the money is later not found to be due to HMRC. The overwhelming majority of people who will be required to make upfront payments through an Accelerated Payment Notice will be conducting their affairs entirely reasonably and in most cases money demanded by HMRC will eventually be determined not to be payable provided that the taxpayer is able to pursue litigation.
Even if we accept HMRC’s figures at face value, they state that in 20% of cases, taxpayers will be asked to make upfront payment of tax that is not due and will only be able to get this money back if they proceed with litigation.
The consequence of forcing taxpayers to make immediate and upfront payments of amounts determined by HMRC without being able to appeal may in many instances eventually be deemed not to be payable, will mean that many people could be required to liquidate their assets to pay unexpected and incorrectly issued payment notices. Many companies will be forced to take money out of their investment plans, make staff redundant or hold off on new job creation, or potentially wind up their business, to be able to pay an Accelerated Payment Notice, while individuals may be forced to dip into savings or investments, sell their assets at a fire sale price, or even sell their homes or declare bankruptcy. The fact that this money will eventually be returned to the taxpayer, after many years of litigation and with only minimal interest paid, will do nothing to compensate for the loss and upheaval caused by the requirement to make upfront payments.
The impact on jobs and investment
HMRC has said that they expect to collect £4bn from Accelerated Payment Notices over the next four to five years, compared with total predicted tax receipts from all sources in 2014 which will be around £606bn. The £4bn then represents under 0.2% of all projected future tax revenue over that period, and demonstrates that the measures will be of little practical benefit in reducing the deficit, particularly given the ruinous effect it will have on many businesses. It also fails to recognise the very large number of individuals and companies who will go bankrupt as a result of accelerated payments and hence will not be able to pay any owed tax that they might otherwise have been able to pay at a later date.
A random survey of 924 companies and individuals carried out by EDF Tax and its peer companies has indicated that 73% would be unable to pay the tax due if an Accelerated Payment Notice was to be issued. 93% said that the proposals will affect investment, expansion and development plans in place for the business, while 69% said they would have to consider redundancies to fund the payment of an APN. 56% said that the proposals may affect their ability to continue in business, with insolvency or liquidation being a possibility.
Extrapolated to the approximately 30,000 recipients of Accelerated Payment Notices which HMRC predict, this could result in job losses of around 150,000 around the country. The tax revenue potentially impacted, again using projected Accelerated Payment Notice recipients as the numerator, could therefore be as much as £50bn over a three year period – consequently costing the Exchequer far more than it anticipates it will collect.
Throughout the consultation process and the passage of the legislation it has been explicitly stated that promoters and taxpayers are deliberately delaying the resolution of tax cases and that HMRC is left powerless in the face of such tactics. As a result, HMRC needs new powers to help combat this abuse. This is misleading and does not reflect the true position nor does it give an accurate account of who is to blame for delays. In our experience lengthy delays are often the result of HMRC’s actions (or lack thereof) and not those of the taxpayer or promoters. If some of these delays are due to HMRC’s lack of resources it is wrong that retrospective legislation should be used as a way of overcoming those lack of resources. Moreover, HMRC already has existing powers to force taxpayers and promoters to cooperate in cases where they believe a case is being deliberately delayed.
Under Tribunal Regulations SI 2009/273, HMRC can link a taxpayer’s arrangements to a lead case where there are material similarities between the two. Under Paragraph 3(2) Schedule 24 FA 2007, HMRC can levy financial penalties when a return thought right is later shown to be wrong- by for example, a decision of the Courts, and the taxpayer does not tell HMRC of the new situation. Also, Section 55 TMA 1970 gives HMRC the power (hardly ever used) to decline or withdraw postponement of disputed tax if they do not accept there are reasonable grounds for believing there has been an overcharge to tax
HMRC has not proved that there is a problem with taxpayers delaying enquiries and holding onto disputed tax, but should this be the case they should use the tools they already have rather than demanding unnecessarily draconian and arbitrary powers.
There is an urgent need to address these deficiencies in the legislation by ensuring that the changes it introduces are applied prospectively rather than retrospectively, meaning that they would only apply to tax planning carried out after Royal Assent. This would bring it in line with the Government’s own protocols on the use of retrospective legislation.
The proposals should also be amended to create an independent appeals process, so that taxpayers have the right to appeal to an independent or outside body such as a First Tier Tribunal when they receive an Accelerated Payment Notice or a Follower Notice. This should include a much broader range of reasons under which taxpayers can appeal the issuing of such notices, including on the grounds that the amount calculated is incorrect, and that the case quoted in a Follower Notice is not relevant to the tax arrangements in question.
About EDF Tax Ltd
This briefing note has been prepared by EDF Tax Ltd, a specialist tax planning advisory company which provides expert advice to help small and medium sized businesses make informed decision about their tax affairs, and a consortium of 12 other accountancy and tax advisory companies who are concerned about the retrospective nature of this legislation.