Since 17 July 2014 HMRC have had new powers to issue "follower notices" and "accelerated payment notices". These require the advance payment of disputed tax in some avoidance cases where the related tax return is under enquiry or appeal.
A follower notice requires the taxpayer to amend his return and pay the correct amount of tax if he has used a scheme which, in HMRC's opinion, is the same or very similar to one which has been found to be ineffective in a "final judicial ruling" in another case. A "final" ruling includes not only a Supreme Court judgment but also any decision of a lower court where no further appeal is possible.
In effect, HMRC do not have to litigate each and every individual case in order to collect tax and, with a 50% penalty for non-compliance and no formal right of appeal if an objection to a notice is rejected, this is a rather draconian new power in their armoury.
According to HMRC's Guidance, follower notices are likely to be limited to marketed schemes with slight variations and they are not looking to extract wide principles from decided cases that can be applied to other taxpayers where the context and facts are substantially different.
Only time will tell how these rules are going to be applied in practice but a follower notice will present taxpayers with a stark choice: either amend the return and forfeit the right to dispute the matter further; or continue with the claim/appeal, risking the costs of litigation plus a 50% penalty if HMRC succeed. Meanwhile, taxpayers will also need to pay the tax up front as accelerated payment notices will have been issued.
Accelerated payment notices may also be issued where a taxpayer has used a scheme which is notifiable under DOTAS and the tax return is under enquiry or appeal; and/or where a counteraction notice has been issued under the General Anti-Abuse Rule, supported by the opinion of at least two members of the independent GAAR panel.
HMRC's objective here is to turn the tables on the cash flow advantage of engaging in a tax avoidance scheme and waiting for HMRC to prove that it is ineffective. Essentially it is now the taxpayer, rather than HMRC, who will be out of pocket while the dispute proceeds. This presents a big disincentive to litigation and, indeed, to engage in tax avoidance in the first place.
This article originally appeared in our Private Client & Tax Autumn Newsletter.