Introduction – taxman's revenge
New legal provisions which came into force on 14 July 2014 now give the taxman the power to demand up-front payment of disputed tax arising from a tax avoidance scheme.
Previously, the taxpayer would retain the tax benefit until the conclusion of any formal challenge by HMRC. This is now reversed - the taxpayer has to stump up the cash payment at the outset and then try to claw it back through the tax tribunals.
Who do the provisions impact?
Any taxpayer who has sought to gain a tax advantage through a tax avoidance scheme which is subject to an enquiry/appeal AND which:
- Falls under the Disclosure of Tax Avoidance Scheme rules (DOTAS);
- Is counteracted under the General Anti-Abuse Rules (GAAR); or
- Has been the subject of a "follower notice" (a notice notifying the taxpayer that HMRC considers that a judicial ruling in another case is relevant to the taxpayer's arrangements).
In practice, this is likely to apply to a wide range of individual and corporate tax avoidance schemes to minimise capital gains tax, income tax, stamp duty land tax and corporation tax.
The HMRC website has recently published a list of DOTAS schemes where it intends to make a demand for an accelerated payment.
How do the provisions apply?
The notice requires the taxpayer to pay the tax in dispute within 90 days or a further 30 days where the taxpayer requests that HMRC reconsiders the amount of the payment notice. There is no right of appeal. Financial penalties apply to late payment.
The provisions apply retrospectively which is particularly controversial in the context of DOTAS schemes. A taxpayer could have implemented a scheme years ago when it was not seen as an avoidance scheme by HMRC.
However, if their use of the scheme is subject to an enquiry (enquiries can also be open for many years) and is now on the DOTAS list then without any judicial ruling they could be hit with a large up-front payment of tax.
The big change for professional indemnity claims is that such claims for negligent tax advice were often dealt with by standstill agreements during the underlying dispute with HMRC. As the repayment of tax was deferred it was not known whether there would be any loss caused by the advice. However, now the loss is immediate rather than a future contingency so we think standstill agreements are less likely and PI claims will increasingly be litigated from the outset.
Going forward, accountants, solicitors and other tax advisers should be incorporating the requirement to clearly advise on the risk of an accelerated payment when they advise on all such tax avoidance schemes.
It should also be incorporated in the terms and conditions of their retainers that by entering into such a tax avoidance scheme the client accept the risk that it may have to make an upfront payment.
Tax advisers will also probably be more inclined to advise an early settlement with HMRC in relation to disputed tax as the scales have now tipped in HMRC's favour.