Under new rules which have just come into effect, disputed amounts of tax in certain direct tax cases (principally involving avoidance) will have to be paid at the outset rather than on conclusion of the dispute, as is currently the case.

It has never been a feature of the UK direct tax system, unlike in other countries, that disputed amounts of tax must be paid up-front pending resolution of the dispute. In its continuing drive against tax avoidance, the UK Government has introduced new legislation to accelerate payment of tax in disputed cases. Within 90 days of receipt of a notice from the UK tax authorities ("HMRC"), taxpayers will either have to settle their tax dispute, or challenge the notice. The notice will designate a taxpayer's case as a "follower case", being on the same or substantially the same grounds as a case already decided in the tribunal or court. The new accelerated payments regime came into effect on 17 July 2014.

Taxes covered by the new rules include income tax, capital gains tax, corporation tax, inheritance tax and stamp duty land tax (with National Insurance Contributions to be added at a later date). It is already the case for VAT that disputed tax must be paid before a case proceeds to litigation, unless the taxpayer can prove hardship. 

The accelerated payments regime will also apply to tax in dispute under arrangements which fall within the Disclosure of Tax Avoidance Scheme (DOTAS) rules and cases being challenged under the new General Anti-Abuse Rule (GAAR). This is potentially an even more significant development than for "follower cases."

Follower cases: Proposals

The procedure for follower cases would be as follows:

  1. A "final ruling" has to be made in another taxpayer's case. A ruling is final if it is a ruling of the Supreme Court or of another court or tribunal and all appeal rights have been exhausted or the appeal has been abandoned. 
  2. A "failure notice" is issued by HMRC to taxpayers who are currently under audit or who are party to an appeal where HMRC consider that the tax advantage arising from the arrangements in dispute would be denied in light of the final ruling. The time limit for issuing the notice is 12 months from the date (a) of the final ruling; (b) when HMRC received the disputed tax return or claim; or (c) when the taxpayer made the appeal. 
  3. The failure notice will require the taxpayer to take the necessary corrective action (i.e. amending the return where the matter is still under audit or agreeing to relinquish the appeal and pay any tax arising as a result) and imposes a penalty for failure to take such action. The notice will also specify the amount of accelerated tax the taxpayer must pay if no corrective action is taken, which will broadly be based on HMRC's estimate of the tax in dispute. Penalties apply for late payment of the accelerated tax. 
  4. The taxpayer has 90 days from the date of the failure notice to (a) take corrective action; (b) make the accelerated payment; or (c) to object on the basis that one or more of the conditions for issuing the notice was not met. There are no rights of appeal if HMRC confirms the failure notice.

Failure to pay the accelerated payment by the due date will attract a 5 percent penalty. Failure to take corrective action will result in a penalty equal to a percentage (as yet unspecified) of the tax in dispute, meaning that a taxpayer who wants to pursue its own appeal will be liable for the percentage penalty as well as the accelerated payment. 

Conclusions and impact

The UK Government has taken steps to increase the taxpayer's responsibilities and eliminate cash flow benefits in disputed tax avoidance cases. The new measures will result in greater emphasis on taxpayers actively establishing at the outset why their position differs from similar cases that have already been decided, with a greatly reduced prospect of delaying paying the tax in dispute until the determination of their own case.