Accelerated tax payments are here

Will HMRC's latest move further deter individuals from using schemes and aggressive tax planning in the future, asks Lucy Brennan

The Finance Bill 2014 has now been enacted and as such one of the more controversial tax measures of recent years now comes into force: HMRC is now able to demand taxpayers pay disputed tax upfront in certain circumstances. The provisions apply to income tax, capital gains tax, corporation tax, inheritance tax, stamp duty land tax, the annual tax on enveloped dwellings and National Insurance contributions.

There are three specific areas in which HMRC can request an accelerated tax payment, which cover a range of circumstances.

Follower notices

Where HMRC has an open enquiry into a tax return, it will be able to issue a follower notice if it considers the circumstances of the case in question are the same or similar to those of one finally decided in its favour in the courts. The case must have reached its final conclusion and therefore either has no scope for appeal or the deadline for the appeal has passed. 

The follower notice will give details of the case it is based on, and explain why HMRC considers the taxpayers' circumstances are the same or similar. A payment notice detailing the amount of accelerated tax due, based on HMRCs best estimate, will be issued alongside the follower notice.

DOTAS cases

HMRC is also able to request accelerated payments in cases where participation in a scheme has been stipulated in a tax return under the disclosure of tax avoidance schemes (DOTAS) rules, where a taxpayer’s details feature on a DOTAS client list, or in cases that should have been disclosed to HMRC under the DOTAS rules but were not.

Interestingly, this ruling applies to both new and existing DOTAS cases that have not yet been settled. HMRC has already published a list of DOTAS numbers under which they may require accelerated tax payments which can be found here.

HMRC has announced that it will start issuing notices to these schemes in August 2014 and the notices will be phased over a 20-month period. Those who may be affected would do well to start preparing themselves.

GAAR cases

When the GAAR Advisory Panel has given an opinion that counteraction is appropriate a payment notice can be issued. While we have not seen these in action yet, they are sure to become a major presence in the anti–avoidance landscape.

The demands from HMRC will be its best estimate of the tax due. The taxpayer has 90 days to either pay or to make representations to HMRC for a review of the notice (if a follower notice has been issued and they consider their circumstances differ from the case quoted) or the amount of tax due. They can negotiate with HMRC regarding the payment of the tax through the usual arrangements to pay channels if they are unable to pay the full amount.

One criticism of this legislation is that the only course for the taxpayer is to make representations to HMRC, which then ultimately decides on the position.  There is no independent course of action if the taxpayer and HMRC are in dispute regarding the notice. 

We are awaiting the issue of the first notices and it is unclear as to whether these notices will include a request for interest as well as the tax, which will ultimately be due if the taxpayer’s case does not succeed.

Consequences

If the taxpayer ultimately succeeds against HMRC, the funds will be repaid with interest, although some of these cases can take several years to be finalised. Alternatively, if the taxpayer does not make the accelerated tax payment, a penalty will be raised against them should their case fail. The stakes are clearly high.

Individuals with returns under enquiry or who have used schemes registered under DOTAS may feel that it is unfair to pay in advance when the final conclusion is unclear and they may ultimately succeed in their case. 

However, the other side of the argument is that individuals have had the cashflow benefit of using these schemes and should not have the benefit of holding the funds while a dispute is ongoing with HMRC.

HMRC has estimated that 33,000 individuals will be caught by the accelerated payments legislation, with £5bn of tax payable.

It will be a while before notices will be issued under GAAR cases, and there is still uncertainty under both follower and DOTAS cases. HMRC has only said it ‘may’ issue notices to the DOTAS number list and those with returns under enquiry will need to wait and see if HMRC issue a follower notice.

We also wait to see if this fulfils HMRC's hopes that the accelerated tax payment regime further deters individuals from using schemes and aggressive tax planning in the future.

Lucy Brennan is a partner at Saffery Champness

She writes a regular blog on tax and estate planning for Private Client Adviser