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Jean-Yves Gilg

Editor, Solicitors Journal

Without a paddle

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Without a paddle

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The recent Nigel Rowe and Others v HMRC case has emboldened an already marauding authority, so where does it leave tax payers with a genuine case that should be challenged, ponders Leigh Sayliss

There once was a time, 1936 to be precise, when the ordinary man, such as the Duke of Westminster, was 'entitled to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be'.

As and when the tax authorities caught taxpayers planning their tax affairs in ways which the government of the day considered inappropriate, the law could be changed to close the 'loophole' - but those who had already passed through were safe.

In the 1970s and 1980s, the courts made some moves to tackle what they saw as artificial tax arrangements in the Ramsay line of cases. The courts showed a willingness to interpret legislation as far as possible in favour of the tax authorities, but stopped short of rewriting the law. There remained a steady game of cat and mouse with taxpayers working to stay one step ahead of the law, with the tax authorities struggling to catch up.

A change in tact

However the new millennium has developed a fresh climate for tax planning, with HMRC being given ever-increasing powers. This has been accompanied by a concerted effort, from the government and by the media in general, to change public perception of tax planning. Barely an HMRC or HM Treasury announcement can be published without reference to taxpayers paying their 'fair share' of tax.

Casualties of this change have included several high profile individuals who have seen their personal reputations severely damaged, as a result of revelations that they have been involved in aggressive tax structures.

A fresh set of tools

The new rhetoric has been backed up by major changes in legislation, starting with the introduction of the Disclosure of Tax Avoidance Schemes (DOTAS) rules. These allow HMRC to find out about planned schemes when they were implemented (rather than when the tax returns were filed) shortening the time between the development of a tax structure and any change in law. However the tax authorities could only close the stable door after at least a few horses had bolted.

HMRC started to take the initiative under the 2009 Banking Code, applying pressure on banks (several of which had benefitted from government support following the banking crisis) to cut off finance from what HMRC considered as aggressive tax avoidance, stopping tax structuring before it had started.

Sharpened teeth

Despite these changes HMRC still considered that they were coming from behind, only being able to change the rules after some tax planning had already been implemented. Further powers were sought and these were granted in 2013, with the introduction of the General Anti-Abuse Rule (GAAR).

For the first time, arrangements that were completely legal when undertaken could be overturned where they could not 'reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions'. HMRC could now turn back the clock and retrospectively change the rules in cases of abuse.

However even where tax planning failed, it could take several years for the tribunals and courts to reach a final decision. In HMRC's view, taxpayers were deliberately using the system to postpone the inevitable day when the tax would have to be paid. Therefore, in 2014, follower notices and the accelerated payments regime were introduced, giving HMRC wide ranging powers subject to little external regulation or appeal.

Follower notices require taxpayers to follow a judicial ruling (once all appeals have been exhausted or dropped) that lays down principles which, in HMRC's view, apply equally to the taxpayer's situation. A taxpayer who does not comply with a follower notice faces significant penalties.

HMRC can issue an accelerated payment notice (APN) demanding payment of tax claimed before the tribunals have decided whether or not the tax is actually due. An APN can be issued where the relevant tax arrangements fall within DOTAS, are subject to the GAAR, or where the taxpayer in question has been issued with a follower notice.

Hardship is no defence

The legality of the accelerated payments regime was challenged in the High Court case, Rowe & Ors v Revenue & Customs [2015] EWHC 2293, but the judge came down fully on the side of HMRC.

A taxpayer has very limited grounds for appeal against an APN (largely based on HMRC not having followed due process or the technical requirements not having been met). Unlike in the case of VAT appeals (which have similar requirements for up-front payment), hardship is no defence.

In a reflection of the current climate, the High Court judge had little sympathy for the idea that a taxpayer 'might have to sell his or her house in order to fund the payment', stating: 'That hardship was always a risk that might materialise in the case of a taxpayer entering a tax avoidance scheme without making provision for payment of the tax if the scheme failed.'

So, where are we now?

The political, judicial and reputational future looks stormy for anyone engaging in tax avoidance schemes. HMRC have ever-increasing powers and are showing a willingness to use them. The courts appear to be in support of HMRC and little sympathy will be found in the media.

While the GAAR appears principally to be intended as a deterrent, and may only rarely be used, that is certainly not the case with follower notices and APNs. HMRC view the victory against the judicial review as a green light to press on with APNs, with David Richardson, Director of Counter Avoidance, saying:

'This is an important result, and good news for the vast majority of taxpayers who do not try to avoid paying their fair share of tax. Those who use tax avoidance schemes need to know they can no longer hold on to the money while their affairs are investigated. They have to pay their tax up front like everybody else.

'We expect to complete the issue of around 64,000 notices tax (sic) by the end of 2016, bringing forward £5.5bn in payments for the exchequer by March 2020. HMRC wins 80 per cent of all avoidance cases that people litigate, and many more are settling before things get to that stage.'

The question arises as to why many taxpayers are settling. Are they doing so because they accept that their planning was wrong, or are taxpayers with strong cases simply deciding that, in the current climate, it is easier to concede to HMRC's demands and try to negotiate a manageable settlement, rather than stand in the face of an increasingly ascendant authority?

What of areas in which there is genuine uncertainty in the law or where HMRC get it wrong? David Richardson admits HMRC loses 20 per cent of cases. Any of those taxpayers who were served with an APN will have to be satisfied with repayment of the tax in dispute, plus interest at the HMRC rate of 0.5 per cent, as compensation for their trouble - even if they have lost their home in the process.

Any taxpayer faced with an enquiry from HMRC must now be aware of the risk of an APN if they have been using structured tax planning. But HMRC are not always right and it is important to seek advice as early as possible.

Follower notices and APNS were introduced because of perceived delaying tactics by taxpayers and failure to engage with HMRC is likely to see them exercise their new powers. Once they have started to do so, it is a difficult process to stop. 

Leigh Sayliss is head of business
and property tax at Howard Kennedy 


Rowe & Ors v Revenue and Customs

On 31 July 2015, the High Court issued its judgment in Nigel Rowe, Alec David Worrall & Others v The Commissioners for HM Revenue & Customs, better known as the Ingenious Media Judicial Review.  Nigel Rowe, Alec David Worrall and the others (a total of 154 people) were investors in Ingenious Media film partnerships whose tax returns have been challenged by HMRC.  

This case challenged the new powers being exercised by HM Revenue & Customs to demand payment of disputed tax before the tribunals have decided whether or not the tax is actually due.  It was these powers that the Ingenious Media investors were challenging in this case; the Judicial Review did not discuss the underlying merits of the investors’ tax position.  

The investors cited various reasons why the demands from HMRC were contrary to the principles of natural justice, infringed the investors’ human rights (the right to a fair trial and the right to protection of property) and were ultra vires (outside the powers given to HMRC).  

The judge rejected all the issues raised by the investors – a complete victory for HMRC.  

The Judge considered that there had been no infringement of the investors’ right to a fair trial because the accelerated payment did not affect their claim on whether they were liable for tax as this was being determined in the normal course of proceedings in the tribunals.  There was no infringement of their right to protection of property because, if successful in the tribunal, the investors would receive a refund of the accelerated payment, together with interest.  

As far as any claim that HMRC had acted ultra vires was concerned, the Judge considered that HMRC had acted within the powers that it had been granted by Parliament and so had acted legally.