Archive for month: July, 2014

Follower Notices

HMRC have, yet again, found another way of attacking ‘tax avoidance!’   This time, the idea is to remove the cash flow advantage for the tax payer, in the form of Follower Notices.

These new provisions are designed to help an understaffed HMRC clear up the large numbers of tax avoidance schemes which they are dealing with but, what about relief for the tax payer?

The Facts

If HMRC take another scheme user to Court – and win, the tax payer will be expected to settle his or her dispute. If the taxpayer refuses to settle and the dispute continues there will be an accelerated payment of tax and if the tax payer is unsuccessful, he or she faces potential penalties. It looks like a win win situation for HMRC….or is it?

So, what is a follower notice and how does it work?

If HMRC have been successful in the courts against one scheme user, the ‘follower notices’ will be directed at marketed avoidance schemes.

HMRC can issue a follower notice where there is an already on going enquiry or tax appeal. This is relating to ‘arrangements’ where it is believed that a ‘tax advantage’ was the sole reason of the arrangements.

The legislation is designed to catch as wide a number of situations as possible, allowing the service of a follower notice where HMRC believes there is a judicial ruling which relates to the arrangements entered into by the taxpayer. A ruling is relevant if principles laid down or reasons given in the ruling deny all or part of the asserted advantage.

The “relevant” ruling must be a final determination, whether because there is no right of appeal,  permission to appeal has been refused, or where the time limits were not adhered to or the case is withdrawn. It follows that if there is no such appeal from the taxpayer, the ruling could be that of the First Tier Tribunal.

The additional requirements of follower notices

If there is still an enquiry under way, a taxpayer is required to amend their tax return or settle with HMRC where there is a closure notice or tax assessment under appeal.

Another requirement by the tax payer is to inform HMRC that they have taken the correct measures to get their affairs in order and notify them of any additional tax to be paid.

The time limit here is 90 days.

Although written representations may be sent to HMRC, the tax payer has no right of appeal when it comes to follower notices.

Representations to HMRC may only be made objecting to the notice on the grounds that procedural conditions have not been complied with or the judicial ruling does not apply to a tax payer’s circumstances.

If the outcome is unsuccessful, there will be a 30 day limit, after the original 90 day period, to comply.

Failing to comply with the follower notice will mean a maximum penalty of 50% of the tax due. The ‘good news’ for the taxpayer is that co-operation will lead to a reduced penalty!

All is not total gloom on penalties, however, as it is possible to appeal against a follower notice penalty on certain grounds:

1. Procedural conditions for the follower notice were not met;
2. The judicial ruling is not relevant to the arrangements;
3. It was reasonable in the circumstances not to have taken corrective action.

The time limit for HMRC to issue a follower notice is 12 months. This period begins on whichever is the latest day of the judicial ruling, the day the tax payer made the appeal and the day HMRC received the taxpayer’s claim or return.

There is a 24 month limit if the ruling was previous to Royal Assent to the Finance Bill 2014.

Accelerated Payment Notices

A follower notice will usually be accompanied by an accelerated payment notice, if the tax disputed has not yet been paid. This notice will specify an amount of tax which must be paid on account to settle the tax.

There are special provisions which apply to those who have participated in a scheme by investing through a partnership. The individual partners will not be issued with a follower notice, instead this will be issued to the representative partner of the partnership.

When accelerated payment notices may be given

These can be given if a tax enquiry or tax appeal is in progress and:

1. A follower notice has been issued and
2. The timing of the notice is in relation to same return and tax advantage; or
3. A DOTAS reference number has been issued by HMRC in relation to the arrangements; or
4. A GAAR counteraction notice has been given (this would be where at least two members of the sub-panel of the GAAR advisory panel expressed their opinion that the arrangements were not a reasonable course of action).

The accelerated payment notice will stipulate the amount of tax to be paid in respect any final liability relating to an ongoing tax appeal or enquiry. This would have been estimated by an officer at HMRC from the information they have acquired from the tax payer.

Key points about accelerated payment notices

1. The accelerated payment-provisions overrule the normal postponement rules in relation to tax appeals;
2. Repayment will be given to the tax payer with interest if the scheme proves to work;
3. Will be discharged by a settlement of the dispute with HMRC.

DOTAS schemes

The DOTAS schemes have become a controversial issue. A scheme user may be required to make an accelerated payment of tax in respect of an old arrangement:

1. Even where the scheme was entered into years before the new legislation;
2. The use of the scheme is still being investigated or litigated;
3. There has been no judicial ruling in respect of the scheme in question.

Penalties

A tax payer will receive a penalty if he or she fail to pays the accelerated payment within 90 days of the issue of the notice.

As for a follower notice, the tax payer will have no right of appeal against such a notice but the recipient can send written representations objecting to the notice as long as it is within a 90 day time limit. However, the only grounds for these are that the taxpayer believes the conditions for the notice were not fulfilled because:

1. The scheme was not a DOTAS scheme;
2. The amount of the accelerated payment claimed is wrong.

HMRC have a duty to examine the representations put forward and either uphold or withdraw the notice or alter the amount of the accelerated payment.

If the notice is upheld by HMRC, the tax payer has 30 days from the decision to make a payment.

Once the new rules become legislation, which is sometime this July, these notices can be served on the tax payer with immediate effect.

And it gets worse….

HMRC intends to review all existing schemes and DOTAS schemes before the new law is in place. The intention is to list all the schemes where they intend to issue a payment notice, so beware all you unfortunate tax payers who have entered into such arrangements!

Tax payers will not be permitted to pay tax in instalments (now there’s a surprise!), although HMRC will consider requests under its existing ‘time to pay’ discretionary relief.  Such requests are unlikely to be granted.

Levy and Levy comment

This is really draconian legislation and the removal of any right of appeal for follower notices and accelerated payment notices rings alarm bells in our mind.  It’s win win for HMRC apart from one important caveat.  Tax payers should be aware that they are not without remedies in administrative law as HMRC must be shown to demonstrate that they are acting reasonably and proportionately when refusing representations sent to them by tax payers. In circumstances were HMRC are not acting reasonably, a tax payer or group of taxpayers affected by a follower notice and accelerated payment notice may have a remedy in judicial review. Each case should be scrutinized carefully to see whether or not the follower notice is indeed justified as being related to the scheme entered into by the tax payer(s) concerned.

Levy & Levy – the tax investigations and resolution specialists in London and Tunbridge Wells.