January 2015 - Levy and Levy

The war on tax avoidance continues…..

FA 2014 brings fresh New Year misery to taxpayers in the form of the dreaded Follower Notices (“FN’s”) and Accelerated Payment Notices (“APN’s”). The principles of ‘follower cases’ and APNs were first raised in HMRC’s consultation document ‘Raising the Stakes on Tax Avoidance’ published on 12 August 2013 and developed in a second consultation document ‘Tackling Marketed Tax Avoidance’ published on 24 January 2014. FA 2014 has subsequently been passed by Parliament with no fundamental changes to the principles put forward in the two consultation documents.

What is a follower notice and how does it work?

Under FA 2014, ss. 204–218 HMRC may give a follower notice to a person (‘P’) if Conditions A to D are met (s. 204) as follows:

Condition A – a tax enquiry is in progress into a return or claim made by P, or there is an open appeal by P;
Condition B – the claim or appeal is made on the basis that a tax advantage (‘the asserted advantage’) arises from tax arrangements (‘the chosen arrangements’);
Condition C – HMRC are of the opinion that there is a judicial ruling relevant to the chosen arrangements; and
Condition D – no previous follower notice has been given to P by reference to the same tax advantage, tax arrangements, judicial ruling or tax period.

‘Tax advantage’, ‘arrangements’ and ‘tax arrangements’ are defined in s. 201, and are the same for both the APN and FN legislation. The definitions draw heavily from the language of the DOTAS legislation. ‘Tax advantage’ is widely defined and includes relief from tax as well as avoidance of tax. ‘Arrangements’ are similarly widely defined and include arrangements that are not legally enforceable. ‘Tax arrangements’ is based on a purposive test, i.e. that it would be reasonable to conclude that the main or one of the main purposes of the arrangements was the obtaining of a tax advantage.

The time limit for the issue of the FN is the later of 12 months from the date of the judicial ruling in question, and (if there is already a relevant judicial ruling) 12 months from the date P’s return or claim was received by HMRC or the day the tax appeal was made (s. 204(6)).

HMRC also have an extended period to issue FNs in respect of a judicial ruling given before FA 2014 was passed on 17 July 2014. In this case HMRC have 24 months from 17 July 2014 to issue an FN, or, if later, 12 months from the date P’s return or claim was received by HMRC or the day the tax appeal was made (s. 217).

Under s. 205 a ‘judicial ruling’ is a ruling of any court or tribunal including the First-tier Tribunal and the test of when a judicial ruling is ‘relevant’ is whether in HMRC’s opinion it is relevant.

There is no formal right of appeal against the issue of a FN, although P may make representations within 90 days from the date the notice is given on the grounds that:

Conditions A, B or D in s. 204 were not met;
The judicial ruling is not relevant;
The notice was not given within the specified time period.

HMRC must consider the representations and then either confirm, amend or withdraw the FN, and notify P accordingly. There is no time period specified by which HMRC must make their decision.

Where a FN has been issued and not withdrawn, P will be liable to pay a penalty if he does not to take the ‘necessary corrective action’ by amending the return or claim or settling the appeal to counteract the tax advantage in issue. The penalty is 50% of the value of the denied advantage (s. 209) subject to a reduction to a minimum of 10% for co-operation, which includes taking the necessary corrective action.

In contrast to the issue of an FN, s. 214 does at least provide a right of appeal to the Tribunal against both the decision that the penalty is payable and the amount of the penalty. The grounds of an appeal against the decision are:

Conditions A, B or D in s. 204 were not met;
That the judicial ruling is not relevant;
That the FN was not given with the specified period;
That it was reasonable in all the circumstances for P not to have taken the necessary corrective action in respect of the denied advantage.

Accelerated Payment Notices

The accelerated payments legislation is in FA 2014, s. 219–229. HMRC may give an APN to a person (‘P’) if Conditions A to C are met (s. 219). These are:

Condition A – a tax enquiry is in progress into a return or claim by P, or P has an open appeal in relation to a relevant tax;
Condition B – the return or claim or appeal is made on the basis that a particular tax advantage (‘the asserted advantage’) results from particular arrangements (‘the chosen arrangements’);
Condition C – Either HMRC have issued P with a follower notice or the chosen arrangements are DOTAS arrangements or a GAAR counteraction notice has been given in relation to the asserted advantage and the chosen arrangements.

Once an enquiry is opened or an appeal is made, there is no specific time limit for HMRC to issue an APN.

The amount of the APN is broadly the amount of additional tax that would otherwise have been paid if the arrangements had not been entered into.

As for FN’s there is no right of appeal but a taxpayer served with an APN may make representations (s. 222) about the issue of an APN. In this respect P has 90 days beginning with the date the APN is given to send the representations to HMRC on the basis that:

Conditions A, B or C (in s. 219) were not met;
The amount of tax specified in the APN is incorrect.

HMRC must consider the representations, and then either confirm, amend or withdraw the notice and, if the representations were about the amount specified in the notice, confirm the amount or specify a different amount, and notify P accordingly. There is no time limit specified in the legislation by which HMRC must notify P of their decision.

Once an APN has been given (and not withdrawn), the accelerated payment must be paid to HMRC within a stipulated time period – s.223.

Where an amount due under an APN is not paid by the end of the payment period, a penalty of 5% of the amount unpaid is due (s. 226(2)). Further penalties of 5% of the amount unpaid are due if the APN is not paid at the end of five months and 11 months from the day immediately after the end of the payment period.

Where we are now with all this

The above is truly draconian legislation and there are number of points that bear particular attention.

There is no right of appeal against an FN;
There is no right of appeal against an APN;
Under s. 205 a ‘judicial ruling’ is a ruling of any court or tribunal including the First-tier Tribunal (“FTT”);
If a taxpayer takes a strong case to the FTT but is unsuccessful and runs out of money to pursue an appeal, then HMRC have their precedent on which FN’s may be issued;
The only test of when a judicial ruling is ‘relevant’ is whether in HMRC’s opinion it is relevant;
There is no time period specified by which HMRC must make their decision following representations made against an FN;
Where a FN has been issued and not withdrawn, P will be liable to pay a penalty if he does not to take the ‘necessary corrective action’ by amending the return or claim or settling the appeal to counteract the tax advantage in issue;
There is no time limit specified in the legislation by which HMRC must notify P of their decision where representations regarding an APN are made;
Where an amount due under an APN is not paid by the end of the payment period, penalties are payable to HMRC.

Challenging the legislation

The above legislation bestows enormous powers on HMRC which must be operated properly and according the laws of natural justice. Judicial review is a process by which the courts review the lawfulness of a decision or action taken by a public body. In judicial review proceedings a court will decide whether a public body has acted in accordance with its legal obligations and if not, can declare a decision taken by it invalid. The following are some of the reasons why a decision by a public body such as HMRC may be challenged:

The decision is irrational;
The procedure followed by the public body is unfair or biased;
The decision taken is in breach of the Human Rights Act;
The decision taken is in breach of European Community Law;
The public body takes into account irrelevant factors when making a decision or fails to take into account relevant factors;
The public body makes a decision which is so unreasonable as to be perverse or irrational.

Challenges may also potentially be made to the legislation itself; for example it is possible that the lack of the right of appeal against an FN or an APN breaches human rights or European Law principles.

Tough times for taxpayers

Given that litigation could take months, if not years, to reach its conclusion, scheme users now have difficult choices to make. If they choose not to settle they will have to find the funds to pay the APN, or face penalties and court proceedings from HMRC to recover the tax now owing. If they do settle they may lose any chance to benefit from the arrangements they have, in good faith, entered into. The controversy will no doubt rumble on for years to come.

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

Archive for month: January, 2015