March 2018 - Levy and Levy

Tax – the press fever continues

The November 2017 Paradise Papers release of 13.4 million documents, obtained from offshore law firm Appleby and corporate services provider Estera, allegedly contained details of the way individuals, companies and investment funds utilise offshore jurisdictions including Bermuda and the Cayman Islands to structure their businesses.

The Paradise Papers have generated widespread public interest and detailed press coverage, thus fuelling the onward march of HMRC’s anti-avoidance campaign.

HMRC’s strategy to date

The government published a strategy to tackle offshore tax evasion in 2013. The strategy defines offshore tax evasion as “using another jurisdiction’s systems with the objective of evading UK tax.”

To implement this strategy, the government introduced a number of important measures:

Early adoption of the Common Reporting Standard, a ground-breaking multinational tax transparency agreement under which over 100 jurisdictions, including the UK, will automatically exchange financial account information. Under the Common Reporting Standard, HMRC will receive information about overseas accounts, insurance products and other investments, including those held through overseas structures such as companies and trusts. This includes details of the account holder or owner, including name, address, date of birth, balance of the account, and payments into the account;
Increased civil sanctions for offshore evaders (FA 2015 and 2016), including a new asset based penalty of up to 10% of the value of the underlying asset;
A new criminal offence for offshore evasion (FA 2016) – this offence removed the need to prove intent for serious cases of failure to declare offshore income;
New civil and criminal sanctions for ‘enablers’ of offshore evasion (Finance Act 2016 and Criminal Finances Act 2017) – they hold enablers, including corporates and partnerships, to account concerning evasion facilitation; and
A new legal Requirement to Correct (FA (No. 2) 2017) any past failure, as at 5 April 2017, to pay UK tax on offshore interests must be disclosed, with new tougher sanctions from 1 October 2018 for those who fail to do so.

Latest developments

Not content with the aforementioned, HM Revenue and Customs (HMRC) will now be able to look at 12 years’ worth of back taxes in cases involving an offshore element from April 2019, if the UK government goes ahead with a proposal announced in the last Budget.22 Feb 2018

HMRC has opened a consultation on plans to change the time limits from four years, or six years where a suspected underpayment has been brought about due to carelessness. The time limit will remain 20 years where the taxpayer has acted deliberately or dishonestly.

The consultation sets out the government’s proposed changes in relation to income tax, capital gains tax and inheritance tax, along with associated safeguards. It also proposes applying the new time limits in respect of corporation tax, “given that many offshore structures involve corporate entities”.

It has also proposed a “proportionate and targeted” application of the new time limits where HMRC has received information about offshore income and assets automatically, under the various international automatic information exchange agreements.

The government intends to apply the new time limits with effect from 1 April 2019 in relation to inheritance tax and corporation tax, and from 6 April 2019 in relation to income tax and capital gains tax. The limits will apply to any year that is still in date for assessment when the new legislation comes into effect, but will not apply to any tax year for which the time limit has already expired.

The consultation closes on 14 May 2018.

Conclusion

HMRC is continuing with its relentless drive to increase powers and beef up direct action against taxpayers with undisclosed offshore assets. There is no sign of any slow down and indeed in our view, this trend is likely to increase in the near to medium term future.

Levy and Levy – the tax resolution specialists

In this Practice Note, we look at mediation and the circumstances in which it may be helpful in resolving tax disputes.

What is mediation?

Traditionally tax disputes have been settled either by litigation or, in the majority of cases, by out of court agreement often following protracted discussions between the two parties. This can be a lengthy and expensive process for the business/individual concerned.

Alternative dispute resolution (ADR) occurs when a third party is brought in with the agreement of both parties to a dispute either to determine the outcome as an arbitrator or to ‘facilitate agreement’ as a mediator. In principle, ADR can be used to resolve disputes relating to any taxes and for a range of taxpayers including small and medium-sized enterprises (SMEs), and large and complex cases. The form of ADR most commonly used for tax disputes is facilitated mediation.

Increasing use of ADR

ADR is becoming more popular: HMRC’s records show that that total applications for ADR had increased from 581 in 2015-16 to 1,265 in 2016-17, with a success rate for resolving cases through ADR 79.39%. However, most ADR takes place at the lower level of individuals and small to medium size companies, not inn larger and complex disputes. A major reason for this is HMRC’s Litigation and Settlements Strategy (“LSS”) which may be found at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/655344/HMRC_Resolving_tax_disputes.pdf. This makes clear that when HMRC believes that it is ‘likely to succeed in litigation ‘and that litigation would be both effective and efficient,’ it will not reach an out of court settlement for less than 100% of the tax, interest and penalties (where appropriate) at stake. If, therefore, HMRC believes that it is right in a dispute with a large corporate and the dispute cannot be settled, it is unlikely that HMRC will agree to mediation because most mediations lead to a compromise which inevitably involve HMRC agreeing to forgo some or all of the tax.

Where mediation can help

HMRC have developed internal mediation training with the aim of having at least one facilitator in each of its regional centres who will be able to discuss with decision-makers the suitability of cases for mediation. HMRC have also issued guidance which sets out clearly where they will consider the use of mediation and where mediation will not be entertained https://www.gov.uk/guidance/tax-disputes-alternative-dispute-resolution-adr.

The guidance states as follows:

When ADR might help

ADR can be useful if:

you and HMRC have different views on exactly what’s happened – the facts
communication between you and HMRC has broken down
you need to know why HMRC haven’t agreed evidence that you’ve given them and why they want to use other evidence
HMRC need to explain why they need more information from you
you’re not clear what information HMRC has used and think they may have made wrong assumptions

Disputes not suitable for ADR

ADR isn’t right for disputes about:

requests for time to pay or similar issues
fixed penalties on the grounds of reasonable excuse
tax credits
PAYE coding
HMRC delays in using information
cases that HMRC’s criminal investigators are dealing with
default surcharges

The scope for mediation is, therefore, very wide and it is perhaps surprising that mediation has not hitherto been applied to the often protracted, long running and complex disputes between HMRC and the large corporates.

The mediation process

An external mediator may be appointed by agreement between the parties, or HMRC may supply an internal person with the relevant experience. Generally, the taxpayer will prepare a ‘position paper,’ giving an outline summary of the facts, legal issues and the taxpayer’s initial negotiating position. The position paper should be as succinct as possible. HMRC should also be asked to identify who the ultimate decision maker is on their side.

On the day

Generally, the day will start with the parties and the mediator sitting down together around the table for a preliminary session. This session will give the parties a chance to set out their position in brief and raise any specific points that they wish the mediator and/or the other party to take into consideration. The mediator will generally make an opening statement. This outlines the role of the participants and demonstrates the mediator’s neutrality. Some mediators will make comments about what they see as the key issues. The parties then retire to separate rooms and the mediator then shuttles between the parties. A skilled mediator will assess the strengths and weaknesses of each party’s case and use this and his private conversations with the parties to enable both sides to take a more independent and realistic view of their prospects of success should the matter have to be litigated. The mediator will also attempt to defuse any resentment or ill feeling between the parties which may have been built up during the course of their previous dealings.

A successful mediation is concluded when common ground is reached and both parties agree to settle the dispute.

Conclusion

The advantages of mediation are as follows:

It offers a more cost-effective solution to a dispute that traditional litigation;
Even if the matter cannot be settled, the issues may conveniently be clarified, thus removing the costs of litigating unnecessary issues of fact or law;
Mediation can be conducted without prejudice to the arguments put forward at a tribunal;
The mediation settlement is entirely confidential, whereas a hearing before the Tribunals is in public;
Mediation is encouraged by the Tribunal.

In our experience, tax meditation can be surprisingly effective particularly in ‘non-tax avoidance’ cases and where small or medium sized companies and individuals are concerned. Certainly, mediation is worth a try.

Levy and Levy – the tax resolution specialists

HMRC’s offshore tax campaign – where we are now

Practice Note: Settling up – how tax mediation can help resolve disputes

Archive for month: March, 2018