Comments from ACCA to HM Revenue and Customs
February 2014
The proposals set out in this consultation paper have provoked a widespread and unprecedented response from the membership of ACCA in the UK. Members have been universal both in their support of the principles behind the proposals, and their condemnation of the suggested implementation of the policy. Widespread concern has been expressed about the brevity of the consultation period, especially given the fundamental nature of the proposed extension of HMRC’s powers.
ACCA supports the contention that those who seek to abuse the tax system should not be allowed to profit by doing so. However, the current set of proposals are too broad in their effect, and appear to confer upon HMRC far too wide a discretion in the conduct of tax collection. The proposed powers would appear to in effect usurp the role of the Tribunal, with no effective checks or safeguards on HMRC’s deployment of the powers. Notwithstanding the narrative of the consultation document, the powers would not be limited to marketed avoidance schemes.
Moreover, the proposals incorporate a significant degree of retrospective effect, which would have a significant impact on a wide population of taxpayers. The proposals appear to reverse the assumption of self-assessment on which those historic returns were originally based, and revise the economic impact of their actions. Many of our members have expressed concerns that based upon the descriptions in the consultation paper businesses who had undertaken planning in a different legal environment might find themselves unexpectedly subjected to demands for money with no immediate right of appeal, and no capacity to raise those funds.
ACCA supports the aim of accelerating the collection of tax in cases where it is due, based upon acceleration of the judicial process. However ACCA would not be able to support a mechanism designed to accelerate collection of tax as a substitute for proper legal process.
The proposed revisions would still give HMRC the scope to accelerate settlement where their interpretation of the law has been confirmed in respect of a particular marketed scheme or widespread structure, without conferring unduly widespread or long-lived powers to reverse the economic impact of self-assessment in any situation where the inspector can draw a parallel with the circumstances of a decided case. While HMRC assurances that they would only seek to use the powers in tightly defined and controlled circumstances under central direction and control are welcomed, the limits of powers such as these should be clearly defined, ideally in law but failing that in a formal Statement of Practice.
ACCA is also keen to ensure that the proposals will not include any element of retrospection, and that whatever legislation is finally settled upon to meet the aims of this element of the consultation will operate only upon those taxpayers only on the basis under which they self-assessed under the law at the time of submission. Imposition of these wholly novel burdens on taxpayers would constitute a retrospective penalty, counter to government’s assurances that such penalties would in fact be ‘wholly exceptional’, an extremely strong form of words.
If, as appears to be the case, government is set upon imposition of a retrospective regime then it must be properly resourced, subject to adequate safeguards, and provide adequate protection for taxpayers who may be affected.
The proposals for extension to GAAR cases could be rendered consistent with the draft legislation if amendments were made to allow for the GAAR Advisory Panel opinion to be treated as a Relevant Case, subject to recognition that the GAAR Advisory Panel is not a judicial authority and its pronouncements will not have judicial weight.. Although we do not of course yet have practical experience of the HRMC approach to GAAR cases, it is to be expected that the sort of structure which might give rise to an Advisory panel opinion would be the type of wholly artificial structure which ACCA would not in any event support.
ACCA does not seek to deny or belittle the risks posed by determined abuse of the tax system. But two wrongs do not make a right, and the proposals set out in this consultation reverse the assumptions on which the UK system of self-assessment is based. It is understandable that HMRC feel a sense of frustration when the rules and processes which are set out to protect the interests of justice can be seen to delay the recovery of tax which is “obviously” due. The concept of failure notices is perhaps a good starting point for the development of a mechanism which might allow for some accelerated process in the case of extreme or egregious taxpayer behaviour – but it is no more than a starting point.
The time allowed for debate of such a fundamental extension of HMRC’s authority over taxpayers is manifestly insufficient, and the detail of the failure notice regime needs considerable work before it is ready for implementation. Its inclusion in the forthcoming budget is unduly hasty. Rushed legislation is almost invariably bad legislation, and while we welcome the opportunity to comment on this legislation in draft, there is of course a concern that this draft will not be changed prior its appearance in the Finance Bill. Government needs to appreciate that if HMRC has insufficient resources to enforce the existing law then the solution lies in additional resource, not additional law. ACCA is particularly concerned that aspects of the proposed extensions to the UK taxes Acts will directly exacerbate existing resource issues in relation to avoidance cases, and antagonise the accountants whose goodwill, by HMRC’s own admission, is fundamental to the proper operation of the UK system of self-assessment tax.
In order to more closely align HMRC’s powers with the purported aims, while providing checks and safeguards for the taxpaying public, ACCA would make the following suggestions:
Conditions for issue of a failure notice: Identification of relevant cases should be on clearly defined grounds, and HMRC’s success must be on the basis of point of law rather than flawed implementation. If HMRC wishes to rely upon a First Tier Tribunal ruling as precedent then it should offer to indemnify the costs of a successful appellant. Relevant cases would need to rely upon an identified TAAR, or involve arrangements subject to a DOTAS number or GAAR application. HMRC to maintain on its website a list of certified “relevant cases”, confirming the grounds of selection and population of taxpayers to whom the ruling would be expected to apply (for example clients of a particular adviser), while at the same time clarifying rights of appeal (see below) and rules of precedent. Ideally, HMRC would be able to apply to the Tribunal during the hearing for a declaration from the Tribunal that was satisfied that the case was suitable for use as a relevant case, based on its legal underpinnings and the factual background (eg mass marketing of the arrangements).
Timing of a failure notice: The time limits for issue of a failure notice should be explicitly aligned with the time limits for opening of enquiries.
Consequences of issue of a failure notice: The accelerated payment regime should be replaced by a dedicated scheme of Certificates of Tax Deposit, which pay interest to the holder at a rate in excess of the current market cost of borrowing, especially in the case of historic users of schemes where the effect of the new charges would be retrospective
Appeals against a failure notice: Taxpayers should be allowed to appeal to the Tribunal against a failure notice. However, the right of appeal would be contingent upon purchase of a Certificate of Tax Deposit as above. It would seem reasonable for such appeals to be subjected to an accelerated administrative process. The appeal would be on substantive grounds of tax liability, rather than against the issue of failure notice per se, and would sit in the place of a closure notice in the open enquiry.
In respect of the conditions for identification of a relevant case, ACCA is concerned that the current wording might extend too wide a scope for application of previous cases to subsequent similar, but not identical situations. Take for example the extraction of profits from a personal service company as dividends rather than salary or loans. The self-assessments of taxes due by the company and its owner might constitute perfectly appropriate treatment of profits earned as a return on capital, or HMRC might form the opinion that any one of a number of anti-avoidance provisions should in fact apply to the taxpayers’ situations. For example, HMRC could consider IR35 to be in point, and open an enquiry to establish whether this was in fact the case. HMRC have won IR35 cases in the past, so a failure notice could also be issued, and with it an accelerated payment notice.
As an alternative example, we could consider the position of a UK subsidiary of an international group considered by HMRC to have made or imposed a provision which differed from “the arm’s length provision” which would have been made between independent enterprises and which conferred a potential advantage in relation to United Kingdom taxation on the taxpayer. It seems quite clear that the principles laid down in the ruling in DSG Retail ([2009] UKFTT 31 (TC)) would, if applied to the taxpayer’s arrangements, deny the asserted advantage, or part of that advantage. Accordingly, the legislative provisions for issue of a failure notice alongside the initial enquiry notice appear satisfied. Of course, application of the principles would historically have been the role of the courts, but under the new provisions HMRC assume the role of judiciary in addition to executive.
HMRC have not indicated how they would respond where the taxpayer could point to an equally ‘relevant case’ which had been found against HMRC, such as for example in the IR35 example above where the principles are consistent, but cases typically turn upon their facts. While we would not expect such examples to occur in practice (not least because of the risk that such an action by HMRC would provoke judicial review), there is nothing in the draft clauses which would specifically prevent it happening.
ACCA has very significant reservations about the tone and scope of the consultation document itself. Many of our members have indicated that they consider the narrative to be misleading and incomplete. There is considerable unease and disquiet at the logic used to justify HMRC’s requests for extension of its powers. The extent of the proposed new powers is widely characterised as unconstitutional, and it is hard to see how the power to force compliance with HMRC’s interpretation of the application of a case (which may not even hold value as judicial precedent) amounts to anything other than an attempt to usurp the role of the Tribunals. The incorporation of safeguards which are noticeably absent from the consultation document would restrict HMRC’s appetite for using the powers in situations where there is any genuine doubt as to the outcome of the case, and where the taxpayer’s genuine right to appeal must be protected.
HMRC’s assertion that the accelerated payment regime does not involve the creation of a new principle in tax law: ACCA is not persuaded that there is any genuine underlying principle that one party to a tax dispute is ever entitled to enforce transfer of monies in their favour and contrary to the existing legal position as to extant tax liabilities. Even to the extent that such principle might be discernible, extending its application to any return or claim where HMRC considers that existing case law principles could be applied can be likened to extending the principle that because the whole life tariff is available for some offences it should also be available for speeding, ABH and public nuisance. ACCA would support the development of mechanisms to accelerate the process of legal confirmation of tax liabilities. ACCA could not support mechanisms which attempt to replace the legal confirmation of tax liabilities, and there is widespread concern that this is what the current regime, as described by HMRC in the consultation, sets out to do.
HMRC’s claim that the accelerated payment regime does not involve creation of any new principle is not in ACCA’s view upheld by the examples given in the paper. The wording of the consultation paper is clear, and it seems deliberate and, at least in para 3.5, accurate. It speaks in terms of tax “sitting with” the Exchequer during the currency of a dispute. To sit is of course a passive operation, and that is all that funds do currently in tax disputes. Taking the points in order:
HMRC is able to deny claims for tax repayment pending final resolution: A tax repayment is, by definition, the return to the taxpayer of money which has already been assessed and paid once, but which it now appears should not have been paid over. A liability had been in existence but is now claimed to have been reduced. HMRC has a discretion as to transfer of funds, but pending resolution of the dispute, HMRC may decline to act if there are concerns as to the validity of the change to the existing liability. The principle is that funds do not move until the tax position has been confirmed.
There is significant concern on the part of many practitioners that HMRC appear to operate precisely the same delaying tactics in relation to their own repayments as they complain of in respect of taxpayers’ liabilities under disputed cases. If money is due it should be paid. Seeking extra powers to enforce its own opinions while denying valid repayments does nothing to improve agent confidence in HMRC.
HMRC can enforce tax payment when there are claims for other years that might reduce or eliminate that tax:
The tax liability for year X exists, and is enforceable. It may be that a claim could be made to reduce that liability by reference to a different territory (eg underlying double tax relief), to a different taxpayer (group relief) or a different period (carried back losses). But none of these relate directly to creation of the liability arising on that taxpayer, for that period, within that jurisdiction; they simply act as mechanisms after the event to reduce an extant liability. The fact that the claim relates to the same taxpayer and territory does not alter the fact that it nevertheless relates to a different period; it is not per se a fundamental characteristic of the liability in question. The liability exists in the first place.
Tax is payable following a court or tribunal decision, despite a continuing appeal: The decision of the tribunal is that the tax liability exists. That decision may not yet be final, but nevertheless there is at the time payment is demanded an extant tax liability in the eyes of the law.
There are general circumstances where tax is withheld and repaid (eg PAYE, tax on interest): Neither PAYE nor withholding of tax on interest are part of the general scheme of self-assessment which is applicable to the avoidance schemes which HMRC are seeking to counteract. Withholding of tax on interest is as a matter of practical expediency operated at the basic rate of tax. However, taxpayers whose personal marginal rate for interest exceeds the basic rate are nevertheless subject to liability and must pay over any excess, while taxpayers who are not liable to pay tax on their interest income at the basic rate are entitled to payment of the interest gross, and may in the alternative reclaim the tax from HMRC. HMRC have no right to the money in the absence of a legal liability.
Equally, the withholding regime of PAYE is a sui generis system of payments on account in respect of tax liabilities, based on a strict legal footing and subject to clear limits and restrictions. Crucially, the application of PAYE to payments is based upon the clear characterisation of the underlying payment as one in respect of which a tax liability arises, and there is a legal obligation on the payer to remit withholding tax to HMRC. The liability of the employee to tax on income received in respect of their employment is estimated, and adjusted in the light of other information known to HMRC, and the payments on account made accordingly. A subsequent claim to repayment is seeking to disturb the legislative status quo based upon the underlying liability.
All that the HMRC list of situations where the tax ‘sits with’ the exchequer does is just that; list examples where 1) a legal liability placing funds with the Exchequer exists and 2) the funds do not move. It is something of a leap of logic to suggest therefore that no new principle is involved in proposals which 1) require funds to move 2) on the basis of a liability which does not as a matter of law actually exist. Tax is based on the rule of law. Taxation based on the opinion of Revenue officers and with no right of appeal has no basis in law, and nor should it.
The language used in the consultation is inconsistent with that of the currently available legislation leading to further potential confusion. The current draft clauses apply only to ‘follower cases’ and are predicated on an ‘combined notice’ incorporating the follower conditions as well as the payment proposals. However, the Finance bill clauses for the DOTAS and GAAR proposals will apparently be based on separate ‘qualification’ and ‘payment’ notices. Given the length of time it has taken HMRC to develop clauses in respect of the follower cases, and the concerns which they have raised, ACCA is not comfortable that the compressed timeframe of Finance Bill debate is a suitable forum for development of a robust and enduring framework which will properly and command the confidence of the agent and taxpayer population. ACCA is concerned that the constraints of the Finance Bill timetable mean that the consultation has not been subject to sufficient consideration prior to release.
We recognise that public finances are under considerable strain. There is of course a desire to discourage those seek an unfair advantage from the system, but it is essential to retain a sense of perspective. Tax is subject to the rule of law. There are constitutional safeguards built into the system to prevent abuse from both sides. Where taxpayer and HMRC cannot agree on the treatment of a given transaction (or transactions) there is a mechanism for independent review and settlement. HMRC are quick enough (and rightly so) to claim confidentiality precludes comparison of taxpayers’ affairs in other cases, so it seems disingenuous to seek the wholesale disapplication of a taxpayer’s right to self-assess by reference to their own facts, not someone else’s, where it suits HMRC.
The current shift in jurisprudential statistics indicating a high rate of HMRC success could be explained by for example a shift in judicial attitudes, or a change in HMRC’s prosecution policy, or (as is perhaps most likely the case) a combination of both. But both elements are temporary matters of policy. By HMRC’s own admission, the bulk of cases currently coming to the courts are in respect of structures put into place well before the current high profile of tax avoidance as a social ill, and while the perceived judicial approach to such matters would perhaps have been more favourable to taxpayers. But what HMRC are proposing is a permanent change to the legislation. HMRC will retain the discretion to issue failure notices in respect of any arrangements which they think look similar to a previously litigated structure, as well as in relation to any scheme in respect of which a DOTAS application is, or has been, made, and also in respect of any transactions to which HMRC thinks the GAAR may apply.
The scope for issue of failure notices is too wide. The DOTAS proposals could constitute a retrospective penalty on users of existing schemes, and risk compromising the effectiveness of its future operation. The GAAR suggestion may be appropriate, but in the absence of any evidence as to HMRC’s practical approach to the new legislation would need to be subject to meaningful and considered review in due course.
We understand HMRC’s position to be that the new proposals will make no difference to the taxpayers’ ultimate appeal rights. A taxpayer who disagrees with HMRC’s position will still be able to object to the notice, and force an appeal to the Tribunal. But at the same time, HMRC concede that they simply do not have the resource to manage cases to a legal conclusion.
HMRC assert in the consultation that delays occur entirely on the side of the taxpayer and their advisers. This is not a position recognised by any of our members who have commented. There is considerable anecdotal evidence that HMRC have opened enquiries into historic structures which are robust on the basis of the law which was in force at the time of implementation. HMRC are in the words of one respondent “sitting on” such cases, unable to advance their challenge as there is neither sufficient statutory nor judicial precedent to support their position. Implementation of the current proposals would give HMRC the ability to revisit such historic cases and in SRN cases potentially trigger payments to the exchequer in respect of taxes which are not and may never be due.
Even more disturbingly ACCA has heard reports of HMRC raising Discovery Assessments in respect of arrangements which were disclosed on submission, and in accordance with existing legislation, but which would not have had the same effect under subsequent periods’ legislation. The inference is drawn that HMRC might now seek to extend the Accelerated payment regime to such cases. The impression given by such manoeuvring is that HMRC’s approach to stretching the law in their favour is identical to that of the taxpayers whose affairs they object to.
Whatever the short term financial gain to the Treasury of such tactics, it should be balanced against the long term impacts of an erosion of trust in HMRC’s strategy towards compliance with the spirit as well as the letter of the law. Notwithstanding the current populist message around tax avoidance, it should be borne in mind that those most important to the proper operation of the UK self-assessment system, the accountants and tax advisers who support compliant tax payers, will have a keener appreciation of the legal niceties and may well respond considerably less favourably to a perceived application of an ‘ends justifies the means’ approach in respect of their own relationship with, and treatment at the hands of, HMRC.
The provisions have been described by David Richardson, director of HMRC’s counter-avoidance directorate as “changing the economics of promoting and engaging in avoidance”. To the extent that HMRC wish to use economics to facilitate application of the correct legal position, ACCA believes there may be a role for clearly drafted and properly considered legislation. However, if the aim is simply to use new law to impose HMRC’s interpretation of the economics in the place of the existing legal provisions ACCA would resist the proposals.
Q1: Do you agree with the proposals for the timing and issue of payment notices?
Payment Notices as a defined term do not exist under the draft legislation, and the description at para 3.12 of the consultation document is potentially unhelpful. The legislation refers to elements of the Failure Notice which quantify the alleged under-assessment. “Payment notices” will be part of the failure notice (S5(2)). It is proposed that a failure notice be issued at any time during the currency of an enquiry, provided it is no more than 12 months after the later of 1) the handing down of the relevant judgment or 2) receipt by HMRC of the claim or return subject to the enquiry.
The effect should presumably be that if HMRC open enquiries as a result of a favourable judgment then they should be able to serve failure notices along with the notice of enquiry; equally, if the enquiries are already open and the favourable judgment is handed down during the enquiry HMRC will have 12 months to issue failure notices.
However, this is not what the legislation does. The ‘return related’ condition runs from the date of receipt of the relevant return/claim. In most situations this will then align the window for service of failure notices with the enquiry window for a tax return. However, in the case of large groups the enquiry window closes 24 months from the end of the accounting period to which the return relates where returns are submitted within 12 months from the end of the accounting period (Para 24 Sch18 FA1998 as amended by s96(3), (4) and (6) FA 2007). Accordingly, unless the return/claim is submitted on the last day of the return window there will be separate deadlines for the issue of the failure notice and opening of the enquiry. Where any self-assessment return (corporate or individual) is submitted late, enquiry deadlines are aligned to quarter ends subsequent to the actual date of submission, again giving rise to a potential discrepancy of up to three months between the failure notice window and the enquiry window.
In respect of existing arrangements, the ability for HMRC to rely upon any historical precedent provided they open an enquiry within 12 months of Royal Assent receipt of the claim/return potentially broadens the scope of the legislation well beyond the bounds of what is necessary to counteract marketed arrangements or novel schemes.
It does not seem unreasonable that where, during the currency of an organised series of enquiries into a particular marketed scheme, HMRC wins on point of law (rather than say flawed implementation or characteristics peculiar to the individual appellant), HMRC should be able to issue a failure notice to other users of the scheme whose defence will rest on those precise legal grounds alerting them to the likely failure of an appeal. The precise content and consequences of the failure notice are discussed elsewhere in this document, but the principle of HMRC being able to put taxpayers on formal notice of the application of a relevant judgment is reasonable.
However, the proposals are not restricted to identical cases on point of law, where the full judicial ratio will apply. While there is an obligation on HMRC to identify the relevant judgment and explain the grounds for its application, there is no effective right of appeal beyond judicial review. The underlying enquiry could be appealed, giving the taxpayer the potential satisfaction of a win at law, effectively nullifying the accelerated payment element of the notice (which is what will for practical purposes concern the taxpayer). But the failure notice would not be an element in that appeal, and the accelerated payment provisions would not be displaced by it. Representations can of course be made under draft SS7 and 19, but these will be confidential and subject to no external review or appeal. It is perhaps unsurprising that the direct responses of ACCA members to the availability of this avenue of ‘appeal’ have been dismissive. The discretion of HMRC would be unfettered barring judicial review, an expensive and unwieldy process which is unlikely to offer full relief for the taxpayer.
An expansive reading of the legislation would put HMRC in a position where the law allows them to deem any historical precedent sufficient to issue a failure notice alongside the initial enquiry notice where the gaining of a tax advantage might be considered a ‘main purpose’ of the arrangements. The clauses as drafted do not require a case to be on all fours for it to be ‘relevant’; they simply require HMRC to form an opinion that if the principles of the case were to be applied to the current facts then some or all of the asserted advantage would be denied. Prima facie this gives HMRC the scope to issue a failure notice alongside every IR35 enquiry notice, alongside every transfer pricing enquiry, alongside any enquiry relating to any litigated TAAR where HMRC have been successful, or in relation to any set of transactions where a fiscally advantageous course has been followed but which might have failed on application of the ‘principles’ in a case precedent within 12 months of Royal Assent. The likelihood that HMRC would not have the resource to do so is neither a satisfactory safeguard nor a welcome feature of current attitudes to funding HMRC.
Q2: Do you agree with this proposed method for establishing the payment amount?
Again, HMRC’s proposals depart from current Tribunal practice, although as described in the consultation document they do have the merit of apparent simplicity. The elements of draft s5 which relate to the determination of the accelerated payment offer considerable discretion to the designated officer in deciding upon a figure, while the taxpayer has not effective right of appeal against the officer’s assessment beyond the draft s19 right to ask for reconsideration. The lack of independent scrutiny of HMRC’s process is not compatible with a transparent and accountable tax system.
Q3: Do you agree with these grounds for objection to an accelerated payment notice?
The current draft legislation seems to envisage accelerated payment notices forming an integral part of a failure notice (see draft ss5 (2), 5 (4)). As such, where the grounds for objection are on the basis of incorrect address then the objection would surely be fatal to the whole notice.
Such grounds for objection do not however create a sufficient safeguard for taxpayers where the underlying powers which HMRC seeks to assume are so broad. A set out above, there should be a right of appeal to the Tribunal against any failure notice, albeit subject to certain additional conditions on the parties to the appeal over and above the normal regime so as to restrict both the likelihood of HMRC issuing an inappropriate notice in the first place, and of a taxpayer attempting to use the appeal process simply as a delaying tactic.
Q4: Should there be any additional grounds for objection to an accelerated payment notice?
Any appeal against the failure notice will inevitably involve a de facto appeal against the quantum of the amount of the accelerated payment. Since the incorrectness of the amount will follow from the incorrect application of law or facts to the circumstances of the individual taxpayer it is therefore more a consequence, or feature, of the appeal than a ground for it.
Q5: Do you agree that accelerated payments for cases under appeal should be handled by way of adapting the existing rules for postponed tax in TMA 1970?
Broadly, yes, However, if HMRC are proposing to use these powers only in cases of marketed tax avoidance, DOTAS and GAAR situations, a failure notice in a case already under appeal should presumably occur where HMRC are victorious at tribunal during the currency of the appeal process, otherwise the failure notice should have been served at the opening of the initial enquiry. We would urge HMRC to make as much use as possible of Rule 18 to join cases together, for the benefit of both taxpayers and the administration.
If the facts and points of law are so similar that the Tribunal is prepared to hear cases together then this should be done. If the “follower” cases are not so similar that the Tribunal would be prepared to at least hear them together then the proposal that HMRC should nevertheless be entitled to read across and apply the findings does not appear consistent with the rules of precedent or natural justice. Giving HMRC de facto powers to coerce taxpayers into following Tribunal decisions which the Tribunal would itself hesitate to follow seems utterly incompatible with any concept of separation of powers, or protection of taxpayer rights.
Where HMRC feel that cases are so similar that the Tribunal will be bound to find in their favour, there should be no objection on their part to the enhanced Certificate of Deposit regime already proposed for enquiry cases. Once HMRC have the cash, which is the economic rationale behind the whole set of proposals, the completion of the outstanding appeal ought to be of little further interest. The cost in HMRC’s time and resource of following through on the appeal will of course only arise if the taxpayer has a genuine belief that they will win on appeal (otherwise there would be no point in buying the Certificate and incurring their own ongoing costs, rather than settling) and HMRC are presumably not seeking to deny appeal rights before the law to deserving cases.
Q6: Do you agree with this proposed approach to interest on unpaid and repaid amounts in relation to accelerated payments?
No. The official rates of interest paid by HMRC are consistently well below the commercial rates of return available in the market. Where a taxpayer is held by the courts to have made a valid initial claim/self-assessment return, the effect of the current proposals would be to inflict financial losses upon the taxpayer, amounting at least to the interest differential and any unrecoverable legal expenses incurred in defending the position. Imposing such a burden on taxpayers goes too far in altering the economic consequences of deliberately arranging ones tax affairs so as to take advantage of situations where Parliament intended a tax advantage to arise.
It is noted in this context that the draft legislation makes no reference to the intention of the taxpayer or Parliament beyond the intention to arrange affairs so that the tax liability is lower than it might otherwise be. The draft clauses impose no ‘avoidance’ condition whatsoever on HMRCs exercise of the powers contained therein, and are as a result far too broad. We understand that HMRC have counsel’s opinion that the legislation will be so limited in scope, but reliance on so transient a feature of the legal system as the mores of judicial interpretation is insufficient safeguard for so potentially wide a power. One need only consider the judicial approach to avoidance cases since the 1980’s for an illustration. Were there some element of the legislation which restricted HMRC’s scope to use the powers to abusive situations then ACCA’s view might change, but given the effectively unlimited scope of application of the powers, and their significant departure from historic norms of behaviour in respect of tax administration, the proposals to inflict unrecompensed loss on compliant tax payers cannot be supported. ACCA would be happy to work with HMRC to attempt to draft a suitable legislative safeguard.
HMRC are confident that these provisions will in fact be used only in cases where the tax is due and any tribunal would uphold that position. Accordingly there should be no objection to introducing the proposed new form of Certificate of Tax Deposit specific to the Failure Notice Regime. The Certificates could quite reasonably pay a rate of interest pegged above the current market rate of return, which would render compensation to any taxpayer wrongly accused by HMRC of submitting an incorrect return/claim. Taxpayers served with a failure notice would have the option to comply with the notice, or to open an appeal to the Tribunal against the Failure Notice. For the appeal to be valid, it would need to be accompanied by a purchase by the taxpayer of one of the Certificates of Tax Deposit. HMRC would have their tax, but the taxpayer would have the comfort of knowing that in the event of winning their case they would be in control of the return of their funds. More importantly, they could be comfortable in the knowledge that even if they had to borrow money at commercial rates to purchase the Certificate, the interest cost of the loan would be more than covered by the rate payable on the Certificate.
Q7: Do you agree that the accelerated payment should be subject to a late payment penalty and that the proposed amounts are reasonable and proportionate?
Given that a reasonable and proportionate form of the accelerated payment proposals would take the form of a Certificate of Deposit, the matter of penalties does not arise.
Q8: Do you agree to this treatment for payment of tax for cases in litigation?
Subject to references to enhanced Certificates of Tax Deposit, the broad mechanism appears reasonable.
Q9: Do you have any further comments on the principles or application of the proposal to issue accelerated payment notices in cases where a ‘follower notice’ is issued?
Given that ‘follower notice’ is presumably a reference to Failure Notices as defined in the draft legislation, accelerated payment notices as such do not exist, and will form an integral part of any Failure Notice in follower cases. The question is more likely to have been relevant to the DOTAS and GAAR cases where it seems that the two notices will be separate. It would have been helpful for the consultation document to have been clear on such points.
ACCA is puzzled by the reference at para 3.28 of the consultation document to the ‘tax’ being payable by ‘an individual or employer, depending on the circumstances’ as recipients of the payment notice. Given the application of the regime to inter alia corporation tax, surely this list should also include corporations, given that many avoidance structures involve the creation of special purpose vehicles which have no employees?
Q10: Do you have any comments about how information may be provided in such a way as to provide a reasonable balance between providing early certainty for taxpayers and not opening up a route to assist the development of future avoidance schemes?
Given the uncertainty over how HMRC’s proposals might interact with the new draft clauses which will be required to give effect to any type of DOTAS regime, it is hard to comment beyond the general principle that if a DOTAS scheme is within the law, and no additional tax would arise, then it seems counterproductive for HMRC to argue in favour of uncertainty in the tax system.
Q11: Do you agree that the proposed time limit for payment of an accelerated payment as a result of a DOTAS scheme should be the same as for accelerated payments linked to a ‘follower’ notice?
The proposals in the consultation document appear to be based on a regime incorporating two separate types of notice, ‘follower notices’ and Payment Notices, with only the latter in play in DOTAS cases. As such, the suggestion that time limits should be aligned with ‘follower notice’ cases would appear reasonable. ACCA supports the aim of reducing complexity in the tax system.
Q12: Do you have any further comments about the proposed extension of this measure to cases involving schemes disclosed under DOTAS?
The proposals for extension to DOTAS cases run the risk of destroying the effectiveness of the current regime. If these provisions are extended to cover arrangements by reference to SRNs, the net result will be a significant reduction in the number of SRNs applied for and returned. For some taxpayers, the cashflow impact of funding the potential tax liability on (compliant) submission of the return bearing an SRN will reduce the attractiveness of the planning and they will not undertake it at all. For other taxpayers, if submission of an SRN alongside the arrangements will remove the cashflow advantage, they will simply decline to apply for an SRN, on the basis of a more or less considered opinion that DOTAS does not apply. The source of information from advisers who currently submit schemes for consideration will dry up, as they either will not look at schemes at all or will deliberately try to work outside the DOTAS regime.
Discouraging compliant advisers from engaging with the DOTS scheme will have the effect of improving the position from the perspective of non-compliant advisers, as HMRC will no longer be informed at an early stage of the sorts of opportunities which may have been identified by planners, and so will have a less clear idea of the features which such planning would exhibit. We expect HMRC to be correct in their assumption that the number of returns submitted displaying a ‘tax to pay’ SRN will be very low. However we do not share HMRC’s apparently sanguine assumption that this will be because those who are determined to abuse the rules will simply stop doing so simply because there is a another new rule in play. Rather, our concern is that every DOTAS type scheme that HMRC end up working on will fall into the category of “should have been registered for DOTAS but was not”, and identifying and prosecuting such cases is far more resource intensive than simply monitoring the DOTAS compliant returns currently received. Obviously we do not yet have any detailed clauses in respect of the DOTAS proposals, but ACCA is concerned that extension of the accelerated payment regime to all DOTAS returns would prove counterproductive from HMRC’s point of view.
In any event, the concerns previously expressed about the exercise by HMRC of sole discretion over identification of ‘relevant cases’ are even more keenly felt in the context of DOTAS, where there will have been no independent scrutiny of arrangements whatsoever. Mistrust of HMRC’s motivation is already widespread among agents, and the prospect of HMRC having sole discretion to render economically unviable any tax return incorporating a DOTAS (given the interest cost of funding advanced payments of tax, even if returned, at statutory rates) will discourage any adviser from engaging with the process. If there is to be accelerated payment in DOTAS cases at all, then selection of those cases will need to be in the hands of independent arbiters. Who those could be is not currently clear, as there is unlikely to be either capacity or legal mechanism for referral to acknowledged independent experts such as the Tribunals of the GAAR Advisory Panel. HMRC and government must recognise that a lack of resource in HMRC will not be solved, or bypassed, simply by enacting a new law, especially one which runs the risk of damaging existing compliance mechanisms and creating extra administrative burdens for HMRC.
Q13: Do you agree that the scheme being challenged under the GAAR should be a criterion for issuing an accelerated payment notice?
Given the novelty of the GAAR regime it is difficult to comment upon the proposals. ACCA would not in principle object to controls on the attractiveness of wholly egregious schemes, but until there is clearer evidence of the HMRC approach to GAAR cases it is impossible to agree that every GAAR challenge would be made in a case where accelerated payment would be appropriate.
Q14: Do you agree with the timing proposal for the issue of an accelerated payment notice in a case being challenged by the GAAR?
The proposal to allow service of a Failure Notice where the GAAR Advisory Panel has confirmed HMRC’s opinion of the arrangements is not in itself unreasonable, although it would have the effect of elevating the status of the Advisory Panel’s opinion to the equivalent of a final judgment. It does however seem likely that the opinion will be based upon clear case law precedent, and there may be scope for revising the 24-month lifespan of ‘relevant cases’ in GAAR cases, such that the case law basis for the Panel’s opinion might itself constitute a “relevant case”.
Q15: Do you have any further comments about the application of the policy to schemes that are challenged under the GAAR?
As with the principle Failure Notice provisions, ACCA would propose use of an enhanced Certificate of Tax Deposit regime, rather than simple payments on account of tax. The concerns about lack of appeal rights do not apply, as the case will automatically be under appeal to the Tribunal before HMRC are in a position to issue the Failure Notice.