As announced in December’s Autumn Statement, measures in Finance Bill 2014 will give HMRC power to require a taxpayer to pay disputed tax when HMRC has won another case involving similar facts.
However, the power goes beyond simply requiring payment pending the outcome of an appeal. Taxpayers will be forced to concede and accept HMRC’s application of the prior case, with no right of appeal.
Although these powers are aimed at marketed tax avoidance schemes, there is nothing in the legislation to limit their use to cases involving such schemes.
The consultation on these proposals runs until 24 February. A response document will be published at the Budget. Please select the link to read the consultation document.
HMRC will be able to issue a “failure notice” to a person (P) if:
- an HMRC enquiry is in progress or P has appealed an HMRC assessment but the court has not issued its decision;
- P is claiming that a particular tax advantage results from particular tax motivated arrangements; and
- in HMRC’s opinion there is final judicial decision that is "relevant" to P’s arrangements.
Any Supreme Court decision will be final, as will any decision of a lower court that the taxpayer cannot appeal (for example, because they have run out of time).
A decision will be relevant if (in HMRC's opinion) it relates to (apparently any) tax motivated arrangements and principles are "laid down" in that decision which would, if applied to P's arrangements, deny the tax advantage claimed by P.
A failure notice must specify the case HMRC is relying upon, why the conditions outlined above are satisfied and the amount of tax payable as a result.
If an enquiry is open the taxpayer must amend their tax return to remove the tax advantage specified in the failure notice. If the taxpayer is appealing an HMRC assessment they must take "all necessary steps to enter into an agreement with HMRC" to give up the tax advantage. In either case the additional tax must be paid within 90 days of the failure notice being issued.
Can the taxpayer appeal?
Apparently not. Aside from asking HMRC to reconsider, the legislation contains no mechanism to appeal a failure notice and there are significant tax related penalties for non-compliance. The condoc is quite clear that the failure notice is not intended to simply move the time at which there is a dispute about the substantive point. The taxpayer should concede and will only be able to challenge the notice on limited procedural grounds.
However, the amount of tax specified in a failure notice is determined to the best of the HMRC officer’s information and belief. The condoc explains that:
- the final figure may not be available until the taxpayer agrees to resolve the dispute and will not be available at all in cases where the taxpayer chooses not to resolve the dispute; and
- an amount paid in response to a failure notice will be a payment on account and not the final liability. If the taxpayer pursues their claim and is successful then they will get their money back with interest.
It is difficult to reconcile these statements with the legislation, which specifically bars a taxpayer from appealing a closure notice issued once a taxpayer has amended their return in response to a failure notice.
Tax authority or judge?
What if one taxpayer decides not to appeal a poor First-tier tribunal decision (of which there are plenty)? As the legislation stands, HMRC will be able to force other taxpayers to accept that decision as binding. The only way to challenge HMRC will be judicial review. However, that could only reverse HMRC's decision to apply the underlying decision to a particular set of facts, not the poor tribunal decision itself. So any principles "laid down" in that decision, however flawed, will become enshrined as binding authority until a taxpayer with sufficiently different facts can bring a case that overturns them.
Can it get any worse?
Yes. The condoc also contains proposals to extend these powers to situations where there is no relevant case for HMRC to rely upon. If these are implemented HMRC would be able to issue a failure notice to a taxpayer who has used a tax avoidance scheme if:
- HMRC has decided to apply the GAAR in another case involving that scheme; or
- the scheme has been disclosed under DOTAS.
In either case it does not seem to matter whether the scheme actually works.
What needs to change?
These proposals are designed to prevent taxpayers who have a remote chance of success (because, for example, the scheme has already failed in another case) from prolonging the dispute for as long as they are able. What the Government wants to stop is taxpayers dragging out appeals in these situations simply to hold into the cash for as long as possible.
However, that problem would be solved if taxpayers were simply required to pay the tax pending the outcome of any such appeal. These powers go too far. Let us hope that the conflicting comments about taxpayers getting their money back more accurately reflect the underlying policy and the legislation we get in the Finance Bill is significantly improved.