Notwithstanding consultation criticisms it was confirmed today that the Government will press ahead with plans to reduce tax avoidance benefits.
It is proposed that Finance Act 2014 will provide HMRC with powers to require a taxpayer to pay tax upfront where:
• the taxpayer has entered into arrangements to obtain a tax advantage (whether or not as part of a tax avoidance scheme), where the courts have decided such arrangements fail;
• the taxpayer has used tax arrangements required to be disclosed under the Disclosure of Tax Avoidance Schemes (“DOTAS”);
• the taxpayer has used tax arrangements which the GAAR Advisory Panel has decided are not a reasonable course of action.
Taxpayers who do not pay the tax within the 90 day period will be subject to penalties.
It is clear that changes need to be made to the current system of self-assessment and non-payment pending appeals. With a huge backlog of cases it is surprising that the Government has not acted sooner. In the context of marketed schemes it is hard to argue against the changes. By bringing forward the time at which payment must be made avoidance is discouraged. Also, HMRC are more likely to find a solvent taxpayer as the longer the time to recovery the more likely the chance of adverse intervening events such as bankruptcy or losses.
But outside of marketed schemes, where arrangements may involve bespoke advice in the context of mixed commercial and tax motives, the position is more nuanced. I will not be surprised if examples emerge of taxpayers being required to pay tax in advance which the majority regard as unfair. It may be possible to take a court decision and identify equivalent arrangements simply by analysing the contractual steps – if that is all that is required then there is no unfairness in requiring a taxpayer who is a party to an equivalent arrangement to pay up. However, if the decision of the court depended upon specific findings of fact, particularly as to intentions or motive, then it becomes harder to be confident that only equivalent arrangements are identified. Arrangements might only have a superficial similarity. For taxpayers who find themselves on the wrong side of a notice to pay perhaps the real problem is that tax litigation is too slow.
The extension of payment requirements to arrangements required to be disclosed under DOTAS is another difficult area. Advisors may naturally take a conservative approach to the disclosure of arrangements under DOTAS, it is not unusual for there to be genuine uncertainty as to the application of the rules. Going forwards the change introduces an unwelcome pressure to take a robust view as to the rules.
Also, let us not forget that the DOTAS regime is not restricted to marketed schemes, arrangements which are commercially led can also give rise to disclosure obligations. In this respect some of the hallmarks are more difficult than others as to their scope, for example the employment income hallmark. So it may be hard on some taxpayers to be subject to early payment in the context of commercial arrangements where there is a genuine point of difference to be taken as to the tax position.
This difficulty may be exacerbated if the consultation announced today by the Government on the extension to the DOTAS “hallmarks” results in more disclosure.
It is also confirmed that the Government will introduce measures to target the promoters of tax avoidance schemes which it consulted on earlier in the year. The proposals use a wide definition of promoter and where a promoter satisfies one of the threshold conditions HMRC will be entitled to issue a conduct notice to the promoter. Breach of a conduct notice will, in particular, result in the promoter being required to notify clients of its high-risk promoter status and HMRC will have a longer period to enquire into the tax returns of such clients. The threshold conditions include circumstances where arrangements are considered by the GAAR Advisory Panel to be unreasonable. This could include circumstances where an advisor who genuinely thought that the arrangements they advised on were consistent with legislation and so represented a reasonable course of action but the GAAR panel subsequently disagreed.
Draft legislation included in the consultation, including threshold conditions, is set to be revised for publication in the Finance Bill.