Now that the Finance Bill 2014 has received Royal Assent, HMRC has two new weapons it can use against those it believes have engaged in aggressive tax avoidance.
From this month, HMRC will start issuing so-called “follower notices” and “accelerated payment notices”, requiring investors in some 1,200 tax avoidance schemes now being challenged by the authorities to pay over any disputed tax within 90 days. The Revenue estimates that the tax demands will total £7.1bn.
The big difference to past practice is that the targeted taxpayer is effectively presumed guilty until they can prove their innocence. Even if the recipient wants to dispute the demand, they have to pay up first – and only then go to court to dispute the amount.
This new regime creates a truly dangerous situation. Although the rules are aimed at marketed tax avoidance schemes, their ramifications could go much further. The new rules threaten to create an environment where decisions are made and payments demanded on the basis of what is effectively guesswork on the part of HMRC.
For the UK and its economy to function effectively, it is vital that our tax system remains rooted in fact, not conjecture.
In essence, the tax authorities no longer need to persuade a court that a given sum is due if there is a dispute. It is enough for a member of HMRC to decide that a taxpayer’s situation is simply similar to one in which the courts have already ruled in favour of the taxman. HMRC can then demand that the disputed amount is paid upfront, as well as a penalty of up to 50 per cent of that sum on top.
But how can you determine if two cases are genuinely similar? Small differences between people’s tax arrangements can affect the tax outcome significantly. Instantly tarring tens of thousands of people with the same brush cannot be right.
Not only is this approach dangerously indiscriminate, it is also counter-productive. While the government has said that the changes are designed to promote early settlement of disputed tax avoidance cases, it could have the opposite effect.
Taxpayers who receive accelerated payment notices will be unlikely to take them lying down. Those unlucky recipients are entitled to ask questions and require HMRC to show that the tax claimed is in fact due. Appeals, judicial review applications and a renewed urgency by taxpayers to bring their cases to court – so that a judge, rather than an HMRC inspector, can determine the matter – seem certain.
In short, the new anti-avoidance measures are likely to prove part of the problem, not part of the solution. These reforms effectively mean that our tax system is moving towards a “guilty until proven innocent” mindset. The government should think twice about proceeding along this road.
Neal Todd is a partner at Berwin Leighton Paisner.