Tax Avoidance Schemes: Are You Ready for Upfront Tax Bills Before Litigation?

In Chancellor George Osborne’s 2014 Budget speech a new disincentive was announced for tax avoidance schemes.

That disincentive took the form of an ‘accelerated payments’ provision giving HMRC new powers to collect disputed taxes up front before any legal ruling has been made on the lawfulness of a scheme.

The provision is expected to become law within the next couple of months meaning many people will suddenly have to find large sums of cash in short order.

How Will the Accelerated Payments Provision Work?

Anyone that has invested in a tax avoidance scheme is a potential target as the Government has begun to take a much tougher line on tax avoidance.

Those targeted by HMRC will receive a letter setting out the amount in dispute and requiring payment within 90 days.

Money collected under the new provisions will only be repaid if the taxpayer wins its dispute with HMRC.

What Will the Affects be?

It is estimated that around 33,000 people have invested in such schemes. In addition there are already around 65,000 open cases related to tax avoidance schemes.

The Government hopes that the crackdown will disincentivise those tempted to use tax avoidance schemes in future and thus reap the additional income receipts. The Office for Budget Responsibility has estimated that it will also bring forward around £4bn in tax receipts.

It is unlikely to be a smooth ride for HMRC however. As noted above, there are likely to be many thousands of people caught by the new rule which raises the risk of significant amounts of litigation. The fact that the amounts in dispute could go back over a number of years means that people may be hit with large bills which they are unable or unwilling to simply hand over.

The legal position is somewhat anomalous. Taxpayers that have to hand over large amounts of cash will only get it back if their scheme is eventually proved legitimate which it may well be. The fact that they will be deprived of significant assets in the meantime sits uncomfortably with how the law typically works. The tax authorities are effectively being given the opportunity to pre-empt the outcome of litigation which puts punishment before proof of wrongdoing.

Comment There is no fixed definition of a tax avoidance scheme but it is generally a commercial arrangement that lacks a genuine commercial purpose other than to reduce tax. Anyone that has used or is using an arrangement that has the appearance of a tax avoidance scheme should prepare for the potential shock of receiving a large tax bill in anticipation of litigation. Anyone considering using tax avoidance schemes or investing in commercial arrangements that appear to have no genuine legitimate commercial purpose but offer a reduction in tax liabilities should seek expert tax advice.

If you have concerns about potential claims from HMRC contact Peter Gourri today by email PGourri@rollingsons.co.uk or telephone 0207 611 4848.