No going back – the perils and pitfalls of the UK’s APN and PPN

What is abundantly clear to anyone who has a passing interest in the manner in which tax disputes are dealt with in the UK is that the legislation in Finance Act 2014, concerning accelerated and partner payment notices (the APN legislation), marks a significant shift in the rules of engagement between HMRC and its ‘customers’.

When introducing the APN legislation, HMRC indicated in its impact statement that the new legislation would “remove the cashflow advantage for the taxpayer of holding onto the disputed tax during an avoidance dispute”. This statement suggests that taxpayers were routinely and deliberately taking advantage of the slow pace with which the wheels of justice can turn in order to achieve a cashflow benefit.

HMRC also stated that the legislation would “predominantly affect individuals with above average incomes. It will
therefore have greater effect on those protected equality groups who are overrepresented in more affluent populations”. It was argued that the APN legislation would make the tax system more “fair”.

The meaning of ‘fair’ is inherently subjective. It means different things to different people and as such it is not
helpful to refer to a ‘fairer’ tax system. It is perhaps for this reason that the Revenue and Customs Act 2005 makes no
reference to ‘fair’. Traditionally, HMRC has been responsible for the “collection and management” of tax and the danger with introducing such a subjective concept as
‘fair’ into tax collection is that it is likely to lead to uncertainty and taxation by administrative action rather than by Act of Parliament.

The APN legislation is retrospective in effect and provides no right of appeal against the issue of an APN or PPN. Taxpayers may make ‘representations’ to HMRC, but it is HMRC which is charged with the job of evaluating its own decision.
The payment demanded by an APN or PPN is not ‘tax’, but rather a sum which may at some point be referable to a sum of tax
determined by a tribunal/court to be owed (or not, as the case may be) at some point in the future.

In the author’s experience, the delays which have been perpetrated in tax disputes have not been as a consequence of
inaction on the part of the taxpayer – many of whom have provided a large amount of documentation and information to HMRC as part of the enquiry process – but rather inaction from HMRC. In some cases, enquiries have been continuing for many years – it is not unusual for an enquiry to last more than three years. Officers come and go, which compounds the problem and adds to the delay while those officers familiarise themselves with the case, and in the meantime taxpayers have nothing to appeal to the tax tribunal, meaning their dispute with HMRC cannot be determined by an independent tribunal or court.

HMRC has issued a large number of APNs in respect of so-called ‘contractor schemes’. These arrangements, as well as being tax efficient, enabled contractors, such as IT
contractors, to organise their affairs through a company structure in order to provide flexible working arrangements
with several employers. Such arrangements were common within the IT sector, and many of the individuals concerned had modest
incomes. They now find themselves, many years later, receiving APNs which frequently contain estimated figures which far outstrip the actual tax which would become due if HMRC were to be successful at tribunal.

HMRC is issuing APN/PPNs on an industrial scale, seemingly with little or no regard to the facts of the particular case and one could be forgiven for concluding that this new power is simply being used as a means of raising revenue.

The real sting in the APN legislation is the fact that it has retrospective effect. HMRC can issue an APN or PPN in respect of any planning which has been allocated a scheme reference number under the disclosure of tax avoidance schemes (DOTAS) regime.

A recipient of an APN or PPN has very little time to organise their affairs to enable payment of the sum demanded. The APN legislation provides that payment must be made within 90 days of the date on which the APN/PPN was given. Interest, currently at the favourable rate of 3%, is chargeable by HMRC in respect of late payment, and penalties for non-payment can
be imposed (initially at the rate of 5% and increasing to 15%).

In those cases where HMRC has not concluded its enquiries, it is unlikely that the payment by the taxpayer of the sum demanded by the APN will act as an incentive to HMRC to progress and conclude their enquiry. This is likely to lead to
a significant increase in the number of taxpayers applying to the tax tribunal for a direction compelling HMRC to issue a
closure notice within a specified period – for example, pursuant to section 28A(4) of the Taxes Management Act 1970.

If a taxpayer does not pay the sum demanded in its APN/PPN, HMRC’s debt management section will become involved. The letters and phone calls begin, followed shortly thereafter by visits in person. The APN legislation does not provide for ‘hardship’ and HMRC may commence enforcement proceedings and
ultimately bankrupt the taxpayer. For someone in the finance industry, or a company director, this will have serious
consequences for their livelihoods. It is extraordinary that a taxpayer may face bankruptcy in circumstances where an
independent tribunal/court has not determined whether any tax is due to HMRC. All HMRC needs to do is issue an APN or PPN referring to a sum which may become tax at a future date should the tribunal/court ultimately agree with HMRC’s interpretation of the law.

That future date may of course never arrive. How is an APN bankrupt to finance the underlying litigation? Even if they are able to do so, and their appeal is successful, the damage caused by bankruptcy may be irreparable.

Many recipients face having to consider: the sale of their family home to pay the sum demanded in their APN, the ‘fire
sale’ of assets at less than market value, or the closure of their business with the associated loss of jobs which that will
entail.

HMRC should confirm, unequivocally, that it will not bankrupt any taxpayer who receives an APN and who is facing
financial hardship.

Those who consider this issue to be an irrelevance because the APN legislation only applies to taxpayers who have
participated in certain tax planning should not be surprised if, in due course, the concept of advance payment to HMRC
pending determination of the underlying dispute, is extended more generally.