The Importance of Tax Upfront

Update on Accelerated Payments

HMRC have recently published a briefing on the requirement of tax avoidance scheme users to make upfront payments of tax, known as ‘Accelerated Payments’. The briefing explains why HMRC believe it was necessary for them to be granted the power to demand tax ahead of the conclusion of a tax dispute and how the department is applying this power.

From 17 July 2014, individuals and businesses involved in tax avoidance schemes have to pay HMRC the disputed amount of tax upfront while the dispute is resolved. This new power, called ‘Accelerated Payments’, so say the Revenue, removes the cash-flow advantage that those who “deliberately try to bend the tax rules” by avoiding tax currently have over the majority of taxpayers who pay their tax up front.

Most of the tax avoidance schemes affected by these new powers apparently do not work, but until now people have been able to hold on to the disputed tax until their case is resolved, which in some instances can be a considerable length of time, often for many years. By forcing these scheme users to pay in advance puts them on the same footing as the vast majority of taxpayers.

Schemes at risk

Accelerated Payment notices are being issued to those involved with schemes that are:

Formally notified to HMRC through Disclosure of Tax Avoidance Schemes (DOTAS) rules.

Counteracted by the General Anti-Abuse Rule (GAAR).

Similar to ones already defeated in the courts.

These schemes fall into six broad categories:

Sideways loss schemes

Stamp Duty Land Tax schemes

Self-employment schemes

Artificial loss deduction schemes

Capital gains schemes

Employment schemes

Before HMRC can issue someone with an Accelerated Payment notice they must first have opened an enquiry or raised an assessment.

Prior notice is given to a taxpayer that a notice is on its way as well as to scheme promoters, who will be told 6 weeks before notices are issued so that they can be prepared to support their clients.

The tax that is paid upfront is the same amount that the person would have paid had they not used the avoidance scheme in the first place.

Being forced to pay the tax before any enquiry is concluded does not affect an individual’s right to continue to fight HMRC should they feel the tax avoidance scheme is legitimate. Where they do so and win, then their tax will be repaid to them with interest. A word of caution however, HMRC have won approximately 80% of avoidance cases that have ended up in the courts and many more settle before reaching litigation.

Who will be affected?

HMRC expect to issue around 43,000 payment notices – 33,000 to individuals and 10,000 to businesses. The average income of an individual receiving a notice is £262,000. Some cases involve wealthy individuals who are trying to avoid over £10 million of tax.

The here and now

On 15th July HMRC published a list of the DOTAS avoidance schemes whose users may be required to make an advanced payment of tax. The list is being revised quarterly and the October update has now been made available. This provides an early warning for avoidance scheme users that they need to brace themselves for a notice.

The vast majority of notices will have been sent out by 2016.

In cases where a person cannot pay because of genuine hardship, then HMRC will consider alternative payment arrangements just like any other debt.