The Finance Act 2014 contains a number of measures to minimise tax avoidance.
In recent years the government has clamped down significantly on tax avoidance schemes, in particular introducing the Disclosure of Tax Avoidance Schemes (DOTAS) which obliges promoters and users of tax avoidance schemes to provide early information to HMRC.
It also introduced the General Anti-Abuse Rule (GAAR) which allows HMRC to counteract tax advantages arising from abusive tax arrangements that do not stay within the spirit of tax legislation. In short, if there is a tax arrangement which has the aim of achieving a result that Parliament did not anticipate and which cannot be regarded as reasonable then it will fall foul of the GAAR and HMRC penalties are likely to follow. It remains to be seen how the courts will interpret the GAAR.
However well tax advisers draw clients' attention to the risks of tax schemes, clients who later receive an unwanted tax bill may be unhappy with those bills (including penalties) and/or with the fact that they have to incur costs to challenge the schemes. Unhappy clients make claims even if they may be unmeritorious. The government is continuing to introduce legislation in this area with a view to strengthening HMRC's powers to tackle tax avoidance, something which could have further repercussions in terms of such claims.
The Finance Act 2014 has very recently seen the government bring in further measures and strengthen these powers. In particular, the Act includes the following notable changes:
high risks promoters
judicially defeated schemes
Prescribed information The Act extends the list of prescribed information that promoters and users of tax avoidance schemes must provide HMRC under the DOTAS rules. The changes will allow HMRC to access sample scheme documents in order to conduct a full analysis of how a scheme works.
High risks promoters New measures will allow HMRC to issue a conduct notice to promoters of tax avoidance schemes who have met a threshold condition in the previous three years. Such promoters will be subject to additional disclosure obligations and may be named publicly by HMRC. In addition, they will be required to inform clients of their promoter reference number (PRN) and of the fact that they are monitored.
Judicially defeated schemes The Finance Act also includes provisions designed to promote the early settlement of tax avoidance cases and to discourage the use of tax avoidance schemes by requiring payment of disputed tax up front in cases where the same or similar tax avoidance schemes have been judicially defeated in litigation. Where HMRC is enquiring into a taxpayer's return or claim and it is of the opinion that there is a final judicial ruling relevant to the taxpayer's tax arrangement, then it will be able to issue an accelerated payment notice requiring up front payment of the sum in dispute.
The provisions are intended to have the effect of discouraging tax avoidance as well as allowing HMRC to recover tax earlier and prevent taxpayers from delaying the payment of tax through disputing the amount in demand. In addition, HMRC will be able to issue penalties of 5% of the unpaid amount if the taxpayer fails to make the accelerated payment by the relevant date, with a further 5% payable if the amount remains unpaid five months after the penalty date.
There is some cause for concern here in that it appears that HMRC will have quite a wide discretion as to whether there is a relevant final judicial ruling, something that could lead to uncertainty for some time. A summary of responses to the draft legislation was published in March 2014 and HMRC confirmed that decisions of the First-tier Tribunal that are not appealed may be held to be relevant, something which means that this measure could potentially have a significant impact for users of tax avoidance schemes and thus may subsequently give rise to more claims against their tax advisers.
In any event, with the introduction of accelerated payment notices, tax advisers will need to inform their clients that they may be required to pay tax up front; failure to advise could itself be negligent.
Article written for Lockton by Simon Mason, Partner, DWF
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