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The Follower Notices and Accelerated Payments Regime brought into UK law by the Finance Act 2014 is a highly contentious method of tax collection that sets a dangerous precedent in the UK tax system. The new rules empower HMRC to demand that participants in tax avoidance schemes pay tax as deemed due by HMRC in advance of any legal process to determine whether the disputed tax is in fact owed, thereby transposing the presumption of innocence mandated in UK statute and judicial opinion. Whilst individuals involved in disputed avoidance schemes should not benefit from a cash flow advantage throughout a lengthy litigation process, equally they should not be made to suffer the lethargies of the UK justice system.
Follower Notices are aimed at individuals involved in schemes that are the subject of litigation, where it is reasonable to conclude that tax avoidance was the predominant purpose of the arrangement. Schemes which bear a resemblance to such disputed arrangements would also attract the same scrutiny. The notice will require a taxpayer to amend his or her tax return in which the tax advantage was claimed. HMRC may issue Follower Notices where a final judicial ruling has been made against a targeted arrangement. This includes judicial rulings made in the First Tier Tribunal; a development considered controversial to say the least, given that decisions of this tribunal do not constitute binding precedents of law.
Accelerated Payment Notices (APNs) may accompany a Follower Notice, or they may be issued in their own right to anyone who has sought tax advantages through schemes that fall within the Disclosure of Tax Avoidance Schemes (DOTAS) rules, or are counteracted under the General Anti-Abuse Rule (GAAR). Thankfully EIS and VCT schemes, as with ISAs and Pensions for example, do not fall within the DOTAS rules, because these are government-approved general investment vehicles. These tax advantaged schemes are prescribed by the government, meaning that provided the rules are complied with, they will not amount to tax avoidance. Companies can seek verification that they qualify for EIS or VCT investment by means of an ‘advance assurance’ process, whereby they submit information to HMRC about their business plans and trading activity. HMRC will then advise on whether the proposed share issue is likely to qualify. Consequently EIS and VCT schemes are unlikely to be affected by the advance tax payments legislation, unless they fall within the scope of the GAAR.
The APN rules mean that an individual may now be required to make an accelerated payment of tax in relation to a scheme established many years before the entry into law of these provisions, if that scheme has still not been agreed with HMRC. This retrospective requirement could have devastating consequences for UK taxpayers who have invested in the list of over 1,100 schemes so far identified by HMRC as tax avoidance vehicles.
Four conditions, details of which can be found in the Finance Act 2014 Part 4, must also be satisfied before either a Follower Notice or an APN may be issued. Once a notice has been issued, taxpayers are required to pay the full amount of tax in dispute within 90 days. Of course, HMRC will not be able to release this money into the public purse until such time as it is proven to be due, therefore this rule serves merely to remove taxpayers’ money from circulation. The taxpayer has no statutory right to appeal either notice, the only recourse available would be along the following lines :
These responses serve to extend the payment deadline by 30 days and penalties are imposed for non-compliance or late payment. Furthermore those taxpayers in receipt of a Follower Notice who decide not to amend their tax return but instead choose to dispute their tax liability, will be penalised for doing so. This penalty may amount to 50% of the tax advantage denied, even if the taxpayer ultimately wins the case. This is a flagrant attempt to restrict access to judicial due process and as such constitutes a violation of human rights.
Whilst these rules apply legitimately to schemes that were deliberately designed to evade tax, they also apply to statutory government schemes, such as film schemes and the Business Premises Renovation Allowance scheme, where the law has simply been poorly drafted and therefore lacks clarity. This ambiguity has created a conflict in understanding between HMRC and legal practitioners regarding the parameters of scheme rules and as a consequence, there are a large number of tax avoidance arrangements that were deemed to be legal at the time of their establishment, but can now no longer be relied upon.
Although it is the rich and famous who have been publicly chastised for their association with the affected schemes, many ordinary investors on more modest incomes are also vulnerable to these harsh procedural changes. Commentators have noted that many individuals in receipt of an APN may be unable to pay, particularly those who have made investments a number of years ago where interest payments will have accumulated. Tax demands on certain individuals and businesses could even be in excess of their initial investments. Some may be forced to liquidate assets or raise external finance in order to satisfy the demands of HMRC, whilst for others meeting the costs will result in bankruptcy.
The Law Society, the Chartered Institute of Taxation and many journalists and lawyers have criticized the regime as unconstitutional and claim that the Executive has bestowed upon HMRC the almighty role of judge, jury and executioner. More worrying still is the Chancellor George Osborne’s latest proposal to grant HMRC direct access to the private bank accounts of individuals with a tax liability greater than £1,000; a power that is both arbitrary and oppressive. To quote Robert Venables Q.C., “These rules are the most pernicious attack on the Rule of Law that the Executive has bamboozled the House of Commons into enacting since the Glorious Revolution of 1688”. Although there is no right to independent appeal and the penalties are clearly intended to deter judicial challenge, a case must be made to support those who have participated in schemes that manage legitimately their tax liabilities.
HMRC has two years from Royal Assent (17 July 2014) to issue Follower Notices and APNs, and the apparent lack of redress is alarming. Where litigation has not yet begun it may be possible to achieve settlement, however the terms are likely to sway heavily in the revenue’s favour. These overreaching laws are open to challenge via judicial review of HMRC’s decision to issue the notice, and if the decision is found to be unreasonable, then the notice will be withdrawn. Of course this process is costly and time consuming with no guarantee of success and taxpayers may have to cover HMRC’s costs if they are unsuccessful.
EIS and VCT investors should therefore be reassured that the likelihood of their being issued a Follower Notice or APN is relatively low. It is however imperative that companies applying for EIS or VCT funding are entirely forthcoming and transparent with HMRC about their business plans when applying for pre-clearance, since approval granted on this basis will rarely be withdrawn and considerably mitigates the risk of the scheme falling within the GAAR. Independent financial advisers are well advised to require evidence of pre-clearance before recommending EIS and VCT products to potential investors. With regard to schemes that are not government sponsored, an open dialogue should be encouraged between practitioners and investors to conceive the best approach to tackling the notices, so that HMRC remains informed of the severe implications of the regime as it exercises its powers.
Summary of the Taxation of Foreign Domiciliaries and Business Investment Relief
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