On 14 July 2014 the Finance Bill 2014 received royal assent and became law. One of the most controversial and widely talked about set of provisions is set out in Part 4 of the Finance Act 2014 (“FA 2014”). It is anticipated that some 33,000 individual taxpayers and a further 10,000 companies will receive a follower or accelerated payment noticei. At the time of writing this article it is, as yet, unclear over what time period these notices will be sent to taxpayers. This article aims to look at some of the issues that advisors may be faced with in practice when seeking to advise a client who has received either a follower or accelerated payment notice.
Before turning to the detail it might be useful to pause and reflect upon the rationale that saw the introduction of this piece of legislation. The consultation document (published on 24 January 2014) was clear that the main or one of the main drivers was to remove the advantage that a postponement of tax provides pending the outcome of an enquiry or litigation. Such a postponement, it is argued, provides the taxpayer with a low interest government loan. The counter, and highly persuasive, argument is that any advantage could be removed with the introduction of higher (or even penal) rates of interest for late tax payments.
The legislation, in summary and as enacted, allows HMRC to collect tax in dispute upfront. HMRC may give the taxpayer a “follower notice” when, broadly, there is a “judicial ruling relevant to the chosen arrangements”. HMRC may give the taxpayer an “accelerated payment notice” where there is a tax enquiry or appeal in progress and the “arrangements” are either (a) DOTAS arrangements, (b) HMRC has given the taxpayer a GAAR counteraction notice, or (c) HMRC has given the taxpayer a follower notice.
The first point to note is that the legislation only applies to “relevant tax”. The definition of relevant tax does not, for the moment, include NICii or VAT.
The second point to note is the absence of an appeal mechanism, other than in relation to penalties. The only recourse that a taxpayer appears to have is to make representations or to challenge the decision by way of judicial review.
The cornerstone of section 204 of the FA 2014 is condition C which provides that before HMRC can issue a follower notice to a taxpayer it must be of the opinion that there is a judicial ruling which is relevant to the chosen arrangements. This is likely to represent the first battleground between HMRC and the taxpayer.
The draftsman appears to have anticipated this in two ways. Firstly, condition C only requires that HMRC “be of the opinion” that there is a relevant ruling. This clearly tilts the position heavily in favour of HMRC as it appears to the author that the test is a subjective one. That is to say HMRC need only show that in its opinion (or more accurately in the opinion of the officer tasked with considering this issue) there is a relevant ruling. The extent to which that opinion differs from that which is held by others or the world at large appears, at first blush at least, to be irrelevant. However, it seems to the author that the opinion must at least be reasonably held or would otherwise become susceptible to legal challenge.
Secondly, the draftsman has gone on to define “judicial ruling” and the circumstances in which a ruling is relevant at section 205 of the FA 2014. A ruling is only relevant if it relates to the tax arrangement, the principles laid down or reasons given would apply so as to deny the advantage or part of the advantage, and it is a final ruling. Most lawyers will be familiar with the difficulties involved in trying to fit the square peg of a new set of facts into the round hole left by a previous court decision. The idea that there is going to be any consensus about the application of any principles laid down or reason given to a particular set of facts appears to the author to be totally devoid of reality. It is for this reason, perhaps, that provision is made for written representations to be made by the taxpayer as to why conditions a-c are not met, within 90 days of the receipt of the follower notice (see section 207 of the FA 2014). It appears that it is not possible to make representations on the basis that the follower notice has been given outside the twelve month time window. However, one assumes that in those circumstances the follower notice is defective per se. The other reason why it is important for representations to be made on behalf of the taxpayer as soon as possible is because, unlike payment following receipt of an accelerated payment notice, complying with a follower notice will, most likely, bring an end to the enquiry or appeal (see section 208(5) of the FA 2014). This is because in order for a taxpayer under enquiry to comply with a follower notice section 208 of the FA 2014 requires that he amend his return or claim to counteract the perceived advantage. The situation is a less clear when it comes to taxpayers involved in the tax appeals process. Section 208(5)(b) provides that the taxpayer must take “all necessary action to enter into an agreement with HMRC (in writing)…”. It may be possible to agree, in satisfaction of section 208(5)(b), with HMRC that the appeal will continue; but the taxpayer will pay a sum representing the disputed amount to HMRC on account. This has obvious advantages for the taxpayer as it will prevent a penalty of up to 50% of the tax accruing under section 208. The advantages to HMRC from such an approach are a less obvious – although such an approach would appear to deal most effectively with the alleged mischief and puts money into HMRC’s coffers immediately.
The final reason, if another one were needed, for early action and / or making representations to HMRC within the stipulated time period is that, generally, applications for a judicial review are dependent upon the applicant having exhausted all other legal rights and remedies. It seems to the author that the courts will insist that a taxpayer have already made representations under section 207 of the FA 2014 before entertaining an application for judicial review.
Accelerated payment notices
In order to send the taxpayer an accelerated payment notice HMRC must either have already delivered a follower notice or the arrangements must be DOTAS arrangements or a GAAR counteraction notice must have been provided.
In relation to DOTAS arrangement the practical starting point must be to examine whether or not the arrangements have an allocated reference number. However, this can only represent the starting point. Section 219(5) FA 2014 defines “DOTAS arrangements” as those arrangements which are in themselves “notifiable arrangements”. The practical importance of this is that the arrangement in question may well have been notified to HMRC by the scheme promoter out of an abundance of caution (why not notify if there is a risk that the arrangement is caught?) when in fact and on a closer examination, the arrangement was not actually notifiable. In such a situation it appears to the author that if the arrangements are not “notifiable arrangements” for the purpose of DOTAS (albeit that the arrangements may well have been notified out of an abundance of caution) then they are not “notifiable arrangements” for the purpose of the accelerated payment regime. The issue of an accelerated payment notice will turn the spotlight back on the DOTAS rules which will need to be re-read carefully in light of the arrangement in question.
In so far as the GAAR counteraction notice is concerned there are likely to be two areas of contention. Firstly, it seems inevitable that the fundamental premises of the GAAR and the resulting notice procedure will be challenged in the courts. Secondly there is the not inconsiderable difficulty of attempting to apply a GAAR notice to a set of similar facts.
Conclusions and non-tax considerations
There is clearly going to be significant challenges for those taxpayer in receipt of either follower or accelerated payment notices. Advisors will need to carefully analyse both the contents of any notice and the circumstances of their clients with a view to identifying any legal challenge or otherwise best protecting their client’s position.
Given the nature of the notices it stands to reason that definable and distinct groups of taxpayers, as opposed to simply individuals, are likely to be affected. It also follows that the issues are likely to be the same or very similar for each group (for example those with the same DOTAS reference number or those subject to a follower notice). It would, therefore, make sense for those affected to obtain advise or take part in any legal action on a joint basis in order to pool resources and limit costs. Advisors should also contact in advance those clients that might be affected with a view to discussing any potential impact on cash flow or any solvency issues that might arise. Specialist advice in these areas may be needed. Timely advice is likely to serve best.