New powers which will see HMRC seize £7bn in disputed tax could trigger a wave of misselling complaints against advisers.
When the 2014 Finance Bill is given Royal Assent this month, HMRC will begin issuing “accelerated payment notices” – demands to pay tax within 90 days – to tens of thousands of individuals. In last year’s Autumn Statement, the Government announced HMRC would be given the power to issue payment notices to anyone who has used a tax avoidance scheme that a court has ruled against. In the Budget these powers were extended to anyone who has used an avoidance scheme into which HMRC has an open inquiry.
Guilty until proven innocent
Regulatory experts say the notices will trigger a torrent of complaints against advisers for recommending the schemes and failing to give clients sufficient warning that they may have to pay upfront.
The accelerated payments scheme marks a major step change in HMRC’s strategy, says Technical Connection joint managing director Tony Wickenden.
He says: “HMRC has realised legislation to ban certain schemes and practices will have limited impact unless it changes its process for recovering money.
“This changes the presumption from innocent until proven guilty to guilty until proven innocent.”
Previously, if HMRC ordered an individual to pay tax which it believes had been unfairly claimed in tax relief, the individual could appeal the decision through a tribunal. They would not have to pay until HMRC won through the courts.
Under the payment notices regime, an individual can still appeal a decision through a tribunal but must pay the tax upfront and will only be refunded, with interest, if they win.
Regulatory consultancy BDO senior tax manager Claire Shelemay says: “In the past, if there was an enquiry by HMRC it was possible to use delay tactics by appealing the decision.
“Investors could stall proceedings by several years without having to pay any tax – but these notices give just 90 days to pay what is due.”
Norton Rose Fulbright partner and corporate tax lawyer Angela Savin says tax pursuits have until now “progressed at a very leisurely pace”.
She says: “The payment notices are going to focus people’s minds and there is a lot of talk of misselling in this area.”
Experts argue the notices will prompt an angry response and, given the large sums involved, could even put some at risk of financial difficulty.
DWF Fishburns partner Harriet Quiney says: “There will be a wave of complaints once payment notices start going out because when people get these notices they are going to be quite wound up.
“It is the inconvenience of having to pay upfront, even if you later go on to win. These are large sums of money and if a client has to take out a loan to cover the payment that could seriously affect their cash flow.”
Savin says the notices will put many people at risk of “genuine financial difficulty”.
Adviser support company Adviser Advocate chief executive Richard Leeson adds: “When clients get a tax demand for a six or seven figure sum, they will seek legal recourse. This will be a trigger for complaints against advisers.”
HMRC says it will issue 43,000 payment notices in total – 33,000 to individuals representing £5.1bn of tax under dispute, plus a further 10,000 notices to businesses concerning £2.1bn of tax.
The Revenue is investigating 65,000 individuals and small businesses that have used marketed avoidance schemes but says the 43,000 figure is based on the number of cases it expects to win.
Disputed schemes largely relate to employee benefit trusts, contractor avoidance, partnership losses and stamp duty land tax.
Leeson says: “Payment notices will be issued for schemes like employee benefit trusts and film partnerships, which a lot of advisers have been involved in.”
Wickenden argues the majority of advisers have steered clear of aggressive tax avoidance schemes, particularly in recent years.
But others say the payment notices will trigger complaints for advice given years before the tide of public opinion turned against tax avoidance.
Quiney says: “Over the past two or three years, investors should have known that HMRC is taking a more aggressive attitude to tax avoidance and advisers will no doubt have warned them of the risks.
“But for the schemes that were sold a long time ago, clients may be up in arms about misselling because they will claim they were not given adequate risk warnings.”
Savin, however, believes it will be more difficult for advisers to prove advice given in recent years was appropriate.
“When considering a claim for negligence, the test is what was reasonable advice at the time,” says Savin.
“What constituted reasonable advice in 2001 may well be less conservative than what was reasonable in 2010. The rhetoric around tax avoidance has gained pace in recent years, so the bar has gone up for how prudent the advice should be, to take into account the reputational risk, the attitude of HMRC and recent HMRC successes in court.”
Tax investigation firm Trident Tax managing director Alan Kennedy says: “There are already a number of websites and claims firms dedicated to helping investors seek redress from those who have sold them tax avoidance schemes.
“The advent of payment notices is likely to further increase their activities.”
Taxbriefs editorial director Danby Bloch says the success of complaints will rest on how robustly advisers assessed clients’ attitude to risk.
He says: “One hopes the adviser did a risk profiling exercise with clients to make sure they really understood the risks of undertaking one of these schemes. Only financially and psychologically very robust clients should have done so. Then they should tell clients about the legislation and its impact as soon as possible. This is something all advisers should be doing in their regular communications.”
Some experts believe advisers who have failed to warn clients of the upcoming payment notices risk a second type of complaint.
Leeson says: “Advisers do not seem to be aware of this change from HMRC, but they should be advising their clients on how to prepare for the payment of these notices.
“If a client has an asset which they could have sold at a higher price several months ago, they may lodge a complaint of financial loss.”
Quiney says: “There is the secondary issue of whether a client could complain that they should have been notified by their adviser as soon as this became Government policy.
“I am aware of some advisers who have been writing to their clients to warn them they may receive a payment notice. For some clients, knowledge will be time critical, particularly if they are in a weak cash flow situation.”
She adds that from now on, advisers must inform clients that they may have to pay disputed tax upfront, to give them as much time as possible to plan for that eventuality.
A spokesman for HMRC says: “ The consultation on accelerated payments ran for a month, giving all interested parties enough time to contribute. Anyone entering into a scheme in future should make sure they have the money to pay the tax upfront.”
With the first payment notices just weeks away, advisers will quickly need to get a grip on this issue.
When was the measure announced?
In last year’s Autumn Statement, the Government announced HMRC would be given the power to issue payment notices to anyone who has used a tax avoidance scheme that a court has ruled against. In a consultation paper published at the end of January, HMRC proposed extending this to anyone who has used a tax avoidance scheme into which it has an open inquiry. The consultation closed on 24 February and the measure was included in the Budget.
Which tax avoidance schemes does it apply to?
Payment notices will be issued to anyone for whom there is an open enquiry, and who has claimed a tax advantage through arrangements that fall under the Disclosure of Tax Avoidance Schemes rules, or has been counteracted by HMRC under the General Anti-Abuse Rule. The Dotas rules mean anyone using a scheme which fits certain conditions must disclose it on their tax return. HMRC says the most common schemes under scrutiny are employee benefit trusts, contractor avoidance, partnership losses and Stamp Duty Land Tax schemes.
When does it come into force?
The measure is expected to come into force later this month, when the 2014 Finance Bill receives Royal Assent. HMRC says it will begin issuing notices soon after that date.
Timeline: HMRC’s tax avoidance crackdown
• March 2013: Government announces in the Budget plans to “name and shame” the promoters of tax avoidance schemes. It also closed nine tax loopholes, including three involving corporation tax loss relief.
• June 2013: Government amends the Finance Bill to close down schemes that use the “transfer of rights” rules to avoid stamp duty.
• August 2013: Government announces plans for advisers offering tax planning products from firms labelled “high risk” to abide by new information disclosure rules, with huge fines for non-compliance.
• March 2014: Government sets outs plans in the Budget to give HMRC the power to recover tax directly from debtors’ bank accounts where they owe more than £1,000 and have previously been contacted about paying the tax (debtors will be left with at least £5,000 in their account). In a consultation paper in May, HMRC proposed extending the power to Isas. The consultation remains open.
Aurora Financial Planning chartered financial planner Aj Somal
If clients receive demands from HMRC for large amounts of money, ultimately they will blame the adviser for recommending the scheme in the first place. Advisers that have recommended these types of schemes in the past should be communicating with their clients right now to make them aware of this change in legislation.
Pilot Financial Planning chartered financial planner Ian Thomas
HMRC seems to be taking a guilty until proved innocent approach, which is likely to come as a surprise to many. It will be interesting to see whether it is predominately accountants or advisers who carry the can for this.
A change that crept up on the industry
The accelerated payment system affects taxpayers in dispute with HMRC on schemes that fell under Disclosure of Tax Avoidance Schemes or which are counteracted by the General Anti-Abuse Rule. It requires them to pay the tax upfront rather than allowing the tax to be withheld until the dispute is resolved.
The lack of coverage of this measure in the media will mean affected taxpayers and advisers may be unaware of the change and its impact. The measure was proposed in the Budget and included in the Finance Bill 2014 which will receive Royal Assent in July.
HMRC will then begin to issue notices to pay to those affected, requiring payment within 90 days. Penalties will of course apply for late payment.
Establishing sufficient liquidity of funds to meet the demand will be a major priority and one which may require realisation of assets. Advisers will want to ensure that they are advising their affected clients on the changes and the imminence of the demand for payment. They will want, no doubt, to discuss the restructuring of the client’s portfolio and any appropriate actions.
How did this measure creep up on the industry? There was an indecently short consultation period from January to February 2014 which allowed little time for discussion or representation. Coupled with this, the annuity changes and HMRC’s new powers to raid bank accounts have swamped a crowded news agenda.
Advisers involved in recommending the tax schemes themselves will be only too aware of the pending lawsuit by Hugh Sloane against his tax advisers. It should be expected that some clients will seek redress against their advisers; whether they are successful or not will depend on the recommendation made and the strength of the file in evidencing the recommendation.
Richard Leeson is chief executive of Adviser Advocate