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New HMRC powers could trigger torrent of misselling complaints

HMRC aims to seize £7bn in disputed tax  from tens of thousands of people which means advisers could face a torrent of misselling complaints

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.”

Misselling

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.”

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.

Q&A

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.

Adviser views

Somal-Aj-Aurora-2014-600x385.jpg

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.

Ian Thomas

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.

Expert view

Richard-Leeson-MM-Peach-700.jpg

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

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. Soren Lorenson 3rd July 2014 at 9:29 am

    Looks to me as though, once again, those of us with fairly ‘vanilla’ client banks of ordinary clients will be required to bail out the HNW complex financial products merchants who are so so clever, until it all goes wrong when they run to the hills in their Mercedes leaving us with the tab. Maybe we should push for a ‘regular adviser’ section in the FSCS?

  2. Dominic Thomas 3rd July 2014 at 9:31 am

    Oh joy. So even advisers that have steered clear of aggressive tax avoiding products will end up footing the bill for those that did and cannot or will not pay. Does it not strike everyone that there is something deeply broken with our system?

  3. This is fairly evil. The Revenue only have to say a scheme is under investigation in order to trigger an immediately payment – even if they are aware that there is nothing wrong with the scheme. Do I believe that the Revenue would do such a thing. Damn right I do.
    Is there an equivalent piece of legislation saying that a tax repayment must be made within a prescribed time limit e.g. 30 days – and I am not referring to the Revenue having to pay interest, since that amount tends to fairly meaningless relative to the repayment itself.

  4. Not evil at all. For far too long “clever” advisers and the clients have been taking the mick – at my expense.
    Anyone having to pay “seven” figures sums will get no sympathy from me. Tax rates could be lower if everyone paid what they were required to. My criticism of the Inland Revenue is that they have not taken action before.

  5. So you are making no Bones about your antipathy to people who plan their financial affairs. An interesting level of non-analysis, since it does not in any way relate to the bones of my comment.
    I will refer first try to clarify your own comment. Firstly there is basic tax planning, such as making contributions to pension schemes. Are you opposed to that? Secondly, there is more sophisticated tax planning such as VCT & EIS investments. Are you opposed to that? Thirdly, there is using specialist schemes, such as film partnerships, that were specifically created by the Chancellor. Are you opposed to them?
    Then there are sophisticated schemes created by tax planners, that push the planning to the boundaries – but not beyond legally. Are you opposed to them?
    Or, is your main bone of contention those schemes that abuse the legislation both in fact and in spirit?
    We’ll assume that you are opposed to schemes that amount to tax evasion, which is of course illegal.
    Most of the above are totally legal, and as the taxation bases were created by The Chancellor, and approved by Parliament at the time. They are therefore not illegal though you may consider them immoral. What is not clear is were you consider the immorality to start, and, as this will be purely a personal opinion. I am not sure why and how you expect a personal opinion to be applied to the nation as a whole. I am assuming your first name is not Adolph.
    So we’ll assume that your main gripe lies with those schemes that abuse the legislation both in fact and in spirit? I many cases it is, or should be apparent, that a very aggressive interpretation on the existing rules are being used. Apparent to whom would be a valid question since the vast majority of clients wouldn’t have a clue. They rely on the expertise and competence of their advisers, so I can sympathise with your antipathy to the advisers. I am not sure that it is totally honest of you to pick on clients, who, as rational people, have chosen to manage the level of tax they pay. I will add the further assumption that the client believes that such planning is perfectly legal.
    In fact this type of planning was socially acceptable until very recently, as a review of the major tax cases until Ramsay in 1982, will demonstrate. In my opinion Ramsay was good social policy, but bad law. This was the judiciary taking over the legislators job because the politicians did not have the balls to introduce the necessary legislation. Even now Parliament is dithering about legislation that has been enacted in other parts of the world. But why complain when we know that politicians are fundamentally spineless.
    It is only in the 21st Century, when the economy has gone into two major stalls that some people, who really should know better, started to treat perfectly legal activity with an increasing level of bile. The prime reason is to distract the populace from the real economic problems that beset the country. Moreover, you will notice that the Government has not closed down the tax planning options that have suddenly become so egregious. Look at what they do not what they say.
    If the Government were to recoup all the tax from the group covered by my definition “abuse the legislation both in fact and in spirit” (which I have assumed is the most contentious area in your mind) I doubt that enough tax would be collected, after costs, to alter the tax rate by 1p in the £. So your assertion that tax rates could be lower is almost certainly incorrect, because no Government is likely to make a 1p adjustment, especially as they can always find more things upon which to spend the small level of extra income. Remember that £1bn is large money to a member of the public, but an insignificant decimal point to a Government.
    To return to my own conjecture, that the measure is evil, I can easily imagine a Government coming close to an election and aggressively (and probably immorally) activating an aggressive collection regime, broadcasting the results to a gullible electorate, along with the new projects the new money will fund, and then quietly repaying the money after the election and going quiet on the loudly trumpeted projects.
    If you accuse me of being cynical, I will answer guilty. One doesn’t give any government powerful tools for manipulation and expect those tools not to be used for the ends of that Government. And do not expect any following government to give up such powers.

  6. >Then there are sophisticated schemes created by tax planners, that push the planning to the boundaries – but not beyond legally.

    But not beyond legally – is the point in question is it not ? the sort of planning that I referred to as “clever” the sort of planning which is for one purpose but claims to be for another – taking the mick

    As to clients not being aware ? possibly in some cases but often they know that they are sailing close to the wind and beyond.

  7. Julian Stevens 3rd July 2014 at 4:03 pm

    “When considering a claim for negligence, the test is what was reasonable advice at the time,” says Savin.

    Try telling that to the FCA and FOS.

  8. @Bones I can certainly accept your definition of “clever”, and was never in favour of such schemes. They turn on very generous interpretations of the law, taxation and life. The upside benefit rarely counters the downside potential, namely the cost of defending oneself against the Revenue, and losing all the benefits.
    They were not too hard to see – if one knew what to look for. Overly generous commission was the first warning sign. It was a great incentive to only sell the upside.
    Wide technical knowledge and experience was definitely a requirement, though it could also blind one to other aspects, such as the competence (and perhaps veracity) of the scheme management. Arch Cru is perhaps a better known recent case of this syndrome.
    I suspect that many of the scheme providers blinded themselves to the downside potential. What chance then did advisers have of coming to grips with all the ramifications. Most advisers are generalists, many highly intelligent generalists. But this meant that they had to rely on the truthfulness and fullness of the explanations they were given.
    It is for this reason that I would suspect that only a small percentage of clients genuinely understood what they taking on board, because their advisers also were deficient in their knowledge, probably through no fault of their own.
    Many schemes worked, but we only hear of those that did not, so it is difficult to extrapolate from an incomplete story. Perhaps many providers and advisers got it right, and those I would applaud.
    There are many inventions that have been failures; there are many cars that don’t deserve the name; there are many entrepreneurs that have gone bust for no fault of their own. And there are many that succeed, beyond expectation. That’s life.
    I can sympathise with your irritation, but its really just like being annoyed that life isn’t perfect. Every set back is but a learning experience. They say that you learn more from a mistake than from a success.
    As far as I am concerned one aspect that should be learnt from the current crop of cases is never to believe what an existing Government says. One regime offers candy floss that a later regime takes away. All these schemes were based on an interpretation of then existing legislation, and quite often encouraging Ministerial pronouncements. A later regime, wanting more revenue, then decides to change the interpretation of the rules. I’m not certain that this is not more despicable than “over smart advisers”.
    As even you have admitted many of these schemes were not beyond legality so there is something more to look at than greedy providers and greedy clients. There is also greedy Governments that are comfortable with moving the goalposts when it suits them. Do remember that these schemes were based, however loosely, on legislation put in place by a willing, at that time, Government. If you put a bag of sweets in front of children do not be surprise if they take some – whatever you have said to the contrary.
    To summarise – it can be very difficult to apportion blame, other than the blindingly obvious statement that “it wasn’t my fault”!

  9. Could this be the beginning of the end of this particular field of financial services?

    It is feasible that a lot of these schemes will go to tribunals and the tribunal will find against HMRC. However, now that HMRC can ask for the tax upfront this will surely put clients off going through this process again in the future. And presumably this is the whole point of the new rules – to deter people doing it again?

    I do not see that deterrent as being a bad thing.

  10. “I do not see that deterrent as being a bad thing.”
    There is an old saying – the end never justifies the means. Just because you consider the deterrent acceptable does not mean that a majority of people do, or that they find acceptable a process of dubious legality, at best, an acceptable method of accomplishing any particular end.
    Its close to lynch mob mentality – just string him/her up. Forget about the niceties of law. Forget about determining whether these people are innocent of wrong doing – just decapitate, because I don’t like them.
    One would like to believe that civilised society had moved on from such a process.
    Let’s just chuck the Rule of Law out of the window, and get back to good ole Mob Rule. It’s a darn sight cheaper, and I’ve never heard a dead body object.

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