Tony Wickenden: HMRC fends off legal challenge on tax avoidance


There has been another interesting and important development in relation to HM Revenue and Customs’ relentless drive to close the tax gap. Of course, it is in the area of tax avoidance: specifically, the part of its strategy that sees it getting the tax “early” from those who have entered into what it believes to be challengeable schemes.

The development I am referring to is the failure of a challenge by way of judicial review to partnership payment notices issued by HMRC requiring the accelerated payment of tax pending the outcome of a tax dispute.

The judicial review took place following an application on behalf of investors in three partnerships: Ingenious Film Partners 1 and 2, and Ingenious Games. The notices for payment issued in these cases were PPNs, which are similar to the accelerated payment notices issued to individuals.

It was argued the PPNs were unreasonable and illegal, and  they undermined the claimants’ “legitimate expectations” not to pay tax on the arrangements in question in the event of a dispute until the outcome of a tribunal and any appeal that may subsequently take place.

The taxpayers claimed the notices were not issued lawfully because “despite the statutory language, no real discretion had been exercised by HMRC, who had adopted an industrialised process for issuing notices based on ‘when’ not ‘whether’ considerations”.

The taxpayers had argued that, in issuing the notices, “HMRC gave no consideration to relevant circumstances, such as the fact the legislation was designed to address situations where HMRC had no pre-existing power to hold onto cash pending the outcome of the tax dispute. This was not the case here, where HMRC checked the claims over 10 years ago and could have refused to repay them at the time pending further investigations but chose instead to pay.”

As already stated, the taxpayers argued the notices were given in breach of their legitimate expectation they would not have to pay any tax in dispute until after the first-tier tribunal had decided all relevant issues. This reminds us of the important point that the issue of an APN or PPN is nothing to do with the tax-effectiveness or otherwise of the arrangement under dispute. The APN or PPN merely requires the payment of tax in advance pending the outcome of the proceedings.

The judge ruled the PPNs were “lawfully issued” and “the principles of natural justice have been adhered to by the statutory scheme and by HMRC in exercise of the discretion conferred by FA 2014”.

The judge also dismissed claims the issue of the notices involved an unlawful interference with property rights under Article 1 of the First Protocol and was in breach of Article 6 of the Convention for the Protection of Human Rights because it involved the retrospective imposition of a payment obligation the claimants could not have predicted when they joined the partnerships.

Apparently, HMRC wins 80 per cent of all avoidance cases that go to litigation and, understandably, it was delighted with this outcome. Together with the intensive publicity and naming and shaming linked to tax avoidance carried out by both individuals and corporates, the market for aggressive schemes is rapidly disappearing.

As well as the continued bringing forward of new targeted anti-avoidance legislation, there is also the proposed further extension of the disclosure of tax avoidance schemes hallmarks to catch a wider number of arrangements. Inheritance tax is a new area of focus in this respect.

Having a Dotas reference number is, of course, one of the key triggers for the issuing of an APN so widening the base, so to speak, makes absolute sense as far as HMRC is concerned.

More than 10,000 APNs were issued in 2014/15, relating to tax of £1.7bn. HMRC expects to issue
a further 50,000 in the current year. Payment has to be made within 90 days of an APN or PPN being issued.

Of course, the normal appeals process is available in relation to the assessment itself but, in the meantime, if you receive an APN in relation to the transaction(s) that is the subject of the assessment, you have to pay that tax up front as a kind of “refundable deposit”.

HMRC’s view in introducing the APN and PPN provisions is that, in the meantime, the tax in dispute should be resting with HMRC rather than the taxpayer. Like many other businesses, it recognises that cash flow is king.

Tony Wickenden is joint managing director of Technical Connection