Last week I wrote about partnership payment notices and the failure of a challenge to their issue by way of judicial review. PPNs are the partnership version of accelerated payment notices, which are, of course, a fundamentally important part of HM Revenue & Customs’ drive to improve cash flow.
And a pretty impressive drive it is too. It is founded on a philosophy that says if you enter into a tax avoidance arrangement that has a disclosure of tax avoidance scheme reference number, the tax that might (or in the view of HMRC, almost certainly will) eventually become payable should rest with HMRC, not the taxpayer. The normal rights of appeal exist and if the tax “deposit” is repayable, then interest will be payable.
The drive to expand the number of arrangements the Dotas regulations will apply to, as well as a widening and strengthening of the Dotas hallmarks (especially for marketed and inheritance tax schemes) is understandably high on HMRC’s agenda. The existence of a Dotas reference number, after all, is one of the key requirements for issuing an APN and securing the resulting deposit of tax.
But there is more in HMRC’s arsenal than just APNs and PPNs. There are also follower notices. These can be sent by HMRC to any taxpayer that has entered into a “tax arrangement” that a court has previously decided does not achieve the tax advantage sought in a judicial ruling which is final.
The notice requires the taxpayer to take corrective action within a specific timeframe or potentially face a penalty. Corrective action involves the taxpayer either amending their return or claim to account for the failed tax advantage or, if a tax appeal is ongoing, entering into a written agreement with HMRC under which the taxpayer agrees to pay and not to continue with the appeal.
An FN may only be issued if all of the following conditions are satisfied:
- There is an open tax enquiry into the taxpayer’s return or claim, or the taxpayer has made a tax appeal that has not yet been determined or disposed of
- The taxpayer has gained a tax advantage by using a tax arrangement
- HMRC is of the opinion that there is a judicial ruling which is relevant to the taxpayer’s return/claim or their tax appeal
- No previous FN has been given in respect of the same tax arrangement and tax advantage (which has not been withdrawn)
- Less than 12 months has passed since the relevant judicial ruling (or 24 months following 17 July 2014 if the judicial ruling predates that day) or less than 12 months has passed since HMRC received the taxpayer’s return or claim (whichever is later).
A taxpayer who receives an FN may make written representations to HMRC within 90 days if they wish to challenge its issue. Since most of the conditions for issuing one are procedural, a challenge will generally be made on the basis the judicial ruling relied upon in the notice is not relevant.
If HMRC confirms that the notice was validly issued, there is no right for the taxpayer to appeal to an independent body. The taxpayer would then have the following choices:
- To take the corrective action described above within 30 days of receiving HMRC’s decision on the representations made
- To proceed with the tax dispute and potentially incur a penalty. The taxpayer should consider appealing the penalty. It should be noted that even if the penalty appeal is successful, the FN itself will remain in force
- The taxpayer can also seek a judicial review of the reasonableness of HMRC’s decision to issue the FN and ask for it to be withdrawn. However, success in an action for judicial review requires the taxpayer to show there was no reasonable basis upon which HMRC could have decided to issue the notice. It will, in most cases, generally be easier to appeal the penalty than the FN.
Next week I will look at the more familiar APNs and PPNs. These are the notices that have had greatest publicity over the past year or so and the tax collection targets related to them are material.
Tony Wickenden is joint managing director of Technical Connection