HMRC's tax avoidance campaign – update
Published 28 November 2014
The subject of tax avoidance, and HMRC's new powers to recover disputed tax, is rarely out of the headlines at the moment. Since our last alert on the subject in July 2014, at the end of August HMRC began contacting investors with'accelerated payment notices' (i.e. the notices which require disputed tax to be paid up front by the investor). The notices require the tax to be paid within 90 days. Over 43,000 tax payers will be contacted in total and it is anticipated that somewhere between £4bn and £7bn tax will be sought in this manner.
There is now a greater risk that disappointed investors will form action groups to seek redress from professional advisers in respect of particular schemes, whether the advice that they were given was appropriate or not. The reported facts suggest that rather than a sudden spike in claims, this may be a sustained issue over a period of time. This is because HMRC is said to be issuing about 2,500 notices each month; at that rate, HMRC could still be issuing notices this time next year. HMRC's own projections indicate that they expect to actually collect the tax receipts at a steadily increasing rate, reaching a peak during the 2015/16 tax year.
There has been a number of developments since HMRC began serving accelerated payment notices:
- Schemes relating to one of the larger promoters, Ingenious Media, have been one of the initial targets of the accelerated payment notices – over 1,300 investors in Ingenious Media schemes have reportedly been contacted and have been given a final payment deadline in January 2015.
- A tax tribunal hearing in relation to Film Partners 2 and seven other Ingenious Media schemes commenced this week. Tax on gains/income of some £300m is alleged to have been sheltered through these schemes. Ingenious Media submit that the schemes have generated over £1bn of taxable income to date i.e. its position is that, taken as a whole, the schemes have generated tax receipts. Prior to the hearing, HMRC made an offer to a number of investors to settle, which was to be withdrawn on 31 October, prior to the hearing commencing on 3 November. The offer is said to be allowing tax relief of 40%, likely to be allowed against the investors' own 'cash contributions' only (i.e. rather than against the larger debt funded “leveraged” contributions) consistent with offers made by HMRC on many similar schemes previously.
- HMRC succeeded in the Upper Tribunal in defeating the Vaccine Research Ltd Partnership scheme. Investors in this scheme and schemes proceeding on a similar basis can expect to receive accelerated payment notices.
A criminal case against two accountants at Montpelier Tax Consultants collapsed in September 2014 after the prosecution declined to offer further evidence against them and asked the judge to direct the jury to acquit them. A formal not guilty verdict was entered.
- George Osborne has announced that he will use the 2014 Autumn Statement due on 3 December 2014 to announce measures designed to avoid multinational technology companies operating in the United Kingdom paying little or no tax, by clamping down on "hybrid mismatches" – the widely reported technique used by multinational companies significantly to reduce their tax bills by exploiting the differences between countries’ tax rules and ascribing profits to entities in lower tax jurisdictions. A further statement on the rules to be implemented to prevent the practice is due to be issued on 3 December.
- The government has also pledged that, to support its general anti-avoidance stance, it will introduce new legislation to penalise those tax advisors who sell aggressive avoidance schemes.
The Irish government has since announced it will abolish the 'double Irish' tax structure. Under this structure organisations with Irish trading companies but with headquarters offshore, can use a royalties system to move tax from the Irish low-tax system to a country with effectively no taxes, avoiding the corporation tax that would otherwise be payable.
- Scheme promoters are reported to be designing schemes which escape the DOTAS (Disclosure of Tax Avoidance Schemes) rules, which could restrict HMRC serving accelerated payment notices on investors. There are significant fines for failing to disclose tax avoidance schemes, but promoters are said to be seeking to remain within the rules by finding business models that are not subject to DOTAS.
- HMRC has been keen to report all year that in support of the Government's drive to minimise tax avoidance, it has been bolstered by significant extra funding. HMRC now has 200 additional investigators and specialised teams, which have been instrumental in helping it to achieve a significant rise in its prosecutions for tax avoidance and evasion.
- HMRC has invested some of this budget in the drafting of its letters – enlisting the assistance of psychologists to "inspire guilt" in taxpayers.
HMRC expects to issue about 2,500 accelerated payment notices a month, reaching a total of about 43,000 by the end of March 2016, and estimates that the actual recovery of funds is likely to peak in the 2015/16 and 2016/17 tax years. For the time being, then, there is bound to be an increase in claims against professionals as investors are contacted, tax demands are made and disputed tax is paid by investors. Many investors will not have made provision for this and some will struggle to pay. The harsh personal consequences of this – at best penalties being levied by HMRC, at worst significant financial hardship – is only likely to serve as further motivation for investors to bring such claims, particularly if they are encouraged by lawyers who are prepared to invest in the claims under CFAs. We have advised on claims arising from these schemes for a number of years, and it used to be the case that the number of claimants was far lower than the total number of investors. Now, with tax paid up front and losses suffered in a very public way and in a similar time period, investors are more likely to form action groups and committees both to fight HMRC and to recover losses from advisers.