Backlash against tax avoidance might force measures of questionable legality through
Rules could allow HMRC to keep disputed tax for as long as a decade
New HMRC proposals which would require the users of tax planning schemes to pay disputed tax up front could inadvertently encourage more aggressive behaviour, warns Pinsent Masons, the international law firm.
Pinsent Masons explains that, currently, HMRC is only able to claim disputed tax from users of tax planning and tax avoidance schemes once it has been successful in gaining a judicial ruling that the scheme is ineffective or abusive. However, HMRC proposes to turn existing legal practice on its head.
HMRC announced the proposals in a new consultation on draft legislation that it hopes will reduce the appetite for tax planning and avoidance schemes by eliminating the 'cashflow advantages' they offer.
The rules could allow HMRC to hold onto legitimate tax savings for up to a decade and only release them once a taxpayer has fought their way through lengthy and expensive litigation.
The new rules would apply to tax under dispute in all schemes caught by the Disclosure of Tax Avoidance Schemes (DOTAS) rules. The DOTAS regime was introduced in 2004 and requires the 'promoter' of certain types of tax avoidance schemes to disclose that scheme to HMRC to support its anti-avoidance efforts.
Pinsent Masons adds that HMRC intends that the rule changes should also apply to pre-existing avoidance cases.
Jason Collins comments: "HMRC is trying to move the goalposts with historic disputes by suddenly requiring those already involved in litigation with them to put the cash on the table now, even though HMRC has not yet established that the scheme is ineffective. On the face of it this offends principles of natural justice and one has to question whether such a step would be lawful.
"This is an audacious move. These proposals are subject to consultation but, despite question marks over their legality, the current backlash against tax planning could allow them to push them through."
Proposals could drive more promoters offshore
Pinsent Masons warns that the measures may also encourage promoters to move offshore, where they cannot be compelled to disclose their schemes to HMRC. Under these circumstances HMRC has to rely on individual users to report the scheme. Those users may be given debatable advice that the scheme is not disclosable – but may not know any better.
Jason Collins, Head of Tax, of Pinsent Masons, explains: "HMRC believe that part of the attraction of tax planning schemes is simply the cash flow advantages of deferring judgment – and payment day – indefinitely. These proposals would reverse those economics by requiring scheme users to pay HMRC up front, with no certainty that they will get any of the tax back.
"That is likely to be a game-changer for many taxpayers who will decide that these schemes are no longer attractive, particularly as the promoter usually also wants to be paid their fees up front.
"It is perfectly possible that existing and future schemes caught by these changes will prove to be legitimate. By requiring payment up front, the rule changes run counter to the presumption in the UK that we are 'innocent until proven guilty'."
Jason Collins adds that the changes also risk encouraging aggressive behaviour which may come close to the line between avoidance and evasion: "Reducing the possible benefits of using tax planning schemes unfortunately also changes the balance between the potential risk and reward of simply operating offshore, and not co-operating with HMRC at all.
"Because offshore promoters cannot be compelled to disclose these schemes to HMRC, the Revenue will be relying on the users to report the schemes. HMRC risks a black hole of its own making because it will have little idea what those users are being told."
Amnesty to encourage voluntary compliance could be more effective
Pinsent Masons points out that many tax professionals have been calling for an "amnesty" for historic tax planning, involving taxpayers being let off a proportion of the tax in dispute. HMRC has rejected such calls because it has expressly set out its stall to litigate tax avoidance all the way. HMRC say that there are currently 65,000 taxpayers in an avoidance dispute with HMRC, some of whom are in multiple schemes covering more than one tax year.
Jason Collins says "Is it the best use of HMRC's limited resources to challenge all 65,000 even having introduced rules to 'stack the cards' in their favour? An amnesty would lead to a stream of voluntary compliance and would avert any challenge on the legality of the measure.
"If HMRC is right that payment up front rules would stop most new avoidance in its tracks, it would be free then to enforce the new rules against anyone who still wants to give new tax avoidance a go. As it stands, it will still be tying up its resource to chase down existing cases instead. Isn't a bird in the hand better than two in the bush?"