Tax avoidance schemes have been around for many years, but until about 20 years ago these were used by rich individuals and large companies to shelter very large sums (typically £1m +) from the taxman. They were usually designed by the very large firms of accountants with the help of senior counsel and high fees were charged to participants, often over £100k.
Following the introduction of the IR35 rules in 2000, new scheme promoters appeared and saw an opportunity to mass market schemes to shelter much lower sums and these new schemes appealed to contractors particularly.
2004 saw the introduction of Disclosure Of Tax Avoidance Schemes (“DOTAS”) which required promoters of tax avoidance schemes to disclose full details of their schemes, and HMRC would then issue the scheme with a DOTAS reference number. Schemes passed this reference to their members who in turn were required to record it on their tax returns.
2013 saw the implementation of General Anti Abuse Rules (GAAR) and then the 2014 Finance Act introduced Follower Notices (FN) and Accelerated Payment Notices (APN). These give sweeping new powers to HMRC to help them tackle tax avoidance. Full details of can be found at www.hmrc.gov.uk/specilaist/acc-pymnts-notices.pdf but they are briefly explained below.
Where a judicial ruling by a court or tribunal on a tax strategy has gone in favour of HMRC and that ruling is no longer capable of being appealed, HMRC may issue an FN to anyone who has used a similar strategy and whose tax return is under enquiry. The FN requires that person to amend their tax return to reflect the judicial ruling within 90 days or face a penalty of between 10% and 50% if they amend their return after that date or eventually have their appeal decided against them by a court or tribunal. There is no independent appeal process, but a person in receipt of an FN can make representation to HMRC. HMRC will then appoint an officer not previously involved with the taxpayer to consider the representations and respond. If the response is that the original decision stands then the individual has the longer of the original 90 day period or 30 days from the date of the HMRC response to amend their return or face the prospect of penalties.
An APN may be issued where an enquiry has been opened by HMRC and either;
- an FN has been issued to that individual;
- the individual has been a member of a scheme with a DOTAS reference; or
- a GAAR “Counteraction Notice” has been issued by HMRC.
An APN requires the individual concerned to make a payment equivalent to the tax in dispute. So for example, if a scheme shelters £10,000 of an individual’s income that would otherwise be taxed at 40%, the amount demanded in the APN will be £4,000.
As with FN’s there is no appeal process but representations can be made in the same way. The tax stated on the APN is due 90 days after its issue. If it is not paid there is a 5% penalty on the 91st day followed by further 5% penalties 5 months and 11 months after the due date. However, HMRC will consider payment arrangements and where such an arrangement is agreed and fully complied with, no penalties will be charged. If HMRC are ultimately successful in the judicial process they will offset the amount paid on the APN against the liability. If the taxpayer is successful then HMRC will re-pay the APN with interest.
HMRC has identified about 1200 DOTAS schemes and intends to issue an APN to each person who has been a member of any of those schemes by 31 March 2016.
The GAAR has been set up to catch arrangements that would otherwise be legal and effective but are nevertheless considered to be abusive. Where HMRC come across such arrangements they refer them to an independent body who use a so called double reasonableness test to make a decision. If they conclude that the arrangements are abusive, HMRC can issue a Counteraction Notice to produce a just and reasonable result. A person served with a Counteraction Notice does have a right to appeal and have the matter decided by a tribunal or court, but HMRC may still of course issue an APN.
FN’s, APN’s and the GAAR apply not just to individuals, but to partners, companies and trusts.
So what future does tax avoidance have? Well, the mass market appeal has probably been lost. Contractors and other freelancers who have used these schemes are going to find themselves far worse off than they would have been if they had used a limited company. However, little has changed for multi nationals and the rich. They will continue to use well thought out schemes to shelter large amounts of income. They will simply pay the APN where necessary and fight all the way to the supreme court. They will win some and lose some, but the tax involved will dwarf the costs and on average they will be better off. So tax avoidance is unlikely to go away, it will just go back to how it was 20 years ago before it gained mass market appeal. Whether that’s just or not is of course another question.