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If one asked the question what was the biggest nail in the coffin of the marketed tax avoidance coffin then the answer must be Accelerated Payment Notices (“APNs”). Certainly, more so than the General Anti-Abuse Rule (“GAAR”).
The very nature of this ‘pay now, argue later’ regime has not only lead to a reduction in the supply and demand for schemes but has also lead to cases being brought to a (kind of) conclusion more quickly as clients opt to ‘throw in the towel’.
This is due to the lack of the right to appeal and, quite naturally, an individual’s lack of enthusiasm for Judicial Review. The balance of power is far too stacked in favour of HMRC for your relatively wealthy individual or business.
Indeed, this legislation has been a nice little earner for the Chancellor. He wrote to the House of Commons Treasury Committee stating that APNs have collected at least £3.5bn since their inception a few years ago.
So, after a few years after the introduction of this game-changing, but highly controversial measure, where are we now?
The taxonomy of the APN regime
The APN family has two distinct branches:
As stated above, the APN requires the recipient to pay an amount of tax that, broadly, HMRC believes represents the tax advantage claimed by the taxpayer.
In order for the APN rules to be engaged, that must be one of three hooks points on which HMRC can hang the APN.
These are as follows:
If one receives an APN then the recipient has to:
Between you, me and the moving goalposts I would almost always suggest to a Client they make representations. Regardless of the merit of these representations it will buy them extra time in which to arrange for payment. Generally speaking, these representations should go in around day 89. This is because the payment date is extended to 30 days after HMRC has responded.
On the other hand, a Follower Notice does not trigger a payment of tax. Rather, a Follower Notice requires the taxpayer to amend their return (or claim) and concede that the tax arrangements simply do not work.
A Follower Notice may only be issued where there is a final judicial ruling that HMRC believes is relevant to the scheme or arrangements in consideration.
The taxpayer may decide to ignore this instruction. However, if he or she does ignore it and the scheme ultimately does not work then there is an eye watering penalty of up to 50% of the additional tax payable.
In these circumstances, there is a right of appeal against this penalty. This is because at 50% the penalty is at a ‘criminal’ level for the purposes of the European Convention on Human Rights (though it is still a civil penalty) meaning that Article 6 is triggered which is the ‘right to a fair trial.’
Who said there were no human rights in tax!?
Early challenges to APNs
As stated above, there is no formal right of appeal to APNs. At the time, this was seen as an outrageous proposition (sadly, we now see increasingly pernicious such as the retrospective loan charge legislation such that APNs now seem relatively passe).
As such, assuming HMRC had gleefully ignored any taxpayer representation (par for the course) then, remarkably, the only route open to challenge APNs was that of judicial review. Let that sink in.
There have been many such challenges to APNs which generally have one thing in common – the taxpayer has been unsuccessful.
A detailed discussion of these cases is outside the scope of this article, however we will consider some of the important points raised in some of them below.
The link between DOTAS and APNs
One key technical issue which can arise (and discussed in a case called Walapu) is whether an APN strictly meets the DOTAS requirements.
As discussed, this is one of the triggers that, assuming there is also an open enquiry, HMRC can issue an APN. Generally speaking, this is probably the most common basis on which an APN has been posted to, and ended up on the door mat of a taxpayer.
First of all, an APN can only be issued if HMRC has issued a reference number under DOTAs to the scheme promoter. This is vital and means that HMRC cannot issue an APN merely because it believes that a scheme should have been disclosed under DOTAS but has not been. Of course, HMRC has other procedures it can follow where it believes a scheme has not been disclosed properly.
The second point is that an APN may only be issued in respect of ‘notifiable arrangements’.
Note that this does not say ‘notified’. In essence, this means that where a scheme has been disclosed on a ‘protective’ basis and did not meet the relevant hallmarks of a DOTAS regime then it simply does not allow an APN to be issued.
I say simply but it is, of course, not simple.
One can try running this argument with HMRC as part of the ‘representation’ process which is the very definition of a kangaroo court. HMRC will not entertain such a prospect in most cases. That again leaves one with Judicial Review and this requires a client, or more realistically many clients in the same boat, with an ironclad gut.
In the case of Walapu, HMRC prevailed over said taxpayers who had argued this very point.
Quantum of the APN
Another condition is that the APN must specify the sum that must be paid under the APN.
In this regard, a designated HMRC officer must determine, to the best of his information and belief, an amount which is termed the ‘the denied advantage’. Perhaps, unsurprisingly, this is the amount that the taxpayer claimed, or over-claimed, as a result of the scheme or transaction and HMRC believe is in dispute as a consequence.
What in blue blazes does the phrase ‘a determination to an officer’s information and belief’ mean?
Perhaps without the same preamble, this very issue was discussed in the memorably named Vital Nut case. By way of a background, this was concerned with APNs issued in respect of on employer financed retirement benefits schemes (“EFRBS”).
Here, the taxpayer contested that HMRC had not actually come to any conclusion as to whether the scheme in question actually worked. The background was that HMRC had seemingly spent many years looking at EFRBS but, for whatever reason, had not moved to litigate any of the cases under consideration.
A-ha! Thought the taxpayer. They had not determined anything. If they had, and they had concluded it did not work, they would have taken some affirmative action rather than sitting on their hands. The conditions are therefore not met.
Au contraire, said HMRC. They argued that all that was required was ‘a calculation of the asserted advantage’ and that ‘an APN can be validly given without consideration of whether, on the information it has, HMRC or the officer considers that the claim for the tax advantage (the relief) is available’.
The judge didn’t agree with HMRC’s interpretation as it would run contrary to the scheme of the APN regime. His view was that the HMRC Officer must have formed a view that the arrangement does not work.
That said, the Judge did believe that HMRC had met this test. But clearly, there might be cases that fall in the gap between the judges view in Vital Nut and HMRC’s view.
Paying an APN
Several attempts have been made to prevent HMRC collecting tax due under an APN on the basis that further appeals in the judicial reviews may invalidate notices.
The courts have so far refused to issue an injunction against HMRC from collecting amounts due under APNs. However, the judge in VVB stated that: ‘If companies are not able to continue to trade/run their businesses in the usual manner when they have to pay the APN interim relief will be granted.’
That said, the grant of interim relief does not change the due date for the payment of the APN and penalties and interest will apply accordingly.
Follower Notices – where are we now?
Follower Notices are a rarer beast. We have already discussed, in general, the circumstances under which a Follower Notice might be issued.
So what are the detailed provisions?
204 Circumstances in which a follower notice may be given
(1) … if Conditions A to D are met.
(2) Condition A is that—
(a) a tax enquiry is in progress into a return or claim made by P in relation to a relevant tax, or
(b) P has made a tax appeal (by notifying HMRC or otherwise) in relation to a relevant tax, but that appeal has not yet been—
(i) determined by the tribunal or court to which it is addressed, or
(ii) abandoned or otherwise disposed of.
(3) Condition B is that the return or claim or, as the case may be, appeal is made on the basis that a particular tax advantage (“the asserted advantage”) results from particular tax arrangements (“the chosen arrangements”).
(4) Condition C is that HMRC is of the opinion that there is a judicial ruling which is relevant to the chosen arrangements.
(6) A follower notice may not be given after the end of the period of 12 months beginning with the later of—
(a) the day on which the judicial ruling mentioned in Condition C is made, and
(b) the day the return or claim to which subsection (2)(a) refers was received by HMRC or (as the case may be) the day the tax appeal to which subsection (2)(b) refers was made.
The first case we are aware of that dealt with a Follower Notice (as opposed to the common or garden APN) was in respect of the Working Wheels scheme – made (in)famous by the fact that one if its participants was the then Radio 1 DJ Chris Moyles who, like the other users, entered in to a scheme selling used cars.
Following the case, which was refused permission to appeal, Follower Notices were sent to other participants in the scheme. As stated above, the practical effect of this was that it required them to amend their returns, withdrawing the tax relief that they had claimed.
The subsequent case of Benton revolved around the fact that a taxpayer did not take such corrective action. As such, HMRC imposed a penalty. The dispute was a rather technical one as to whether the notice met the requirement of a FN in so far that it had an incorrect date.
Follower Notices and Rangers
So we now move on to what is probably going to be the ‘big daddy’ Follower Notice case. The full title of the case is RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v Advocate General for Scotland (Respondent) (Scotland) – One can see why it is Rangers or Big Tax Case – is likely to lead to many Follower Notices being issued.
A summary of the judgement and links to associated articles can be found here, however, this is likely to form the basis of many challenges to so called disguised remuneration cases such as EBTS and EFRBS.
HMRC stated last year that they would issue such notices and it seems that they have now started to make good that promise.
However, if HMRC take the decision to issue FNs quite freely to EBTs then it seems to me quite likely that this will generate a plethora of litigation. This is because, in the context of existing case law, Rangers must have been quite narrowly defined and seems to me to be best applied to cases where those benefitting are ‘normal’ employees.
It seems to me to be difficult to apply the same decision to those who have used EBTS and EFRBS for businesses they own as there is a much wider appreciation offered to such a person in how they extract profits from the business.
As discussed above, one can resist the requirement to amend the tax return. Doing so is potentially a high stakes game as if one loses the substantive matter in the Court then there is a maximum headline penalty of 50%.
If you have any queries about Accelerated Payment Notices or Follower Notices then please do not hesitate to get in touch.