No one disputes that taxpayers must all pay their fair share, but equally fair procedure, due process and legal certainty are vital. These measures place those principles under serious threat
The Budget confirmed a contentious proposal to significantly extend HMRC's powers in both existing and future open enquiries, despite significant opposition during consultation earlier in the year.
The new powers come in two forms. First, where a taxpayer has used planning which comes under the Disclosure of Tax Avoidance Schemes (DOTAS) legislation or which is deemed to fall foul of the new General Anti-Abuse Rule (GAAR), HMRC will be able to demand upfront payment of the tax assessed as due.
Second, where a taxpayer has put in place planning similar to a structure which has been defeated in court, generally because HMRC has chosen to pursue a representative case – ie one which is especially favourable to HMRC – HMRC will have power to require other taxpayers with similar arrangements to either settle their dispute or, if not, pay the amount of tax assessed.
This is really quite breathtaking at one level. It means HMRC can demand payment of tax it deems due in open enquiries which have been long running and where no-one outside HMRC has ever decided the planning doesn't work. Or if a tribunal has decided it doesn't work, has done so on different facts and in relation to a different taxpayer.
No one disputes that taxpayers must all pay their fair share (whatever that means), but equally fair procedure, due process and legal certainty are vital. These measures place those principles under serious threat.
That is because they allow HMRC to completely change the goal posts part way through an open enquiry, for tax planning that may have been put in place a number of years ago, and where an enquiry may have been conducted with slow progress despite the taxpayer's best efforts to advance matters.
Further, even if planning doesn't work, the tax initially assessed as due and the actual tax liability may well be very different. Nonetheless, HMRC will be able to demand advance payment of a potentially very high amount, which can only be recovered if the taxpayer has the funds to pursue an enquiry and potentially litigation.
We can fairly expect the payment demands to be for rather large amounts – the expectation is that accelerated payment notices will be issued to 33,000 individual taxpayers concerning ’5.1 billion under dispute, which means ’150,000 average per taxpayer.
Clearly, these are the sort of sums which will place some people in very real difficulties, notwithstanding that they may have high annual incomes (especially where the payment relates to loss claims dating back a number of years which taxpayers have effectively already spent).
HMRC will also have the power to dip into taypayers' accounts where more then ’1,000 of tax is owed and they consider the taxpayer has the means to pay.
The new powers will be enacted with the Finance Bill, so expect them to come into force in July/August this year.
Strategies to combat HMRC's new powers
Taxpayers who think they may be affected by these measures with respect to open enquiries will want to consider a number of alternative, and potentially parallel, strategies beforehand.
A key option is to try to force closure of an enquiry and the issuing of an assessment – the taxpayer can then appeal the assessment rather than simply having to pay money upfront (and it is often possible to postpone payment of tax assessed). The First Tier Tax Tribunal can issue directions to HMRC to issue a closure notice in some cases, and taxpayers will want to consider if this could lead to efficient resolution of long running enquiries.
Even where the case is not far enough advanced for the FTT to direct HMRC to issue a closure notice, taxpayers will wish to think about requesting that the inspector handling their enquiry seek to progress matters swiftly.
If, despite these efforts, the matter is not closed and a taxpayer receives a demand to settle or pay upfront, there may very well be strong grounds for seeking a judicial review of the exercise of that power by HMRC and/or considering a challenge under Human Rights legislation.
If a taxpayer decides to pursue these avenues, he is likely to be in a stronger position if he has tried hard to bring an enquiry to an end before the demand to pay is issued.
The message is that while the provisions are certainly controversial and provocative, the time between now and enactment of the Finance Bill is the time for anyone who thinks they may be affected to formulate and follow a careful plan of action to mitigate their effect as much as possible.
Sophie Dworetzsky is a partner at Withers LLP
+44 207 597 6378; firstname.lastname@example.org