Comment: Beware falling foul of tax avoidance rules

HMRC's  heightened powers have far-reaching consequences. Picture: PA
HMRC's heightened powers have far-reaching consequences. Picture: PA
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IN JULY, HM Revenue & Customs made a number of provisions to the 2014 Finance Act relating to disclosure of tax avoidance schemes (Dotas) that will impact upon any business or individual that undertakes more complex tax planning.

HMRC now has the power to issue an “accelerated payment notice” to anyone who has used a disclosable tax avoidance scheme. Concerns have been raised about the wide range and retrospective nature of the provisions and the lack of a right appeal.

The provisions are a cause for concern for many who have made Dotas disclosures in the past. In particular, a taxpayer might have to make an accelerated payment of tax where the scheme is still under inquiry or being litigated.

Introduced in 2004, Dotas require promoters to provide information to HMRC about schemes being made available or implemented that have a tax advantage. HMRC can conduct investigations into the mitigater’s tax returns once the scheme has been disclosed, with the submitter being given a scheme reference number for their tax return.

The Dotas provisions are wide-reaching and cover income tax, corporation tax, capital gains tax, SDLT, inheritance tax, annual tax on enveloped dwellings and NI contributions. Few businesses or individuals can undertake any tax planning without considering the Dotas principles to ensure they are within the law. The new provisions could have a serious impact on anyone who has previously disclosed a scheme under Dotas, as the law now states that users of existing schemes may have to pay the tax in dispute up front without a right of appeal. That is HMRC’s stated goal.

HMRC now has the power to issue an “accelerated payment notice” to taxpayers where it determines that a particular tax advantage has resulted, and the amount of tax paid by that person has been understated.

The notice will specify the amount of disputed tax required to be paid and the recipient will have 90 days to pay. In the event that the company or individual makes an objection, the taxpayer will have to make payment on whichever is the later of (a) the 90-day period or (b) the period of 30 days beginning on the date when the taxpayer is notified of HMRC’s decision on the objection.

The legislation effectively allows HMRC to act as prosecutor, judge and jury in cases where promoters and taxpayers have tried to be open in disclosing the scheme. In many instances, the schemes disclosed under Dotas have involved use of legitimate statutory exemptions that are not, per se, avoidance schemes. As a precaution, promoters chose to disclose to avoid a fine, but now are finding that an accelerated payment notice might be issued.

HMRC says that the new power will reduce the cash-flow advantage for the taxpayer of holding on to the disputed tax during a dispute and will put all taxpayers involved in avoidance schemes on the same footing.

So what impact could these new provisions have on those who have disclosed a scheme in the past and what, if anything, do they need to do?

HMRC has published a list of Dotas scheme reference numbers indicating all of the present schemes where it “may” issue an accelerated payment notice. This list (available at will be updated quarterly and HMRC has confirmed that, starting this month, it will start to phase the issuing of notices to users over approximately 20 months.

The controversy surrounding the new Dotas provisions is increasing and tax counsel has indicated there are likely to be grounds for judicial review of the legislative provisions. In HMRC’s Budget publication notice confirming the changes, it was acknowledged that “these measures are expected to prompt a range of different legal challenges” and that legal resources would be “increased and adapted depending on the scale and scope of any legal challenges”.

One challenge might arise through a major class action, and it would, if an individual is faced with a notice, be worthwhile to contact the promoter to ascertain if they would facilitate a forum for a potential class action for judicial review.

An important point that should also be borne in mind is that even if the tax in dispute is paid, it can be recovered if the dispute is settled in the taxpayer’s favour. Taxpayers should consider the various options to expedite a resolution of the dispute.

Promoters should consider whether or not the Dotas regime applies to any future schemes. Either way, the new legislation is likely to have far-reaching consequences for many businesses and individuals.

• David Thomson is head of real estate with McClure Naismith LLP