You may have seen in the March 2014 budget that HMRC’s consultation document on Tackling Marketed Tax Avoidance has passed to MP’s to consider as part of the next Finance Act. Although it is expected their proposals will be much watered down when they form part of the tax legislation I thought I would share my views on how the current proposals would play out if enacted in full.
What has HMRC proposed?
HMRC has proposed that companies that have undertaken tax avoidance strategies that have been registered under the DOTAS (Disclosure of Tax Avoidance Scheme) rules will now be expected to make a payment on account to HMRC. This payment on account will be repaid should the planning ultimately be found to work by the courts.
This is seen as unconstitutional on two counts, firstly the planning has not been tested by the courts and so unless a court says the planning does not work the tax is not due in the mind of most fair minded people. Secondly there is no right of appeal built into the system, so HMRC are judge and jury in their own court.
How this is likely to play out in practice
Bear in mind around 65,000 entities are thought to be affected by this legislation, most of which are represented by the country’s most successful entrepreneurs. These are not people who will agree to being bullied into paying tax that they have every reason to believe is not due. HMRC have already said they expect judicial review of the legislation. They have also said they expect it to take them two years plus to send out the assessments due to the sheer numbers involved. Whether any get paid is another matter.
What is not clear is whether HMRC can continue sending out demands whilst the actual legislation is under review. Neither is it clear whether taxpayers will be able to have their own circumstances dealt with under representative sample. As this new initiative is unprecedented it is expected the judiciary will not accept such an unconstitutional and cavalier approach to be taken by HMRC. At worst HMRC will find themselves being sued by tax payers should they act outside the law by enforcing payment of undue tax.
Many of the companies being targeted by HMRC will have no funds left and it is not clear what, if anything HMRC can or will do about this. The Inland Revenue must also be careful to ensure they too act within the law and only the courts will be able to decide this. Bearing in mind the tax courts are already creaking at the seams with cases the latest initiative will do nothing to alleviate this.
Chartered Accountant and Chartered Financial Planner