New provisions, which came into force on 17 July 2014, are designed to remove the cashflow advantage for the taxpayer that currently exists in relation to most direct tax disputes and to help HM Revenue & Customs (HMRC) to clear the backlog of disputes relating to past tax avoidance schemes.
The key points are:
If HMRC succeeds in the courts against another user of the same tax scheme it will be able to require a taxpayer to settle their dispute or if they wish to continue their dispute, to make an accelerated payment of tax and face potential penalties if they are ultimately unsuccessful.
In addition, anyone who has used a scheme disclosable under the Disclosure of Tax Avoidance Schemes (DOTAS) rules may have to make an accelerated payment of tax – even if the planning was disclosed under DOTAS many years before these changes became law and even if HMRC has not succeeded in any litigation against the scheme.
Follower Notices Following A Judicial Ruling In Another Case
‘Follower notices’ are aimed at marketed avoidance schemes, where HMRC has succeeded in the courts against one scheme user.
HMRC will be able to issue a follower notice where an enquiry or tax appeal is in progress in relation to ‘arrangements’ where it is reasonable to conclude that obtaining a ‘tax advantage’ was the main purpose or one of the main purposes of the arrangements.
The legislation is widely drawn and allows the issue of a follower notice where “HMRC is of the opinion that there is a judicial ruling which is relevant to [the taxpayer's] arrangements”. A ruling is relevant if “principles” laid down or reasoning given in the ruling would, if applied to the arrangements, deny the asserted advantage, or part of it.
There is no right of appeal against a follower notice, just a right to send written representations to HMRC, within 90 days of the notice being given, objecting to the notice on the basis that the procedural conditions have not been complied with or that the judicial ruling is not relevant to your circumstances. If you submit representations and are unsuccessful, you have 30 days from being notified of the outcome to comply with the notice, assuming this period ends after the original 90 day period.
If the disputed tax has not already been paid, a follower notice will usually be accompanied by an ‘accelerated payment notice’ specifying an amount of tax that must be paid on account of the final liability. See below for more details.
My initial view on Follower Notices is “fair enough”.
Accelerated Payment Notices
HMRC can issue an ‘accelerated payment notice’ (sometimes referred to as an ‘APN’) to a taxpayer if a tax enquiry or tax appeal is in progress and:
a follower notice has been given or is given at the same time in relation to the same return and same tax advantage;
HMRC has issued a DOTAS reference number in relation to the arrangements (or similar arrangements where the promoter is required to notify a scheme reference number to the taxpayer); or
a general anti-abuse rule (GAAR) counteraction notice has been given in a case where the stated opinion of at least two members of the sub panel of the GAAR advisory panel was that the arrangements were not a reasonable course of action.
The accelerated payment notice will specify the amount of tax that must be paid on account of any final liability in respect of the enquiry or appeal. This will be determined to the best of the HMRC officer’s information and belief. The accelerated payment provisions overrule the normal postponement rules in relation to tax appeals. The accelerated payment will be repaid (with interest) in the event that the scheme is ultimately proved to work.
Now, this is where I have an issue.
To my mind, this could lead to APNs being issued to taxpayers where the liability of the taxpayer is disputed and, indeed, the taxpayer has received legal advice supporting the validity of the scheme used.
This being the case, should the payment of an APN issued to a company be treated as an expense of the company and posted through the Profit and Loss Account? Or should it be treated as a deposit being paid against a contingent liability and therefore only be reflected in the Balance Sheet?
I’m not an accountant, I’m an Insolvency Practitioner. I’ve discussed this recently with two firms of accountants and received two different opinions.
The deposit argument seems to me to represent the true position where the advice received is that the tax scheme is robust and no liability will arise. However, a demand has been received in terms of legislation and is payable, I can understand why you would consider it should be an expense until proved otherwise.
So why do I think the treatment of this is important?
If you treat the payment as a deposit against a contingent liability, the solvency of the business is not affected (at least on a Balance Sheet basis).
If, however, the payment should be treated as an expense, profits are reduced and there may be the possibility of losses arising. If these losses are of such a level that the shareholders’ funds become negative, we’re in a new ball game.
The obligations and potential risks to directors of an insolvent business are significant. Should the directors continue to trade they must be confident that the company will return to solvency and that they are acting in the best interest of the company’s creditors. Wrongful Trading, Fraudulent Trading and misfeasance can result in personal liability. Believe me, HMRC are aware of this and I expect we’ll see an increase in Actions against directors in the next few years.
On the flip side, directors of solvent companies have a duty to their shareholders. If the company hasn’t received an APN but the directors think there is a risk this may happen, should they be taking steps to protect shareholders interests? I’d be delighted to hear your views.
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