Contractors who have used tax avoidance schemes and receive an Accelerated Payment Notice (APN) demanding tax may have little choice but to pay up. This follows a High Court Ruling that comprehensively rejected a challenge to the legality of APNs on all counts.
Graham Webber, Director of WTT Consulting, a firm representing contractors who allegedly used tax avoidance schemes, warns that because the APN legislation has no appeals process, contractors have few options: “Contractors should be prepared to pay up, either immediately or in instalments.
“It is possible that, following major cases likely to reach the Supreme Court during late 2016, HMRC may be forced to accept alternative calculations of tax liabilities it is imposing on avoidance scheme users, but this may be too late for many contractors.”
Webber adds that contractors can try to force their case to be heard by the tax tribunal, but for an individual this strategy is considered risky with low probability of a positive outcome for the contractor.
HMRC’s High Court win likely to be challenged on appeal
Despite HMRC’s apparently comprehensive victory, Webber expects this legal challenge to continue: “I think an appeal will be made, and I think it will be made on pretty much the same grounds that went through in the first place.
“The [Ingenious] appeal is important because, of the six grounds that Ingenious argued, four are probably appropriate to contractors.”
Webber believes that the similarities are so close that many courts may refuse to hear a case on behalf of a contractor if Ingenious is under appeal: “To hear what is effectively the same case twice is a waste of court time. So, if Ingenious do appeal, I think a lot of contractor schemes will just wait to see what the result of the appeal is.”
What were the grounds for the legal challenge?
Webber explains that 154 members of the Ingenious Media Plc investors’ avoidance scheme challenged the APN regime through a judicial review: “Arguments were made on the basis that HMRC’s decision to issue the APNs breached natural justice and represented an abuse of their rights according to the European Convention on Human Rights to a fair trial and protection of property.”
Many users claimed they had signed up to the tax avoidance scheme under the premise that they would not have to pay tax before the dispute had been resolved, prior to the implementation of the accelerated payments regime. However, the challenge lost on all accounts.
What are the options for contractors facing APNs?
Things don’t look good for contractors facing APNs. One feature which is notably exempt from the regime is an appeals process, something that Webber claims is deliberate policy “because HMRC don’t want to create any more disputes”.
Webber suggests the best course of action would be to try and defer payment for as long as possible, although contractors should be prepared to pay up, either immediately or in instalments.
“If contractors worry that they are going to have problems paying, even on a deferred basis,” continues Webber, “they need to contact HMRC in order to make arrangements, or risk facing a potential penalty which can amount to as much as 15% of the APN charge.”
Another barrier limiting contractor options is the financial costs. Whilst multiple organisations have raised funds to make the application for a judicial review, this only constitutes around one tenth of the total budget required to actually have a hearing before a Judge, a large price to pay for what WTT considers to be a slim chance of success.
Contractors have three options, but there are risks
For contractors, there are three potential means of resolving the underlying dispute. Webber explains: “The first, and least costly in terms of fees and time, is for contractors to assess their numbers and consider accepting the settlement offer. However the settlement is uncertain in many areas and must be agreed by the end of September 2015. So, there’s a period to review it but take care and if in doubt get advice.”
The second means is litigation, which Webber considers to be a long-term and inherently uncertain strategy: “There are groups around who have spent two or more years preparing cases, but even then we believe the nearest litigation group won’t be in court until the end of next year. This is partly because HMRC control the timetable for tribunals. They say they don’t but, in fact, the process is skewed towards their control.”
Alternatively, contractors could start discussing alternative tax analysis of their situation with HMRC. Despite HMRC’s current reluctance to do so due to their current strong position, Webber believes circumstances could change soon:
“We expect to see more major cases going through to Supreme Court next year. We expect Murray Group, UBS and Deutsche Bank to win their cases, which will be a heavy blow to HMRC, and at that point we expect HMRC to start taking alternative views on liability more seriously.”
What for contractors looking to speed up the process?
With HMRC looking to take full advantage of their High Court-approved powers by issuing APN’s en masse, it could be a while before contractors who have paid theirs have an opportunity to challenge HMRC over their charge, should they want to.
But Webber highlights that there is a way to accelerate the process, although it’s not advised: “In theory you can apply to tribunal to have your case heard and they will likely put a date in the diary which will probably be around the middle of next year.
“Applying for a hearing is free, but contractors would not be well advised to try and fight these cases on their own because it’s a very complicated process,” warns Webber.
“Frankly, HMRC would absolutely love it if an individual contractor decided to take them on because the contractor would almost inevitably lose, and if HMRC get a win against a very popular scheme, there would be no hope of a successful appeal by the other users of that scheme. I certainly wouldn’t recommend going it alone.”
All tax avoidance schemes will be reviewed, eventually
While pressing HMRC is not advised, contractors who feel they have been charged unjustifiably need not worry about never having their say, as Webber believes that every case will be examined eventually:
“In due time, HMRC will start bringing litigation against schemes. At the end of which you’ll know whether the sum you paid under APN is too much, not enough, or somewhere around the middle. HMRC are not able to just sit there and wait. That’s not an option for them.”
What is the APN regime?
The Accelerated Payments Notices regime was introduced by the Government in July within the Finance Act 2014, and has made substantial changes to HMRC’s administrative rights regarding tax avoidance.
Under the legislation, HMRC are granted power to issue an accelerated payment notice to tax avoidance scheme users requiring them to pay the tax in dispute within a 90 day period and before their scheme is challenged in court.
HMRC is clearly delighted with the High Court ruling: “This is an important result, and good news for the vast majority of taxpayers who do not try to avoid paying their fair share of tax,” highlights HMRC Director of Counter Avoidance David Richardson.
“Those who use tax avoidance schemes need to know they can no longer hold on to the money while their affairs are investigated. They have to pay their tax up front like everybody else.”
HMRC is already looking to take advantage of their High Court-approved status, as it plans to issue approximately 64,000 notices by the end of 2016, bringing forward an estimated £5.5bn in payments by March 2020.