The Government’s position is that contractors continue to use tax avoidance schemes even though HMRC has challenged and defeated a similar scheme in court. Up until now, even if a scheme was essentially the same as another, small variations would have to be challenged through litigation, with the taxpayer hanging on to the tax owed until the courts handed down their decision. This was a costly and time consuming procedure. To combat it, Follower Notices will now be sent out which give the contractor the option to continue their dispute with HMRC but only if they pay the disputed tax; if it’s subsequently decided that HMRC are wrong in their assertions, the contractor will get their money back. However, if the contractor chooses not to settle with HMRC they could be facing a penalty of up to 50% of the disputed tax amount.
These notices can only be issued if a tax enquiry has already been undertaken by HMRC and that the tax advantage results from the tax avoidance scheme and that HMRC believe that there is a final judicial ruling which is ‘relevant’ i.e. the principles laid down or the reasoning given in the ruling would, if applied to the tax avoidance scheme, deny the asserted advantage or part thereof. The guidance does also state that, if a later case ‘significantly’ the effect of the judicial decision, HMRC would reconsider the follower notices.
Once Follower notices have been sent HMRC will also send an Accelerated Payment Notice (APN) detailing what they claim is owed. These will also be sent to users of DOTAS schemes and those who fall foul of GAAR where an enquiry is already underway or an appeal has been made against a closure notice, assessment or determination. The guidance states that there is no specific time limit for HMRC to issue an APN which acts as a huge deterrent to contractors who may be considering using a tax avoidance scheme which appears, currently, to be legal.
Unfortunately, as is typical in law, ignorance is no defence when it comes to these notices; it will make no difference to a case if the scheme promoter didn’t provide contractors with a DOTAS reference number, HMRC will still pursue the tax owed.
These rules have obviously been introduced to deter contractors from using tax avoidance schemes and the potential penalties may indeed deter many. However, what’s not stated in the guidance is that, in the majority of cases, even if the contractor were to win against HMRC in court, they would get back the monies paid on account, with interest, but there would be no guarantee that they’d be able to recover their legal costs. Historically purveyors of tax avoidance schemes don’t stay around long enough to fight HMRC on contractors’ behalf so the financial burden of the battle would fall to the contractor themselves. Furthermore, if the case is allocated to the complex track (which means it may be lengthy, complex or high value) losing would mean that the contractor could be liable for HMRC’s costs.
It’s unlikely that anyone would defend themselves in a tax case and lawyers don’t come cheap so the ‘choice’ for contractors, following the introduction of these new rules, is to pay up or risk paying interest, penalties and a substantial legal bill.