Tactical deterrent: APNs post EBTSO

Key Points

  • APNs may follow a settlement opportunity
  • HMRC are quick to issue
  • Possibility of negotiation
  • Penalties are painful whatever the outcome
  • Commercially a negotiated settlement may be the best route
  • Those who have done planning need to read on!

“They told me that case law supported the planning and HMRC accepted the position, therefore why should I enter the Employee Benefit Settlement Opportunity?” The EBTSO closed on 31 March 2015 and shortly after Accelerated Payment Notices (APNs) were issued and are still being issued.

The APN provisions came into force on 17 July 2014. The purpose was to remove the cash flow advantage participants of undertaking certain planning. The rules are retroactive: if you have undertaken tax planning historically and within the parameters of these provisions, you are affected.

The rules for APNs apply to those with open enquiries or appeals in relation to a disputed ‘tax advantage’ where it would be reasonable to conclude that obtaining that tax advantage was one of the main purposes of any tax arrangements.

When can an APN be issued?

Finance Bill 2014 requires those within the provisions to pay the disputed tax upfront where:

  • A follower notice has been issued or

  • The tax planning arrangements used were issued with a Disclosure of Tax Avoidance Schemes (DOTAS) reference number and HMRC has opened an enquiry or

  • A General Anti-Abuse Rule (GAAR) counteraction notice has been issued

The application of payment notices to DOTAS arrangements does not require any predicating tribunal or court judgement. Those caught could be faced with a payment notice and payment demanded before the outcome of the investigation or substance of the arrangements is known –ouch!

Following the EBTSO, APNs have been issued on schemes which carried a DOTAS number. We have even received a few enquiries where the individual is not aware of the reason for the APN and it may be that one of the other provisions apply or that HMRC are testing the boundaries.

What do I have to pay and by when?

The provisions do not consider a participants ability to pay the tax upfront and this could have a detrimental impact on unsuspecting and ill-informed persons. The provisions have little sympathy for those participants that received advice ahead of the introduction of accelerated payments.

Upon issue of a payment notice, those affected have 90 days to pay the disputed tax (or within 30 day of HMRC’s determination following an objection). The notices calculate the potential additional tax due having removed the effects of the avoidance arrangements put in place. HMRC are responsible for the calculation. The amount of tax under the notice may be objected to although the challenge is to HMRC and it is them that decide the outcome – there is no right of appeal!

Those caught within the provisions are therefore potentially subject to an unforeseen liability and it is likely that many have utilised previously perceived saved tax for further business development or even lifestyle thereby placing significant pressure on the ability to pay the accelerated payment.

However, the good news is that HMRC have demonstrated flexibility in the payment of APNs and are generally open to a negotiated plan.

What happens if I don’t comply with an APN?

Penalties for not complying with the payment notices may also be levied where the payment is not made within the payment period. A penalty of 5% is levied. Where a further six months elapses, an additional penalty is charged. The penalties can be appealed against.

Non-payment of the disputed tax will result in a penalty for each six month period that the payment remains outstanding. Should the tax planning implemented ultimately be successful, then any disputed tax paid under the accelerated payment provisions will be repaid with interest.

What will HMRC do following other settlement opportunities?

It is without doubt that HMRC’s armoury will be used. Where APNs can be issued, they will be and with swift effect. It is likely that a number of contractor loan arrangements will be within DOTAS or subject to a GAAR counteraction notice thereby permitting APNs to be issued. Even where not, it is likely assessments will be raised (if not already) and these will have to be appealed opening up the route to an APN, negotiated settlement or costly legal battle.

The legal battle route is fraught with danger. The most evident being that the courts appear to seek ways to find reasons why tax avoidance schemes don’t work (or the anti avoidance legislation applies). In relation to loan arrangements, the Boyle case and the breadth of the transfer of asset legislation appear to be significant hurdles for a taxpayer to get over. Is it therefore worth the long drawn out battle that is unlikely to succeed? If there were success, would it not be reasonable to believe new legislation with a penal effect may be introduced? After all, it can’t be better for those not entering a settlement opportunity than for those that do: that would do nothing to support a modern tax system as well as being a huge political embarrassment!

I have undertaken tax planning, what should I do?

If your tax planning fits the broad parameters of a settlement opportunity (contractor loans, offshore structures etc.) then you should have that planning independently reviewed for an opinion whether you should consider entering a settlement opportunity. Whilst you may have obtained tax advice and consider your arrangements legitimate, it does not mean HMRC will. Given HMRC are openly challenging many tax planning arrangements, there is a significant risk that over the next few years more enquiries will ensue given HMRC’s information powers. It would be prudent to be proactive and it may even give reassurance that your arrangements are likely to be unaffected.

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