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HMRC accelerated payment notices face legal challenge

VAT| HMRC | Case StudyWith news that yet more high profile names – this time cricketing legends David Gower and Michael Vaughan – are now facing bills for alleged tax avoidance, the contentious issue of accelerated payment notices has once again hit the headlines. Here we take a look at the facts behind the stories – and why the High Court has asked HMRC to suspend a number of the controversial notices, pending the outcome of a judicial review.

On the face of it, the introduction of Accelerated Payment Notices (APNs) last summer was just the latest development in the ever-changing landscape of tax avoidance. However, two aspects were of particular note – the “pay now, ask questions later” approach and the retrospective nature of the legislation. At the heart of the matter, lies the Ingenious Media case.

The High Court has now asked HMRC to suspend APNs issued to over 100 participants and has granted  those participants under the advice of law firm, Pinsent Masons, permission to review HMRC’s use of the notices against members of Ingenious Media film partnerships.

Ingenious Media – the investment advisors behind successful films such as Avatar and Girl with a Pearl Earring – used film investment partnerships, approved by HMRC when they were established, and made up of individual scheme investors including celebrities and sportsmen.

Since the changes introduced in July 2014, many of Ingenious Media’s investors have been issued with HMRC accelerated payment notices which demand up-front payment of disputed tax (to be paid within 90 days) if a scheme can be shown to demonstrate certain ‘avoidance hallmarks’. One such hallmark includes a scheme being subject to disclosure requirements under the Disclosure of Tax Avoidance Schemes (DOTAS) rules or where a general anti-abuse rule (GAAR) counteraction notice has been issued.

Once an APN is issued, there is no right of appeal against it. The effect is that taxpayers are “guilty until proven innocent” and in some cases, may need to sell their assets to generate money to pay the notices.

The High Court decision to grant permission for a judicial review means that over 100 individual investors in Ingenious Media can now challenge their APNs in the courts in a case which could be heard as early as this summer.

Jason Collins, Head of Tax at Pinsent Masons, said “that in the absence of a right of appeal against an APN, judicial review is effectively the only remedy potentially available to the recipient of an APN”.

He explained there were several grounds for arguing that issue of the APNs in these cases were unlawful:

  • The fact that taxpayers who receive  one have no right to appeal, which is not compatible with human rights legislation.
  • The fact that the legislation is retrospective because it applies to DOTAS schemes which were entered into before the APN rules came into force.

Whether the unusual step of granting a judicial review will open the flood gates remains to be seen. HMRC originally planned to send more than 40,000 APNs to individual tax avoidance scheme users before the end of March 2016. However, it is quite possible that the recent High Court ruling may encourage other affected parties to dispute their notices, either independently or by joining the Ingenious Media group action – and that could potentially see the whole issue blow up in the face of HMRC.

HMRC’s previous methods of tackling tax avoidance have already pushed the backlog of tax disputes waiting to be heard to near-record levels. Add to that the administration of the APNs and the likely impact of procedural delays if others decide to stand their ground, and it’s easy to see how HMRC will struggle – to say the least – to cope with the workload.

Tax avoidance has become a political hot potato, and as much as we understand the government’s desire to be seen to be acting on an issue that many people have strong feelings about, mainly because of constant Press reporting on the subject no doubt at the behest of government, however, granting the power for HMRC to be judge, jury and executioner is a worrying twist of the knife and it seems that those who spoke out in concern as to how HMRC would wield these powers are being proven right.

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