Contractors' Questions: Is the 'pay-up first' avoidance rule retrospective?

Contractor’s Question: Is it only No To Retro Tax that is against the proposals to introduce a ‘pay-up first’ tax avoidance rule, the consultation on which has now closed, or have other respected bodies voiced objections? And how is the rule going to work in practice -- is it, for example, retrospective, as some contractors are saying?

Expert’s Answer: The government’s proposals would link together cases which are deemed to be similar, so that if a court ruled against one taxpayer, not only that taxpayer but all others deemed to have ‘follower cases’ would have to pay straight away the tax that HM Revenue & Customs believes is due.

They would get the tax back if they pursued the case and ultimately won. The government’s intention is to encourage taxpayers to either not pursue or to expedite cases which the government believe are bound to fail. Often the cases will involve hundreds of taxpayers using the same scheme or a close variant of it from the same company.

These proposals are designed to tackle the backlog of outstanding mass marketed avoidance cases going through the courts, and are understandable given the size of the backlog. But we believe the measures should only be used as an ‘emergency measure,’ applying in tightly defined categories of cases for a limited period of time.

We are strongly opposed to extending the new rules, which would see the loss of safeguards such as rights of appeal, to all schemes notified to HMRC as having characteristics associated with avoidance schemes.

In other words, handing HMRC almost unprecedented executive powers to decide who falls within the mischief they intend to deal with, without the usual safeguards and appeal rights, is not something which should be done lightly. It should be regarded as an emergency measure to deal with a clearly defined set of cases and it should be time-limited.

If these proposals are to proceed, HMRC should issue comprehensive guidance (at the same time as the Finance Bill 2014 is published) to show what situations are to be tackled in this way. It should only apply to members of the same scheme or very close variants of it.

Additionally, the legislation should include a sunset clause repealing the legislation after, say, three years as the exceptional circumstances that are currently in existence should be dealt with in that time. These emergency measures should not become a permanent state of affairs.

While we believe the proposed ‘emergency measures’ are workable, subject to the conditions set out above, in relation to ‘follower cases’ in the courts, we are opposed to a proposal to apply the same requirement to pay tax up front to all taxpayers who are members of schemes notified to HMRC under Disclosure of Tax Avoidance Schemes (DOTAS) or General Anti-Abuse Rule (GAAR) legislation. We at the Institute are particularly opposed to the application of the provisions retrospectively.

Put another way, we are very concerned about HMRC’s proposal to extend the accelerated payment proposals to existing schemes disclosed under DOTAS. This is, in effect, introducing retrospective legislation.

[Under DOTAS], the fact that there has been disclosure indicates an intention to be open and transparent with HMRC. In a number of cases the disclosure has been made even if the promoter or taxpayer did not believe it to be strictly necessary ‘to be on the safe side’.

To now introduce a retrospective change of law leading to an accelerated payment of tax is unreasonable. To extend HMRC’s powers without safeguards to taxpayers who by definition have been transparent with the tax authority is unjustifiable. If these provisions are to come in at all then they should only apply to arrangements entered into after Finance Bill 2014 is passed.

Lastly, we have had an unprecedented response from our members to the consultation. Without exception, our members have expressed their deep concerns about the lack of safeguards in the proposed measures and what they see as the erosion of the principles of a fair justice system. The vast majority of tax advisers support most or all of the government’s approach to stopping aggressive tax avoidance. Pressing ahead without adequate safeguards and appeal rights runs the risk of reducing that support.

The expert’s answer is based on the comments of the Chartered Institute of Taxation and its president, Stephen Coleclough.