Contractors' Questions: Will the 'pay-up first' avoidance rule catch me?

Contractor’s Question: What will the new 'pay-up first’ tax avoidance rule mean in practice? I've read ContractorUK’s latest article on the power but still don't understand how it might potentially apply to me.

Expert’s Answer: The Finance Bill 2014 introduces significant new powers that may result in taxpayers having to pay disputed tax upfront and also having to settle in cases where similar tax planning cases have been defeated in court.

These ‘accelerated payment’ and ‘follower notice’ proposals are aimed at tackling procrastination and delays in payment to HM Revenue & Customs (HMRC). Not complying with a follower notice may result in penalties of up to 50% of the tax advantage, or if you go to court but are likewise unsuccessful.

Taxpayers who have used avoidance schemes may be required to pay the disputed tax upfront where either:

• a follower notice has been issued
• the taxpayer implemented tax planning that has been disclosed to HMRC under the disclosure of tax avoidance scheme (DOTAS) regime and that planning is under enquiry by HMRC
• a general anti-abuse rule (GAAR) counteraction notice has been issued.

The purpose of the legislation is to remove the cash advantage of sitting and waiting during a dispute with HMRC concerning the planning. Penalties of up to 15% of the disputed tax apply to late payment but ‘time to pay’ arrangements may be achievable. No case precedent is needed before HMRC can issue payment notices for DOTAS and GAAR cases. 

The legislation applies to past tax planning that is under enquiry, not just new arrangements entered into after enactment of the legislation (Royal Assent to the Finance Bill is expected in July 2014). HMRC intends to issue, in time for Royal Assent, a list of all DOTAS schemes where payment notices will be issued. 

These legislative changes are causing some concern. However with the right advice and preparation you can ensure you are not left with an unexpected tax bill in the autumn when we anticipate HMRC will start issuing notices.

The Expert’s Answer is based on the comments of Grant Summers, a partner at tax advisory Grant Thornton.