These will be issued where HMRC believe that the point at issue has been finally decided in another taxpayer’s case (including where the judicial ruling applies to only part of the ‘asserted advantage’). Follower notices can only be issued if four conditions A-D are met. The most important condition is A which requires that there must either be an open enquiry (into a return or a claim) or an open (ie. unsettled) appeal against a closure notice or an assessment or a determination in relation to a relevant tax. The guidance notes that it is less likely that follower notices will be issued except in the case of marketed avoidance schemes, but there is nothing in the legislation that restrict follower notices to marketed schemes.
No right of appeal against follower notices
The taxpayer will also be issued an accelerated payment notice for the tax in dispute. There is no right of appeal against either type of notice: the taxpayer’s only option is to make representations to HMRC. Assuming, after considering the taxpayer’s representations HMRC confirm the notice, there is a stark choice: continue the dispute but pay up under the accelerated payment notice and face penalties, or agree to take ‘corrective’ action and amend the tax return within the specified timeframe.
The judicial decision on the back of which HMRC can issue follower notices only needs to be ‘final’ in that it cannot be further appealed and does not need to be at a level that sets a legal precedent: so a First Tier Tribunal (FTT) ruling that is not appealed counts as ‘final’ for this purpose. This raises uncomfortable questions about HMRC’s ability to pick and choose which cases they take to the tribunal – for example, ‘weaker’ cases, either technically or because the taxpayer is unrepresented, or cases where the taxpayer is less likely to be financially capable of supporting an appeal. However, if a later case changes the effect of the relevant judicial ruling, HMRC will reconsider whether follower notices and accelerated payment notices should have been issued. Surely this should be grounds on which a taxpayer has rights of appeal, rather than being left to HMRC’s discretion?
Follower notice penalties
Penalties will be charged on those taxpayers who do not take corrective action within the required timeframe. If the taxpayer ultimately wins their argument the penalty is discharged. The guidance sets out the basis of charging penalties. The basis is the ‘denied advantage’. Where the ‘denied advantage’ involves losses that have been created, not only is the penalty based on the losses actually relieved, but also 10% of any losses not used. In other words, part of the penalty is charged on losses that haven’t even generated any tax saving in a return. The only exception is if there is no prospect of these losses ever being used.
The maximum rate of penalties under these provisions is 50%, falling to 10% for full cooperation. The guidance sets out what counts as cooperation. So for example, if a taxpayer has made representations against the follower notice which HMRC has rejected but then the taxpayer nevertheless engages with HMRC and provides full calculations of the tax due and documents requested within the timescales specified, HMRC expect that a maximum reduction in the penalty will be appropriate. This shows how important it is in these cases to have a dialogue with HMRC and how costly it can be to ignore any notices or demands.
If the taxpayer amends their return for only part of the denied advantage within the timescale, the penalty will be based on the remaining denied advantage. Taxpayers may appeal to the tribunal in respect of penalties within 30 days of receiving notice of the penalty. Note that other penalties may also be charged: for example on the basis that an incorrect return was filed although there are some limitations on the total percentage level where two tax-geared penalties are charge on the same amount.
Accelerated payment notices (APNs) can be issued in other situations where a tax advantage has been claimed. However, they can only be issued where certain conditions are met, basically where there is an open enquiry or appeal in respect of the disputed tax, and the tax advantage must arise from tax arrangements which are the subject of a follower notice, are DOTAS schemes selected for this purpose by HMRC, or are being counteracted under the GAAR where two members of the GAAR Advisory Panel have concluded the arrangements were abusive. If some of these conditions are subsequently no longer applicable, HMRC have to withdraw or modify the APN, and reduce the tax in the notice accordingly.
HMRC recently published the first list of DOTAS scheme reference numbers of those schemes where accelerated payment notices may be issued. HMRC will undertake a programme of accelerated payment notices between now and March 2016. The list of DOTAS schemes will also be regularly reviewed and HMRC have advised that they will publish an updated list in October 2014.
No right of appeal against an APN
There is no right of appeal against an APN (as covered above in relation to follower notices), but written representations can be made to HMRC within 90 days, where the taxpayer believes the conditions for the APN were not met or in respect of HMRC’s calculation of the tax due. In many cases, it will be quite complex identifying the amount of a tax advantage, so any accelerated payment notices need to be dealt with as a matter of urgency as there is only 90 days in which to put forward alternative calculations for HMRC to consider (although HMRC are not bound to accept these). HMRC’s guidance states at 2.4.9:
‘The accelerated payment is intended to represent only the additional amount that the taxpayer would have to pay for the chargeable period if their avoidance scheme fails. This may not necessarily be the total tax involved in the appeal or dispute as there may be other reliefs or allowances to take into account.’ Consequential effects will also be taken into account, such as effects on other periods. Separate APNs will be issued for each period affected. However, the total tax sought cannot be more than the tax on the total of the taxpayer’s aggregate income and gains for a given period.
Late payment penalties
Late payments of APNs do not attract interest, but do carry penalties starting at 5% with further 5% penalties for tax unpaid after 5 and 11 months. If the APN is later repaid by HMRC, repayment interest will be paid and excess penalties repaid. If the taxpayer’s case is successfully litigated, HMRC will normally have to repay the disputed tax. However, there are some exceptions to this, such as where HMRC appeals the decision and convinces the court that there would be a risk to the Exchequer if a repayment was made. So even in these cases, HMRC may hold onto all or part of the disputed tax, but this should only arise where HMRC believes there is a genuine risk the tax may not be paid on the ultimate outcome of the case.
Taxpayers receiving an APN have a number of choices: agree to amend the tax return and pay the tax, enter into a settlement agreement with HMRC, or continue with their case.
Partnerships and other Joint Ownership
Special rules apply to partnerships, in respect of both follower notices and APNs, including in relation to the rates of penalties which can be charged. For example, a follower notice will be issued to the representative partner (ie. the partner responsible for delivering tax returns). Difficulties may arise in practice where some partners wish to take corrective action but others do not. Only the representative partner can take corrective action – so if he chooses not to, other partners who disagree find they must nevertheless bear their portion of the penalty.
It is also easy to anticipate problems where partners have left the partnership or have died since the tax planning was first implemented. The delays in HMRC’s pursuit of these cases, and the general slowness in the litigation process, is such that it will be rare for the same partners to be in place now as when the planning was implemented and this will be especially true for the larger partnerships.
Special rules also apply in respect of ATED and SDLT to cover partnerships and joint ownership.
For further information see Guidance dated 17 July 2014