Andy White, Senior Partner at CBW, examines whether the tax authority’s latest attempts to clampdown on tax avoidance are really necessary and, more importantly, how they could fundamentally infringe upon taxpayers’ rights.
This article was first written for and published on the 14 June in Accountancy Daily magazine, the essential online current awareness, insight and news service for Accountants.
There can be little doubt that the Government has been extremely successful in recent years in tackling tax evasion and artificial avoidance. Most commentators would applaud their efforts in this regard.
Nevertheless, it is critical that a balance be maintained between HMRC’s laudable efforts to collect the “right amount of tax” on the one hand, and taxpayer rights on the other.
There can be few people who would deny that the tax statute book is already a work of byzantine complexity. Moreover, its sheer volume is daunting at best. Now we have proposals, pithily titled “Tax Avoidance involving Profit Fragmentation”.
It will be instructive to study the results of the recently-closed consultation on this matter. But it seems to me that some aspects of the proposals are so outlandish as to require more than just a consultation response.
The evil that the Government now seeks to combat is where a UK resident taxpayer arranges his tax affairs so that profits arise to an offshore entity, where they are taxed at a lower rate. For example, a professional might supply services to both UK and overseas clients. Payment from the latter are made directly to an offshore company in a tax haven. These payments are in return for consultancy services “allegedly provided by the offshore company”.
If these arrangements are artificial, then I would be HMRC’s main cheerleader in seeking to overturn them. And indeed, there is an armoury of weapons available to this end. Transfer pricing, diverted profits tax, transfer of assets abroad and the GAAR. Do we really need something else? Couldn’t the same end be reached by simply extending the scope of the first two, to include smaller entities?
Well, no actually. Because there are certain extremely worrying aspects to the new proposals that will go much further than anything that already exists. I believe that the new proposals, if enacted, will give HMRC draconian and unprecedented powers.
The new legislation will place an onus on the taxpayer to notify HMRC of any arrangement that might be caught. HMRC may then issue a preliminary notice explaining the reasons for the proposed charge.
The taxpayer will have 30 days to make representations following which HMRC may issue a charging notice giving the taxpayer a further 30 days in which to pay the amount calculated by HMRC.
Where, you may ask, do the Courts, tribunals or even the GAAR panel fit into this process?
If HMRC has “reason to believe that an amount is chargeable under the new rules” then that amount will be charged, with none of the checks and balances one would expect to be in place. HMRC therefore acts as judge, jury and executioner.
The taxpayer will admittedly have an ultimate right of appeal (after having made payment of the disputed tax). However, this right only arises after the end of a review period. This period is intended to allow HMRC to determine whether the initial amount of the charge was incorrect. Crucially, there appears to be no time-limit set, thus giving HMRC as long as they want to conduct the review. Given that they will already have executed judgement and received the money, we can expect them to act with all due alacrity, can’t we?
This idea of depriving the taxpayer of the cashflow advantage in disputed cases is not new. This is the whole point of the APN legislation. But at least those rules incorporate some protection for the taxpayer. Here there is none.
In these proposals, the single test as to whether tax becomes payable is whether HMRC has reason to believe that it should. (Incidentally, given that the legislation depends on HMRC’s belief, it is nonsensical that the onus to notify the arrangements should be placed on the taxpayer).
HMRC has consistently shown itself to be incapable of exercising its powers within the boundaries of the relevant legislation. The recent withdrawal of several APNs illustrates the point and demonstrates the importance of the limited rights of appeal in that legislation.
These “advance payment provisions” are egregious. They fly in the face of everything we know about how the law should operate and give unprecedented powers to a body that has consistently shown itself as ill-equipped to use them.
Paragraph 2.4 of the document seems to me to sum it up:
“HMRC has succeeded in challenging some of these arrangements and in recovering significant amounts of tax. However, the necessary enquiries consume considerable resource and can take several years to resolve. The government therefore proposes to introduce legislation to target these schemes directly and to remove any cash flow advantages for users of the arrangements.”
In other words, let’s change the law so that we don’t have to persuade a judge of the merits of our case.