Contractors who have participated in tax avoidance schemes that are being challenged by HMRC could be sent an Accelerated Payment Notice (APN) requiring them to pay the disputed tax up front.
“APNs were introduced following enactment of the legislation in July 2014 and are part of HMRC’s anti-avoidance toolkit,” explains Andy Vessey, Qdos Consulting’s tax investigations expert. “The notices enable HMRC to demand tax up front from contractors who use, or who have used, disputed tax avoidance schemes going back at least six years.”
There is no appeal against the notices and, unless HMRC has made an error of procedure, contractors will simply have to pay the tax until their scheme goes through the tax tribunals and courts. Only if HMRC eventually loses the case will the tax be refunded to the taxpayer, which could take many years.
How APNs work
According to Vessey, APNs are designed to remove the cashflow advantage that participating in a disputed tax avoidance scheme delivers: “Every scheme is designed to save a certain amount of tax.
“After identifying and challenging the scheme, HMRC will calculate the tax that the contractor would save by using the scheme. The taxman then uses an APN to ask for that tax upfront from the contractor.
“If the avoidance scheme is successfully challenged by HMRC through the tax tribunals, and possibly the courts, then the contractor has already paid the tax but may also be required to pay interest and a penalty.
“If the scheme promoter and the contractor prove that the scheme is legitimate, then HMRC must refund the tax, although this could be many years down the line. HMRC currently wins about 80% of the cases it launches against tax avoidance schemes.”
HMRC can go back the standard limit of six years, so contractors who used a scheme in the past could still be sent an APN. If HMRC suspects fraud, it can go back 20 years, which means the tax to pay could be considerable.
The legislation applies to arrangements entered into in the past and not just new arrangements entered into following enactment of the legislation. This means large amounts of tax could be at stake.
Which avoidance schemes is HMRC targeting?
Vessey notes that the schemes that HMRC is targeting with its Accelerated Payment Notices fall into six broad categories:
- Sideways loss schemes
- Stamp duty land tax schemes
- Artificial loss deduction schemes
- Capital gains schemes
- Self-employment schemes
- Employment schemes.
“Contractors will most likely not be involved in the first five of these types of schemes, apart from a very small number of the highest earning contractors,” he says. “The ones that I have encountered the most are employment schemes, and most of these involve some form of employee benefit trust (EBT) and loans.”
Even though the tax advantages of EBTs were cancelled by anti-tax-avoidance disguised remuneration legislation introduced in April 2011, with anti-forestalling provisions that took effect from 9 December 2010, many contractors will have participated in schemes in the past and their case will fall within the six year time limit.
How HMRC identifies the schemes and their users
“Currently HMRC publishes lists of the schemes subject to Accelerated Payment Notices on its website,” says Vessey. “A contractor won’t know what schemes are targeted unless they know what their scheme reference number (SRN) is.
“The scheme promoter will have notified the contractor of the SRN, as this must also be included on a contractor’s self-assessment tax return or corporation tax return if the avoidance scheme is a company scheme. If a contractor spots their scheme reference number online, then they know an APN is coming.”
Vessey highlights that there are three ways that HMRC targets a scheme for an APN:
- Those that are formally notified through the Disclosure of Tax Avoidance Schemes (DOTAS) legislation
- Those that are classified as tax avoidance schemes under the General Anti-Abuse Rule (GAAR)
- Schemes similar to ones that have already been defeated in the courts.
“HMRC powerful IT systems cross reference the tax avoidance scheme with the tax returns of contractors. The taxman then opens up an investigation into all of the taxpayers using the scheme, sending them notices telling them that an enquiry has been opened into their tax affairs.
“Next, if the contractor does not immediately settle, HMRC will send the contractor the APN. This is a letter that includes calculations of the tax that would be due if the scheme did not work and the tax due if it did work, and that demands the difference between the two be paid within 90 days.”
There is no appeal
Vessey warns that, shockingly, contractors have no right of appeal against APNs, so cannot go to a tribunal to dispute the tax: “Contractors can only make a ‘representation’. Certain conditions have to be met before HMRC can issue its notice of investigation, and it is only on this basis that the representation can be made.”
The conditions are:
- That a tax enquiry is in progress
- That the enquiry is about an ‘arrangement’, or scheme, that offers a tax advantage to the contractor
- That one or more of the following applies: HMRC has given the contractor a follower notice in relation to the arrangement; that the chosen arrangement is registered under DOTAS; and that the arrangement is subject to a counter action notice under GAAR that has been upheld by the GAAR panel.
“The chances of HMRC not meeting those conditions are remote, so contractors will have to stump up the cash while the enquiry is underway,” adds Vessey. “And even if the contractor is able to make representations, this would only delay the requirement to pay.”
At the time of writing, HMRC expects to issue 43,000 APNs, of which 10,000 will be companies and the remainder to individuals, including contractors. . The vast majority of notices will have been sent out by 2016. The average annual income of the individuals is £262,000, so these taxpayers are facing paying out a lot of tax plus interest.
Vessey concludes: “I would urge any contractor considering using a tax avoidance scheme to seek advice from a qualified third party.”