‘Pay-up first’ anti-tax avoidance rule not justified

by Cormac Marum, Harwood Hutton

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07 Feb 2014

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HMRC building

IN A KNEE-JERK reaction to the current ‘morality' campaign on tax and in an attempt to look tough, HMRC is seeking to take for itself new legislative powers for the first time to secure the earlier payment of disputed tax.

No convincing evidence has been put forward to support the implied claim that significant amounts of tax remain unpaid after a final judicial decision has defeated a tax planning arrangement. These proposals appear to be a solution to a non-proven problem.

But the important point of principle is that the tax authorities never have been, are not, and never should be the arbiters of the tax law. It is the independent tribunals and courts who, correctly, are the arbiters of the tax law in this country. That principle has long stood the test of time. It is a ‘golden rule' and, whatever the current ‘direction of travel' in tax policy, it should remain inviolate.

The proposals put forward consider it is reasonable for HMRC alone to determine what constitutes a ‘follower case' in virtually any case. This decision will be made not only where there has been a final judicial decision in another taxpayer's case on the same arrangements but also where HMRC arbitrarily decides the other taxpayer's case is merely similar. Such a ruling will allow HMRC carte blanche to issue a ‘payment notice' determining that the disputed tax has to be paid forthwith.

The taxpayer could be left waiting years for a resolution of the actual appeal in the case as HMRC continues to drag its feet in bringing the main dispute to court.

Furthermore, the proposals go on to suggest that, even where there has been no final judicial decision at all, HMRC can still issue a ‘payment notice' determining that the disputed tax has to be paid simply because a disclosure has had to be made under the very extensive DOTAS rules.

In none of these proposals is there any scope for an appeal against the ‘payment notice' to an independent body. All that is offered is a review of the decision by none other than HMRC itself.

These proposals are simply at variance with the principles of natural justice. It is not acceptable to have HMRC as prosecutor, judge and jury on such matters. It's little short of taking a ‘forced loan' from a taxpayer. Where would such an approach end? Such a development is only likely to bring the impartiality of the tax authorities into question and undermine respect for the tax compliance system.

What is shocking is that the existing rules on the postponement of tax are wholly adequate as they stand and do not require any change.

Under section 55 Taxes Management Act (‘TMA') 1970 tax charged in any assessment or determination is due and payable as if there had been no appeal. When the appeal is made, the taxpayer can make a ‘postponement application' to HMRC. If the grounds for the ‘postponement application' are not accepted by HMRC the application must be submitted to the independent tax tribunal and courts for adjudication.

Furthermore, if, after any determination of the ‘postponement application', either party (i.e. either the taxpayer or HMRC) believes that there has been a change of circumstances such that the postponement has become excessive or insufficient and the parties cannot agree to a revised determination, either party can apply to the tax tribunal and courts for a revised determination.

Why does HMRC not use these powers correctly? Probably because they are contained in the actual legislation and nowadays nobody at HMRC seems keen any more to refer much to the actual tax legislation.

In the interests of natural justice, these unnecessary proposals from HMRC should be dropped and not see the light of day.

Cormac Marum is head of tax advisory for Harwood Hutton

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