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

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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  • Varun

    100% agree with Mr Marum in this article. I consider UK a just country and hoping Law makers and politicians will ensure it stays that way.

  • Dragon

    Tax avoidance schemes endeavour to exploit perceived loopholes that are as yet untested in the courts, however, the law already provides to ensure HMRC collect tax due and the courts merely enforce the will of Parliament. Most of these schemes are promoted by non-lawyers such as financial advisers and naive speculative accountants and it’s no surprise that many of these schemes are collapsing in the courts once the avoiders are brought to justice. HMRC are only recovering tax that is legally due. The avoider who believes they have a strong case not to pay a demand from HMRC may still refuse to pay and proceed to the court for judgment. To state that HMRC asking for payment of tax is unconstitutional is highly hypocritical where these schemes are also untested in the courts.

    • Alexis

      If the writer were a scheme promoter, the charge of hypocrisy may be applicable. Is he? If not, the term is irrelevant. His point stands – it is for the courts and not HMRC to determine legality, especially when HMRC is scarcely up to the task.

      • I can assure you that I am not a scheme promoter. I am an ex-tax
        inspector and ex-KPMG tax partner. But even if I was a scheme promoter, the
        point remains. The appeal to an independent court is a fundamental right and a
        right so badly needed when my old colleagues (now operating as HMRC) behave so
        Cormac Marum

    • I am afraid but you do not understand the issue in my article. I am an
      ex-fully trained HM Inspector of Taxes and an ex-tax partner at KPMG with 31
      years experience in tax. Tax avoidance schemes do not exploit loopholes; they
      apply the law of the land as it stands. Under the proposals now put forward
      HMRC are seeking powers arbitrarily to force payment of tax from taxpayers who
      have submitted tax returns on the basis of professional advice with absolutely
      no right of appeal against that decision. Such a power is unreasonable as every
      person should have the right of appeal to the courts against the action of a
      government body. That is a long standing principle in this country which has
      stood the test of time. The proposal is also contrary to the principles of
      self-assessment as a taxpayer can assess only on the basis of the law of the
      land at the time of the self-assessment. To change the rules afterwards
      introduces retrospection. HMRC does not decide how much tax anyone pays in this
      country. The law of the land decides (although in nearly every case taxpayers
      and their advisers end up reaching agreement with HMRC what the law of the land
      says). If HMRC think the tax is due, the matter can only be brought to court
      and the courts will decide. HMRC do not know all the answers on tax – otherwise
      why are there so many volumes of tax cases? Increasingly HMRC delay enquiries
      and obstruct the progress of appeals to court in the hope that the taxpayers
      morale will be drained or more likely that their finances will run out. If the
      current tax laws are not producing the ‘correct’ tax result, Parliament needs to
      change the law but change those laws in line with the principles of natural
      justice and the rule of law.

      Cormac Marum