The message given by George Osborne in his speech to the House in March of this year was: “While the vast majority of wealthy people pay their taxes, there is still a small minority who do not.”
To combat that minority, the government “will now require those who have signed up to disclosed tax avoidance schemes to pay their taxes, like everyone else, up front”.
The basic premise is, perhaps, not all that contentious. The government’s message is aimed at taxpayers who join partnerships making highly geared investment in films, intellectual property or other assets that produce substantial first-year tax losses that can be used to offset income from other sources. However, the manner in which the government proposes to execute that plan could give rise to a significant increase in the number of professional negligence claims being brought against financial advisers.
The Finance Bill 2014/15, which is currently passing through parliament, contains provisions in relation to an “Accelerated Payment Scheme”. The effect of this is that, if HM Revenue & Customs considers that a taxpayer has made use of a tax avoidance scheme that a court or tribunal has already ruled against (or one that is similar), then the taxpayer can be required to pay the tax HMRC believes is owing, while the dispute or investigation into that particular taxpayer’s investment and claim for relief is going on.
The scheme would apply re-trospectively to investments and it is this that may cause difficulty for some advisers and their professional indemnity insurers.
Under the current regime, the taxpayer can withhold the disputed tax until the dispute has been concluded. Therefore, the onus has previously been on HMRC to challenge the taxpayer’s claim for relief before it can receive the tax.
However, under the scheme, the taxpayer has to pay the disputed tax straight away, giving them an ‘interim’ tax liability purely because HMRC considers that their investment might be ineffective as a tax avoidance scheme.
The Chartered Institute of Taxation and the Treasury Committee have recently expressed concern about the retrospective nature of the proposed scheme. From our perspective as lawyers who regularly defend financial advisers in negligence claims, it appears that there could indeed be unforeseen and undesirable consequences.
It is estimated that HMRC has a backlog of around 65,000 potential tax avoidance cases. If the proposed scheme is enacted, then many of those 65,000 investors could receive Accelerated Payment Notices requiring the prompt payment of very significant alleged tax liabilities.
A ‘perfect storm’ could, therefore, be brewing. For HMRC to issue a notice, it must believe that the investment in question is the same or similar to one that has been found to be ineffective by a court or tribunal.
There have recently been a number of high-profile cases relating to tax avoidance schemes, where HMRC has successfully challenged various schemes. The most recent has been in the Icebreaker litigation. It is not often that a 147-page judgment handed down by the First Tier Tax Tribunal captures the imagination of the national press, but this is no doubt due to the sprinkling of stardust from Gary Barlow and other high-profile individuals who had reportedly invested in one of the partnerships in question.