01 July 2014

This fourth briefing note deals in more detail with the accelerated payment notice provisions which are in Part 4, Chapter 3 of the Finance (No.2) Bill.

The circumstances in which an accelerated payment notice may be given by HMRC to a person (“P”) were set out in the previous briefing. Briefly stated, however, HMRC need to be enquiring into the tax affairs of P (or P needs to have brought an appeal to the Tribunal); P must have secured a tax advantage from the arrangements in question; and either P has been given a follower notice, or P has used a DOTASable scheme, or his tax planning strategy has been the subject of a GAAR counteraction notice. 

The form of notice differs depending on whether a tax enquiry is in progress, or whether it is given pending an appeal. HMRC must specify the condition pursuant to which it has been given (follower notice, DOTAS or GAAR) in both cases. An APN issued during an enquiry must specify the payment which P must make. This accelerated payment is treated as a payment on account of the understated tax.

However, where a notice is given pending an appeal, the notice simply has to state the disputed tax.

Then, in both cases, it has to explain P’s rights to make representations about the notice (more of which below).  Where the notice is given during an enquiry, it also has to explain that should P fail to comply with the APN, P could be liable to a penalty.  There is no such requirement in respect of a notice given pending an appeal.

The reason for this is that clause 217 of the Bill restricts the Tribunal’s powers to postpone tax payments pending an appeal. 

In other words, its effect is the same as actually serving an APN, whilst a tax enquiry is in progress. P has the obligation to pay the disputed tax amount.

What happens next?

P has 90 days from receiving the notice to make representations to HMRC objecting either to the grounds on which the notice was given, or the amount that he has been asked to pay (or both).

HMRC are obliged to consider these representations, and having done so either confirm the APN (with or without amendment) or withdraw it.

Since HMRC have a discretion at this stage, it is likely that any unlawful exercise of that discretion can be subject to judicial review.  Success or otherwise in the judicial review will depend on the precise facts of the claim.  But it may be a pyrrhic victory. Given that the judicial review simply challenges the procedural propriety of HMRC’s decision, it is open for them to accept that they have made a mistake in terms, say, of the amount, because they’ve failed to take into account relevant considerations or taken into account irrelevant ones, but then simply issue a new APN which is generated “fairly”.

The main issue arises where HMRC have confirmed the APN (with or without amendment). To all intents and purposes the effect is the same, whether the APN is served during an enquiry or pending an appeal. 

The amount specified in the APN then becomes payable, and is a tax debt. This clearly has implications given the current consultation regarding HMRC’s ability to recover tax debts from a taxpayer’s bank account.

There is no right of appeal to the FTT against the issue of the APN.  Failure to pay an APN issued whilst an enquiry is in progress renders a taxpayer liable to pay a penalty.  It is 5% initially and then goes up by 5% on six and twelve month rests.  The penalty is appealable.

But, as mentioned above, the issue of the APN, or the decision to issue it, is not.  It is difficult to see that the issue of an APN can be subject to judicial review, since it seems to involve no discretion on behalf of HMRC (unlike the obligation on them to consider representations in response to the APN).

One of the unsatisfactory aspects to this is that at the time the APN is issued during an enquiry, HMRC need to have done very little investigative work.  All they need to have done, practically, is to have come up with a reasonable figure that they think P owes, and to issue the APN on the back of it.  The amount which will be included in the APN is the amount of understated tax determined to the best of an HMRC’s officer’s information and belief.  This is a very low hurdle.

There is no obligation for the enquiry then to be prosecuted with any enthusiasm.  P may seek to get the FTT to direct that a closure notice should be given but that is unlikely to succeed if the enquiry has not run its course. 

So P is left in the unhappy position of having paid the tax, but having no decision that it can appeal to get his case heard before the Tribunal.

Tax partner Nigel Popplewell suggests that the issue of an APN should itself be an appealable decision in respect of the substantive merits of P’s tax planning. P could then appeal the APN (but will still be obliged to pay it) and at that stage would be able to bring his appeal before the Tribunal. One of the issues that HMRC are concerned about is that if they can only issue an APN following closure of an enquiry, P can spin out that enquiry by not providing information. Nigel's solution would force P to provide the information since without doing so, it would not succeed in the appeal.  It remains to be seen whether HMRC will adopt this solution.

Finally one further, and important, issue concerning APN’s issued following service of a Follower Notice (”FN”).

As mentioned in an earlier briefing, there is no appeal right against the issue of an FN. Only against a penalty issued following P’s failure to take the necessary corrective action.  So where an APN is issued on the back of an FN, P has no right to get to the FTT unless he takes no necessary corrective action, and is assessed to a penalty. Then he could have several claims on the go. Firstly, the substantive claim.  Secondly, the appeal against the penalty. Thirdly, a JR action against HMRC’s unlawful behaviour following representations. 

But what happens if the FN is proven to have been improperly issued (either because during the penalty appeal the FTT says so, or because in the substantive appeal, the FTT decides the taxpayer’s planning works)?

There is no statutory obligation for HMRC to repay the money that it has been paid under the APN. But of course there is no lawful ground on which it could retain it. So it is likely that HMRC will have to repay.

The problem is a cash flow one for P.  Having paid the money up front, it may well be in financial difficulties. There is no hardship “safe harbour” for money sought under an APN (as there is for pre-payment of VAT as a pre-requisite to bringing an appeal).

Banks may be reluctant to lend in circumstances where the reason for that lending is to enable a taxpayer to bring an action in respect of tax planning which HMRC reckon to be “avoidance”. Banks have reputations to consider...

If you have any questions about the introduction of the Finance (No.2) Bill or would like to discuss any other tax matter, please call or email the key contact identified at the top of this page.

Key contact

Suzanna Harvey Partner

  • Head of Private Wealth
  • Private Client Services
  • International Tax

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