The introduction of Advance Payment Notice (APN) rules was controversial from the moment it was announced at the 2014 Budget. Introduced under the Finance Act, the proposal requires participators in certain aggressive tax-planning arrangements to make upfront payments of disputed tax in advance of whether or not it is found to be due.
Taxpayers, practitioners, and professional bodies criticised the move from the outset, mainly over concerns about the retrospective effect of the rules and the lack of a clear appeals process. How the past comes back to bite us all; too true even for HMRC, but also note once again HMRC’s reluctance to admit mistakes and alter procedures.
Why has HMRC reversed the decision on APN for Montpelier tax scheme participants
An HMRC APN demands tax that it believes someone owes. There is no adjudication process or hearing by an independent tribunal or court; the taxpayer is given ninety days to pay the upfront amount, and there is no room to appeal the decision.
Taxpayers who participated in the Montpelier IR35 Manx Partnership arrangements were issued with HMRC APNs in April 2015. HMRC has now been forced to withdraw 2,000 of these issued to IT Contractors Who Had Participated in the Montpelier Scheme, after admitting the demands should never have been issued.
Why did HMRC do a U-turn?
The outgoing boss of HMRC told the Accounts Committee that: it is unlikely there will be prosecutions concerning allegations that British customers of HSBC Suisse used the bank to evade tax. On hearing this, Stephen Phillips, a Conservative member of the Accounts Committee observed, some might say rightly, that HSBC Suisse had been allowed to get away “scot free”; the bank had helped UK clients evade tax, but HMRC was withdrawing the APNs issued in April 2015. Why?
It gets complicated, and has to do with the rules of Disclosure of tax avoidance schemes (DOTAS) in 2004, when Montpelier first floated the scheme and notified HMRC; then it turned out to be unnecessary to notify under the current rules. However, by 2015, according to HMRC, the reason for the U-turn is that the statutory criteria for an APN could not be met, because in 2004 the scheme had not been notifiable under DOTAS. Simple!
But why won’t Montpelier accept HMRC’s explanation?
The case has been painful for Montpelier, in legal costs, not to mention customer relations. It has written to users of its scheme issued with APNs, to say that HMRC is being selective with the truth: Montpelier states: “The aforementioned letter refers to the HMRC view following Huitson in the First Tier Tax Tribunal that the scheme does not work. But what HMRC does not say is that:
1. An application has been made to appeal Huitson to the Upper Tribunal
2. The Article 56 point, being the free movement of capital, which we say prohibits Section 56 FA 2008 has yet to be heard.”
Montpelier is pursuing the two appeals as well as apparently filing a claim against HMRC for legal costs incurred challenging the unlawful APNs.
What about the taxpayer?
According to one commentator, the IT contractors some taxpayers have already been forced to sell their assets in order to pay the amounts demanded by APNs. Once pundit comments that, “This case demonstrates the very real risks involved in giving such a draconian power to HMRC with no right of appeal to an independent tribunal or court.” In other words, the taxpayer has virtually no power in this game.
Where does this go now?
HMRC has since posted fresh warnings about tax schemes in a new ten ten-point guide and its Spotlights section. However, while HMRC warns the taxpayer about aggressive tax planning schemes and HMRC stretching the law to carry out tax return enquiries, it is not about to learn and adjust the system that polices them. A spokesperson from HMRC stated, “We act quickly to correct the position once we become aware that things are not correct. If an APN is withdrawn that does not mean there is no tax to pay. … We have issued over 32,000 APNs and collected over £1bn of tax since APs were introduced in 2014. We remain tough on avoidance and the AP regime is a key part of our work on tackling avoidance …. By the end of 2016, HMRC expects to have completed issuing notices, bringing forward over £5bn in payments for the Exchequer by March 2020.”
What should we do?
Be vigilant, be upfront in your tax affairs, and operate compliantly within the bounds of Sensible Tax Planning. Okay, HMRC made an error, but the stress and the hassle of any of these approaches by HMRC are just not worth it. Even when you might think you are winning, it is highly likely that the anti-avoidance regime, a veritable army, will catch you; and even when HMRC gets it wrong, it seems, they can still take taxpayers to the cleaners!