HMRC should settle all outstanding avoidance scheme disputes to bolster UK tax credibility, says expert

Out-Law Analysis | 05 Nov 2014 | 10:12 am | 2 min. read

OPINION: HM Revenue and Customs (HMRC) should adopt an overall resolution strategy to settle every one of the 65,000 UK tax avoidance schemes that are still open. Only by doing that will HMRC help the tax system to retain vital credibility, stability and predictability.

The new system of follower notices and accelerated payment notices (APNs) is now in operation and the first APNs have hit the doorstep, but there are more avoidance schemes out there than HMRC can reasonably expect to clear up by any conventional means, such as scheme-by-scheme litigation.

If HMRC continues down that path, tax revenues will come in but the problem of how to clear up the 65,000 open schemes will remain. I know many people find it galling to think that ‘in the past HMRC did deals’, but this isn't really the case, and the ‘dodgy deal’ was largely a myth.

Sir Andrew Park’s report into five large settlements made it clear that compromise can be reasonable and lawful. It is easy to say that HMRC should have more resources, but the real problem here is that HMRC’s shortage is not people, or even bright people, but people who are experienced and able to operate in the toughest or most complex situations.

HMRC's 'central bunker' approach, where decisions are centralised, has not helped, and has caused many experienced inspectors to be disaffected and stripped the rest of authority. Inspectors in the specialist parts of the Revenue, who were once treated with caution by the profession because they knew what they were about, are now reduced to being the mouthpiece of the central bunker in a way that stifles innovation.

We know the central bunker is not meant to do deals, HMRC’s litigation and settlement strategy (LSS) tells us that, but HMRC does offer the high risk corporates programme; EBT settlement facilities; contractor settlement facilities; loss scheme facilities; film scheme settlement opportunities, and numerous other initatives. These contain many of the attributes of past settlement approaches, but thus far they have only been available to the chosen few and they are not attractive to taxpayers who believe that their planning was lawful.

We have reached the point where the open wound that is the huge backlog of schemes is not worth the ongoing damage to the UK’s international reputation and the sheer amount of resources that HMRC has to commit to it.

What is needed is a clear and principled approach to an overall resolution strategy - let’s follow custom and call that an ‘ORS’ -  that makes possible the settlement of any kind of scheme. This would leave the LSS and follower notices to those who are determined to fight to the bitter end.

The professions should be involved in its design, since they would play a huge part in making it work, and it needs to be sufficiently attractive to persuade scheme users that it’s time to ‘sue for peace’.

This approach would inevitably be controversial and would be opposed, but the real villains have always been the aggressive promoters of tax schemes and they are now being sorted out.

Getting rid of the backlog will be of huge benefit to the UK exchequer and those who are tired of the status quo. Opponents of an ORS will need to reflect upon a simple fact: they have no practical workable alternative.

Ray McCann is a tax expert at Pinsent Masons, the law firm behind Out-Law.com. A version of this piece first appeared in the Tax Journal.