Use of APN power could backfire on HMRC, says expert

Out-Law Analysis | 25 Jul 2014 | 2:10 pm | 2 min. read

OPINION: New power designed to help Her Majesty's Revenue and Customs (HMRC) recover tax from users of UK tax avoidance schemes could backfire heavily and leave HMRC overwhelmed and struggling even to fulfil its basic duties.

HMRC's use of the new power is designed to strong-arm users of avoidance schemes into paying up, but it doesn't take account of the likely behavioural response of risk-taking taxpayers. HMRC assumes many will meekly fall into line. That is not likely, and it will only take a small proportion of them resisting to throw HMRC's entire operation off track.

The new power to issue Accelerated payment notices (APNs), came into force this month and allows HMRC to demand accelerated payments of tax from users of a scheme when it has won a court case against other users of the same scheme. The power also allows it to demand payment from users of schemes previously disclosed under Disclosure of Tax Avoidance Schemes (DOTAS) rules.

HMRC's predictions about the use of APNs do not quite stack up: its yield expectations usually outstrip what is eventually collected, but in this case HMRC’s expected yield from the issue of APNs exceeds the total tax avoidance tax gap.

HMRC hopes that by issuing these to users of the 65,000 open schemes taxpayers will throw in the towel and pay up quickly. But it doesn't seem to have thought hard enough about taxpayers' responses. 

The strategy pushes taxpayers into an 'all or nothing' position, and this means that they have nothing to lose, other than the cost of a tribunal hearing and reputational risk.

On the reputation issue, many of those involved in these schemes have already been ‘outed’ and the majority of users are unlikely to care about being revealed as users of schemes.

On costs, as we have seen in other areas, the legal market is incredibly adept at finding ways for clients to pursue civil claims in a managed cost environment. Taken together, one possible outcome from the introduction of APNs could be the catastrophic grinding to a halt of HMRC’s entire counter avoidance strategy.

When the APNs start being issue HMRC will come under pressure to justify its approach, then to accelerate any settlement process. This will be in addition to the extra workload from the additional collection burden. HMRC will put a brave face on the situation, but the department is not configured to handle any significant negative outcome from the issue of APNs. HMRC has plainly struggled to cope with the burden imposed by its litigation and settlements strategy, so how would it cope with more disputes?

If only 10% of taxpayers receiving an APN resist, that would amount to 4,300 taxpayers disputing their APN, negotiating time to pay, pressing HMRC for progress and applying to the tribunal for closure notices or, as HMRC is anticipating, pursuing judicial review. And regardless of what HMRC says, in too many cases it has been HMRC delay, in some cases lasting for years, that has been the single biggest impediment to cases being resolved, so enquiries will have to be resurrected years after the last engagement.

If the level of resistance to APNs is higher still, say 40% or 50%, then even if such resistance is ultimately futile, the scale of the task facing HMRC has the potential to bring the tax system itself to a halt, leaving HMRC’s entire counter avoidance strategy in a smouldering mess.

It is possible that all those affected will simply line up with their chequebooks in their hands, but it is not likely, and HMRC's aggressive strategy may end up backfiring badly.

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