Proposed new tax seizure rules run contrary to 'principles of natural justice', says expert

Out-Law News | 04 Feb 2014 | 4:21 pm | 2 min. read

Forcing individuals to pay disputed tax up front before it has been proven that tax planning schemes they use are illegal runs contrary to "principles of natural justice" and may end up making it harder for HM Revenue & Customs to identify genuine tax avoidance, an expert has warned.

Late last month the Government outlined draft new rules that would give powers to HM Revenue & Customs (HMRC) to seize money they claim is owed in tax up front before any dispute about the legality of those savings is resolved.

However, tax law specialist Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, questioned whether the Government's plans were lawful since it intends the new rules to apply to disputes which have already commenced.

"HMRC is trying to move the goalposts with historic disputes by suddenly requiring those already involved in litigation with them to put the cash on the table now, even though HMRC has not yet established that the scheme is ineffective," Collins said. "On the face of it this offends principles of natural justice and one has to question whether such a step would be lawful."

"This is an audacious move. These proposals are subject to consultation but, despite question marks over their legality, the current backlash against tax planning could allow them to push them through," he warned.

The Government proposals would allow HMRC to collect upfront payment of any disputed tax associated with avoidance schemes caught by the Disclosure of Tax Avoidance Schemes (DOTAS) rules.

The DOTAS regime was introduced in 2004 and requires the 'promoter' of certain types of tax avoidance scheme to disclose that scheme to HMRC. This allows HMRC to review whether changes are needed to existing tax legislation as new avoidance schemes emerge, and to take action where necessary against the users and promoters of schemes it deems to be abusive.

The Government is not proposing to change the underlying tax rules, but rather to "significantly shift the economic balance" in the around 65,000 cases it is currently investigating. HMRC wins over 80% of the avoidance cases that it litigates, which it said gave those that held onto the disputed tax while their case was investigated and litigated a "cashflow advantage".

However, Collins warned that by turning "existing legal practice on its head", HMRC may end up driving the operators of tax planning schemes offshore. This could cause HMRC to lose oversight of those schemes, he said. Where the promoters move offshore, HMRC would have to rely on individual users to report the schemes to them, but Collins said there is a danger those users may not be made aware of their obligation to do so.

"Reducing the possible benefits of using tax planning schemes unfortunately also changes the balance between the potential risk and reward of simply operating offshore, and not co-operating with HMRC at all," Collins said. "Because offshore promoters cannot be compelled to disclose these schemes to HMRC, the Revenue will be relying on the users to report the schemes. HMRC risks a black hole of its own making because it will have little idea what those users are being told."

Collins said that it does not make sense for HMRC to challenge all 65,000 taxpayers it is currently in dispute with over alleged unpaid tax. If it called an amnesty on historic tax planning schemes it "would lead to a stream of voluntary compliance and would avert any challenge on the legality of the measure", he said.

"If HMRC is right that payment up front rules would stop most new avoidance in its tracks, it would be free then to enforce the new rules against anyone who still wants to give new tax avoidance a go," Collins added. "As it stands, it will still be tying up its resource to chase down existing cases instead.  Isn't a bird in the hand better than two in the bush?"