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Out-Law News 2 min. read

Tax in dispute could be demanded upfront in most cases of suspected avoidance under Government proposals

HM Revenue and Customs (HMRC) could be able to demand upfront payment of any disputed tax associated with avoidance schemes caught by the Disclosure of Tax Avoidance Schemes (DOTAS) rules under plans put forward by the Government.

It is consulting on extending the circumstances in which HMRC will ask for upfront payment of disputed tax from taxpayers, following an announcement at the Autumn Statement that it would do so in relation to schemes that are the same or similar to one that has already been defeated in the courts. Taxpayers that are currently being investigated under the new General Anti-Abuse Rule (GAAR) for the most abusive tax avoidance could also be caught by the proposals.

Tax expert Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, said that the proposals were part of a long-running drive by HMRC to "clean up how tax schemes are marketed". However, changing the law to require users of schemes to pay the disputed tax up front were a "bolt from the blue", he said.

"This proposal, if implemented, has the potential to be a 'game-changer'," he said. "Taking away the cash flow advantage won't stop all forms of tax planning, but many prospective users will question having to lay out substantial sums paying the promoter its fee in the hope of getting money back from HMRC five years or more down the line."

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".

The GAAR came into force in July 2013. It applies to the main direct taxes and is designed to prevent 'artificial and abusive' tax avoidance schemes that fail to pass a 'double reasonableness' test, showing that the arrangements "cannot reasonably be regarded as a reasonable course of action". A GAAR Advisory Panel provides guidance and non-binding opinions on cases where HMRC considers that the GAAR may apply.

The proposals consulted on would allow HMRC to seek upfront payment where a scheme hits certain "avoidance hallmarks", such as the scheme being subject to disclosure requirements under the DOTAS rules or where it has been the subject of a counteraction decision by the GAAR Panel. Taxpayers would remain free to make their case to the tribunal or court and, if successful, their money would be returned with interest.

HMRC has been consulting since 2011 on measures which are designed to tackle the way tax avoidance schemes are sold, and to take away perceived cash flow advantages. It intends to introduce new information powers, obligations and penalties against promoters it designates as 'high risk', and could 'name and shame' those advisers that do not comply with its restrictions. Clients of these promoters could face enhanced penalties if they do not take independent advice before buying a scheme from one of these promoters that is ultimately found not to work.

"HMRC is trying to drive a wedge between promoter and client," said tax expert Jason Collins. "These measures are fierce - but one has to ask how easy they will be to police in practice, especially if the promoter is located offshore."

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