The debate on the lawfulness of tax avoidance led to the introduction of Accelerated Payment Notices (APNs) in July 2014. APNs are issued by the HMRC on taxpayers believed to be avoiding tax. They allow HMRC to demand payment of disputed tax connected with Disclosure of Tax Avoidance Schemes. Through the use of APNs, of which there are approximately 40,000 potential cases, the HMRC is reported to aim to recover £7.1 billion of unpaid tax by April 2016.
If the HMRC has issued an enquiry on the taxpayer with respect to an avoidance scheme, or the taxpayer is in the process of appealing a disputed amount of tax, and the enquiry or appeal is not yet resolved, an APN may be served on the taxpayer. The APN demands a response from the taxpayer within 90 calendar days beginning with the date on which the accelerated notice is given.
The taxpayer can respond to the APN in one of two ways within this time: either the taxpayer provides a written reply as to the reasons why they object to the APN and then the HMRC considers these reasons and either withdraws the APN or reconfirms the notice; or, the tax figure in dispute is paid in full.
At present, there is no right of appeal, should the HMRC enforce the APN following objections. This will undoubtedly lead to cash flow issues, which could result in bankruptcy for some. Failure to pay within the 90 day time frame will lead to a penalty of 5% of the unpaid amount. Further 5% penalties will be imposed on the taxpayer if unpaid tax remains after 5 and 11 months of the notice.
Without a right to appeal following confirmation of an APN by HMRC, targeted tax payers have little option but to pay up or seek judicial review. Ingenious Media, an investment company, operated film schemes into which up to 1,300 individuals are thought to have invested. An application for judicial review has been made on behalf of people who invested in the schemes on the basis that APNs are unreasonable and illegal.
One argument is that the APNs violate Article 6 of the Convention on Human Rights, because removing the right to appeal removes the right to a fair trial. A second argument is that the APNs are operating with a retrospective effect, because they are clawing back tax from schemes created before the new rules came into force.
APNs have been suspended until the judicial review is carried out. In the view of Ingenious Media, the schemes were operating as standard investments, carrying on a trade with a view to profit. The Tax Tribunal will now consider whether the schemes were in fact a mechanism through which individual investors were avoiding tax. Ingenious Media also contests that the tax reliefs claimed were validly accrued and that all accounting was done according to the rules.
HMRC remains confident in their position to enforce APNs and explains that it acts in the best interests of taxpayers who ‘play by the rules’. Even if the application is successful, there is a strong likelihood that the HMRC will continue to seek to restore their early clawback powers by requesting further legislative change.