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Taxpayers caught in the government’s clampdown on avoidance have received highly inflated tax bills for their involvement in disputed schemes, prompting concerns about how the tax authority is using its new powers.
While HM Revenue & Customs has revised its calculations where mistakes have been pointed out, tax professionals have described the inflated payment demands as “disturbing” for those at the receiving end. “For some clients where the amounts in question are so large, you sense genuine worry in their voices,” said Neal Todd, a partner at law firm Berwin Leighton Paisner.
Accelerated payment notices (APNs), used by HMRC to collect over £5bn from individual taxpayers deemed to have deliberately avoided tax, were first issued last autumn. Mr Todd said he has since seen several APNs where the calculations have been “spectacularly wrong”. “One client’s payment notice was so wrong that in the end HMRC called us up and apologised.”
“It’s no secret that the Revenue is quite overwhelmed by this work,” said Dawn Register, a partner at accountants BDO. “It’s a massive exercise to collect this cash.” Ms Register added that problems can easily arise given that APNs are issued by a separate team within the tax authority that does not have full access to individuals’ full tax records.
One investor in a tax mitigation scheme disputed by the Revenue told the Financial Times he had been sent a payment notice demanding tens of thousands more than expected. “Imagine my shock when the APN was more than five times more than I thought it would be,” he said. “I thought I was going crazy.” It became clear that the discrepancy arose because the tax claim on his initial investment was never paid out. After weeks of going back and forth with the Revenue, he said the authority has acknowledged the mistake and promised to reissue the payment notice. “One has to wonder if this was a deliberate mistake on their part.”
This experience has been relatively common, said Michael Avient, personal tax partner at UHY Hacker Young. “Great care needs to be taken [by taxpayers] to make sure that the amounts are calculated correctly.” Mr Avient added, however, that it was inevitable that errors would occur given the volume of payment notices that HMRC is issuing.
Administrative bottlenecks may nonetheless offer taxpayers affected some breathing room, he added. Accelerated payment notices need to be paid within 90 days of receipt, but individuals can make representations to HMRC if they believe they are incorrect. While the taxpayer normally has only 30 further days to pay from the point of re-issuance, Mr Avient said the authority is currently unable to respond quickly. “There appears to be a significant backlog, and if you have bona fide representations . . . it’s going to be at least four months until you receive a response from the Revenue.”
Taxpayers should note, however, that a 5 per cent penalty may be levied on their bill if the disputed amount has not been settled within three months, Mr Avient added.
For Paul Noble, a tax director at law firm Pinsent Masons, the main concern remains the way in which APNs are being issued. The tax authority has the power to demand upfront payment of tax from investors in any arrangement it considers to be tax avoidance. The legislation, as well as the way that HMRC has used its powers, is being legally challenged. “The question is often whether these things should have been issued in the first place when a query may have been opened when it should not have been,” said Mr Noble. The tax bills, which can run to millions of pounds depending on the scale of the taxpayer’s investment and their scheme’s leverage, can also not be challenged. Although taxpayers may ultimately receive their tax back if their arrangement is found by the courts not to have contravened avoidance rules, many will meanwhile face hardship in paying their APN, Mr Noble added. “Philosophically it’s a bit arbitrary whether taxpayers pay up before or after a court dispute, but the fact the Revenue has so much discretion with a limited appeal process . . . [means] you rely on the Revenue’s goodwill if they get it wrong,” said Mr Todd.
HMRC said legislation allows the authority to issue notices using estimated figures where precise figures are not available. “Where people contact us and more exact figures can be agreed, we will issue amended notices.”
The taxpayer described the process as a source of “acute stress”, adding that the tax bill arrived before his disputed arrangement has gone before the courts. “I really don’t have tens of thousands in spare cash to pay a bill I don’t even owe.”
“Law abiding citizens like myself who pay millions of pounds in tax and who invested in schemes which were totally lawful, and in many cases actually promoted by the government, are being treated worse than common criminals,” he said. “It’s totally scandalous.”
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