In their recent consultation document ‘Tackling Marketed Tax Avoidance’ HMRC has advised that 16,000 contractors are currently under investigation following their use of offshore intermediaries and loan schemes to avoid paying the correct tax and national insurance contributions. These investigations can take months, sometimes years, to resolve and therefore HMRC are changing their strategic approach in order to speed up the process and to take action against scheme providers who continue to develop and market such tax avoidance schemes.
To this end new legislation introduced in the 2014 Finance Bill will require contractors that are seeking to take a tax advantage from a scheme which is the same or substantially similar to a scheme that a tribunal or court has already found against will be obliged to settle their tax owed on receipt of a ‘follower notice’ rather than waiting until their particular scheme is tested in court.
HMRC also intend that these changes to legislation will be extended to cover National Insurance contributions. It is intended that a ‘follower notice’ will be issued and then the tax payer will have a time limit to respond of 90 days at which point the additional tax requested will become payable. HMRC will estimate the amount of tax owed based on what the individual would have been liable to have paid in income tax had the scheme not been used. This will not be the final liability and therefore any contractor who has used an avoidance scheme may find that they receive an additional notice for payment even after they have settled the initial payment notice.
The ‘follower notices’ will be issued when HMRC determine that a tribunal or court has decided that the substantive issue has been decided and therefore the contractor has no basis for argument and should concede. Therefore the Payment Notice will only be eligible for challenge if HMRC have erred in process e.g. sent the notice to the wrong person. Regarding the question of liability, HMRC have advised that the Payment Notice could be issued to an individual or to an employer, depending on the circumstances. Not only will contractors who have used avoidance schemes be liable for additional tax, they will also be liable for interest on the tax debt.
If payment is made following receipt of the ‘follower notice’ interest will only be due on the amount paid for the period from the original due date up to the point at which a payment is made. It is also proposed that a late payment penalty provision will be brought in: 5% of the tax owed when the due date for payment has passed A further 5% of any amount unpaid 5 months after the due date A further 5% of any amount unpaid 11 months after the due date.
The interest and penalties plus the additional tax owed is likely to total a significant amount of money for any contractor using a tax avoidance scheme and HMRC have warned users to budget for it should they continue to use or enter into an offshore or loan scheme. The Government has also proposed that Payment Notices will also be sent to users of DOTAS arrangements as they believe that most structures notified under DOTAS have ‘characteristics or hallmarks’ of avoidance. Not all schemes will be affected as some may involve arrangements where no additional tax liability will arise but, to give certainty to tax payers as quickly as possible, HMRC will review all DOTAS arrangements and will issue a list of all those schemes affected in time for Royal Assent 2014.
The message for contractors is ultimately that there is nowhere to run and nowhere to hide if you use a tax avoidance scheme; these new measures are as hard hitting as any ever seen.