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Five recommendations on HMRC’s ‘judge and jury’ tax powers

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As the draft Finance Bill reaches committee stage in the House of Commons, the Law Society is warning of the threat to people’s right to appeal.

The Law Society Tax Law Committee chair Gary Richards said: ‘The Law Society agrees that HMRC should be able to root out hopeless cases that clog up the system at the expense of the courts, HMRC and – ultimately – the British taxpayers. But we are concerned that the government’s proposals to give HMRC more powers come at the expense of individuals’ rights to appeal. We have made five recommendations to maintain the balance of power between individual rights and governmental power.’

When a tax avoidance scheme is challenged in court, the tax system currently allows taxpayers to hold on to the disputed tax until the case is resolved. The government is proposing to change that through ‘accelerated payments’, whereby the taxpayer has to pay the money upfront, before a decision has been made on whether the tax is actually due.

The government is also proposing that where other taxpayers have used a similar scheme, if HMRC issues a ‘follower notice’ the taxpayer must accept that the judgment made in a completely separate case applies to them and return the taxes. The government is proposing that if the taxpayer believes the case is not relevant to theirs, they should tell HMRC. However, there is no right of appeal following an HMRC decision to issue a follower notice.

Under the proposals, taxpayers will be able to appeal the tax liability (not the follower notice), but if they do so they can be financially penalised if they lose their appeal.

The Law Society’s five recommendations are:

  1. First-tier Tribunal rulings should not be allowed to be used as the basis for a follower notice. FTT decisions have no precedential value, so it would be unfair for HMRC to order a taxpayer to amend their tax return because of a decision in a case that is non-binding and to which the taxpayer was not a party.
  2. There needs to be clearer criteria for what constitutes a ‘relevant ruling’. The draft legislation gives HMRC broad discretion to determine when a decision is ‘relevant’ to another taxpayer’s case for the purposes of issuing a follower notice. If this legislation is to go ahead, it must set clear, specific guidelines for determining whether a decision is relevant or not.
  3. There needs to be a right of appeal to an independent body in respect of follower notices. The draft legislation does not allow a taxpayer to appeal HMRC’s decision to issue a follower notice. All a taxpayer can do is ask HMRC to reconsider. This in effect makes HMRC judge and jury.
  4. There should not be an additional penalty for a taxpayer who has received a follower notice but chooses to appeal their tax liability. HMRC suggests it would only impose penalties in rare cases to discourage spurious cases being pursued in court – but the legislation does not provide for this. In any case, it is not clear that additional penalties would achieve this objective, while it is entirely possible that they would unfairly discourage cases that ought to be tested in court.
  5. The disclosure of tax avoidance scheme rules (DOTAS) regime is too broad to be used as the sole means of determining whether accelerated payment should be ordered, because the fact that arrangements have been notified under the DOTAS regime is not a reliable indicator of avoidance that HMRC wishes to challenge.