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HMRC’s notice powers and safeguards

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Advance payment notices have changed the economics of tax disputes and may serve a useful function in tackling those who were playing the system, but the underlying legislation is insufficiently focused on the intended targets. Follower notices and GAAR penalty notices are likely to result in few affected taxpayers being prepared to continue tax disputes, even where they have a strong underlying case. As a result, those notices may lead to taxpayers being denied access to justice. Current taxpayer safeguards where these powers are used are neither independent nor accessible. A review is proposed to include consideration of a new form of independent safeguard. 

The Tax Law Review Committee (TLRC) was created in 1994. Members represent a broad cross-section of informed opinion from industry and commerce, the judiciary, academia and the tax professions. The chairman is Malcolm Gammie CBE, QC. Its remit is to keep under review the state and operation of tax law in the UK with its focus on the working of the UK’s tax system rather than the underlying policy. Its latest paper, published at the end of last year, looked at some of the more recently introduced powers given to HMRC and, in particular, the advance payment notices (APNs), follower notices (FNs) and GAAR penalty notices (GNs). The paper considered the ambit of the powers and the extent of safeguards for taxpayers.

APNs: the wrong triggers

It is recognised that, historically, some taxpayers felt that they had little to lose by engaging in tax avoidance and in prolonging disputes and litigation. Their only financial exposure was to the costs of litigation itself. APNs changed those economics. There may be concerns about the application of APNs to taxpayers on the basis of historical transactions entered into before the powers were introduced – not least where the money, which may have already been spent, would be found; but going forward, at least, APNs generally lead to a processing and cash flow change. Their underlying aim in so doing – to tackle those seen to play the system – is not challenged. However, the lack of focus on the group described by HMRC as the ‘recalcitrant few’ and the lack of safeguards in the system, including the lack of appeal rights, raise concerns. 
The lack of focus in the provisions has derived in part from using other powers as triggers; in particular, the disclosure of tax avoidance schemes (DOTAS) rules. ‘Piggybacking’ on the DOTAS rules has left groups of taxpayers outside the APN rules, even if a casual observer would expect them to be caught. For example, the press reported a case of around 2,000 self-employed contractors who had APNs withdrawn months after they were issued. When it became clear that the DOTAS rules had not required the disclosure of the scheme the contractors had used to reduce their income tax bills, the APNs had to be withdrawn; even though the marketed scheme was exactly the sort of thing HMRC said the powers were designed to catch. 
It is undoubtedly difficult to define precisely who should be subject to the new powers, but using rules such as DOTAS, which were designed to achieve different objectives to those envisaged by the more recent powers, has given rise to anomalies. This can lead to a sense of unfairness. At the same time, using DOTAS as a trigger for HMRC powers, including APNs, means that taxpayers and their advisers will be less likely to notify under DOTAS. Although DOTAS is very widely drawn and there are penalties for failure to comply, the cautious disclosures will now be discouraged. Is that really what HMRC wants or would it rather restore the previous stated purpose of DOTAS – to enable it to learn what it does not know? 

APNs: the limits of judicial review

If a taxpayer thinks that HMRC should not have issued the APN or that the amount sought is wrong, the taxpayer can make representations to HMRC. The latest HMRC annual report shows that around one in 10 of those representations was upheld, while the original amount sought was changed in around one in five cases. However, beyond this the taxpayer is only able to rely on judicial review proceedings, with all the complexities and costs they involve, as there are no appeal rights against the APNs themselves. (There are only appeal rights in relation to penalties resulting from non-payment of the amount demanded in the APN.) 
As the Court of Appeal judgment in R (on the application of Rowe and others) v HMRC [2017] EWCA Civ 2105 shows, there are high hurdles to overcome in using judicial review. Indeed, no judicial review challenge to the issue of APNs has yet been decided in favour of the taxpayer. As the TLRC’s paper points out, judicial review is of limited value as a mechanism for limiting the scope of wide powers granted in general terms or for testing their use and execution in practice. 

FNs and GNs: more fundamental problems

Similar concerns are identified in the paper in relation to FNs and GNs, but there are also potentially more serious problems for both the tax system and taxpayers. 
In essence, where an FN or GN is issued a taxpayer will be required to amend their tax return, settle the dispute or pay over the disputed tax within a specified time. If they fail to do so, they risk the imposition of a 50% penalty (in the case of FNs) or a 60% penalty (in the case of GNs). 
The TLRC is not the first to express concern about this element of the powers, with the potential result that HMRC now has quasi-judicial powers to determine what tax law means and how it applies in particular cases. The financial risks to taxpayers seeking independent adjudication of their cases through the tribunals and courts are so high when FNs and GNs are issued that few will wish to dispute the tax claimed, even when they have a strong case deserving judicial consideration. In such situations, taxpayers are effectively denied access to justice. HMRC often refers to its high success rate in the courts, winning around 80% of cases, but that still leaves 20% of cases which it does not win. 
In addition, HMRC has been given the power to rely on judicial decisions in ways that the courts themselves cannot. The First-tier Tribunal (FTT) decisions do not create legally binding precedent. Therefore, an FTT sitting tomorrow is entitled to reach a different decision from an FTT sitting today when considering essentially the same facts. Yet HMRC can choose to rely on any unappealed FTT decision, despite it having no precedential value. This adds to the potency of the FN power and the increased concern about the extent of safeguards regarding its use.
Although there are rights of appeal in relation to an FN to the FTT, these rights are limited. In particular, a taxpayer may appeal the penalty arising from not taking the required corrective action on the ground that the case that triggered the FN is not ‘relevant’ to them or that it was reasonable in all the circumstances for the taxpayer not to have taken the corrective action. However, given the wide definition of what is ‘relevant’, this may not get an appellant very far. A case may be ‘relevant’, as defined, so the FN can be issued and the penalty can be triggered if the notice is not complied with, even though the FTT or a higher court may later decide that there are sufficient distinguishing features between the FN recipient’s case and the relevant case to conclude that the result sought by HMRC was not correct. Similarly, reasonableness is likely to turn on the extent to which the case relied upon by HMRC is relevant. The problem is that to reach the stage of determining the relevance of the FN case, the taxpayer has to take on the normal risks of litigation and the risk of a 50% penalty.
There is a similarly limited appeal right when GNs are issued. The main basis of appeal is effectively that the GAAR is not applicable in the first place. Therefore, it adds little. If the GAAR is not applicable, the penalty would be expected to fall away in any event, and the application of the GAAR will only be decided if the taxpayer risks the 60% penalty and pursues their substantive case.
In the case of GNs, the penalty kicks in if the taxpayer does not concede prior to the matter being referred to the GAAR panel. The power effectively circumvents the safeguards built into the GAAR, which provided the very basis for its adoption. When enacted, the GAAR contained specific safeguards in recognition of the fact that it may apply in circumstances outside the normal limits of the tax code. The GAAR panel was set up; and the safeguard known as the double reasonableness test was written into the GAAR provisions to be applied by the courts if a case was referred on by the panel. However, the GN provisions are crystallised before referral to the GAAR panel and before the application of the double reasonableness test by a court. Therefore, the potential application of the GN penalty is not preceded by an independent adjudication corresponding to the final adjudication that would be made. 
The ability to challenge HMRC’s action in invoking the GAAR to override the tax legislation in question may be severely limited by the financial risks involved in the 60% penalty now attached to that challenge. In effect, the value of the double reasonableness test (which was previously at the heart of the GAAR) and the GAAR panel have been significantly reduced. One may wonder whether there will be taxpayers willing to take the risk of the penalty even to get as far as consideration by the panel. 

Existing safeguards

Given these issues, the paper considers what safeguards could be used by taxpayers. Judicial review is of limited value as a mechanism for limiting the scope of wide powers granted in general terms or for testing their use and execution in practice. 
The Adjudicator’s Office considers complaints made regarding HMRC. However, the limits on what the adjudicator can do mean that, in many cases, she is unable to provide any safeguard. In particular, her inability to consider complaints where there is an ongoing investigation or enquiry would be expected to mean that she would not consider complaints made in relation to FNs or APNs. In any event, the process of referral to the adjudicator is slow and the adjudicator’s resources are limited. There appears to be little potential for reference to the parliamentary ombudsman, given that the ombudsman focuses on process and administration complaints. 
That leaves the tax assurance commissioner (TAC), but the TAC is not independent of HMRC. The TAC is a commissioner of HMRC. In short, the independent safeguards available where the APNs, FNs and GNs are used are found to be neither sufficient nor accessible. 

Suggested review

So what should happen? A wide-ranging review of HMRC’s powers, deterrents and safeguards, in line with the recommendation in 2015 of the Treasury Select Committee, is proposed by the paper. Such a review should address the extent to which the safeguards are sufficient and accessible and whether modernisation is needed in relation to not only the powers discussed here, but also HMRC’s powers more widely. 
As part of that review, consideration should be given to whether there should be a new independent safeguard for taxpayers. One possibility would be to provide some form of independent control, perhaps along the lines of the Australian inspector-general of taxation. Alternatively, the TAC could be made independent of HMRC and given the role of monitoring and controlling the use of powers, or the adjudicator’s role could be extended.
To read the paper in full, see