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Facing tax avoidance payments

Demands to pay upfront disputed tax in relation to avoidance schemes deemed ‘aggressive’ by HMRC could tip some people into bankruptcy, and insolvency practitioners should prepare, says Fiona Hotston Moore, forensic partner at Ensors

Fiona Hotston Moore
Forensic partner

Contrary to popular perception, the majority of people facing unwelcome demands under the Finance Act are not rock stars, hedge fund royalty, or others easily able to absorb a huge and unexpected financial blow.

Most of the 33,000 individuals and 10,000 companies due to receive ‘accelerated payment notices’ from HMRC over the next 20 months, often to pay backdated amounts, will be well-paid professionals who took advantage of what they were advised were legitimate investment schemes. The notices are expected to be issued at the rate of 2,500 a month from the end of the year.

Many will not be in a position to pay the disputed amount, especially sums that will be often significant multiples of annual salaries.

There is much that could be said about the principle behind accelerated payments. The idea of effectively being ‘guilty’ until proven ‘innocent’ has disconcerted both the legal and accounting professions. It reverses the historic practice whereby a challenge to HMRC was resolved by a tribunal before money was passed over from the taxpayer. But we have now reached the stage of practicalities.

Taxpayers can normally negotiate terms with HMRC for large demands, but not easily this time. The legislation enshrines little sympathy from a government hoping to claw back about £7bn by moving the goal posts on more than 1,200 avoidance schemes, some of which were entered into up to a decade previously. Those at risk include film partnerships and contractor loan schemes.

HMRC has made it clear that only in limited circumstances will it consider payment by instalments. The general requirement will be for the money, millions of pounds in some cases, to be paid within 90 days. This short three month window means an almost immediate liquidation of assets on demand.

This lack of flexibility, even forbearance, means that insolvency practitioners will find themselves drawn into what will be, for many taxpayers, a demand too far.

Insolvency practitioners have an opportunity at this point; they can help to negotiate funding options, try for time to pay the demand, and crucially give advice about how to protect business and personal assets. However, some people will still have to consider insolvency proceedings.

Those facing financial collapse from an advance payment pose a delicate challenge for insolvency practitioners, who will need to consider the potential that although a liability may crystallise due to an ‘accelerated payment notice’, the scheme may survive its court challenge. The upfront tax would then be repayable to the taxpayer.

Independent tax advice will, of course, be crucial in weighing up the options for individuals. These may include trying to reach a settlement with HMRC rather than risk a tribunal hearing that could be lost. It may also be possible to challenge the legitimacy of the accelerated payment notice itself.

Companies also face serious problems from the use of tax schemes. Many will have invested some years ago and assumed the tax relief was a given. It is not, as there may be latent liabilities.

Many companies face the need to provide for substantial tax liabilities, and this unexpected provision may impact adversely on their banking covenants.

In addition, corporate advisers will need to consider the impact on historic dividends, as well whether the directors have an exposure. All of this may be too much for some companies to survive.

Insolvency practitioners face being drawn into tax avoidance, an area they may not have thought of before as being relevant. It is time to start thinking differently.

Posted on 30th September 2014 by



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