During his fateful meeting with undercover reporters from the Telegraph, the England national football team’s erstwhile manager, Sam Allardyce, made some trenchant criticisms of HMRC, accusing them of being the “most corrupt business in our country”. While I am not at all convinced that “corruption” is quite the mot juste to describe HMRC’s behaviour, does he have a point?

In his own words...

Mr Allardyce - who like many football managers, is not known for mincing his words - was quoted in the Daily Telegraph as saying:

“They [HMRC] fly out tax demands without any real knowledge whether they should or shouldn’t. They just put ‘em out willy-nilly and if you pay them, people s--- themselves and pay them. Then they go to their accountant and say, and if you’ve got a s--- accountant, the account (sic) s---- himself and says, well you must owe them, you had better pay it."

Accelerated Payment Notices

Reading between the lines of Sam Allardyce’s colourful if impassioned language, it seems fairly obvious that what he is referring to is HMRC’s powers to issue Accelerated Payment Notices and Partner Payment Notices - which I will hereafter refer to collectively as APNs. Not only do I recognise from Sam Allardyce’s description the methodology that HMRC employs; the tone of the language used is also familiar from numerous and often similarly expletive-laden conversations with clients on the receiving end of APNs. (Fortunately, I do not recognise the reference to "s--- accountants"...)

"The country's so skint..."

The APN legislation was introduced in the 2014 Finance Act. It would be an understatement to say that the new legislation was controversial. According to HMRC, its purpose was to “change the economics of tax avoidance”. Sam Allardyce’s description of the reasons behind the legislation is rather more blunt and prosaic:

“…because the country’s so skint, they come to government and say we’re skint, government says we’re skint how we gonna get the money. Let’s change the laws and let’s just fly out these demands. If you invested in this tax scheme, where they pay the tax back, for investing in new businesses, or in regeneration zones, do you know what I mean, in current poverty areas. But HMRC, you have to pay it back even if you don’t owe it.”

The fact is that Sam Allardyce’s description contains more than a grain of truth. Finance Act 2014 gave HMRC the right to demand disputed tax from taxpayers who have either participated in a scheme which was notifiable under the Disclosure of Tax Avoidance Schemes regulations (“DOTAS”), had received a Follower Notice (issued if there is a final judicial decision which HMRC thinks applies to the recipient’s tax arrangements) or have entered into arrangements where HMRC has issued a counteraction notice under the General Anti-Abuse Rule.

"Willy-nilly"

On the face of it, none of this justifies Sam Allardyce’s allegation that HMRC are sending out demands “willy-nilly”. However, the fact that an arrangement was disclosed under the DOTAS regulations does not of itself signify that it was “notifiable” as the APN legislation clearly requires. In several cases, arrangements were disclosed to HMRC, even though there was significant doubt that they were notifiable, for the simple reason that the penalty for failing to register a notifiable scheme was up to £1,000,000. This point seems to have been lost on HMRC’s Counter-Avoidance teams who have seemingly issued APNs on the assumption that schemes were “notifiable” simply because they were notified. This is not a mere technicality even if HMRC has characterised it as such; they have been obliged to withdraw APNs for precisely this reason. To that extent, the “willy-nilly” claim does have some validity.

Where now for APNs?

As matters stand, we still do not know whether the APN regime is in fact lawful. Various groups of affected taxpayers have taken the matter to judicial review on the basis that the legislation is technically defective, unreasonable, offends against the principles of natural justice, and infringes the recipients’ human rights, including the right to peaceful enjoyment of their possessions. Judges in the High Court have given these arguments short shrift although the leading case, R on the application of Rowe and others v HMRC, is expected to be heard by the Court of Appeal later this year. Given the evident strength of feeling and the sheer scale of the sums involved, a further trip to the Supreme Court seems almost inevitable. So while it's a very early bath for Sam Allardyce amd his career as England manager, the question of the legality of APNs is unlikely to be answered until we are well into extra time.

Settlements with HMRC: a warning

Although there has been a great deal of litigation regarding tax avoidance arrangements in recent years, many cases have not yet reached the courts. HMRC is keen to settle those cases, preferably without litigation and collect the tax. In last year’s Autumn Statement, the Government announced further 'settlement opportunities' for taxpayers and some settlements have already been reached. However, settling with HMRC could result in some paying far more tax than they may ultimately owe.

Settlements with HMRC frequently take the form of binding legal contracts. This means that, even if judicial interpretation of the relevant tax law changes after the contract is signed, the settlement’s terms remain in force, unless the parties agree to vary them or a Court orders otherwise – and there is no guarantee that either of those things would happen.

The De Silva Judicial Review

Next year, the Supreme Court will hear an appeal in a judicial review case, The Queen (on the application of De Silva and another) v Commissioners of Revenue and Customs [2016] EWCA Civ 40. This is one of three cases involving members of the Cotter Solutions Action Group, the others being The Queen (on the application of) Derry v Revenue and Custom [2015] UKUT 416 (TCC) and Dr Walapu v HMRC [2016] EWHC 658. Although the claimants in De Silva were users of the “Liberty” tax avoidance scheme marketed by Mercury Tax Group, the outcome of the case could mean that taxpayers who made carry-back claims would retain the benefit of those claims, even if the scheme or arrangement has been successfully challenged by HMRC. It is those taxpayers who are most likely to be contemplating settlements with HMRC now, possibly to their ultimate detriment.

The relevance of the Cotter case

The point at issue in De Silva is a technical one, namely whether HMRC has enquired correctly into stand-alone claims – i.e. claims not included in a return. HMRC argues in De Silva that an enquiry into a return under section 9A TMA 1970 extends to any claim included in that return, and where there is a claim for a partnership loss, any reduction to the partnership losses as a consequence of an enquiry at partnership level flows through to the individual partners’ returns. This is probably an interpretation that most advisers would have accepted until recently. However, the claimants rely on what they consider to be a clear statement of the law in another Supreme Court case, Cotter v HMRC [2013] STC 2480. The Supreme Court found that a stand-alone claim is not included in a return for a year just because its details are entered on the return form. The De Silva claimants argue that this means that an enquiry under section 9A TMA 1970 is not a valid enquiry into a stand-alone claim. In Cotter, HMRC’s power to enquire into a claim under Schedule 1A TMA 1970 worked to its advantage as it meant that they could collect the disputed tax immediately whereas if it was the subject of a section 9A enquiry, it could not be collected until that enquiry was concluded. However, the claimants in De Silva seek to use Cotter to argue that, as HMRC did not make timely enquiries under Schedule 1A TMA 1970, their stand-alone claims are final and conclusive, even though the Liberty losses were disallowed at partnership level. HMRC argues that the Cotter decision is relevant only to the particular facts of that case and that the scheme of partnership enquiries is such that any amendment to a partnership return must flow through to each partner’s return. The Supreme Court will decide the matter next year.

Proceed with caution...

HMRC does not seem to admit the possibility that they will lose in De Silva and they are certainly not bringing this important case to the attention of those taxpayers they are “inviting” to settle. Individuals whose tax affairs could be affected by the outcome of De Silva would be wise to resist any temptation to enter into settlements with HMRC unless and until HMRC accept that they can be revisited in the event that the claimants win in De Silva. Otherwise, they may find themselves tied into agreements that require them to pay more tax than may be legally due or having to take HMRC to court to have the agreement varied or set aside, with outcomes that are by no means certain.

This article appeared in the October 2016 issue of Accountancy Age magazine.