'Pay-up first' avoidance rule not justified, say MPs

A retrospective measure to force 65,000 customers of HM Revenue & Customs to pay upfront any disputed tax associated with avoidance schemes has not been fully justified, MPs are warning.

The Treasury Select Committee says it has “deep reservations” because the government has “yet to explain what is wholly exceptional” about the cases that justifies the measure as being retrospective.

So while there “may be a case” for the measure to be adopted as policy, “it would have to be justified” by the government on the grounds that the cases represent wholly exceptional circumstances.   

“It should do so in response to this report,” the select committee added, addressing the government. “We have deep reservations about any extension of retrospection in the tax system.”

Explaining its reservations, the committee said retrospection goes against its principles of tax policy because its puts it on a slippery path to “arbitrary taxation” and “undermines certainty,” said its chairman, Tory MP Andrew Tyrie.

Retrospective tax policies, such as this one – known as the ‘pay-up first’ avoidance rule, also discourage investment and innovation and create the scope for great unfairness, the MPs say.

Paul Spindler of Kingston Smith, a chartered accountancy firm, believes that the committee is right to call on the government to justify what he called a “draconian” measure, partly due to the unfairness it could create.

“This initiative may only be successful in a minority of cases and could, in the meantime, force many taxpayers into serious financial hardship or even personal bankruptcy – which would, in turn, result in significant costs to the state,” he said.

“Whilst it may be a policy objective of the government to tackle tax avoidance, it would be very wrong for individuals to be penalised for the failures and shortfalls of unclear tax legislation.”

But individuals would be at risk of being penalised by the tax authority too. The accountant explained: “This draconian measure, affecting 65,000 taxpayers, relies on HMRC to exercise ‘judgement,’ as it currently does on ‘failure to pay’ cases.

“[But] we all know that that ‘judgment’ is often flawed; HMRC have seriously miscalculated the impact of several high profile initiatives to collect tax.”

Mr Spindler hopes the government will “take heed” of the concerns of the committee, which in 2012 said that retrospection should be confined to wholly exceptional circumstances, before individuals’ livelihoods are adversely affected.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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