What the taxman isn't telling you about APNs

Fresh guidance on Follower Notices (FNs) and Accelerated Payment Notices (APNs) has been published by HMRC which, in effect, is telling contractors that they’re damned if they do, and damned if they don’t, writes Lisa Keeble, founder of Contractor Umbrella.

Before I elaborate on this hidden message from the taxman, a little background on the highly controversial legislation that will bring about FNs and APNs from next month is necessary.

In short, the two notices will let the tax authority claim purportedly underpaid taxes from contractors without having to win the right through legal process.

The government’s fuller position is that contractors continue to use tax avoidance schemes even though HM Revenue & Customs has challenged and defeated a similar scheme in court. Up until now, even if a scheme was essentially the same as another, small variations would have to be challenged through litigation, with the taxpayer hanging on to the tax owed until the courts handed down their decision. This was a costly and time consuming procedure for the Revenue.

To combat it, Follower Notices will be sent out which give the contractor the option to continue their dispute with HMRC but only if they pay the disputed tax. If it’s subsequently decided that HMRC was wrong in their assertions, the contractor will get their money back. However, if the contractor chooses not to settle with HMRC they could be facing a penalty of up to 50% of the disputed tax amount.

These notices can only be issued if a tax enquiry has already been undertaken by HMRC and that the tax advantage results from the tax avoidance scheme -- and that HMRC believe that there is a final judicial ruling which is ‘relevant.’ In this context, ‘relevant’ means the principles laid down or the reasoning given in the ruling would, if applied to the tax avoidance scheme, deny the asserted advantage or part thereof. The HMRC guidance does also state that, if a later case ‘significantly’ changes the effect of the judicial decision, HMRC would reconsider the follower notices.

Once FNs have been sent, HMRC will also send an APN detailing what the department claims is owed. These will also be sent to users of DOTAS schemes and those who fall foul of GAAR where an enquiry is already underway or an appeal has been made against a closure notice, assessment or determination. 

Interestingly, although HMRC has approximated a 20-month period for sending APNs, the guidance states that there is no specific time limit for HMRC to issue an APN. This fact will act as a huge deterrent to contractors who may be considering using a tax avoidance scheme which appears, currently, to be legal.

Unfortunately, as is typical in law, ignorance is no defence when it comes to these notices; it will make no difference to a case if the scheme promoter didn’t provide contractors with a DOTAS reference number, HMRC will still pursue the tax owed.

These rules have obviously been introduced to deter contractors from using tax avoidance schemes and the potential penalties may indeed deter many.

However, what’s NOT stated in the Revenue’s guidance is that, in the majority of cases, even if the contractor were to win against HMRC in court, they would get back the monies paid on account, with interest, but there would be no guarantee that they’d  be able to recover their legal costs.

That’s an unfortunate omission in the taxman’s guidance because he knows that, historically, purveyors of tax avoidance schemes don’t stay around long enough to fight HMRC on the contractors’ behalf, so the financial burden of the battle normally falls to the contractors themselves. Furthermore, if the case is allocated to the complex track (which means it may be lengthy, complex or high value) losing would mean that the contractor could be liable for HMRC’s costs. If guidance from the tax authority is meant to be helpful -- which surely is the intention -- these are aspects HMRC should have pointed out.

And of course it’s unlikely that anyone would defend themselves in a tax case -- lawyers don’t come cheap so the ‘choice’ for contractors, following the introduction of these new rules, is to pay up or risk paying interest, penalties and a substantial legal bill. Rock and a hard place spring to mind.

Editor's Note: Further Reading -

Contractor guide to Accelerated Payment Notices (APNs)

Dividend users alerted to 'pay-up first' tax rule

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

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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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