THE A TO Z OF TAX PLANNING

‘A’ is for advanced payment notices

As we approach a new editorial season, we’ve decided to start a new series giving the ABC of tax planning, although not necessarily all of these articles will be completely basic. The emphasis, as always, though, will be on practical tax planning that readers can use.

‘A’ seems to stand for all kinds of nasty things these days, in the context of tax planning. It stands for ‘avoidance’ (now a dirty word), the Government’s response to this in the form of reams of anti-avoidance legislation, ‘aggressive tax planning’ and a particularly vicious (far more than aggressive) response in the form of the dreaded APNs, or ‘advanced payment notices’.

Readers of 1066 And All That, the classic alternative history textbook, may recall the history of Morton’s Fork. This was, according to the authors, a method of extracting tax from reluctant barons (the evil rich of those days) by arbitrary force. No nonsense about proving that they owed the king any money. The king just took it by force.

APNs are pretty much the same story, although the weaponry in the hands of the State nowadays is made of paper rather than iron.

What APNs have in common with Morton’s Fork à la Sellar and Yeatman is that the taxman doesn’t have to prove any more that you owe the money in order to demand it from you. Thus, HMRC is in a uniquely privileged position as against all other individuals, corporations and government bodies. Quite a neat bit of political chicanery on the part of Somerset House.

But can the Revenue actually just help itself to your money in any circumstances it chooses? Fortunately, no, we haven’t quite gone as far as that yet. Although there’s no appeal against the issue of an APN, it does have to meet one of three criteria before they’re valid:

So things come into focus a bit more. APNs are aimed at people who go in for the racier sort of tax planning, and are designed to take away the cash flow benefit that people were getting from schemes even when those schemes didn’t work.

DOTAS stands for ‘disclosure of tax avoidance schemes’, and these rules have been with us for over 10 years now. Where a promoter promotes, or a taxpayer uses, a tax-avoidance scheme that has certain hallmarks that scheme has to be notified to HMRC within a very short timescale. DOTAS doesn’t apply to all tax planning by any means: broadly, it’s really aimed at the more artificial arrangements – those that meet the vague description of ‘aggressive’; although not all aggressive schemes, even, are caught.

GAAR stands for ‘general anti-avoidance rule’, and this was introduced a few years ago in order to catch some of the more artificial arrangements. It’s probably an oversimplification, but the sort of scheme that GAAR tends to catch is one where you have different figures for accounting and tax purposes. So, for example, a scheme may have as its aim creating a tax ‘loss’ that isn’t really an economical loss at all. Or, conversely, it may aim to arrive at an economic profit which isn’t a taxable profit. Needless to say, ordinary differences between taxable and accounting profit – for example because of different rates of capital allowances on fixed assets – aren’t covered by GAAR.

Follower notices are issued by HMRC when they’ve won a case, and they think the decision applies to a lot of other taxpayers as well. The basic idea behind these seems to be to avoid HMRC having to take every single user of a particular tax-avoidance scheme to court, after they have defeated the first one.

So what should you do if you receive an APN?

What most people will do is feverishly consider how they are going to come up with the money to pay. The APN takes no account of a person’s personal circumstances, and sometimes a taxpayer will have lost the money, or spent it, in a way that can’t be used to reduce the tax liability. You have the fairly tight timescale of 90 days to come up with the money, subject to any objections you may make, which can prolong the period.

The second thing you should do is check the calculation of the APN carefully, or ask your accountant to do it. There is anecdotal evidence that a high proportion of APNs are actually based on errors, either of arithmetic or of principle. So perhaps this should be the first thing you do, really, rather than panicking first and then checking the calculations second!

Next, consider, or ask your adviser to consider, whether any of the above three triggers is actually present. Again anecdotally, the most common trigger in practice seems to be a DOTAS. And there’s an interesting distinction to be made here.

What the rules actually say, we think, is that an APN can be issued not so much when a DOTAS disclosure has been made but when a DOTAS disclosure ought to have been made. This is important, because many promoters, for example of film schemes, used to make disclosure under DOTAS as a matter of routine, without considering whether the necessary hallmarks were present. It is a defence against an APN that a DOTAS notice should not have been issued because the arrangements didn’t come within the scheme – and that’s all right and proper, in our view.

Don’t forget, also, to check, or ask your accountant to check, the absolutely ‘obvious’ and basic point as to whether the year in question is still in time for the Revenue to raise an assessment. They will be in time to do this if it is either no more than four tax years ago that the offending tax planning took place or the year in question is open for an inquiry. An inquiry into a year has to be opened by HMRC no more than a year after the filing date. So, for example, for the tax year 2012/13, the normal filing date was 31st January 2014 and therefore more than a year has passed from then and the Revenue is now too late to open an inquiry into 2012/13, although it isn’t too late to issue an assessment. The difference isn’t academic, because without the ability to raise an inquiry, the taxman will find it harder to get the evidence he needs against you to raise the assessment.

If you think you have grounds to raise an objection to the APN, you need to do this within the 90-day period. As far as we can see, the way the rules are worded means that it is advantageous to wait until nearly the end of that period before objecting. HMRC then goes through the motions of responding to the objection, and of course it will nearly always uphold the notice in practice. At worst, however, raising the objection may give you another month or two, or three, to come up with the money. At best, HMRC may be unable to ignore your objection and may have to reconsider the issue of the APN.