HMRC has recently sent several letters to participants in tax avoidance arrangements. The letters provide an update on the tax dispute and offer individuals the opportunity to approach HMRC to settle the disputed liabilities in relation to the schemes.
The terms for settlement are not publicised, meaning that taxpayers are enticed into contacting HMRC on a named basis in order explore what this means for them. HMRC has confirmed it will not make settlement terms available until a letter of offer is issued, which will be tailored to the individual's specific circumstances.
Seemingly, the only benefit HMRC is offering is the certainty on the tax position, whilst having the opportunity to pay any amounts owed, including late payment interest, by instalments. However, in most instances, the offer for settlement is only available if taxpayers are prepared to withdraw their claims to relief in full i.e.100 per cent.
With many of the test cases for these schemes still being heard by the tax tribunals, the terms of settlement essentially mirror the worst-case scenario for taxpayers. In fact, the reality for some cases is that the tribunal has decided partly in favour of the taxpayers. Whilst HMRC's factsheets which accompany the letters clearly state this, the settlement terms do not reflect this judicial finding, and effectively pre-empt a successful appeal of the tribunal’s decision by HMRC.
Although the recent letters show that HMRC’s stance in relation to tax avoidance remains unchanged, taxpayers deserve more transparency in respect of the settlement terms on offer, and also could reasonably expect those terms to accord with the most recent tribunal judgements.
Failure to reflect tribunal decisions could work against HMRC. Many taxpayers will not be encouraged to settle when there is the chance that the tribunal may rule in their favour, and in some instances has already done so.
What are the consequences of not settling now?
Interest will continue to accrue in respect of tax which is subsequently found to be due. However, many taxpayers have already made payments to HMRC in respect of Accelerated Payment Notices (APNs), which claw back the cash-flow advantage of participating in an avoidance scheme. These also serve to limit the exposure to late payment on interest beyond the date they were paid. Others may not have received an APN so agreeing to settle would trigger an immediate charge.
In addition to late payment interest, taxpayers may be exposed to penalties if they choose not to settle, although we know that HMRC rarely pursues penalties in respect of adjustments arising from marketed schemes. So, the only significant disadvantage of not settling appears to be the accrual of interest and potentially penalties.
Whilst HMRC's settlement opportunity letters do offer finality for taxpayers who wish to conclude their use of avoidance arrangements for good, the settlement terms available may not be reflective of relevant tribunal judgements. For some, it may be more beneficial to wait for the finality of the legal process. Anyone who receives a letter should seek specialist advice to explore the options available in their individual case.
Those impacted by this issue can speak to an RSM tax dispute specialist on +44 (0)800 032 8374.