When I first started in taxation, I worked for a one-man band on Staple Hill High Street in Bristol. My employer had run his own firm for decades before I was born and was an incredibly intelligent man whose mental arithmetic surpassed anyone I have ever known. He was very traditional in his ways and did not trust the post to deliver Tax Returns to HM Revenue & Customs (“HMRC”), so he insisted that I hand delivered the Returns to our local HMRC office by hand. Though antiquated in his approach, this meant that I built up a strong relationship with my local tax office. I could call the Inspectors up by name and we would discuss client affairs amicably and openly to reach a sensible and pragmatic conclusion. Those days, sadly, I fear, are long behind us.
It started simply. Several local offices were shut down and consolidated into regional offices. The HMRC postal system was centralised. The Inspectors in technical offices became overburdened and the rush to meet resourcing issues left many fresh faced case workers unskilled, inexperienced and with no commercial knowhow. Specialist teams such as the Small Companies Enterprise Centre (SCEC) and the Reconstructions team in Southend can no longer be contacted by phone. The ability or opportunity to have a conversation with HMRC feels as though it is reducing and, when you do have a conversation, HMRC seem resolute in their stance and unwilling to accept further explanation of the offer of another technical point of view. I feel that this has led to relations between HMRC and the tax profession reaching a low point, with HMRC assuming that our clients are ‘dirty’ tax avoiders and in any situation where a tax advantage has arisen, it must be the sole or main reason for the transaction.
Over recent years, we have seen HMRC use the Tribunal Service as a threat. I have also seen the Valuations Team suggest that they would re-open previously approved valuations (with no legal premise) if we did not comply and have been told that they can raise the valuation if they wanted, seemly without any justification. Unfounded threats may have come from HMRC’s belief that they are the governing body, that they are the law. They are wrong.
However, who could blame them for being confused? Since 2014, 17th July 2014 to be exact, HMRC have had the ability to issue tax payers with a notice to pay tax before judgement has been passed. This applies where HMRC have opened an enquiry and the ‘person has participated in a scheme or arrangement that has been listed on HMRC DOTAS (disclosure of tax anti avoidance scheme); or where a counteraction notice is received under the General Anti Avoidance Rule (“GAAR”); or a follower notice. It is the fact that money is collected before it has even been determined whether it is owed that made this step so controversial.
What is an APN?
How are HMRC able to do this? Under section 200, Finance Act 2014 (“FA14”), an accelerated payment notice (“APN”) can be issued in relation to an assessment of income tax, capital gains tax, corporation tax, inheritance tax, stamp duty land tax or annual tax on enveloped dwellings tax. When received, the recipient has 90 days in which to settle or dispute the APN.
The motivation behind this new approach was to ensure that HMRC were not out of pocket until the enquiry or appeal into (what they see as) a tax avoidance matter has been concluded. Prior to APNs, HMRC relied on an interest charge to make good the delay in underpaid tax. However, does this not assume that the taxpayer is guilty before being proven innocent? Should we not allow the taxpayer to state their case and defend their position? That is a point of opinion, and each will have their own view, making this a contentious issue indeed.
To explain further, the APN will state the reasons why HMRC believe the notice to be valid and the basis upon which they can raise a notice must be in accordance with s219, FA14. The APN must also show a calculation of the tax liability HMRC believe has become due. Where either the validity of the notice or the tax [and national insurance] liability is not challenged or paid within the prescribed 90 day period then a minimum 5% late penalty will be incurred; with this percentage increasing after the amount remains unpaid 5 months later. Significantly, there are no statutory grounds to claim a reduction of liability due to hardship, as there is with VAT, for example, so this will only be granted at HMRC’s discretion.
Where a challenge to the APN is made within the prescribed period but this is not accept by HMRC then there is no opportunity to appeal. Instead, the dispute must be taken to judicial review and it is here that an unreasonable refusal on hardship grounds can be challenged. This lack of appeal process has led to the number of APN related judicial reviews steadily increasing over recent years; reportedly increasing by 35.56% from 90 in 2016 to 122 in 2017.
In circumstances where the taxpayer wishes to settle the APN whilst trying to resolve an open enquiry and it is later found in the taxpayer’s favour, HMRC will return the amount in full, including interest. In many circumstances, HMRC are paying a higher rate of interest than some of the high street banks so this may not be detrimental to anything but cash flow.
Pinsent Mason led two key legal challenges in 2017, with the lead appellants being Mr Rowe (R (on the application of Rowe and Others) v HMRC  EWCA Civ 2105) and Vital Nut (R (oao Vital Nut Co Ltd) v HMRC  EWHC 1797), both of which were unsuccessful. The claimants appealed the decisions made by the High Court on several grounds, being that the APNs issued were:
- unreasonable, disproportionate, or otherwise unfair;
- beyond the powers conferred by statute;
- contrary to the principles of natural justice;
- unlawful, in that there was no tax due or payable;
- in breach of Article 1 of the First Protocol (A1P1) (and Article 6); and
- not in accordance with the ‘designated officer’ requirements contained in the legislation.
The defence here was such that it did not only look to defend the taxpayer(s) but to challenge the legal validity of the APN framework – none more so than point five, in which the claimant looked to argue that the APNs were in contravention of the Human Rights Act, which states:
“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.”
In every case, the Court of Appeal upheld the High Court decision and, with particular reference to point five, Lord Justice McCombe said:
“Under the APN/PPN procedures, it [the state] simply has a money claim conferred on it by legislation, in anticipation of a possible future tax liability which may or may not be established. It makes no claim whatsoever to the money as tax. The appellants’ money remains their money. It is to turn the matter around 180 degrees to say that it is the appellants who only have a claim to keep their money because of the demand made by the state to deprive them of it … It is difficult to see how the state’s statutory claim prevents the cash being a “possession” of the appellants.”
What are the numbers?
The APN route has clearly been a favoured one for HMRC in order for them to accelerate the collection of underpaid taxes, with reports showing that over 80,000 APNs have now been issued since their inception. In HMRC’s 2016/17 Annual Report, they stated that in that year alone over 30,000 notice had been issued and £4 billion had been collected to date under the APN regime. These are certainly headline-grabbing numbers.
They continued to discuss the success of the 75,000 + issued APN notices, as was at that time, stating that only 40,000 had been challenged. Of that number 32,000 had been had been processed and 90% of these were found to be valid, with 80% confirming that the original tax liability became due. Based on these numbers, and assuming that all unprocessed challenges are wholly accurate, HMRC have a 96% success rate in raising a valid notice and a 92% success rate in calculating the correct amount of tax due. However, one may argue that where HMRC have such power to collect taxes in advance of a judgement their accuracy should be higher than this.
Statistics also show that the number of APNs withdrawn by HMRC increased 100% over the last two years from 3,000 in 2016 to 6,000 in 2018. These statistics would suggest that HMRC have withdrawn around 10% of all APNs issued to date, a statistic which was further proven following figures obtained by City law firm RPC, who believe that a total of 8,600 notices have been withdrawn out of the total 81,000 notices which have been issued.
Given the potential for HMRC to have made a mistake, no matter how small, taxpayers who receive an APN should be strongly encouraged to seek professional advice in order to ensure that they understand the framework, HMRC’s powers in this regard and to ensure that the claim is valid and/or that the potential liability to tax is correct. Many believe that there is no point in disputing an APN, or that HMRC would not have got the position wrong, yet I have seen HMRC miscalculate a simple PAYE coding notice on many an occasion.
Whether the APN is worthy of challenge will, of course, be dependant upon the facts of the individual case. However, I would urge the taxation and legal professions to ensure that HMRC have accurately made these claims, that they have not overstated their powers and to ensure that they continue to be reminded that they need to operate within the law, rather than being the law.