That is when a new requirement that those involved in avoidance schemes identical or similar to another that a court has already ruled against are to pay the tax under dispute "up front" – included in the Chancellor's Budget on 19 March – is expected to take effect.
These rules will also apply to any scheme that has been reported under the Disclsoure of Tax Avoidance Schemes rules (DOTAS), which enable HM Revenue & Customs to remain current and review the latest tax avoidance schemes in use.
It may be as long as three to four years before all of those whom HMRC is expecting to seek upfront tax payments from have been contacted and told to pay, experts say.
Nevertheless, “advisers will need to identify those clients who have been involved in a tax dispute with HMRC, and arrange with them the necessary liquidity, and, if appropriate, tax mitigation strategies,” said Richard Leeson, chief executive of Adviser Advocate, the specialist distribution and marketing company, and former Axa executive.
This is particularly important, he added, if the sums involved are large, particularly if they are currently being held in relatively illiquid assets, such as property.
Importantly, the requirement that taxpayers pay the disputed amounts upfront does not meant that they cannot continue to challenge the tax charge, only that even if they win, they will not have access to the money until the final decision has been made.
As reported, HMRC proposed the change to paying disputed tax amounts "up front" in certain cases in order to, in its words, "rebalance the economics of entering into avoidance schemes" by requiring of taypayers "to pay disputed tax earlier in the process".
In making this argument, HMRC said it wins more than 80% of the avoidance cases that it litigates, which, it noted, meant that those involved in a dispute who hold onto the disputed tax while their case is being investigated and litigated enjoy a significant "cashflow advantage".
The schemes affected by the new rules are explained in the just-published Finance Bill 2014, the explanatory notes of which describe the new "Follower Notices and Accelerated Payments" rules in detail, beginning on page 333.
Gerry Brown, technical manager for Prudential, who has been monitoring the upfront tax plan since last year's Autumn Statement, when it was first announced, said the four tax avoidance scheme categories that the new upfront tax rules will apply to are employee benefit trusts, contractor avoidance, partnership losses and stamp duty land tax.
“The Revenue is arguing that taxpayers who are challenging cases that are similar to ones that have already been settled, in the Revenue’s favour, are clogging up the system,” Brown added, explaining the reasoning behind the new upfront tax regime, which some observers have said had been pushed through with rare determination by the Government, following just a month's consultation.
"It is obvious that this backlog needs to be tackled."
Brown says contractor avoidance – whereby individuals make use of offshore intermediaries, including employee benefit trusts, to funnel loans instead of remuneration, in hopes of avoiding or defering income tax and national insurance contributions – is estimated to be the category in which the most people will be found liable to pay a disputed tax up front. The category with the next largest number of people who may expect to receive a "Notice to Pay" from HMRC in connection with an amount under dispute are those in partnership loss schemes, which involve borrowing to invest in a partnership and subsequently claiming for loss relief on the investment.
Delay 'unlikely'
Patrick Stevens, tax policy director at the Chartered Institute of Taxation, said that it was unlikely the new up front tax plan would be postponed, even though there were strong arguments being voiced by some groups, including the CIOT, for certain changes to be made to the way it is currently written.
"We expressed concern that [the scheme] gives HMRC a large amount of executive power without effective taxpayer safeguards," he said. "But we would be really surprised if there were any delay, and indeed, we at the CIOT wouldn't really call for a delay. We do recognise that it is a very unusual situation, with all of these mass-marketed tax avoidance schemes, and we are genuinely sympathetic to what the government is trying to do."
For the individuals affected by the new up-front tax regime, however, Stevens went on, the sudden need to pay "on account, as it were", possibly as soon as early autumn, is likely to cause "in many cases quite a lot of anguish".
"The individual amounts will vary enormously, of course. A football manager with an income of £5m, for example, might have to pay more than someone who works at a bank and has an income of £1m. But the Government has estimated that over the next three to four years, they will see money coming in to them of about £4bn from this [scheme] alone, and we could quite imagine that would be right."
Before the proposed legislative changes take effect, the Finance Bill containing them must be approved by Parliament and then receive Royal Assent. Its provisions then become law, normally at the end of July or early August.
To read more about CIOT's reaction to the up-front tax plan, click here.
