Lee Ellis, Victor Cramer, David Pickstone and Cristiana Bulbuc have drafted the United Kingdom chapter of the Ninth Edition of the Tax Disputes and Litigation Review, recently published by The Law Reviews. The book gives information on tax disputes across 22 jurisdictions.
Below is the section of the chapter on tax claims. The introduction can be found here.
The legislative approach to tax avoidance has involved:
- the Disclosure of Tax Avoidance Schemes (DOTAS) disclosure regime first introduced in 2004 with subsequent tightening of the rules aimed at identifying avoidance arrangements at an earlier stage and counteracting the perceived abuse;
- the introduction of targeted anti-avoidance provisions within new legislation;
- the introduction of principle-based anti-avoidance legislation (for example the group mismatch rules);
- the introduction of the general anti-abuse rule (GAAR) from July 2013 under Part 5 of the Finance Act 2013;
- the introduction of follower notice and accelerated payment regime under Part 4 of the Finance Act 2014, which requires the upfront payment of tax in advance of resolution by HMRC or the courts in respect of a notifiable tax avoidance scheme under the DOTAS provisions or where a case has been decided in relation to an arrangement whose main purpose is to secure a tax advantage and HMRC believes the ruling involves a principle that is applicable to another taxpayer, or is subject to the GAAR. The provisions also provide for tax geared penalties for failing to make upfront payments and the measures apply from 17 July 2014;
- the Promoters of Tax Avoidance Scheme (POTAS) legislation targeting persistent promoters of tax avoidance schemes who are uncooperative, or whose schemes are regularly defeated;
- penalties for taxpayers using schemes counteracted by the GAAR;
- a requirement for large businesses to publish their tax strategies;
- proposed sanctions for serial avoiders and promoters;
- significantly enhanced exchange of information with overseas territories including low-tax jurisdictions; and
- various G20-driven/OECD-led initiatives aimed at countering perceived tax avoidance by multinational companies – known as Base Erosion and Profit Shifting (BEPS).
Below, some of the above approaches are briefly considered.
The Finance Act 2004 introduced a set of intricate disclosure requirements that are imposed on promoters and users of certain tax schemes and arrangements. Effectively, the DOTAS rules oblige taxpayers or their advisers to inform HMRC about certain arrangements for avoiding tax. The rules were designed to enable HMRC to identify at a much earlier stage tax-avoidance schemes it was likely to find unacceptable, with a view to introducing swifter and more targeted legislation in response. These DOTAS requirements have gone through extensive amendments to widen and strengthen their effect and scope to better enable HMRC to close down tax-avoidance schemes and cover a much wider range of transactions.
The DOTAS rules apply to arrangements that are expected to produce an advantage in relation to: income tax, corporation tax or capital gains tax, inheritance tax, national insurance contributions, stamp duty land tax, the annual tax on enveloped dwellings (ATED), or the apprenticeship levy.
The rules vary somewhat depending on which tax is potentially being avoided. A separate regime applies to VAT (DASVOIT), which since January 2018 has been expanded to cover all indirect taxes and align it more closely to the direct tax DOTAS regime.
In both cases, the legislation applies to ‘notifiable arrangements’ (and ‘notifiable proposals’) that have as a main expected benefit the obtaining of a UK tax advantage and that fall within any one of certain widely drawn ‘hallmarks’.
The regime is now also used as a trigger to apply to following other regimes: accelerated payments, higher risk promoters, serial tax avoidance and restriction of reasonable care defence in defeated avoidance cases.
General anti-abuse rule (GAAR)
Part 5 of the Finance Act 2013 took the significant step of introducing a GAAR to the UK, with effect from 17 July 2013. HMRC has also published and updated extensive guidance about the scope, objectives and application of the GAAR.
It applies to corporation tax, income tax, capital gains tax, petroleum revenue tax, inheritance tax, stamp duty land tax, annual tax on enveloped dwellings, diverted profits tax and apprenticeship levy (Section 206, FA 2013). The GAAR can also apply to arrangements where UK tax advantages have been obtained from the benefits and rights derived under any double tax treaty. VAT is excluded from its scope.
The GAAR is intended to be a freestanding regime that comes into operation when the application of all other tax rules (including targeted anti-avoidance rules – too many to enumerate here) applied purposively may not defeat the tax planning.
The purpose of the GAAR is to counteract tax advantages arising from tax arrangements that are abusive. However, it is not sufficient that the arrangement seeks to secure a tax advantage; it must do so in a way that is considered abusive. Therefore, there is a relatively high threshold for showing that a scheme is abusive.
The objective test for abuse is whether entering into the tax arrangements, or carrying them out, cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances (the double reasonableness test) (Section 207(2), FA 2013). If the GAAR is invoked in an appeal, HMRC must show the tribunal or court that the tax arrangements are abusive and that the adjustments made to counteract the tax advantages arising from the schemes are just and reasonable.
The GAAR’s counteraction measures are currently subject to the usual appeals procedure, with normal time limits. HMRC have contended that they have been prevented from taking certain procedural steps within the 12-month limit by taxpayer obstruction and that this has prevented any challenge under the GAAR and in some cases the ability to challenge the arrangements under other enquiry provisions has also been lost. It was therefore announced in the Budget 2018 that the current system of Provisional Counteraction Notices will be replaced by protective GAAR notices that will enable HMRC to continue enquiries beyond the current 12-month limit.
Since 22 July 2020, an HMRC officer has been able to give a protective GAAR notice (PGN) to enable HMRC to make counteracting adjustments before the GAAR procedural requirements have been completed (Section 209AA FA 2013; Sch 14, paras 10, 15 FA 2020; GAAR guidance, paras C6.5.5, E3.7A.2.1–E3.7A.2.3). A PGN must be given within the ordinary assessing time limit applicable to the proposed adjustments unless a tax enquiry is in progress, in which case the PGN can be given at any time until (but no later than when) the enquiry is completed (FA 2013, s 209AA(2)-(3); GAAR guidance, para E3.7A.2.2.). A recipient of a PGN cannot appeal against the notice itself, but can appeal against the making of the adjustments specified in the notice.71
Any appeal against the specified adjustments is stayed until the earlier of:
- when a final GAAR counteraction notice is given after the GAAR procedure has been complied with; or
- 12 months after the PGN was given (FA 2013, s 209AA(6); GAAR guidance, paras C6.5.4, E3.7A.2.5.).
The Finance Act 2016 introduced a new penalty for all cases successfully counteracted under the GAAR – a penalty of 60 per cent of the counteracted tax will be charged in respect of tax arrangements entered into after 15 September 2016. The penalty can also challenge the imposition or amount of the penalty by making an appeal. A GAAR penalty can only be imposed if a number of conditions are satisfied, including that a final GAAR counteraction notice has been given.
Although a PGN is treated as if it had been given as a final GAAR counteraction notice if the taxpayer does not appeal against the making of the adjustments specified in the PGN, the PGN is not treated as a final GAAR counteraction notice for the purposes of the GAAR penalty. Consequently, a final GAAR counteraction notice must actually be given to a taxpayer in order for that taxpayer to be liable to pay a GAAR penalty (FA 2013, ss 212A, 209AA(8); GAAR guidance, paras E3.7A.2.7, E3.24.3.).
As and when Finance Bill 2021 is legislated, it is expected that:
- HMRC will be able to apply the GAAR to partnerships, with counteraction taking place through the partnership statement and then carried through to the partners benefiting from the tax advantage (i.e., making the GAAR procedure work consistently with how HMRC conducts partnership tax enquiries and amends tax returns in respect of partnerships);
- the GAAR penalty will be levied on the partners and based on the value of each partner’s counteracted advantage; and
- the representative member of a partnership would benefit from the existing safeguards, such as the right to make representations, the right to appeal (where relevant) and the GAAR panel’s role in providing an independent review.
Accelerated payment and follower notice regime
The Finance Act 2014 introduced new provisions, which came into force in July 2014, under which HMRC has the power in certain circumstances to require payment of disputed tax in advance of the ultimate resolution of the taxpayer’s dispute (Sections 199–233, FA 2014 and Schedules 30–33, FA 2014.).
HMRC may issue an accelerated payment notice (APN) in circumstances where HMRC has opened an enquiry into the taxpayer’s return or an appeal is ongoing (Section 219(2), FA 2014). Where a notice is issued to a partner and an enquiry is opened into the partnership tax return, the notice is known as a partner payment notice (PPN), although the provisions are otherwise near identical (Schedule 36, FA 2014). The return or claim must (Section 219 (3), FA 2014) have been made in respect of a tax advantage arising from the arrangements in question. Further to this, one of the following requirements must be met:
- HMRC has given the taxpayer a follower notice in relation to the same return, claim or appeal;
- HMRC has allocated a DOTAS reference number to the tax arrangements, or the scheme was included on HMRC’s list of users who may be required to make an accelerated payment; or
- HMRC has issued a counteraction notice under the GAAR and at least two members of the GAAR Advisory Panel consider that entering into the tax arrangements was not a reasonable course of action (Section 219(4), FA 2014).
The APN or PPN must specify the amount of the payment (Section 220, FA 2014). The taxpayer has 90 days to object in writing, following which HMRC will confirm, withdraw or, where the taxpayer objects to the amount specified, amend the APN or PPN. It is not possible to appeal to the Tax Tribunal the giving of a APN or PPN, but, depending on the circumstances, it may be possible to commence judicial review proceedings against the giving of the notice before the High Court. (Section 222, FA 2014. If the taxpayer does not make written representations, the payment date will be 90 days from the date that the APN was issued. If they make written representations, the payment date will be the later of 90 days from the date of issue of the APN or 30 days following notification of confirmation of the APN by HMRC; see Section 223, FA 2014). If the taxpayer fails to pay the APN or PPN by the relevant date, HMRC may issue penalties, beginning at 5 per cent of the amount in question (Section 226, FA 2014).
HMRC may issue a follower notice (FN) in circumstances where HMRC considers that there has been a final judicial ruling on the issue relevant to the disputed tax in question. The provisions operate in a similar fashion to those for APNs (Section 204, FA 2014). The notice must be issued within one year of the later of the date of the ruling or the date on which HMRC received the claim or appeal, and cannot be issued to the same taxpayer in relation to the same tax arrangement, tax advantage, ruling or period.
The notice must identify the ruling HMRC considers to be relevant, its reasoning for this belief, the effects of the taxpayer objecting to the FN and the fact that penalties may apply if the taxpayer does not take corrective action (Section 206, FA 2014). The taxpayer may amend the return (and notify HMRC) or object to the FN within 90 days by written representation (Sections 207–208, FA 2014).
HMRC will consider any objection and either confirm or withdraw the FN; there is no right of appeal from a confirmation of the FN to the Tax Tribunal. However, as with APNs and PPNs, it may be possible depending on the circumstances to bring a claim for judicial review in the High Court. Penalties of up to 50 per cent of the disputed tax may apply if the taxpayer refuses to take corrective action, although this is subject to HMRC’s discretion (Section 208(2), FA 2014 and Section 211, FA 2014).
The notices, since their introduction, have received significant criticism and have been the subject of a number of judicial review claims. Besides cases where the APNs or PPNs were invalidated because of the invalidity of the FNs on which the APNs or PPNs were based, all of these claims have been dismissed and the notices have been found not to be unreasonable, disproportionate, ultra vires or otherwise unfair or in breach of Article 1 of Protocol 1 of the European Convention of Human Rights.
Organisation for Economic Co-operation and Development (OECD)
The OECD’s 15 BEPS action plans are designed to combat the shifting of profits from one (high-tax) jurisdiction to another (low-tax) one. The UK has taken a very proactive approach to the implementation of the 15 action plans.
In March 2016, the UK government confirmed the implementation of hybrid mismatches (Action 2), (this was enacted in the Finance Act 2016 with effect for payments from 1 January 2017) interest deductibility (Action 4), (this was enacted in the Finance Act 2017) intellectual property (Action 5), (this was enacted in the Finance Act 2017 with effect from 1 July 2016) transfer pricing (Actions 8–10) (This was enacted in the Finance Act 2016 and has effect for all accounting periods beginning on or after 1 April 2016 for corporation tax purposes) and country-by-country reporting (Action 13). (The Finance Act 2015 gave the UK Treasury authority to introduce regulations implementing country-by-country reporting. The Taxes (Base Erosion and Profit Sharing) (Country-by-Country) Regulations 2016 were subsequently made on 26 February 2016 and came into force on 18 March 2016.)
The UK considers that its current controlled foreign companies (CFC) rules are compliant with Action 3 (controlled foreign companies), although on 26 October 2017 the EU Commission issued a preliminary decision concluding that the provisions that either fully or partially exempted non-trading finance income of CFCs amount to state aid contrary to the EU Treaty (See Official Journal of the European Union (OJ C 400, 26.10.2017, p. 10).
According to the Commission, the UK provisions selectively benefit groups whose non-resident finance income derives from investments that do not produce UK tax deductions or interest income from third parties over those groups who do. On 2 April 2019, the European Commission announced its final decision which confirmed its view that the rules amounted to state aid (See Official Journal of the European Union (OJ L 216, 20.8.2019, p. 1). The UK government brought an annulment application (see Official Journal of the European Union (OJ C 263, 05.08.2019, p.62) before the General Court against this decision on 12 June 2019 and is currently awaiting judgment on its application.
On 7 June 2017, the UK signed the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). The UK then deposited its instrument of ratification and final list of reservations and notifications on 29 June 2018. The MLI entered into force in the UK on 1 October 2018, and came into effect in the UK for UK tax treaties in 2019 (the dates varied depending on the specific UK tax). (MLI entered into force on 1 January 2019 for taxes withheld at source, 1 April 2019 for Corporation Tax and 6 April 2019 for Income Tax and Capital Gains Tax.
The date of modification for individual UK tax treaties is dependent on treaty partners depositing their own instruments of ratification, acceptance or approval. For the current version of any individual tax treaty. The MLI introduces changes to various articles of UK tax treaties that follow the OECD Model Convention, adds at least one new article (Article 29 (entitlement to benefits)), and inserts a preamble to clarify that the purpose of UK tax treaties is to avoid double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
The UK has chosen to apply Part VI (Arbitration) of the MLI. In the absence of resolution by mutual agreement between the tax authorities after two years, taxpayers will be entitled to request that their case be submitted to arbitration. In relation to disclosure of aggressive tax planning (Action 12), the UK has introduced a new disclosure scheme in respect of VAT, DASVOIT (the DOTAS regime has existed since 2004 and GAAR since 2013). This supersedes the previous disclosure regime VAT Disclosure Regime (VADR) which will now only apply to arrangements entered into before 1 January 2018.
In an attempt to combat aggressive tax planning arrangements, DASVOIT extends the scope of duty to disclose beyond VAT, to include 17 other indirect taxes. It also broadens the obligation to disclose to include promoters of the schemes. Like its predecessor, DASVOIT runs in conjunction with DOTAS. However, the UK has elected not to adopt most of the provisions targeting abuse involving permanent establishments, other than the anti-fragmentation rule (in Article 5(4.1) of the OECD model convention and the revised definition of closely related persons (in Article 5(8) of the OECD model convention).
The full UK chapter of the Tax Disputes and Litigation Review Ninth Edition, can be accessed here.
The Tax Disputes and Litigation Review Ninth Edition, can be accessed in full here.
Reproduced with permission from Law Business Research Ltd
This article was first published in March 2021
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