08 August 2015

HMRC investigations: code of practice 8, code of practice 9 and tax avoidance schemes

HMRC conducts investigations under Code of Practice 8 with a view towards the financial recovery of any tax, interest and penalties it believes that you owe. HMRC will investigate any situation where it believes that there may have been a serious loss of tax and but doesn't necessarily suspect fraud. This includes the tax affairs of individuals, partnerships, companies and trusts and covers all of the taxes, duties, levies, contributions etc. for which HMRC is responsible. This is also the code of practice used by HMRC's Special Investigations department when they suspect that the tax payer has been involved in aggressive tax avoidance planning, perhaps through a marketed tax avoidance scheme. HMRC recognises that a number of high net worth individuals use marketed tax avoidance schemes. These are schemes which use contrived arrangements to seek tax advantages in circumstances where the legislation doesn't intend that the advantages be available.

Code of Practice 9 is used when HMRC do suspect tax fraud but offer the taxpayer a chance to make a full admission and pay taxes owed and a civil penalty in return for not commencing a criminal investigation. This is a complex and high risk area where time limits are short and expert advice is required. We have handled scores of such matters over many decades.

The Foreign Account Tax Compliance Act (US law)

This was designed to protect tax evasion by US citizens using offshore banking facilities. It requires financial institutions outside the US to provide information to the US tax authorities regarding financial accounts held by US Nationals. So that financial intermediaries could comply with the FATCA obligations without breaching its Data Protection and Confidentially laws the UK entered into an inter-governmental agreement with the US for information required under FATCA by UK financial intermediaries to provide to HMRC to be forwarded to the US. Any other governments including those of Crown Dependencies and Overseas Territories have entered into similar agreements with the US and the UK has also entered into similar agreements with the Crown Dependencies and the Overseas Territories so that HMRC can find out about offshore accounts held by UK residents.

Follower notices and accelerated payment notices

Legislation in the Finance Act 2014 allows HMRC to issue Follower Notices and Accelerated Payment Notices to any taxpayer for whom there is an open enquiry, or matter under appeal, and who has claimed a tax advantage by the use of arrangements.

Follower notices can be issued to taxpayers who have used an avoidance scheme which has been shown in another taxpayer's litigation to be ineffective. The notice tells the taxpayer they may be liable to a penalty of up to 50% of the tax in dispute if they do not amend their return or settle their dispute. HMRC may give a follower notice to a taxpayer if all of the following conditions are met:

  • A tax enquiry is in progress into a return or a claim made by the taxpayer in relation to a relevant tax, or the taxpayer has made a tax appeal in relation to a relevant tax, but the appeal has not been determined by the tribunal or court, or abandoned/disposed of. HMRC cannot issue a follower notice unless an enquiry has been opened into a return or claim, and is still open, or an appeal has been made against a closure notice, assessment, or determination and that appeal is still ongoing.
  • The return, claim or appeal is made on the basis that a particular tax advantage results from particular tax arrangements. Tax arrangements are defined as those where it is reasonable to conclude that the obtaining of a tax advantage is the main, or one of the main, purpose of the arrangements.
  • HMRC is of the opinion that there is a judicial ruling which is relevant to the chosen arrangements.
  • No previous follower notice has been given to the same person, by reference to the same tax advantage, tax arrangements, and judicial ruling and tax period; unless the previous notice has been withdrawn.

Accelerated Payment Notices (APN's)

Under current rules, taxpayers who can self-assess the claimed tax advantage from an avoidance scheme can hold the money in dispute while the dispute is resolved. This can take a considerable time as these schemes are often highly complex and a considerable amount of information needs to be obtained from taxpayers and advisers, and litigation may be required to resolve the dispute.

However the legislation which was announced in the Budget 2014 and enacted in part 4 of the Finance Act 2014 changes those rules by introducing the concept of Accelerated Payment Notices (APNs) which may be issued to taxpayers who have used an avoidance scheme and where certain conditions are satisfied, namely:

  • if a tax enquiry or tax appeal is in progress and;
  • a follower notice has been given or is given at the same time in relation to the same return and same tax advantage;
  • HMRC has issued a DOTAS reference number in relation to the arrangements (or similar arrangements where the promoter is required to notify a scheme reference number to the taxpayer); or
  • a general anti-abuse rule (GAAR) counteraction notice has been given in a case where the stated opinion of at least two members of the sub panel of the GAAR advisory panel was that the arrangements were not a reasonable course of action.

The accelerated payment notice will specify the amount of tax that must be paid on account of any final liability in respect of the enquiry or appeal. This will be determined to the best of the HMRC officer's information and belief. There are penalties if you fail to pay the accelerated payment within 90 days of the issue of the notice.

How can we help you?

Our tax investigation team has extensive experience in dealing with Special Investigations under Code of Practice 8 and Code of Practice 9. We can accompany you to meetings, if so advised, with HMRC. We can also correspond with HMRC on your behalf. We can work with HMRC to help regularise your tax affairs and we work with accountants to ensure that you only pay the correct tax and interest due and the minimum appropriate amount in penalties.


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