Finance Act 2014 gives HMRC the power to demand disputed tax up front

The Finance Act 2014 received Royal Assent on 17 July, and with it HMRC acquired the power that will define its relationship with tax avoidance for the rest of the decade: the right to demand payment of disputed tax before the dispute is decided.

Accelerated payment notices allow HMRC to require a taxpayer who has used a scheme disclosed under the DOTAS rules, or counteracted under the general anti-abuse rule, to pay the tax in dispute within 90 days. There is no appeal against the notice itself, only a right to make representations on the amount. The money is held until the dispute is resolved and repaid with interest if the taxpayer wins. Follower notices, introduced alongside them, allow HMRC to tell a taxpayer whose case is similar to one already decided in the department's favour that they must settle or face a penalty.

Who is affected

The government's argument is simple. Under the old rules a scheme user could enter arrangements, claim the tax advantage, and keep the money for the years it took HMRC to litigate, with the cash-flow advantage acting as a subsidy to avoidance. Reversing that, the Treasury says, removes the incentive to enter schemes and to prolong disputes. HMRC has said it expects to issue notices covering around £7 billion of disputed tax over the next two years, and has published the DOTAS reference numbers of the schemes it intends to start with.

For the contracting industry the significance is direct. Among the arrangements on HMRC's list are the employee benefit trust and loan schemes that were marketed to contractors from the early 2000s onwards, under which a worker was paid a small salary and received the balance as a loan from an offshore trust that was never intended to be repaid. Tens of thousands of contractors used them. Many are still in open enquiry, and many of those enquiries date back a decade. Every one of them is now a candidate for a notice.

The objections

The measure passed with the opposition's support and against the advice of most of the professional bodies. The Chartered Institute of Taxation, the Law Society and the Institute of Chartered Accountants all argued that requiring payment before a tribunal has ruled reverses the presumption that a taxpayer's return is correct until shown otherwise, and that applying it to schemes entered into years before the power existed is retrospective in effect if not in form. The government's answer was that the tax was always due if the scheme failed, and that all the notice changes is who holds the money while that is decided.

For the contractor who used a loan scheme in 2006 on the advice of a provider who has since disappeared, the distinction is academic. The notice, when it comes, will demand the tax on years of income at once. HMRC has said it will offer time to pay where hardship can be shown. Advisers are telling clients to open a settlement discussion now, before the notice arrives, on the ground that the terms will not improve.

The Act also contains the onshore employment intermediaries rules that took effect in April, requiring agencies to treat workers they supply as employees unless the worker is genuinely not under supervision, direction or control, and the reporting obligations that will follow from next year. Between them, the two measures mark the year the government stopped arguing about the boundary between employment and self-employment and started collecting.