'Pay now, argue later': new powers HMRC is using to batter taxpayers

Taxman issuing orders to pay as much as £100,000 within 90 days thanks to new powers to claim unpaid tax.

HM Revenue & Customs (HMRC) is using little-known powers to demand huge, backdated payments of tax from thousands of workers it claims have paid too little tax in the past.

Using 'Accelerated Payment Notices' (APNs), which were introduced in 2014, the taxman can order taxpayers to pay many thousands of pounds upfront within 90 days, even if this tax demand is wrong and the amounts paid are later refunded.

Initially used against celebrities and the very wealthy, APNs are now being used to pursue middle-income workers.

The taxman turns nasty

At least 64,000 taxpayers have been targeted with APNs. These workers must pay backdated taxes in full and within three months of an APN being issued. HMRC will only issue refunds when it admits that its previous calculations were wrong.

The taxman has defended the growing use of APNs, arguing that they help to tackle "aggressive tax-avoidance schemes", for example, film-investment partnerships used by the super-wealthy, sports superstars and celebrities to lower their tax bills.

HMRC argues that these new powers enable it to claw back taxes promptly, rather than pursuing debtors through costly court action.

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'Pay now, dispute later'

To be fair, members of the public have no misgivings about the taxman using these powers to force super-wealthy tax-dodgers into paying their fair share. What is worrying, however, is how APNs are increasingly being used to hammer middle-class workers into paying large, yet disputed, tax demands.

Take these two anonymous case studies, provided by Dominic Arnold, partner at law firm Moore Stephens. Both involve workers using contractor-loan schemes notified to HMRC under the controversial Disclosure of Tax Avoidance Scheme (DOTAS) rules. DOTAS rules require promoters of and advisers to tax-avoidance schemes to provide HMRC with full details of these vehicles.

Mr A: 'Pay £58,000 within 90 days'

In 2006, 2009 and 2012, Mr A used DOTAS-registered contractor-loan schemes to reduce tax on his earnings. As required by law, Mr A entered the relevant DOTAS Scheme Reference Number on his tax returns in each of these three years. HMRC issued enquiries into his tax returns for 2006 and 2007, but not 2009.

In 2012, a 'discovery assessment' was issued to Mr A for the 2009 year for £25,000 of back tax, which he appealed. However, despite receiving enquiry notices for 2006 and 2007, HMRC did not ask Mr A for any information, nor did it take any action in respect of his appeal against the 2009 assessment.

Mr A heard nothing until June 2015, when he received APNs for 2006 and 2012 for a total of £58,000 in back taxes. He has just 90 days to pay that tax, unless he makes representations against the APNs. He has attempted to contact the scheme promoter for assistance, but it no longer appears to be trading.

In short, despite HMRC's failings to properly handle his case, Mr A must pay £58,000 to the taxman this month, or else face severe penalties.

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Miss B: 'Pay £102,000 within 90 days'

Miss B used contractor-loan schemes in every year from 2005 to 2010. Some of these schemes were DOTAS-registered and some were not. HMRC issued enquiries in respect of each those years. However, while information requests were sent to the scheme promoters, HMRC failed to provide Miss B with copies of any correspondence with the promoter, which she later learned had not responded to HMRC and had ceased trading.

In 2015, Miss B requested a settlement figure from HMRC under the Contractor Loan Settlement Opportunity, which came to £102,000. What's more, the taxman has also warned Miss B that she may have a future liability to Inheritance Tax within her lifetime if the loans made to her under the scheme by an offshore trust are written off.

If Miss B does not settle with HMRC, APNs are likely to be issued in respect of the DOTAS-registered schemes. Miss B does not have £102,000 in liquid assets and will require a lengthy 'time to pay' agreement with HMRC if she decides to settle, which she must do by the end of this month.

A blunt instrument to beat taxpayers

As you can see, HMRC is using APNs to browbeat middle-income workers into paying massive tax demands within 90 days, often in spite of administrative and procedural errors by the tax authorities. In many cases, these demands go back many years and can be in excess of a year's take-home pay.

In effect, APNs are a blunt instrument that allows HMRC to assume that taxpayers are guilty until proven innocent. Why should innocent taxpayers hand over five- or six-figures sums to HMRC and then have to jump through hoops to get their own money back?

While taxpayers can agree payment plans with HMRC to pay overdue taxes demanded by APNs, the taxman does not hesitate to bring in debt collectors if payments are not made to its schedule. Furthermore, HMRC often demands additional interest, penalties and other taxes from alleged tax-avoiders.

To date, HMRC has collected at least £1 billion by using APNs to claw back allegedly overdue taxes, while £28 million has been refunded to taxpayers after HMRC admitted its calculations were wrong.

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Are you in the taxman's sights?

Lucy Brennan, partner at accountancy practice Saffery Champness, said: "HMRC has issued a list of 1,200 DOTAS numbers that it will be reviewing and issuing APNs for. Unfortunately, this does not include the names of the schemes, but individuals with a DOTAS number on their tax return can cross-reference to this list.

"Some of the more well-known schemes are the film schemes revealed in the press, with the famous investing, but we should consider that the less wealthy will have also invested in these schemes and be receiving the APNs as well."

In short, if one user of a DOTAS-registered scheme is in line to receive an APN, then all the other scheme members will also be issued with one. This enables HMRC to go after thousands of workers by reviewing a single DOTAS number. With such schemes highly popular before 2008, tens of thousands of taxpayers are now firmly in HMRC's sights!

More on tax:

How to get a tax refund

How to check you're on the right tax code