Being up front about the new tax challenges

As Accelerated Payment Notices start putting the brakes on tax avoidance schemes, we look at the complex implications for accountants, as well as their clients.

One of the key planks of the Revenue’s attempts to crack down on tax avoidance is the new regime of Accelerated Payment Notices (APNs). In a nutshell, if a particular DOTAS (tax avoidance scheme) is under enquiry, HMRC can issue an APN to an individual or company requiring them to pay the tax up front that would have been owed if the DOTAS weren’t in operation. There’s a penalty of 5% if the payment isn’t made within 90 days. The figure then rises to a hefty 10%.   If you receive such a notice and cannot pay it’s vital that you speak to HMRC, as they will seek to enforce the debt and collect the payment.

The good news is that if your scheme is ultimately found to be legal by the courts, HMRC must repay the money paid to them and no penalties apply. The process can, however, take a long time. Critically, the system also throws up some difficult issues for professional advisers working with corporate clients.  How exactly do we provide for the APNs in the accounts?

Although the new arrangements clearly differ from the previous tax enquiry issues accountants have tackled, the broad principles will be the same. There is a dispute between two parties that could give rise to a potential liability for the company.

There are three criteria set out in current accounting standard FRS 12 which have to be met before recognising a provision at the balance sheet date:

• there is a present obligation as a result of a past event;
• it’s probable that a ‘transfer of economic benefits’ will be required to settle the obligation; and
• it’s possible to make a reliable estimate of the amount involved.

Once the APN has been issued, then it is a reasonable view that as this is an enforceable debt, it will need to be reflected as a liability in the accounts. If recognised as a liability – or if you have made a payment – then there’s a deduction which needs to be accounted for. There are two possible places for this to hit the accounts; it can be shown as a tax charge or as an asset.  However, the conditions for recognising a contingent asset are strict – there has to be a reasonable degree of certainty – and therefore once the APN has been received, there is a higher threshold to avoid it impacting on the tax charge. If there is not a reasonable degree of certainty, then the standards do allow disclosure in the accounts of a ‘probable contingent asset’.

With disputes of this type, there is always going to be a fine balancing act. It is actually increasingly difficult to know with any degree of certainty the outcome of a specific case. This is particularly true in an environment where it might be argued the emphasis is now on sending signals about tax avoidance rather than deciding each case on its individual merits.

On receiving an APN, you will need to then consider how this is reflected in the accounts and the signal this may send about your perceived view of the strength of your case. On the other hand, there are clearly dangers to being too bullish and failing to accept that there is any obligation (not least dealing with HMRC officers seeking to collect the tax due under the APN).  Your accountants are there to hold your hand through the process, but remember a lot of this is new territory and there won’t necessarily be a black and white answer.