Of the 26 decisions handed down in 2016/17 in cases where HMRC considered that tax avoidance was involved, 22 went in favour of HMRC, according to a recently published report. Three of the remaining decisions went in favour of the taxpayer, while one was a mixed decision, where the High Court found in favour of HMRC on some points but not on others.
Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, pointed out that there was actually a slight increase in the proportion of cases that HMRC lost last year, compared to the two losses and one mixed verdict recorded in 2015/16. However, this was "admittedly on a low base", she said.
"Anyone seeking to implement a complex tax avoidance scheme would have to be a confirmed optimist to assume they would win if the case is ultimately litigated," she said.
"Furthermore, HMRC can also now rely on the General Anti-Abuse Rule (GAAR), which applies to transactions from 2013. The first ruling of the GAAR panel was released recently and was unanimously in favour of HMRC," she said.
The GAAR applies to the main direct taxes. It is designed to prevent 'artificial and abusive' tax avoidance schemes that fail to pass a 'double reasonableness' test, showing that the arrangements "cannot reasonably be regarded as a reasonable course of action". An independent GAAR Advisory Panel was set up at the same time, to provide guidance and non-binding opinions on cases where HMRC considers that the GAAR may apply.
Since 2014, HMRC has had the power to require payment of disputed tax upfront, before a dispute about the efficacy of tax scheme has been settled by the courts. Once an advanced payment notice (APN) has been issued, the disputed tax must be paid within 90 days with no right of appeal. APNs can be issued against users of over 1,000 different types of tax planning schemes which demonstrate certain 'avoidance hallmarks', such as being subject to disclosure requirements under the Disclosure of Tax Avoidance Scheme (DOTAS) rules.
Tax disputes can take many years to proceed through the courts and tribunal system, meaning that the cases finalised last year "give little clue to current behaviour by taxpayers", Heather Self said. For example, all the direct tax cases referred to relate to facts dating from 2003 to 2009, with the majority at least 10 years old before they reach the courts, she said.
"Of the decisions reported, there is only one VAT case – and that dates back to 1997! The long delay was caused by a need to refer to the Court of Justice of the EU (CJEU), but shows that VAT avoidance issues are now rare, especially following the leading 'Halifax' case in 2006. It takes a long time for the 'tail' to die out," she said.
"The corporation tax cases mainly relate to complex financing transactions, where subsequent legislation makes it unlikely that such schemes would be implemented now. Many were devised by professional services firms, but few have actually succeeded. The income tax cases, on the other hand, tend to relate to fundamental questions such as whether an entity was trading, or whether PAYE/NICs should apply to specific arrangements," she said.
Self said that, overall, the volume of cases resolved last year was "not high".
"This suggests that politicians' regular promises to collect billions more from 'stamping out avoidance' are unlikely to collect as much as they would think," she said.