HMRC’s proposal for tax avoidance scheme users to pay upfront “offends principles of natural justice”, says one UK law firm.

HMRC announced last month its plans to “change the economic incentives to avoid tax and promote tax avoidance,” by forcing taxpayers using avoidance schemes the same or similar to ones that have been defeated in courts to pay upfront.

Law firm Pinsent Masons, which has one of the largest tax teams of any law firm in the UK, argues that the proposal could inadvertently encourage more aggressive behaviour, as HMRC could hold onto legitimate tax savings for up to a decade and only release them once a taxpayer has fought their way through lengthy and expensive litigation.

Jason Collins, head of tax at Pintent Masons, said,

“HMRC is trying to move the goalposts with historic disputes by suddenly requiring those already involved in litigation with them to put the cash on the table now, even though HMRC has not yet established that the scheme is ineffective. On the face of it this offends principles of natural justice and one has to question whether such a step would be lawful.

”This is an audacious move. These proposals are subject to consultation but, despite question marks over their legality, the current backlash against tax planning could allow them to push them through.”

Collins also highlights the risk of encouraging more aggressive behaviour, which could blur the line between avoidance and evasion. He said that reducing the possible benefits of tax avoidance schemes could upset the balance between the “potential risk and reward of simply operating offshore, and not co-operating with HMRC at all.”

This could potentially encourage tax avoidance scheme promoters to move offshore, where they are not compelled to disclose their schemes to HMRC. HMRC would then have to rely on individual users to report the scheme, thereby having much looser control over tax avoidance.