HM Revenue and Custom's new proposals to require the disputed tax in tax planning schemes to be paid upfront could drive more promoters offshore, where they do not have to disclose their schemes, and potentially be illegal, according to UK law firm Pinsent Masons.

HM Revenue and Custom's new proposals to require the disputed tax in tax planning schemes to be paid upfront could drive more promoters offshore, where they do not have to disclose their schemes, and potentially be illegal, according to UK law firm Pinsent Masons.

Under new government proposals, suspected users of tax avoidance schemes could be compelled to pay their bills upfront whilst HMRC investigates and challenges in the courts.

Jason Collins, head of tax at Pinsent Masons, said this could be a "game-changer" for many taxpayers who will decide that these schemes are no longer attractive, particularly as the promoter usually also wants to be paid their fees up front. He also believes that the changes risk encouraging aggressive behaviour which may come close to the line between avoidance and evasion.

“Reducing the possible benefits of using tax planning schemes unfortunately also changes the balance between the potential risk and reward of simply operating offshore, and not co-operating with HMRC at all,” said Collins.

“Because offshore promoters cannot be compelled to disclose these schemes to HMRC, the Revenue will be relying on the users to report the schemes. HMRC risks a black hole of its own making because it will have little idea what those users are being told,” added Collins.

The consultation will look at proposals to include any disputed tax associated with schemes that are subject to the Disclosure of Tax Avoidance Schemes regime, and taxpayers engaging in the activities covered by the new General Anti-Abuse Rule.

The move follows the announcement last year by UK chancellor George Osbourne in the Autumn statement that HMRC will ask for upfront payment from taxpayers using avoidance schemes the same as or similar to one that has already been defeated in the courts.

HMRC said expanding the system will remove the tactic that some taxpayers currently use of holding onto the disputed tax while their case is being investigated and litigated and also act as a deterrent to those tempted to exploit the cashflow advantage allowed by the current rules.

Pinsent Tasons said that the new rules could allow HMRC to hold onto legitimate tax savings for up to a decade and questioned the legality of the proposal.

“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," said Collins.