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Let’s call the whole thing off? Maybe...

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21 January 2013

We all know that HMRC are under pressure to close the tax gap and clear the huge backlog of open cases. Over the past few days we’ve seen how HMRC are once again offering to settle (on their terms) with taxpayers who have implemented certain partnership based loss relief schemes.

Affected schemes include those which have sought to create losses in partnerships through reliefs such as first year allowances, payments made for restrictive covenants and specific capital allowances. GAAP partnerships are also in the offer. HMRC see these as partnerships which have sought to create a loss through the write-off of expenditure or the value of rights or assets through Generally Accepted Accounting Practice. Letters have been sent including their generic offer and responses are awaited. It’s up to the taxpayer now.

So, what to do if you receive one of these letters - what should you bear in mind?

  • The cost – by which we mean not only the potential tax benefit to be foregone but also any management and/or advisor time in managing the settlement process. Also, the impact of unwinding any structures will need to be included in any costing. The terms offered by HMRC are not overly generous, as you would expect. A quick calculation of the opportunity costs of settling is clearly vital in your decision making.
  • The risk of failure – how likely are HMRC going to be successful in challenging your arrangement should you continue with the ‘normal’ dispute process? This approach is essentially a tactic HMRC are using to cut their own costs and speed up the compliance process as required by the 2010 Spending Review. If you choose to ignore the letter (as is your right) you will continue to be covered by the terms of HMRC’s Litigation and Settlement Strategy which aims for a fair-handed, non confrontational approach. If you have a strong technical and factual position is settlement a sensible option?
  • Your current circumstances – being pragmatic, you might be in a position where you just want a quiet life or need certainty on your tax position quickly. Settlement might be more attractive under such circumstances.

Our advice? Look before you leap

Whatever decision you make you should be fully informed and up to speed with your rights as well as obligations. You might want to consult with your fellow partners but keep in mind this is your decision in the end -  HMRC have taken a potentially divisive stance by making the offer attributable to the person not the partnership.