This is an extract from Ladbroke’s Annual Report and Accounts 2013. Not that it matters, but it’s the bit for telephone betting and high rollers.

It makes a rather obvious point: if you’re a bookmaker, there’s a difference between the amounts your punters stake and your profit. Sometimes they win, and when they win you have to pay out.

The bit of the accounts for the UK that deals with marketed, artificial avoidance schemes shows that HM Treasury has about £14bn of exposure to the outcome of such cases. That’s the difference between the amount HM Treasury stands to collect (or avoid having to repay) if HMRC defeats all those schemes and the amount HM Treasury will lose the ability to collect (or have to repay) if HMRC loses.

This number reflects a huge backlog of unresolved cases involving about 65,000 taxpayers. Yep, that many.

That’s the background against which in the Finance Act 2014 the Government introduced its Accelerated Payment Notices provisions. HMRC has just started issuing Notices and so they’ve been much in the news. I’ve written about them here but what they do is require the taxpayer the subject of the Notice to cough up the disputed tax now pending the outcome of his fight. They accelerate the moment at which the taxpayer has to pay the amount he will have to pay if he loses. But if he goes on to win, he’ll get the money back, plus interest.

HM Treasury estimates that it will issue some £7.1bn of Accelerated Payment Notices in the next couple of years. And the 2014 Budget Policy Costings Document (page 36 for eager beavers) shows that Accelerated Payments Notices will bring in an extra £4.645bn of income over the next five years. (For the £4.645bn figure you need to read it alongside page 22 of this).

The reconciliation between the £7bn and the £4.645bn figure takes into account a number of factors: for example, not everyone who is issued with an Accelerated Payment Notice will pay or will pay immediately. Moreover, some people would have paid within that five year term anyway and so you can’t describe their payments as extra money resulting from the Accelerated Payment Notices provision.

But it’s instructive to think about what that £4.645bn figure actually represents. It’s clear that it’s not new money: Accelerated Payment Notices don’t create any new income for HM Treasury, they just advance the point in time at which a losing taxpayer would have to cough the money up. Now that’s a bit unsatisfactory because we spend it as if it’s extra income. I made that point some time ago here. But I’m a bit slow these days and I didn’t spot the real story.

When the Exchequer collects tax it accounts for that tax as revenue. Generally speaking, that’s fine. People typically don’t pay tax unless they owe it. Having received it, the Exchequer doesn’t generally have to return it. It’s not a bookmaker after all. It’s “Net Revenue” (to go back to the Ladbrokes analogy) that the Exchequer can spend.

But that general rule is not true of the £7.1bn the subject of Accelerated Payment Notices. If HMRC loses the fight, the Exchequer will have to give the money back.

Most of that £7.1bn (indeed, most of that £14bn) exposure rests on two issues: what is a “trade” and what does the phrase “incurred on” mean? The two leading cases on these issues are plodding their way through the appellate system. So far HMRC has won. But so far the cases have only come before the lower tribunals. And it’s far from certain HMRC will win on appeal. The risk of a reversal in the higher courts is no mere theoretical possibility. There was, for example, a case called Conde Nast where the taxpayer lost in every tribunal except the House of Lords (where, coincidentally, I was instructed for the first time). The Exchequer’s exposure to that case ran into many billions.

If taxpayer X wins even one of those two issues then so will taxpayers Y, Z and A. I estimate HMRC’s exposure to each of those issues will be in the mid to high single digit £bns. For scale, the amount of money expected to be raised from Labour’s mansion tax is £1.2bn.

That’s bad news in relation to the £14bn: money we might have hoped to get we won’t get. But it’s extra bad news in relation to the money paid under Accelerated Payment Notices (of between £4.645bn and £7.1bn) because HM Treasury will have already accounted for that money as revenue – and spent it – whilst all but ignoring the possibility that HMRC will lose. I say “all but ignoring” because HM Treasury does make a modest adjustment for the possibility – we don’t what because they don’t tell us – but we do know it’s modest because HMRC tell us that the main uncertainties in calculating the income from Accelerated Payment Notices don’t include the possibility that HMRC will lose on one of those two issues.

Go back to Ladbrokes. If you were a shareholder, you’d want to be pretty sure the “Amounts staked” line wasn’t being represented as “Net Revenue”, wouldn’t you? You’d want to know that serious consideration had been given by expert minds to the size of any provision that should be taken. And you’d want to know the size of that provision. Before you spent the Amounts staked?

Summary:

1. The Exchequer accounts for tax receipts as income and spends it on public services.

2. However, unlike normal tax receipts, receipts raised under Accelerated Payment Notices (expected to be some £7.1bn) carry a contingent liability to repay those receipts if the tax case the subject of the Notice goes against HMRC. Nevertheless those receipts are being spent just like normal tax receipts.

3. HM Treasury’s provision for that contingent liability is opaque and may well be many £billions too small.

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