A notable feature of the UK tax landscape is the ever-increasing powers available to the UK tax authority, HM Revenue & Customs (“HMRC”), to challenge all forms of tax non-compliance. However, questions have arisen in recent years as to where the balance between taxpayer’s rights and HMRC powers should lie. These issues can be particularly acute where taxpayers are involved in genuine, non-avoidance motivated, disputes with HMRC.
Over the last year, a sub-committee appointed by the House of Commons Treasury Committee (the “Committee”) has conducted two reviews into HMRC’s approach and powers: the first, the Tax Avoidance and Evasion Inquiry, covers steps taken by HMRC to address public concerns around tax avoidance and evasion; and the second, the Conduct of Tax Enquiries and the Resolution of Tax Disputes Inquiry, covers HMRC’s approach to conducting tax enquiries and resolving tax disputes, with a focus on its governance and settlement processes.
On 23 July 2019, the Committee published the Disputing Tax Report (the “Report”) explaining the findings and recommendations resulting from both inquiries. A summary of the key points raised in the Report are below.
TAX AVOIDANCE AND EVASION INQUIRY
The landscape of tax avoidance schemes
During the inquiry, HMRC outlined the various challenges it faces in identifying the number of people involved in tax avoidance schemes, particularly mass marketed tax avoidance schemes. The Committee highlighted the importance of HMRC having a robust picture of the number of people that are involved in tax avoidance schemes. The Committee stated that this will: (i) ensure that HMRC puts in place efficient and proportionate arrangements to conduct enquiries and collect any tax due; and (ii) allow proper transparency and scrutiny of the performance of HMRC.
Combatting disguised remuneration schemes
The Committee acknowledged that some taxpayers had “fallen foul of anti-tax avoidance measures because they followed professional financial advice to engage in disguised remuneration schemes (or were persuaded to do so by their employer)”. However, it said that Parliament requires HMRC to fulfil its responsibility to protect public funds from tax avoidance “assiduously”.
HMRC has offered individuals who earn a salary below £50,000 up to five years to pay the loan charge owing and for those who earn a salary below £30,000 up to seven years. HMRC has also publicly stated that it will not require people to sell their homes to pay their disguised remuneration tax bills or make them bankrupt. In light of this, the Committee concluded that HMRC has now adopted a “sensible administrative approach” to the payment of large unexpected tax bills by people with limited resources. It also agreed that the Financial Secretary to the Treasury’s announcement that HMRC would not pursue the charge on individuals in “closed” tax years (in which participation in a loan-based scheme had been fully disclosed) was a sensible one.
The role of tax advisers in marketing avoidance schemes
The Committee stated that professional bodies have a role to develop standards for professional conduct in relation to tax. Given the concerns that a number of firms continue to promote tax avoidance schemes, the Committee stated that “HMRC should vigorously pursue the promoters and enablers of avoidance schemes to the full extent of their powers”.
Offshore tax evasion
As explained in HMRC and HM Treasury’s No Safe Havens 2019 Report, the Common Reporting Standard (“CRS”) has led to HMRC receiving information about the offshore interests of around three million UK resident individuals and 5.67 million accounts in 2018. The Committee stated that, given the extent of the information now available, and the international effort to reach the current level of transparency, it is reasonable to expect HMRC to make good use of the bulk data provided by the CRS.
Further, following the Finance Act 2019, the time limit for issuing an assessment has been increased to 20 years for non-deliberate offshore tax non-compliance. The Committee warned that “proper regard” should be given to the potential impact of these extended time limits and that HMRC should ensure that it is sufficiently resourced to ensure that cases are brought to resolution as quickly as possible.
Tackling offshore promoters of tax avoidance
The Committee agreed with the proposal in the No Safe Havens 2019 Report that, given that a substantial proportion of tax avoidance schemes are marketed and promoted offshore and there is currently little that can be done, HMRC should attempt to work with other jurisdictions to promote comparable standards for UK tax advice.
This recommendation is consistent with the emerging trend towards greater collaboration between global tax authorities.
HMRC's APPROACH TO DISPUTE RESOLUTION INQUIRY
The Litigation and Settlement Strategy (“LSS”)
There was a concern amongst tax advisers that increased external scrutiny of HMRC’s relationship with large businesses had resulted in HMRC adopting a more aggressive and inflexible approach to resolving disputes. The evidence presented to the Committee was that the “all or nothing” approach taken by HMRC pursuant to the LSS has resulted in some disputes proceeding to litigation where a mutually acceptable settlement might otherwise have been achieved.
There have also been concerns about HMRC’s approach to penalties in recent years. The evidence presented to the Committee was that, in some cases, HMRC has taken an unduly aggressive stance by categorising taxpayer behaviour as worse than it is during the initial stages of a dispute – for example, by claiming inaccuracies were due to “deliberate” behaviour.
However, despite the evidence, the Committee did not appear to be overly sympathetic to criticisms against the LSS, drawing a clear distinction between HMRC’s role as collecting tax liabilities from taxpayers, and a commercial two-way relationship (as in normal settlement negotiations). The Committee stated that HMRC must ensure that taxpayers are incentivised to pay the correct amount of tax at the correct time, and that HMRC’s role is to collect tax liabilities as defined by tax law. However, the Committee reminded HMRC of the importance of being “fair and consistent in its application of tax measures”.
During the inquiry, concerns were raised about the quality of HMRC guidance available to taxpayers who are in dispute with HMRC. For example, the Chartered Institute of Taxation said, “we understand the basic guidance on gov.uk is written for persons with a reading age of nine; in practice this means that the information available to ordinary taxpayers can omit important points of detail to such an extent that it is actually inaccurate.”
In response to these concerns, the Committee recommended that HMRC urgently reviews and improves the accessibility, quality and level of detail of the guidance it makes available to “vulnerable taxpayers”. It is unclear why this recommendation only proposes making improvements to guidance for vulnerable taxpayers and not all taxpayers; experience indicates that HMRC’s approach to guidance on highly technical or complex matters should also be reviewed.
Whilst the Report highlights a number of interesting and important issues, the extent to which any of the recommendations of the Committee will be implemented and lead to any meaningful change is not clear.
The Committee’s views on the LSS are not helpful but they are unsurprising. It is equally unsurprising that there is limited recognition of what the House of Lords Economic Affairs Committee highlights in their December 2018 report as the erosion of safeguards for taxpayers. Disproportionate and unjustified delays, HMRC’s enhanced willingness to assert “deliberate” behaviour on the part of taxpayers, limited rights of appeal and poor quality guidance are all problems experienced by taxpayers across the spectrum; they can serve to erode public trust in HMRC and undermine taxpayer certainty. However, on balance, it seems that the Committee’s recommendations may prioritise the protection of HMRC powers over preventing the further erosion of taxpayer safeguards.
On 22 July 2019, the Financial Secretary to the Treasury’s published a written statement in response to the House of Lords Economic Affairs Committee Report which was further evidence of the government’s uncompromising desire to protect the powers of HMRC. Despite the clear concerns raised by the House of Lords as to the effects of the far-reaching powers granted to HMRC since 2012, the government concluded that “the powers granted to HMRC since 2012 were properly scrutinised before being granted by Parliament. The Government’s view is that they remain necessary and proportionate”.
In the current climate, the apparent unwillingness of the Committee and the government to undertake a formal review of HMRC’s powers and policies to counter concerns raised about HMRC is unlikely to be well received.