Minutes of Consultative Committee Meeting
of 05 September 2005

Attendees

Simon Norris (Chair), Dave Hartnett, Stephen Alambritis, Philip Baker QC OBE, David Cruickshank, Teresa Graham OBE, Mike Hardwick, John Hasseldine, Francesca Lagerberg, Liz Lathwood, Chas Roy-Chowdhury, Edward Troup.

HMRC: John Shuker, Frank Jones, Michael O’Callaghan, David Stephens, Tom Evans, Simon Galloway (Secretary).

Apologies

Roderick Cordara QC, Richard Excell, Anthony Leonard QC, Adam Little, Penny Hamilton.

Contents

Design Framework for Powers, Deterrents and Safeguards

The committee agreed that HMRC’s work had followed the committee’s steer in adopting a risk-based approach that distinguished different approaches adopted by taxpayers to compliance.

There was discussion around the risk attached to “those who make mistakes.” It was suggested that the proposed spectrum approach did not yet sufficiently distinguish between those making honest mistakes and those fraudulently attempting to deceive HMRC.

The committee asked for more work to draw out a more sympathetic approach to taxpayers who make mistakes despite trying to comply, and more thought to be given as to whether it was appropriate for penalties to apply to this category of taxpayer.

The committee noted that in considering whether an understatement were due to a mistake, not taking enough care or deliberate intention, it was not appropriate to decide on the basis of only the amount of the understatement. All the facts had to be taken into account.

Increasing complexity of tax returns for larger businesses was raised as another reason for not adopting a purely arithmetical approach.

In summary, the committee endorsed the broad structure and risk based approach taken by HMRC. However, there remained objections to an arithmetically based penalty for mistakes.

Penalties for Understatements and Over-claims that do not amount to fraud

This discussion built on ideas previously considered by the committee by considering how past behaviour might influence penalties in an otherwise arithmetically triggered regime, and whether there might be a case for capping arithmetically determined penalties.

The committee considered frequency of mistakes might reflect persistent lack of care, but the complexity of some tax matters meant that mechanical approaches to classifying understatements would not be appropriate.

It was suggested that considerable thought would need to be given to what might constitute a single ‘mistake’.

It was noted that the interactions of disclosure with understatements and over-claims need to be explored further.

In summary, the committee noted that HMRC needed to do more work in this area. However it was also noted that the approach to date had been imaginative and demonstrated a willingness to look at issues in radically different ways.

Discussion then turned toward the pros and cons of capping penalties. Difficulties in assessing the impact of penalties and the likelihood of a greater frequency of mistakes made by large firms with complex tax affairs were both recognised as being complicating factors. An alternative suggested to capping penalties was allowing taxpayers more time to pay.

Human Rights Act principles were discussed. Principles stating penalties should not be excessive nor undermine the economic viability of those subject to them could be adapted and used as a kind of flexible test when considering penalties.

Penalty responses to late-filing/non-filing of ITSA returns – ‘Options’

It was recognised that a holistic approach to self assessment (SA) filing was needed, embracing encouragement and support as well as enforcement – though the focus of this discussion was the latter.

The committee remarked that HMRC proposals seemed to build on existing provisions rather than develop new ones. Concern was expressed as to whether penalties were effective in encouraging people to file ITSA returns on time.

It was noted that penalties are not the only possible solution but research shows that there is a proportion of people who do not file that cannot attribute their failure to any particular event, and penalties remain the best option for influencing this group.

HMRC noted that there have been interventions like telephone contact with targeted taxpayers that have had a positive effect but that such measures were unlikely to be successful in isolation.

Inducements were discussed in brief as an alternative to penalties, as was the possibility that the very length of time before the filing date caused taxpayers to forget about their obligations until the last moment.

It was agreed that the first fixed penalty was not always effective and that the second had limited effect. It was also agreed that a system whereby there is an initial penalty, which then moves, after a warning, toward daily penalties (with no second fixed penalty), might be more effective.

The committee was happy that further work in this area considers the authorisation process for daily penalties.

An additional suggestion concerned the possibility of removing the penalty capping, either initially or in the event of a second failure to submit a return. It was noted that 61% of returns filed late show no tax due or a repayment due. It was suggested that there might be a connection between capping and timely payment of tax.

Applying PACE to HMRC – ‘Proposals’

HMRC provided more detail for the committee, in response to their requests, on how the Police and Criminal Evidence Act could be applied to HMRC work, along with any issues arising.

On the latter, two points were raised specifically;

  • Existing tax-specific search warrant powers allow HMRC to search both premises and any persons found on the premises who it is reasonably thought may be in the possession of evidence. PACE search warrant powers do not make provisions allowing persons found on the premises to be searched – but this would be available to the police following arrest. HMRC therefore proposed modifying PACE search warrant powers as applied to HMRC in order to preserve the current situation, as it was less likely that all persons at premises being searched by HMRC officers would be arrested.
  • PACE search warrant and production orders usually only apply where there are reasonable grounds for believing an offence has been committed. Tax-specific powers include provision for applying warrants and orders where an offence is about to be committed. This is important for tax specific investigations and again HMRC proposed modifying PACE search warrant powers as applied to HMRC in order to preserve the current situation.

The committee discussed whether the above points meant it would be appropriate for HMRC to have greater powers under PACE than the police. HMRC agreed to return to the committee with examples of where these provisions would be important to investigation work. HMRC also agreed to provide the committee with information as to how police investigation work may or may not be affected by the apparent restrictions.

Discussion then took place around the operational aspects of the PACE legislation for HMRC. It was emphasised that arrests would be carried out only by a small and specialised set of officers and the only difference in applying PACE as compared to what occurs now is that on the direct tax side the police would no longer need to be enlisted for this purpose. The levels of internal authorisation would need to be reflected in legislation.

The committee expressed concern that applying PACE might be perceived as a ‘levelling up’ of ex Customs & Excise (C&E) powers to ex Inland Revenue work. HMRC denied this was the case, pointing out that nothing in operational terms would actually change and that there would be a variety of adjustments to HMRC powers, both ‘up’ and ‘down’, if PACE were applied across the board.

Writ of Assistance

The committee expressed disappointment that an electronic system for the writ of assistance could not be implemented within a short timeframe. However, they also recognised the practical limitations here and supported HMRC’s suggestion of a system of external scrutiny for the current system and proposals to trial a possible new system for the medium/long term.

Suggestions were made on the form of the trial for a future system for issuing writs of assistance including equipping magistrates with Blackberries.

Review of Civil Procedures within HMRC for Handling Fraud

The committee asked for clarification as to whether this new offence would be limited to ‘ex Hansard’ type material – in other words just applicable to cases where serious fraud is being investigated. HMRC confirmed there was no such restriction. The key feature of this proposed legislation, it was agreed, would therefore be the ‘intent to deceive.’ The committee therefore asked that the provision for applying ‘reckless’ criteria be considered carefully and removed if possible.

The committee endorsed the approach taken, and was pleased to see so many suggested areas of repeal.

Compliance Assurance: Inspections, Enquiries and Other Interventions

SN introduced the subject and asked the committee for views as to whether a public consultation on this area would be appropriate. In the meantime, some time-limited provisions might be considered for Finance Bill 2006 to facilitate the trial of new approaches.

The committee welcomed the longer time-scale this work had been placed on, emphasising the importance in getting this right. It was agreed that a full consultation would be appropriate, with particular calls for small family businesses to be included.

The committee asked that training of staff for joint visits be considered.

Taxpayer’s Charter/Bill or Rights- ‘Information’

The committee emphasised the importance and sensitivity of the issues covered. They suggested that there should be further discussion as to whether any bill/charter be aspirational or legally binding. SN suggested that it be put on a future, less full, agenda.

AOB

None

Next Meeting

Thursday 29 September 2005 at 9.30 a.m.