Consultative Committee Meeting - 24 July 2006

HMRC and the Taxpayer: Modernising Powers, Deterrents and Safeguards

Attendees: Dave Hartnett (Chair), Peter Curwen, Stephen Alambritis, David Cruickshank, Penny Hamilton, Derek Allen, Peter Gravestock, Francesca Lagerberg, Philip Baker QC OBE, Chas Roy-Chowdhury

HMRC and HMT: Simon Norris, Tom Evans, Peter Short, Arnold Ridout, Rachel Button, John Burey, Luke Liddiard, Henry Bell, Simon Galloway (Secretary), Patrick Guhig

Apologies: Lawrence Longe, Mike Hardwick, Richard Exell OBE, Anthony Leonard QC, Roderick Cordara QC, John Hasseldine

Consultation Document responses summary

1. HMRC summarised the number and breakdown of responses to the latest condoc. Responses were approximately as follows:

60 external responses (although about a dozen were not relevant to the issues raised but made wider points about HMRC or tax policy)
70 additional responses from small business thanks to the help of the Small Business Service
70 internal responses by HMRC’s own staff

In addition three “deliberative research” events had sought the views from 100 “citizens” and 50 SMEs.

2. The main points reported by HMRC as emerging from external responses were:

Broad acceptance of the main themes of the consultation and of the spectrum.
Strong agreement with the proposals that the compliant should be better supported – with many such comments emphasising the need for clear advice to be easily available.
Most respondents were in favour of new interventions in principle, but there was concern over the detail of the proposals made - particularly in respect of telephone contact.
Most major representative bodies expressed dissatisfaction at what appeared to be insufficient time for HMRC to consider responses before the proposed interventions were scheduled to begin.
Widespread concern on what would constitute “taking an unreasonable tax position.”
Strong support for a reduction in penalties for those with a track record of compliant behaviour.
Strong support for a significant reduction in penalties for unprompted voluntary disclosure.
Of those who commented on criminal powers, there was a clear majority in favour of adopting PACE. There was support also for surveillance powers providing they were used in only the most serious of cases.

3. The Committee were concerned that as the recent consultation had not been at a detailed level there should be sufficient time to publicly consult on draft clauses once they were published – certainly the 12 weeks laid out in Cabinet Office guidelines. The Committee and HMRC agreed that the need for sufficient consultation time was of particular importance.

4. HMRC emphasised that the Committee were invited to discuss proposals on a consultative capacity. They were certainly not expected to endorse proposals without having seen the detail of any proposed legislation. Rather, their function is to help officials develop proposals for public consultation and to advise on potential options.

The CIOT and ICAEW commented that HMRC’s summary did not include a point raised in their individual consultation responses – namely their concerns that the review did not have sufficient independence. This made it even more imperative that detailed proposals on powers were exposed to at least 3 months consultation.

5. HMRC observed that the consultation was running along the themes its officials hear when speaking publicly or to representative bodies, namely

To come down hard on the dishonest
To be more accommodating to those who try their best to get their tax affairs right
To simplify the tax system

The same people have typically added that they will reserve judgement until they have had sufficient time to consider detailed proposals. It was the view of HMRC that nothing in the way this consultation is being run goes against any of that.

6. The Committee suggested that one area that had not been built on to date was that of safeguards, which was perhaps (along with concerns over the time that would be allowed for detailed consultation) causing unease. The Committee expressed a clear desire to be able to see ‘the whole package’ of powers and the safeguards that would apply to them.

7. HMRC accepted these concerns, but added that it was necessary to firstly decide what the department’s powers are to be before working out what safeguards would apply to them. It would not be possible to develop the safeguards first. But they would come in due course and were hugely important. HMRC added that it also recognised that the spirit in which any revised powers were implemented would be just as important as the legislation and that it would be working hard to change the way in which its staff are trained and how they operate.

8. HMRC also undertook to issue any draft legislation as early as possible, and provided assurances that this would be accompanied by explanatory text.

Summary of general principles

9. The Committee had no difficulty agreeing and endorsing the principles and conclusions of the review thus far. Again however they emphasised that this was no substitute for the detail of proposals. The Committee was keen to see detail on the type of safeguards that would operate on revised powers in particular.

10. The following more detailed points were raised:

The Committee asked HMRC to be realistic in its expectations of the extent to which people in business deal in ‘real time’, as this can vary substantially. For example, so long as basic records and documents are retained in year they will be used by accountants to draw up what is needed for the tax return after the year end. HMRC were happy to recognise the need to distinguish between circumstances of individuals, small cash trades, large businesses etc and would do so.
As far as safeguards go, some Committee members argued that there is strong support for a Taxpayers’ Charter or equivalent so this should form part of HMRC’s plans.
The Committee agreed that it would like to see assurances as to how staff using revised powers would be trained. HMRC and the Committee agreed that this would be a major factor in determining the effectiveness of any revised powers once in operation and therefore their effectiveness for the department and for taxpayers.
The Committee also commented that HMRC had described the need to “engage” with taxpayers but pointed out that those not required to submit returns (or who were not making claims) had no need for contact with the department. HMRC agreed this was not brought out and it did not mean to infer otherwise.

Penalties

11. The Committee discussed penalties for submitting incorrect returns and HMRC’s initial analysis of data coming from its large review of a sample of cases to consider what the effect a the proposed revised penalty system might be. HMRC noted that this work was only part of their much wider approach to compliance which included

support and education for taxpayers
influencing thinking and behaviour
interventions, where thinking was still developing
penalties for non-compliance.

12. HMRC were grateful for the Committee’s feedback on the emerging results and agreed to reconsider the penalty figures in more detail when the supporting analysis to inform this was fully in place.

13. HMRC and the Committee agreed that there were a number of issues applicable to large business – size of penalties, proportionality, reasonableness, reputational effects, ability to pay – that would need to be considered in more depth.

14. The Committee agreed with HMRC’s assertion in the paper that a penalty regime alone could not provide all the answers to encouraging compliance.

15. HMRC and the Committee agreed that any possible interaction with Tax Credits should also be considered in more depth.

Irish Tax Defaulters List

16. HMRC provided copies of the Irish Tax Defaulters list and some supporting information to complete an action point from an earlier meeting.

17. Committee members reported a wide variety of views from their discussions with colleagues on this issue and there was no clear consensus. The Committee expressed a desire to see some evidence that this would be effective if this were to be looked into in more depth.