Modernising powers, deterrents and safeguards

Meeting of the Consultative Committee 3 July 2008

Attendees: Mike Hanson (Chair), Philip Baker QC OBE, Chas Roy-Chowdhury, Ian Menzies-Conacher, Roderick Cordara QC, Peter Gravestock, Mike Hardwick, Lawrence Longe, Mike Templeman, Tina Riches, Peter Short (HMT) and Angela Roach (Secretary)

Invitees: HMRC and HMT: Simon Norris, Rachel Button, Patrick Clarke, Jim Ferguson, Simon Habesch, Juliet Roche, Neil Johnson, Luke Liddiard, Matthew Vick, Catherine Gregory, Robina Dyall Rosanna Davies and Georgina Halligan.

Apologies: Stephen Alambritis, Derek Allen, David Cruickshank, Penny Hamilton, Professor John Hasseldine, and Francesca Lagerberg

Minutes and action points from 17 March 2008 meeting

Consultation responses:

  1. AP1: Committee's views on consultation period to be passed to Ministers:
    HMRC said the Committee's views had been passed on to Ministers.

Compliance Checks

  1. AP2: Examples to be drawn up for pre-return visits for HMRC's communication strategy.
    HMRC said these will be covered in the guidance for the implementation of the new Compliance Check Framework

Route map

  1. AP3: HMRC to take advice about publishing a 'route map' for the Review. HMRC said they are content to take this forward as Jane Kennedy, Financial Secretary, said in Public Bill Committee:

    'The hon. Gentleman rightly says that HMRC has had a traumatic year and as its Minister, I have shared every traumatic moment. He will know that it is anticipated that a new chair of HMRC will soon be appointed, followed shortly afterwards by a new chief executive. It would seem appropriate for a new leader, in these circumstances, to want to take stock not only of the work in response to the capability review and the work on the merger of two big organisations-a process which began only three or four years ago. So I would anticipate that a new chair and a new chief executive might want to look also at how powers are developed. There was a suggestion that there be a road map-that a more strategic view be taken. The chair would sensibly want to comment on that and might even wish to influence it.'

  2. HMRC quoted the Opposition front bench comment on Powers' debates (Report Stage):
    'There has been an intention to listen to the concerns of professional bodies and an attempt to allay them... I want to put it on record that the Government' approach has been sensible.'

Implementation of New Compliance Checks Framework

  1. HMRC introduced this paper emphasising that effective safeguards are central to the implementation of the new powers. It was reaffirmed that HMRC is committed to delivering the behavioural change which is key to the success of implementing the framework. It was pointed out that issues had been raised particularly about low income groups and their awareness of the changes. HMRC confirmed that issues such as this will be covered in the Communication strategy and that work had already started on the guidance. HMRC said that the first draft was due to be circulated internally next week and would then go out to an external reader panel.
  2. HMRC explained that a project leader for implementation had been appointed, who would be co-ordinating the implementation work including drafting technical and operational guidance together with a training package. HMRC emphasised that they would ensure that there were consistent messages and were keen to hear the Committee's views.
  3. The Committee made the following comments:
  • They favoured continued interaction with the guidance after initial comments had been sent in. They felt this was important as it had not been done for the new penalties for incorrect returns package. HMRC assured members that this would be the case.
  • Members wanted to be part of the external reader panel.
  • They asked if presentations would include various external Committee meetings. HMRC said there would be a team of presenters who would cater for various needs, and they would be engaging with the professions.
  • They recommended that the guidance be produced in sections to make it more manageable. HMRC agreed this would be sensible.
  • They were keen to involve the 'working together' network and have joint training between HMRC and external accountants etc as this would be a good trigger for working together more.
  • They wanted to see the draft guidance as soon as possible to have the maximum time to comment and HMRC assured them that this would be done and agreed to give the Committee contact details.
  • There was concern about the time-scale of implementation and stressed it would be better to delay to get a better quality product. HMRC said they would review the situation, and promised the Committee would be updated on implementation at a later meeting.

Consultative documents published 19 June 2008

  1. HMRC introduced the two documents - Meeting the obligations to file returns and pay tax on time and Interest - Working Towards a Harmonised Regime, the Committee was informed that early meetings had been set up with representative bodies. These meetings were to be expanded to include the employer and payroll software groups to cover the PAYE issues.

Meeting the obligations to file returns and pay tax on time

  1. The Committee made the following points:
  • It is difficult to get a feel about proportionality of tax geared penalties where someone failed to both submit a return and pay tax on time. HMRC said this is definitely an issue and important to get the structure right. HMRC also explained that HMRC is considering the interactions of penalties where the failure to file or pay may be linked to other failures by the taxpayer. For example where a taxpayer fails to notify HMRC of a new taxable activity this could lead to them failing to file or pay on time. It is important that when considered together the penalties for these failures remained proportionate.
  • The rule of thumb should be to 'cap' late filing/payment penalties. HMRC said currently a penalty for filing an ITSA return more than 12 months late was up to 100 per cent but the law did not say anything about deliberate failure. This means there are no differentials between people being fraudulent and those burying their head in the sand or having financial problems.
  • They asked if any research had been done as to the impact of any changes. HMRC said external research had been commissioned to understand the range of behaviour as to why people paid or filed late and the results should be known by the end of September. The team is also talking to analysts about an internal exercise. Here the challenge is to use data gathered by head of duty to understand behaviour at the individual level. HMRC emphasised that it was important to understand the impact of any new penalty structures. It was pointed out that there are examples in the consultation document that compare existing penalty structures with how some options for the new penalties could apply - for example ITSA penalties.
  • One Committee member said that looking at it crudely it looked as though capping was to be taken away. HMRC assured that this is not the case but that the consultation explores whether it is an appropriate safeguard. HMRC stressed the current ITSA penalties for not filing are not working as intended, half of all late filing penalties are capped. This suggests that some taxpayers are paying tax and then delaying filing as they know the penalty will be capped. A more effective safeguard is for HMRC to ensure that it only sends returns to those who need them. Another Committee member added that there should be flexibility as sometimes circumstances can drastically change - someone on a pension who could suddenly have a capital gain. HMRC stressed that they were not necessarily looking at consistency across taxes - the aim is alignment where it makes sense to do so.
  • Some of the Committee commented that HMRC needed a system that was more flexible, as taxable amounts change and it is not easy to tell. HMRC commented that returns are needed because HMRC need to check the basis on which the taxpayer has calculated their liability to tax.

Interest - Working Towards a Harmonised Regime

  1. The Committee made the following points:
  • There was no right answer in terms of the mechanics by which rates are set but agreed interest should provide recompense for the loss of use of the money to the Exchequer.
  • There was tension caused by the need for simplicity. Ideally, to be fair, HMRC should be able to track an individual's credit rating but realised this was not possible.
  • They did not feel that a single rate for both interest charged and paid would be sensible as they accepted that HMRC should not be used as a bank.
  • They acknowledged that the consultation document makes references to the special circumstances of companies within the Quarterly Instalment Payments scheme.
  • One question raised was whether the consultation was also considering the 'official rate' used when calculating tax due on beneficial loans. HMRC commented that this consultation concerned harmonisation of the interest paid and charged by HMRC but that they were in touch with colleagues regarding any further synergies that could be achieved between rates.

Debt: FB09

Flexible Payment Schemes

  1. HMRC introduced this paper, referring to the previous meeting on 17 March where developing proposals were put to the Committee. HMRC had revised proposals in the light of those views, and now had two detailed models for Income Tax and Corporation Tax. These were payment by instalments in advance of the due date and payments straddling the due date. Both could accommodate arrears of unpaid tax. More ambitious proposals for flexible payments covering a number of taxes were considered beyond reach at present.
  2. In discussion, the Committee made the points:
  • One of the problems about Direct Debit is general distrust of HMRC systems to get things right. HMRC said all the evidence/research from the Payments Council and the utilities pointed to the fact that people/businesses preferred Direct Debit, for example for paying Council tax. One Committee member added that one advantage of paying Council tax over a period is that payment can be made in arrear by instalments. A further attraction would be to offer a discount. It was recognised that both would be politically difficult for HMRC. Another member recognised that instalment plans of the type set out by HMRC are popular in practice.
  • Standing orders should be offered alongside Direct Debit. They questioned whether HMRC could not find some way to ensure that the correct HMRC references were used.
  • The Committee believed payment plans were more favourable for HMRC than for businesses, and so there had to be a balance between convenience and incentives. They did not think there was anything to recommend example 1 (Budget Payment Plan ITSA taxpayer) without offering interest. HMRC replied that the aim was to make the scheme attractive enough on its own merits, but that HMRC was currently consulting on interest generally.
  1. The Committee acknowledged that the proposal would be suitable for consultation once HMRC had reflected on their concerns.
  2. AOB: None