Modernising powers, deterrents and safeguards

Meeting of the Consultative Committee 5 November 2007

Attendees: Dave Hartnett (Chair), Derek Allen, Philip Baker QC OBE, David Cruickshank, Penny Hamilton, Mike Hardwick, Professor John Hasseldine, Francesca Lagerberg, Mike Templeman, Ian Menzies-Conacher, Tina Riches

Invitees: HMRC and HMT: Simon Norris, Tom Evans, Huw Stephens, Matthew Sawyer, Rachel Button, Juliet Roche, Martin Stribblehill, Pamela Mulholland, Robina Dyall, Stephanie Allistone and Peter Thorpe (Secretary)

Apologies: Stephen Alambritis, Roderick Cordara QC, Anthony Leonard QC, Peter Curwen, Lawrence Longe, Peter Gravestock

Minutes and Action Points from 19 September Meeting

The minutes of the previous meeting were agreed and there were no outstanding actions.

Implementation of new penalty regime: Update

The Committee was appraised of the work undertaken in preparation for the implementation of new penalties under Finance Act 2007, for return periods starting 1 April 2008 onwards where the filing date is on or after 1 April 2009.

Detailed technical guidance has been drafted including illustrative examples and a glossary of key phrases such as:

  • reasonable care
  • deliberate, both with and without concealment
  • prompted and unprompted disclosure

Key highlights

  • A panel of experts will be asked to comment by December on implementation plans and guidance.
  • Aim was to publish on the internet before April 2008.
  • Suspended penalties will be explained in detail.
  • A programme of communication events will be announced including attending conferences and seminars, publishing internet articles and external advertising.

Key messages from HRMC

  • Make sure you take reasonable care when preparing returns to HMRC.
  • If you think there may be a problem with your taxes, contact HMRC.
  • Accountancy firms will be given material to help further convey messages that HMRC want
    • to encourage disclosure
    • businesses to improve their VAT processing systems
    • to deter repetition of errors in VAT returns, which even if disclosed may now be penalised.
  • Our aim is to encourage behavioural change.

HMRC business processes: areas for consideration

  • IT support - including Management Information and Security
  • authorisation processes
  • accounting and quality monitoring
  • supporting officers to make correct and consistent decisions

Training

  • Work is underway to prepare training material for 15,000 officers.
  • HMRC is exploring opportunities to share training with professional and accountancy bodies.
  • Will be delivered nearer the implementation date in early 2009.

Building in evaluation of systems and results

HMRC are reviewing:

  • requirements for internal Management Information Systems
  • ways to deliver more effective quality assurance and impact measurement
  • ways to measure the impact of the changes on customer behaviour patterns

The Committee recognised that HMRC is heading in the right direction, noted the progress so far and observed that there is further important work ahead.

Rep bodies offered their support to maintain contact with external businesses and welcomed the idea of joint training. HMRC were keen to share advice widely with responsible organisations and to work together with them to educate members.

An update on Criminal Investigation Measures

HMRC reported on progress in implementing criminal measures.

The Serious Crime Act (SCA 2007) extended the powers in RIPA (intrusive surveillance) to include former Inland Revenue responsibilities. The Act received Royal Assent on 31 October 2007 and we are liaising with Home Office about the implementation date.

  • These powers were needed to protect Tax Credits and tax repayment system from organised fraud.
  • Only senior HMRC officials can authorise surveillance or applications to carry out intrusive surveillance. This is now a statutory safeguard.

Finance Act 2007

  • Draws on the Police and Criminal Evidence Act (PACE) for HMRC’s criminal investigation powers in England, Wales and Northern Ireland.
  • Repeals tax-specific provisions.
  • Introduces a new schedule of investigation powers for HMRC into Criminal Justice (Consolidation) Act (Scotland).
  • Significantly reduces the number of people in HMRC with powers of arrest. Previously 20,000 staff had powers of arrest whereas in criminal investigation only 1,500 and in frontiers work 4,500 now do so.
  • Modest numbers of staff in only four Directorates can use PACE. Namely Criminal Investigation, Detection, Risk and Intelligence and Legal and Governance.
  • A limited number of designated senior officers can authorise use of PACE powers.
  • A statement will be published on HMRC internet about policy and practice for the use of PACE powers, controls and safeguards before they come into use.

    England, Wales and Northern Ireland
  • Orders to be made to bring the change into effect from 1 December 2007 – will be layed week commencing 5 November 2007.

    Scotland
  • A different process applies in Scotland – Rules of Court made by the Lord President (Act of Adjournal) – but the new laws will also come into force 1 December 2007.
  • HMRC is undertaking an extensive staff training programme to prepare for using the new provisions.

    Cross-border issues
  • There are provisions which allow for effective cross-border use of the powers. For example, a warrant issued by a court in Scotland can be executed in England if it is endorsed by an English court and vice-versa.
  • In response to concerns in consultation we are working with the three prosecuting authorities on guidance on the criteria which determine in which jurisdiction a prosecution is brought.

Revised Proposals for Compliance Checks

HMRC updated the Committee about progress made in developing ideas for compliance checks. In general there was support for the suggestions subject to the following comments:

  • The use of telephone enquiries, when handled properly would be welcome. But used inappropriately or where staff are not properly trained it can do more harm than good.
  • On record keeping and retention, particularly for small businesses, the main issue is to consider where and by whom the records are kept.
  • A reference to reasonableness and some form of appeal should be included in each element of any new power.
  • Achieving the right result at year end was seen as more constructive than being prescriptive about systems.
  • The retention of a one year enquiry window was welcomed.
  • The Committee would like to see some form of independent review panel considered; HMRC welcomed views from Committee on what an external review panel might look like.
  • HMRC need to do more in relation to the effect of the CTSA enquiry framework on large businesses – an opt-out from the enquiry framework may be appropriate but work would be undertaken with large business representatives to understand the issues.
  • The Committee advised that HMRC can expect to receive feedback about unannounced visits.
  • Time limits for enquiries - particularly were there to be a change to four years for VAT, must be balanced against the cap on taxpayer claims and should include reciprocity where enquiry windows extend those limits or revisit closed years. In making extended time limit provisions 'grounds for reasonable belief' should be required as a statutory condition.
  • HMRC did not envisage altering the scope of S20(8A) this year and the intention is to restate the existing provision so that it was not stranded if the rest of S20 were to be repealed.
  • Concern was expressed about unannounced visits to business premises for inspection other than as part of a criminal investigation. HMRC noted that there are instances where exceptionally tax may be at risk and in those circumstances we would want to have the right to visit unannounced. HMRC plans to consult further using examples to explain when and where these powers might be used and what safeguards would be put in place.
  • Is there a clear definition of the sort of business books and records to which access would be required? HMRC would want a clear statutory definition on which to base requests for specific documents or information.
  • HMRC agreed that clarification was required about the nature of records in general, particularly if access to records is intended to be in real time. 'Records' has a very broad meaning. The proposed new inspection power is intended to cover the basic information which businesses would need to retain for their own purposes. HMRC would want to ensure that there would be a right of appeal to safeguard against requests for supplementary or older information.
  • Has HMRC considered whether it needs external authorisation to proceed with visits without notice?’ HMRC will take into consideration Article 8 HRA which states that judicial approval ought to be in place and noted that without specific legal 'rights' when HMRC makes an unannounced visit to a business they may currently legitimately be refused entry. HMRC said that the HRA would not be breached as there is no plan to legislate to be able to force entry in these circumstances.
  • Can the time frames for discovery and failure to take reasonable care be combined as there may be very little difference between the underlying causes? HMRC said that the time limits were proposals and the any decision would be affected by a number of factors including the cost of implementation.
  • The issue of Legal and Professional Privilege was raised. HMRC said they had no plans to change the current rules for Legal and professional privilege, that was the province of the Ministry of Justice.
  • As far as checks and enquiries were concerned are they to be treated separately? HMRC confirmed that they would be distinct.
  • There was concern that HMRC’s view of what constituted adequate records would impose a burden on compliant businesses. It is not necessarily the case that incomplete is the same as inaccurate. HMRC confirmed that its interest is in making sure people are keeping sufficient information to enable accurate end of year returns. HMRC would hope to work with the profession on guidance about record keeping requirements.
  • More detail would be required about the use of and time limits envisaged for these powers and more thought should be given to the alignment of claims and assessments during an enquiry.
  • Does HMRC advise individuals as to why a check or an enquiry is to take place? HMRC experience was that if we did so the level of settlement tended to be higher. Best practice would be for an officer to disclose why he or she was visiting. HMRC is also being far more open with Rep bodies about risk areas.

Working towards a harmonised Interest Regime

HMRC explained the background to a review of interest, including the differences in the interest regimes between the former Departments and the number of different rates applied. Proposals were discussed for the simplification of interest payment regimes to achieve a more transparent and accountable system, for example by applying interest on tax paid or repaid late across all of HMRC’s business, thus reducing the number of rates and simplifying methods of calculation. It was proposed that any new regime should be based on the principal of restitution. Any new regime would require legislation and the review time table should align with that of the ongoing Powers work. The intention is to consult next Spring/Summer but implementation will depend on when IT changes can be made.

Next steps are to understand the potential impact on HMRC and its customers. The committee discussed the direction and current focus of the review and the outline proposals. The Committee generally agreed with the proposals stressing that the priority should be to identify those areas where it may be inappropriate to charge interest, eg - tax credits.

MT had prepared written comments explaining why a different interest regime had been introduced for Quarterly Interest Payments (Q.I.Ps) and why it should be retained. IMC suggested that a range of rates should be applicable depending on the business type, with the main principle being appropriate commercial restitution. MH thought that interest ought to be based on preventing unfair commercial advantage.

Further issues discussed included:

  • whether it was right to make a link between interest and general customer behaviour
  • what is restitution and what is compensation?
  • if there are likely to be long-term IT issues then HMRC should consider making manual ex gratia payments
  • the application of two different rates of interest (receivable/payable) and the arguments either way. Attractive rates might attract overpayment from those wishing to use HMRC as an investment bank, and some saw nothing wrong with this. HMRC certainly needed to understand when it was being used as a bank in order to inform treasury and the government
  • the different rates currently applied often reflect the fact that tax has been taken out of the equation
  • concerns were raised about the complex knock on effects of the application of incorrect penalties, and the compound effects of multiple overpayment
  • was a mechanism needed to correct mistakes given there was no appeal facility?
  • HMRC should look at how interest might be compounded
  • was the link to the BoE base rate right for all. It may be the right link for individuals but for corporations LIBOR might be more significant.

DH thanked the committee for the lively debate. HMRC will consider the points made.

Any Other Business

None.

Next meeting: Wednesday 6 February: 14.00: Auditorium : 1 Horse Guards Road