Modernising powers, deterrents and safeguards

Meeting of the Consultative Committee 5 November 2008

Attendees: Simon Norris (Chair), Derek Allen, Philip Baker QC OBE, Ian Menzies-Conacher, Roderick Cordara, David Cruikshank, Peter Gravestock, Penny Hamilton, Mike Hardwick, Professor John Hasseldine, Francesca Lagerberg, Mike Templeman, Tina Riches and Rosanna Davies (Secretary)

Invitees: HMRC and HMT: Rachel Button, Patrick Clarke, Jim Ferguson, Robina Dyall, Guy Hooper, Neil Johnson, Dympna Kelly, Steve Pope, Juliet Roche, Huw Stephens, Martin Stribblehill.

Apologies: Dave Hartnett, Chas Roy-Chowdhury, Lawrence Longe

Minutes and action points from 3 July 2008 meeting

  1. No action points

Financial Secretary to the Treasury

  1. Stephen Timms introduced himself to the Committee and thanked them for their valuable contribution to the Review of Powers. Assurances were given that the 'route map' and Taxpayers Charter are being taken forward.

Compliance Checks phase 2

  1. HMRC introduced a paper on Compliance Checks phase 2 and sought the Committee's initial views on it.
  2. The paper was originally sent to the Committee members for the 30 September meeting which was subsequently cancelled.
  3. HMRC updated the Committee on the developments made to Compliance Checks phase 2 work since they received the original paper:
  • Stamp Duty is not part of the FB09 package, because it has no compliance checking frame work
  • Excise will form part of the FB10 package
  1. The Committee made the following points:
  • Some Committee members referred to the SME projects and queried how the implementation of Compliance Checks phase 1 fitted in to these projects. HMRC confirmed that they are aware of the many projects spanning SMEs, and are working with the implementation team to understand the findings of projects. HMRC made clear that they understood why some people might favour holding back phase 2 until phase 1 had bedded in, but HMRC do not feel they can justify delaying improved safeguards.
  • The Committee queried whether HMRC had researched the various record-keeping requirements on businesses. The point was made that businesses keep records for non-tax purposes and HMRC should work with what is already kept. In relation to record keeping HMRC said that there had not been any specific research in this area. However they had been involved in the KPMG 'Administrative Burdens Report'. HMRC would take on the points raised and will feed comments to the relevant unit.
  • The Committee expressed concern that the planned alignment of taxes in phase 2 may have lost sight of making changes only when it makes sense to do so. HMRC emphasised that they want to ensure that there are consistent safeguards across the taxes as well as powers.
  • They expressed the view that HMRC would have to think very carefully about applying the concept 'involved third parties HMRC agreed with the Committees' concerns and explained plans to specify exact circumstances when such powers would be needed, and by whom.
  • In relation to the proposed valuation power the Committee queried whether the first-tier or higher tier of the tribunal would give authorisation. HMRC clarified that the appropriate tribunal tier for such authorisations is likely to be decided by the tribunal itself.

AP 1- HMRC to pass the Committee's views to the relevant unit on further research carried out on businesses record keeping requirements.

Bulk information powers

  1. HMRC introduced a paper to set out the purpose of bulk information powers and sought the Committee members' views as to what this review should cover.
  2. The Committee made the following points:
  • The Committee suggested that a more detailed paper outlining how current bulk information powers are used would be useful.
  • The Committee noted that bulk information powers could require organisations to incur significant costs, without recompense.
  • The Committee expressed the view that bulk powers needed to be targeted and carried out regularly, rather than requiring expensive one off processes. For example, providing information on off-shore accounts had meant significant new costs for banks.
  • All bulk information powers requests should require objective not subjective information, so that the gathering of information can be automated.
  • The committee questioned whether HMRC could really use section 17 information, because there is nothing on the return against which to ??? it. Only large differences in the figures could be questioned.
  • The Committee encouraged HMRC to research whether information from current bulk powers is being properly used. In particular in terms of identifying which taxpayer the information is about. This would help to show whether the usefulness of the data was enough to justify the costs of obtaining it. The US approach was raised as an example of where taxpayers' identifiers were used.
  • They did not believe penalty levels were relevant because companies would supply the information regardless of penalties. The cost of a penalty would always be less than the cost of providing the information.
  • HMRC thanked the Committee for these initial views, and will be taking them forward over the next year.

Late filing and payment

  1. HMRC introduced a paper to update Committee members on consultation responses from the consultation document published on 19 June 2008, and the continuing development of the models for late filing and late payment penalties.
  2. The Committee made the following points:
  • The Committee noted that the percentages, rates or levels were not mentioned which meant it was difficult to consider proposals in full. HMRC emphasised that they want to get the structure right before discussing the levels of the penalties. HMRC are working on the penalties' levels with HMT and our analysts and hope to be in a position to provide more detail on this shortly.
  • They queried whether HMRC understood the problem they were trying to address and why late payment occurs. HMRC confirmed that research has been carried out which suggests that cash flow problems are one of the principal drivers for late payment. HMRC emphasised the point that they do not want to put penalties on those that have come to HMRC and want help to pay. It is those taxpayers that do not pay and do not contact HMRC for prolonged periods that HMRC seeks to deal with as well as those avoiding their obligations. It was made clear that there were a number of different behaviours demonstrated by tax payers and a number of different reasons for late filing or payment. Any new penalty model must try to account for the full range of behaviours as far as possible.
  • The Committee raised the issues of liability in relation to when a taxpayer would receive penalties for late payment after the due date for example where there are amendments to returns etc. HMRC explained that a penalty was only payable thirty days after the due date. In general that will be the normal due date but in some circumstances extra tax is put into charge for example where a taxpayer amends a return or HMRC issues a discovery assessment. In these circumstances the penalty will be due from 30 days after the tax is put into charge. Penalties are not retrospective.
  • The Committee questioned the percentage difference between tax due and unpaid tax and commented on the overlap of penalties between late filing and late payment. HMRC emphasised that they consider late filing and late payment as separate obligations that must be encouraged by separate penalty regimes. It was made clear that when setting the levels late filing and payment must be considered together and that taxpayers will only be penalised once for one behaviour.
  • Some Committee members raised concerns in relation to the proportionality of penalties for late filing and late payment. There are two obligations - filing and payment and the penalties when taken as a whole could be quite significant. There is a severe penalty of 70-100 per cent if there is evidence of deliberate failure. How could HMRC justify a 100 per cent penalty if they could remedy the situation (for example by issuing a determination)? HMRC emphasised that gaining evidence for deliberate failure is very hard and was often linked to fraud. The proposed 100 per cent penalty for deliberate behaviour is set out to act as a deterrent and to change behaviour - it would not be used routinely.
  • The Committee expressed concern that if a taxpayer refused to put in a tax return they would be incriminating themselves and would have to pay a 100 per cent penalty. HMRC informed the Committee that full unprompted disclosure would result in a 30 per cent penalty, and HMRC hopes that disclosure reduction schemes will encourage people to come forward.
  • The Committee stressed the importance of the package being considered as a whole. The rates and levels were considered critical.
  • Some Committee members suggested that for Self Assessment nil returns are not appropriate. HMRC made the point that people would only know whether they owed any tax if they completed a tax return. In order for HMRC to check that no payment is due they need a return to check the basis of the calculation.
  • The Committee observed that HMRC should be taking steps not to require returns unnecessarily, for example where no tax is due. HMRC agreed but pointed out that sometimes returns will still be required where no tax is due, for example profits offset by losses. HMRC recognised the need to have better phone reminders and escape routes for taxpayers rather than penalties.
  • Some of the Committee referred to the 'those who can pay' section of the paper and asked whether there was any room for more time to pay such as the waiver of interest in the current climate. HMRC explained that the mechanism of time to pay is an arrangement between two parties. If arrangements are made with HMRC, tax payers should not be penalised. If however taxpayers mislead HMRC penalties will be reinstated.

Interest

  1. HMRC introduced the paper to update the committee on consultation responses and the continuing development of the models for interest.
  2. HMRC explained that in the light of consultation responses work was going forward to develop proposals for a single rate for interest paid by HMRC, based on the Bank of England base rate, with a different single rate for interest charged by HMRC. Any change in the rates would be based around rate changes announced by the Monetary Policy Committee, ie to track the Bank of England base rate. The exception to this would be the different rates for interest paid and charged on Corporation Tax quarterly instalment payments (QIPs), which was in line with the committee's thinking.
  3. The Committee discussed:
  • Whether there was scope for charging interest on late or under payments of PAYE in year as opposed to a final calculation at the year end. HMRC noted that this would mean re-calculating interest at the end of the year which could be complex for both HMRC and taxpayers.
  • The case for the differential between the interest rates on amounts charged and paid by HMRC. They also discussed the size of any differential. HMRC said that they were looking at a number of models and that the rates would be something for ministers to decide in the light of the development of the proposals.
  • the tax treatment of interest for Corporation Tax
  • The Committee urged HMRC to ensure that new businesses were signed up and paying early, possibly offering more flexible options on paying their tax as an incentive.
  1. AOB: None