Modernising powers, deterrents and safeguards
Meeting of the Consultative Committee 6 February 2008
Attendees: Simon Norris (Chair), Derek Allen, Philip Baker QC OBE, David Cruickshank, Peter Gravestock, Mike Hardwick, Lawrence Longe, Mike Templeman, Ian Menzies-Conacher, Tina Riches, Angela Roach (Secretary)
Invitees: HMRC and HMT: Rachel Button, Patrick Clarke, Jim Ferguson, Simon Habesch, Neil Johnson and Juliet Roche
Apologies: Stephen Alambritis, Roderick Cordara QC, Penny Hamilton, Professor John Hasseldine, Francesca Lagerberg
Minutes and action points from 5 November 2007 meeting
None
Late payment penalties
HMRC introduced this paper which set out early thinking on late payment penalties. These were options for reforming and aligning these penalties. It was also recognised there were genuine problems for some people to pay their tax liability which needed to be addressed. The Committee was asked for their views about the degree to which a new penalty structure might influence behaviour and whether they were aware of any external research.
The Committee made the following points:
- Some members were not convinced that the paper put across an adequate case to change the late payment system. If a taxpayer was deliberately paying late and gained an economic advantage then this implied the interest was not high enough. They stressed more evidence was needed.
- Fixed penalties should be at a level to give an incentive to pay on time, not punitively high. But for those who were unable to pay there should be another form of treatment.
- One member suggested that to change attitudes there should be small ‘carrots’ rather than a penalty. For example, some taxpayers have cash flow problems or are confused about what their obligations were, eg the illiterate and elderly. These groups needed to be considered.
- There were also other ways HMRC could encourage and improve payments on time by way of instalments and sending out regular and clear statements which people understood in advance of the deadline.
- They stressed that there should be different remedies as a ‘one size approach’ did not fit all. People had different requirements and issues to cope with.
- A Committee member highlighted that one of the problems was that a person’s first encounter with HMRC could be the £100 Class 2 NIC penalty for failing to notify self employment within three months. HMRC said that the recent penalties consultation document had proposed abolition of this.
- The Committee liked the proposal for ‘time to pay’ arrangements as it recognised genuine payment difficulties which needed to be considered. Also that HMRC should be working towards encouraging taxpayers to come forward where they were not able to pay on time. HMRC stressed the new business payment arrangements would be put in place straight away.
- Overall the Committee favoured a fixed penalty followed by a tax-geared penalty because it seemed more flexible. However, they recommended that there should be a low entry point and further penalties should not be charged if time to pay arrangements were entered into and honoured.
HMRC recognised that penalties by themselves would not work and that different payment arrangements needed to be considered. HMRC added that they did not consider interest as penal but as recompense for the loss of the use of the money to the Exchequer or the taxpayer.
Models for a penalty for late payment of In-Year PAYE
The Committee made the following points:
- They noted that on-time payment of in-year PAYE was a significant problem for HMRC.
- Option 1 - To file a short monthly statement setting out how much tax is due and the basis of the calculation. They were concerned that having interim statements would create greater administrative burdens which would be criticised. Credit cards would be a good idea but there was always the risk of misunderstandings occurring.
- One member thought there should be discounts if all payments were made during the year. But if a payment was missed the discount would be lost for that year.
- Another member suggested increasing the level at which people could fall into quarterly payment (currently £1,500) so that more people could pay quarterly. HMRC said when this was introduced there was very little take-up as the compliant wanted the discipline of making monthly payments.
- They recommended that HMRC work with different groups.
- It was suggested that there were alternative options like HMRC having more contact with taxpayers so being more proactive rather than relying on penalties which were perceived negatively. HMRC said their position was different because, unlike other creditors, they could not stop further debts from arising. A Committee member raised the fact that one of the problems was that HMRC was no longer a ‘preferential creditor’.
- Option 2 - Extend the existing surcharge for large employers to other employers (possibly to medium-sized businesses) - The Committee thought surcharges worked for large business and suggested that for medium-sized businesses the provision of 250 employees might be reduced to 50. HMRC said extending this provision would be considered.
- Although there were concerns about the feasibility of the options put to them, overall the Committee favoured Option 2 as the best.
Taxpayers’ Charter
Following the announcement on 10 January 2008 about the development of a Taxpayers’ Charter, HMRC informed the Committee that work was starting to understand what taxpayers and claimants may want out of a Charter. Consideration was particularly needed for those who were unrepresented whose needs are likely to be different to those who were represented.
HMRC would be working with interested parties both internally and externally.
The Committee made the following points:
- lessons should have been learnt from the last document that was developed in the Inland Revenue
- it must be meaningful
- some members thought it should be on a legal basis which would enforce the rights of the taxpayer but were not sure about obligations
- it should be an aspirational document underpinned by rights and safeguards in legislation but it should not be cluttered
- there should be some measure of performance and it should be respected within the department
- they highlighted that HMRC dealt with a wide spectrum of taxpayers from Tax Credits recipients to large corporations so there was a question as to whether there should be separate charters that would be more accessible and meaningful to particular groups
Consultation documents published on 10 January 2008
A New Approach to Compliance Checks
The Committee made the following points:
- Para 3.24: They were concerned about the ability to inspect and recover documents pre-return which would be prior to the end of the accounting period for CT returns. It was emphasised that CT was a ‘period tax’ not a ‘transaction tax’ and the right to have access to information ahead of the return could cause problems. They were particularly nervous about supplementary information. HMRC said it would not be a right to obtain information which was not meaningful. These issues would be addressed in the guidance. The Committee were concerned that issues would not be covered in law and questioned whether leaving it to guidance meant that in practice proper operation of the power would be down to staff training. HMRC suggested internal pre-authorisation would give reassurance. HMRC needed to look at PAYE and VAT risks, the shadow economy and those unrepresented taxpayers, therefore actual usage would be very different across different groups. Some members thought it would be better to look at past ‘accounts’ rather than what is going to happen after the year end.
- The Committee expressed concern about visits to business premises without prior agreement which amounted to a search. They had raised this issue at a previous Committee meeting. They stressed there were rights to privacy in EU law and to enter premises there must be external rather than internal authorisation, for example from the Special Commissioners or a magistrate. HMRC reassured the Committee that this power was akin to VAT visits and not a power to force entry or search but a power to visit. The person would be presented with a Code of Practice on arrival. The Committee were unhappy that this power was being extended more widely. They questioned why the taxpayer could not be notified in advance and also expressed surprise that external review would present HMRC with a greater resource problem than internal review. HMRC agreed to look again at the HRA concerns. HMRC also clarified that the power only allows statutory records to be examined and is not an ability to search for additional records.
- The Committee highlighted that the definition of Legal Professional Privilege (LPP) would not cover foreign lawyers. Case law made clear what information could not be obtained through LPP (para 17 of new legislation) which was reflected in S20 TMA 1970. HMRC stressed the intention was not to remove anything from S20 and thought there would be no need for anything to go in tax law because LPP was an overriding principle. The Committee emphasised that it was better set out in law as it avoided any misunderstandings.
AP1: HMRC to follow up concerns regarding visits without prior arrangement to business premises
Penalties Reform: The Next Stage
Committee members were concerned that the third party provision (para 1A) was too wide, particularly the term ‘withholding information’ rather than ‘deliberately false information’. In particular, whether HMRC would be able to charge a penalty on a third party who deliberately withheld information from the person causing that return to be incorrect. Banks, for instance, may deliberately withhold information from a person because of confidentiality or for non-tax commercial reasons. Some Committee members questioned whether they had seen this provision before. HMRC assured the Committee that they had seen this provision at a previous meeting in relation to Inheritance Tax (re Executor) and Excise duties (re warehouse keepers). At that point it would not have been known to OPC who had drafted a generic provision. HMRC would consider the Committee’s concerns.
In addition members asked what was happening with ‘reasonable excuse’. HMRC confirmed that the intention was to have a single provision which was in the consultation document published on 10 January. The fact that there were separate and slightly different provisions between indirect and direct taxes meant it was essential that the final wording was right before bringing the two together.
AP2: HMRC to consider if the drafting needs tightening on withholding information
Payments, repayments and debt
The Committee were concerned about ‘related entities’ in particular issues around the need for securitization in groups. SH said that HMRC were thinking mainly of companies in groups and partners & partnerships, but reassured the Committee that this proposal was likely to be dropped.
AOB
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