Modernising powers, deterrents and safeguards

Meeting of the Consultative Committee 17 March 2008

Attendees: Simon Norris (Chair), Derek Allen, Philip Baker QC OBE, Peter Gravestock, Penny Hamilton, Professor John Hasseldine, Francesca Lagerberg, Mike Templeman, Chas Roy-Chowdhury, Tina Riches, Angela Roach (Secretary)

Invitees: HMRC and HMT: Rachel Button, Patrick Clarke, Jim Ferguson, Simon Habesch, Neil Johnson, Luke Liddiard, Stephanie Allistone

Apologies: Mike Hanson, Stephen Alambritis, David Cruickshank, Roderick Cordara QC, Mike Hardwick, Lawrence Longe, Ian Menzies-Conacher, Peter Short (HMT)

Minutes and action points from 6 February 2008 meeting

Compliance Checks: Visits to business premises

  • AP1: HMRC to follow up concerns regarding visits without prior arrangement to business premises

Civil Penalties: Third Party provisions (Schedule 40 Finance Bill 2008 para 1A)

  • AP2: HMRC to consider if the drafting needs tightening on third party penalty

Both of these action points were covered in item 2 ‘Consultation document responses – updates’.

Consultation document responses – updates

HMRC introduced this paper highlighting the initial views from responses received on the three published documents the deadline for which was 6 March 2008. The details were as follows:

Thirty-eight individuals or organisations responded to one or more consultations. The totals of written responses to each document were:

  • Penalties Reform: The Next Stage: 24
  • A New Approach to Compliance Checks: 22
  • Payments, Repayments and Debt : 21

HMRC pointed out that there were two main issues which went across all three consultations that caused concern. They were:

a) More safeguards should have been included in primary legislation as opposed to putting them into guidance or codes of practice.
b) Concern was expressed about the implementation of the new legal frameworks and HMRC’s ability to ensure that their staff were properly trained, recognising that they would need to work differently.

HMRC explained for item 1 that more safeguards had been included in the legislation than was previously the case. However, the nature of some issues meant it was too difficult to put them into primary legislation: guidance and Codes of Practice needed to be clear and capable of change to reflect changing practice if they were to be effective.

The Committee made the following points:

  • Some Committee members had received feedback which criticised the six days from the end of the consultation deadline and the announcements made in Budget 2008. The impression was that decisions had already been made as there seemed no time to analyse responses. For some people it felt like it was the first time they had been consulted about proposals, particularly about visiting business/private premises. HMRC pointed out that development of these proposals had been a long process involving formal consultations, workshops and dozens of face to face meetings. Many changes had been made as the proposals were developed in the light of comments made.
  • They emphasised that their concerns were about how the perception of the process could influence its credibility. They emphasised that it needed to be clear that responses are valued and considered. HMRC recognised the perception issues but highlighted that a lot of initial views had come from the consultation meetings during the consultation period. HMRC were therefore in a position to react very quickly to final responses – the changes made should demonstrate that HMRC had reacted to what had been said.

HMRC described responses for each of the consultation documents as follows:

Penalties

The extension of penalties for incorrect returns was generally welcomed and described as ‘sensible’, ’fair’, ’reasonable’ and ‘appropriate’. Some had noted that Tax Credits had not been included and suggested they should be. HMRC said the Tax Credit penalty regime had recently been reviewed and amended to broadly reflect the principles described in the consultation document.

HMRC highlighted AP2 from the last Committee about penalties: HMRC to consider if the drafting needed tightening on ‘withholding information’ for the third party provision. The scope of the penalty on third parties for deliberately falsifying or withholding information from a taxpayer, had been narrowed so that HMRC had to demonstrate that the third party did so intending to cause a tax return to be inaccurate. Also HMRC added that guidance on ‘reasonable care’ would be expanded to deal with the different taxes, levies and duties.

For failure to notify the proposals were broadly welcomed and particularly the idea of tying the penalty to tax lost as a result of a failure and the removal of the £100 fixed penalty for non-registration for Class 2 NIC. Also as a result of the consultation the proposed legislation had been modified to allow a reduction to nil, where the taxpayer makes a full unprompted disclosure of failing to notify a new taxable activity, within 12 months of when tax first became unpaid as a result. Consideration of a suspended penalty, in light of future behaviour, had been postponed until next year to consider alongside reform of late filing and late payment penalties. It was also pointed out that there would be a need to ensure that where there was both a failure to notify and consequential late payment, HMRC should not doubly penalise the taxpayer. Almost everyone who commented supported a single reasonable excuse provision.

Compliance checks

In general respondents applauded efforts to design an aligned framework for record keeping, information powers and time limits across IT, CT, VAT, PAYE and NICs. Aligned time limits were particularly welcomed but acknowledged that there were concerns about rights to make visits.

AP1 point from the last meeting: HMRC to follow up HRA concerns regarding visits without prior arrangement to business premises. Following a review, the legislation on the right of entry has been redrafted. HMRC officers retain the right to enter premises, which would reassure taxpayers that they were doing the right thing in giving HMRC officers access to premises, and protected them against claims from third parties or other regulatory bodies where access had been given inappropriately. But the power would not now have a sanction attached and this would be made clear when arranging visits. Separately, there would be an externally authorised power of entry. Where entry was refused after such authorisation had been given the taxpayer could become liable to the financial penalties. HMRC did not expect to use this power extensively.

The Committee acknowledged that the external authorisation was a big improvement. But they remained concerned about unannounced visits generally, particularly to business/private premises and questioned what the purpose was without a sanction. HMRC stressed for a home visit there must be a business use involved. They added that changes had been made so that there was internal authorisation for ‘unannounced visits’.

The Committee made the following points:

  • The Committee questioned whether records required to be kept would be enshrined into primary legislation as the Budget Note was ambiguous. Also whether HMRC was going to be flexible about records being kept as its officers appeared to have a preconception that records must be kept up to date all of the time particularly by small businesses. They emphasised that this was not always the case as there were times of absence or sick leave. They added that they were concerned that if documents were kept in a bottom draw or a ‘shoe box’ and not written up, then HMRC would assume that the business was ‘dodgy’. They highlighted that prime documents should be kept and the computer should only be used for preparation of the return.
  • HMRC reassured the Committee that the record keeping requirement in primary legislation was at a high level, being records required to complete an accurate return. More detail would be in regulations and guidance. They said that there would be circumstances when prime documents would need to be examined in pre-return checks, including businesses in the hidden economy. The Committee said that one-man businesses were unlikely to have such papers. They stressed it was essential that HMRC staff ‘put their commercial hats on’. HMRC said that selection of cases would be risk based and agreed that it was essential for HMRC to think about the nature of the business. They added that it was important to get the right learning out to staff about what to expect from different businesses and that one size did not fit all.
  • There were concerns about incomplete records and whether HMRC would try to advise on recording keeping. Also if HMRC were looking at business records pre-return they would be penalised because HMRC did not understand the nature of the business. HMRC assured the Committee that a business visit would be to cover specific issues and not to do the job of an accountant.
  • The Committee asked what would happen if a business kept adequate but imperfect records: would they be penalised? HMRC stressed this would be where ‘reasonable care’ came in and was important. The Committee added that the perception was that businesses would be penalised so HMRC’s media exercise would have to be managed carefully. The Committee recommended that examples should be publicised to show where and why HMRC would make pre-return visits. HMRC agreed that examples would be given to Press Office.

Payments, repayments & debt

Most responses favoured the broad thrust of the package and the general aim of removing inconsistency. There was support for the proposals for setting off repayments against debt but concern about insufficient safeguards in the legislation. Draft legislation would be changed to make explicit HMRC’s undertaking that when making a set-off HMRC would honour the assignment of repayments to charities under the SA Donate Scheme. Payment by credit cards was welcomed and collecting debts through the PAYE system was generally viewed as favourable. HMRC advised that the latter measure was being deferred to allow more time to ensure that the correct processes were in place.

General comments made by the Committee:

It was an opportunity missed to examine Legal Professional Privilege (LPP) which both the USA and Australia had reviewed. They believed it was only a matter of time before it was tested in the EU Courts.

They favoured the publication of a ‘route map’ to help with the general understanding of the Review. It would make it easier for people to see how all the pieces fitted together. HMRC said that Ministers were the ultimate decision makers and what the Review did in any year would be subject to their priorities.

AP1: Committee’s views on consultation period to be passed to Ministers
AP2: Examples to be drawn up for pre-return visits for HMRC’s communication strategy
AP3: HMRC to take advice about publishing a ‘route map’ for the Review.

Late filing Penalties and Interest: working towards a harmonised interest regime: update

Late filing

HMRC introduced both papers saying as these papers interacted so it seemed sensible to discuss them together. The issues on late filing were very similar to those on late payment: there was a need to increase clarity and simplicity and for HMRC to influence behaviour. The interest paper gave an update on the progress being made on working towards a harmonised interest regime with the intention to consult. HMRC was looking on interest as recompense rather than as a penal sanction.

The Committee made the following comments:

  • The Committee emphasised that if a fixed penalty was used followed by a tax-geared penalty with no safeguard, the sanction could escalate to become disproportionate. They were particularly concerned for people like the elderly who were not normally liable to tax. They suggested that there was a need to explore those groups where tax was not normally due and consider appropriate safeguards for vulnerable groups, for example those with impaired vision who were unable to complete a return. HMRC acknowledged that issuing returns was inevitable largely an automated process due to its scale and mistakes were made. They added that HMRC needs to explain why they required a tax return even where no tax is payable or no repayment due and why there was a penalty even if not received.
  • It was stressed that those who had only just missed the filing deadline should receive something that was proportionate. Care was needed to ensure that charging penalties did not drive people with small incomes into the hidden economy. They highlighted that there had been situations where someone had received a failure to notify penalty which was higher than someone who had been fraudulent. HMRC needed to concentrate on effective penalties for those people at the ‘deliberate’ end of the spectrum.
  • One Committee member was in favour of not having a late filing penalty at all and did not think it was justified. HMRC stressed that returns were needed to enable both taxpayers and HMRC to calculate the tax due, to be risk assessed and to enable HMRC to find out information so that calculations for repayments could be done or information about employees obtained. By having a time limit it sent out a clear message to people. A deadline had an effect on behaviour and a sanction increased that effect. HMRC added that returns were encouraged through advertising and targeted phone calls, which reduced the numbers not filed, but that still left a large number of Self Assessment returns filed late.
  • The Committee highlighted that it wanted to change behaviour so they favoured ‘carrots’ not just ‘sticks’ and were concerned about those people who were not represented. Consideration needed to be given to the different compliance requirements.
  • Feedback from some smaller firms of accountants thought the ‘Adam Hart-Davis’ advertising campaign was vital and its success was reflected in the timing and amount of information coming through to accountancy practices. HMRC said one of the messages they were picking up was the level of the late filing penalty was too low to have a real impact on behaviour. The Committee said this area was very complicated but a clear cut off date was useful.
  • They favoured a system that was simple and easily understood. The more sophisticated the system the harder it was for taxpayers to understand. They recommended looking at other counties to find out the effects of their late filing penalties. HMRC said some analysis had been done but to find out the effectiveness would be difficult because systems and local conditions varied significantly.

HMRC asked the Committee if there was anything else that could be done apart from sanctions:

  • Telephone calls to people and perhaps informing the taxpayer ahead of how much tax they owed, suggesting the end of September. This would give them an incentive to file on time.
  • An acknowledgement if a return was filed on time.

Interest Review update

The Committee asked what was happening about ‘penalty interest’ for aggregates levy and insurance premium tax. HMRC confirmed that these would be considered as part of the work on late payment penalties.

The Committee thought there should be a clear financial rate and preferably one rate for both HMRC and the taxpayer. HMRC recommended carrying out international comparisons.

Conclusion

The Committee favoured that the late filing and late payment should be published as one consultation document.

Payments, repayments & debt

HMRC updated the Committee on the issues shared with the Committee at the 19 September 2006 meeting and included in the consultation document published on 25 June 2007.

AOB: None

Next meeting: Thursday 3 July 14.00: G/16: Ground Floor: 1 HGR