Modernising powers, deterrents and safeguards

Meeting of the Consultative Committee Monday 16 October 2006

Attendees: Dave Hartnett (Chair), Stephen Alambritis, Roderick Cordara QC, David Cruickshank, Peter Gravestock, Penny Hamilton, Mike Hardwick, , Francesca Lagerberg, Chas Roy-Chowdhury, Peter Short (representing Peter Curwen (HMT), Mike Templeman and Angela Roach (Secretary)

Invitees: HMRC and HMT: Rachel Button, Patrick Clarke, Simon Norris, Tom Evans and Juliet Roche.
Apologies: Derek Allen, Philip Baker QC OBE, Peter Curwen (HMT), Richard Exell OBE, Professor John Hasseldine, Anthony Leonard QC, Lawrence Longe and Ian Menzies- Conacher.

Minutes and Action Points from 7 September Meeting

There were no outstanding action points.

Emerging thinking on compliance assurance: presentation

HMRC described the emerging model of a compliance assurance regime covering IT, CT, VAT and PAYE.

The objectives were:

  • Proportionate and flexible response for HMRC
  • Reduced compliance cost burden
  • Appropriate safeguards for taxpayers
  • Easier HMRC access to routine documents and information
  • A regime that was not tied to completed returns
  • Compliance with non-tax requirements especially the Human Rights Act

HMRC presented how they saw the intervention powers operating from someone’s first encounter with the tax authority through to submission of tax returns.

Two points were emphasised:

  • the Review of Powers is looking at overarching safeguards as a separate piece of work and
  • the use of existing terminology/language was a barrier to understanding what a new regime would look like.
    Action: HMRC would welcome ideas from the Committee for alternative terms to use.


“Registering” with HMRC

HMRC described proposals to enable them to check whether someone had correctly entered the tax system and the Committee raised the following issues:

  • HMRC explained there were two types of situations where someone should register: those people who had come into the tax system for the first time and those who had started a business. Wider issues had not been covered and it was agreed that more work was needed.
  • The Committee did not like the term ‘access’ and favoured that this should be confined to more serious cases. HMRC agreed that it was important to get the language right.

Pre-Return Interventions

HMRC explained that pre-return interventions were presently used for indirect tax. To have the same power for direct taxes would enable HMRC to gain an early understanding of the business but such a power would not be used in every case. .

The Committee felt that any decision should await the results of the current intervention trials and made the following points:

  • Checking business records, assets and transactions was agreed to be an HMRC function.
  • Interventions for policy assurance:
    • The Committee were uncomfortable with interventions for this purpose because of the financial and management implications for the taxpayer.
    • Avoidance: HMRC explained there were occasions when they needed to look at particular transactions relating to Avoidance Schemes and arrangements, where taxpayers felt the disclosure regime did not apply

Action: HMRC agreed to take away two issues which needed further work:

  • Any circumstances when HMRC believed the need for policy assurance justified the costs and inconvenience to the taxpayer; and
  • The nature of the intervention when HMRC’s risk assessment indicated a serious risk to the Exchequer.

Pre-return Inspection Power - How this might work

The Committee stressed that a taxpayer should have the right to challenge an inspection of business premises particularly in relation to the plausibility of the information that HMRC held and the strength of the risk assessment. .

HMRC assured the Committee that the overwhelming use of any inspection power would involve pre-arranged visits and commented that, again, the use of existing terminology had led to understandable misunderstandings. A
distinction needed to be made between domestic and business premises that was aligned with the Human Rights Act.

Action: HMRC agreed to look at how access can be obtained to records held on business premises without jeopardising the trust between taxpayer and HMRC which underpins effective tax administration.

Post Return - areas to consider

HMRC confirmed where the mode of contact with a taxpayer was via telephone, email or letter and an agent was involved they would be the first port of call. This had already been done for the Intervention pilots. The Committee said that HMRC should consider the risk to reputation when deciding on an intervention. Also they questioned if one power would fit all interventions. HMRC confirmed that the set of rules they were seeking to develop would underpin all interventions. The Committee pointed out that there needed to be some fast-track arrangement to ensure that appeals could be heard quickly.

Authority/Appeal

The Committee favoured an external appeal authority. However they questioned whether there should be a right of appeal for any inspection power. They thought that not having one for any inspection power could put the taxpayer in a difficult position by forcing him or her to incur a penalty before they could appeal. They also highlighted that it may be disproportionate for a taxpayer to provide a large volume of papers and were concerned that such a request could amount to a fishing exercise. The Committee favoured a full right of appeal in such circumstances. However, they recognised that there could be occasions when this could lead to a loss of evidence but recommended that such situations should be catered for through a separate power.

Timing

The Committee were asked about the period during which HMRC should be able to intervene and how HMRC’s ability to intervene should be regulated?

The Committee made the following points:

  • The 12 month enquiry window limited the period within which businesses can have an ongoing dialogue with HMRC that enables issues to be settled as they arise. 6 years to assess would not be a problem for large business but this was a problem for most small businesses given the implications for retention of records.


Action: HMRC confirmed that they would consider what applied in other tax administrations; a period of 3 years to assess, except for fraud; and the added value for HMRC in having an additional 3 years.

The Committee agreed that the ability to come to early binding agreements was sensible.

HMRC confirmed that the emerging model for compliance assurance would be subject to full external consultation.

Penalties for incorrect returns: update

HMRC updated the Committee on further work on the developing model for a penalty structure for incorrect returns. The results demonstrated that the model should support the proposed new regime’s aims and principles.

Comparing the results of the old regime to the new model some Committee members were concerned about how HMRC would distinguish between ‘failure to take reasonable care’ and ‘mistake’. The difference in interpretation could encourage taxpayers to appeal which would increase the administrative burden for both the taxpayer and HMRC. Clarification was also needed over ‘materiality’.

HMRC assured the Committee that the definition of ‘reasonable care’ was still under discussion. Representative bodies who attended the Workshop had agreed to provide comments by 31 October. They confirmed that CBI representatives had been asked for their views on a form of words for ‘materiality’. Comments were welcome from the Committee.

The Committee expressed some concern about a taxpayer receiving a penalty when professional advice was wrong and sought reassurance about how a charge in respect of third party failures would operate.

HMRC confirmed that separate maximums for each behaviour would be set in legislation and that appeal tribunals would be able to consider mitigation. . The Committee felt that the power to mitigate should be included in legislation.

HMRC explained that the attendees at HMRC’s recent Workshop on the penalty proposals were very supportive of suspended penalties, as they felt they turned a sanction into an incentive.

HMRC confirmed with the Committee that they broadly supported the new approach to penalties. Suspended penalties would be welcome but should be set in statute with appropriate appeal rights.

The Committee questioned where tax credits and NICs fitted into this work. HMRC confirmed these areas would be considered during the second stage of this work.

Action: HMRC would send the Committee material from the 4 October Penalties Workshop with representative bodies plus the illustrative behaviours and glossary of terms on which attendees agreed to provide comments by 31 October.


Next meeting: 11:00 Friday 17 November 2006 in Room G/14.