Modernising powers, deterrents and safeguards

Meeting of the Consultative Committee Thursday 19 April 2007

Attendees: David Richardson (Chair), Derek Allen, Philip Baker QC OBE David Cruickshank, Peter Curwen (HMT), Peter Gravestock, Penny Hamilton, Mike Hardwick, Francesca Lagerberg, Lawrence Longe, Mike Templeman, Ian Menzies-Conacher and Angela Roach (Secretary)

Invitees: HMRC and HMT: Rachel Button, Patrick Clarke, Tom Evans, Simon Norris, Juliet Roche, Robina Dyall and David Halsey.

Apologies: Stephen Alambritis, Roderick Cordara QC, Dave Hartnett, Professor John Hasseldine, Anthony Leonard QC and Tina Riches.

Minutes and Action Points from 25 April Meeting

None

Record-keeping requirements

HMRC introduced this paper which set out HMRC’s initial thinking on what the statutory requirements for taxpayers to keep personal and business financial records might be. There was recognition of the association between incorrect returns and poor record keeping. HMRC stressed that they needed to be clear about how these financial records should be best expressed so that taxpayers knew what the requirements were. It was proposed for IT, CGT, CT, PAYE, NICs and VAT requirements, to align where it made sense and for there to be a statutory requirement. Another issue to address was whether it was necessary to specify additional records, eg - to comply with requirements of EU law, and whether this should be done in secondary or tertiary legislation. The question put to the Committee was whether this would provide sufficient certainty?

The Committee agreed with the alignment of record keeping requirements for IT, CGT, CT, PAYE, NICs and VAT where it made sense to do so.

The Committee gave the following views:

Tests for record keeping requirements

They agreed with the basic principles particularly being ‘flexible to taxpayers’ circumstances’. They thought ‘the minimum adequate to meet tax obligations’ was otiose as the SA regime already required a taxpayer to keep certain documents. They also questioned why, for example, a taxpayer should keep a tax dividend certificate which they felt would be of no interest to HMRC. The Committee emphasised that retention of such records should not be imposed as it would be an added burden to the taxpayer. They stressed that sufficient records should be kept to provide a correct tax return but were against a long list of requirements which would be onerous. They suggested that the list should be co-ordinated with other non-tax records and that disclosure of any documents should be in line with Article 8 HRA - ‘any disclosure of information should be justifiable and proportionate’. Also, a taxpayer must be able to see the relevance of keeping non-financial records for their tax return.

Present position

They pointed out that the current problem areas were Legal Professional Privilege and Money Laundering.

Records and Information

They emphasised that non-financial records should be relevant and proportionate and added that there should be no obligation for information beyond financial records. They queried keeping documents for major contracts and in relation to transfer pricing. HMRC confirmed failure to keep information about a contract had a maximum penalty of £3000. The Committee thought it was important to take into account other penalties.

They felt there had to be a clear dividing line between what should be seen as records and what should be accessed only by information powers.

Expressing the requirement

They said that a generic requirement backed by guidance provided a sensible framework. There was a mix of views from the Committee about using tertiary legislation, one member thought it would cause problems with IR20. Another thought issues arose when tertiary legislation needed to be changed. To be effective copies of the original tertiary legislation should be retained and made available. In practical terms there would be difficulties in specifying individual transactions given the sheer volume. The Committee felt the provision of some non-financial information via a day book could be particularly useful for understanding a corporate’s affairs. The Committee stressed that the legislation needed to be short and clear otherwise taxpayers would not read it.

Compliance Burden

The Committee applauded the fact that the Review was looking at ways of reducing the admin burden. The Committee agreed that it was a good opportunity to trawl through legislation which covered record keeping requirements to find out what records should be kept and those which were no longer required. One member added that this would fit in with the Chancellor’s remit of ‘Simplification’. One Committee member suggested a single populated tax return which the taxpayer could have access to. Another added that the way forward was to store information electronically as this would reduce costs. The Committee favoured consideration of how long records should be kept. One member clarified that VAT obligations were too wide which often lead to misunderstandings. It was pointed out that management accounts were not necessarily helpful for HMRC as they concentrated more on information like bonus payments rather than trading profits.

The Committee agreed that record keeping and retention was required for tax reasons but they were also required for, for example - property records or other regulatory requirements. Electronic retention reduced the burden for accountants but did not resolve all the issues particularly around accessing what had been stored. One Committee member warned that there should be caution over holding information in electronic format as the ‘language’ used to read documents could change and is often forgotten, causing access problems. Another Committee member stressed that records should be in a format that could be easily read.

The Committee believed current requirements about which formats were acceptable by HMRC, eg - paper or electronic, were not well understood.

Time limits for compliance checks

HMRC explained that currently compliance checks worked in two different ways - checks governed by closing time limits for PAYE and VAT and checks governed by opening time limits for CT and IT. The question posed to the Committee was whether or not there should be just one requirement?

The Committee agreed that there should be a single system and it was important that there was symmetry in time limits to bring more uniformity for both sides. The Committee pointed out that with simplification there would always be winners and losers. The Committee said it would be better to align at three years or six years so long as there was fairness in handling and changes were fully considered to reduce the need for subsequent repair.

Penalties Update

HMRC gave the Committee an update on the progress being made in reviewing HMRC penalties with a view to extending the Finance Act 2007 provisions more widely to other taxes and duties. It also covered the possibility of extending and adapting FA 2007 provisions to penalties for failing to notify a new taxable activity to HMRC.

The Committee referred to the FA2007 provision for incorrect returns and asked if PRT was covered. HMRC confirmed that tonnage tax was covered under CT provisions but PRT would be covered in FB09.

The Committee endorsed the wider alignment of penalties for incorrect returns to other taxes.

Failure to notify new taxable activity

The Committee made the following comments:

  • ‘Positively influencing behaviour’:. They highlighted that there was nothing in this section about encouraging the less knowledgeable taxpayer.
  • Options for the future: One Committee member could not see the rationale of a stepped approach and questioned whether penalties were needed at all for failure to notify if interest was applied. .Different considerations applied where the behaviour was deliberate. They added that the only unfair commercial advantage gained they could see was for VAT, with non-registered traders. It was also pointed out that the longer someone failed to notify the harder it was for them to come forward with the knowledge of a potential 70-100 per cent penalty. HMRC confirmed that these rates would only be applied for deliberate cases and at present failure to notify for direct tax had no behavioural test and was up to 100 per cent penalty.
  • HMRC asked the Committee if evidence of underlying behaviour could be found for failure to notify as it seemed more difficult to prove than for incorrect returns. The Committee said a taxpayer should not be penalised if it was a mistake and also the taxpayer should be able to appeal if they had informed their agent. The Committee stressed that a taxpayer who had not notified should not be in a better position than one who had notified. The big issue was the loss of tax. Also special consideration was needed where technically there was a failure to notify by one person, but the tax had been paid by a different person, eg - in respect of a ‘Permanent Establishment’. The Committee emphasised that there needed to be a distinction between failure to notify due to fraudulent behaviour and other failures.
  • HMRC also mentioned the £100 penalty for failing to register as self employed for Class 2 NICs which could be a taxpayer’s first encounter with HMRC. It was charged even though there was no or little tax lost. The Committee highlighted the difficulty in determining the start date for a new business, especially when a hobby developed into a business. Such a fixed penalty was a disincentive and encouraged people to join the hidden economy.

Penalties: Reasonable Excuse for Failure to Meet an Obligation

HMRC informed the Committee that as HMRC was moving towards a more streamlined and aligned approach to penalties across the range of its responsibilities the defence of ‘reasonable excuse’ needed to be addressed. This paper described the merits of moving to a single legislative formulation for reasonable excuse.

The Committee generally agreed that there should be a single legislative formulation for reasonable excuse. But one Committee member thought HMRC should go with the direct tax approach rather than the indirect tax one. They added that reliance on a third party should not qualify for ‘reasonable excuse’ particularly in avoidance cases which are complex. It was also pointed out that there was still confusion on the VAT side particularly over what was reliance on a third party and what was ignorance of the law.

Recent consultations: Compliance Checks consultation, oral update on Safeguards and Debt Management which closed on 17 September

A paper detailing the responses on compliance checks was provided to the Committee.

HMRC gave the Committee a summary of responses on the following consultations:

Safeguards

Respondents accepted that safeguards were generally not embedded in tax legislation but some was in other legislation or within HMRC practice. There were concerns about a perceived trend to legislate intrusively then modify the application of the law through guidance or codes of practice.

  • Several calls for HMRC to do more to provide support and education to taxpayers including to understand and secure their rights.
  • Welcomed focus on tax legislation, some suggesting HMRC could do more to highlight and explain it.
  • Suggestion that HMRC’s responsibilities under the Disability Discrimination Act needed wider coverage
  • Looking at HMRC complaints handling:
    • it was felt that HMRC officers were unnecessarily reluctant to apologise
    • current arrangements for redress were inadequate
    • complaints should be handled by a separate office, especially as some taxpayers felt that making a complaint would have an adverse influence on future handling of their affairs
    • the complaints process itself was over-complicated
    • by and large respondents felt complaints were taken seriously but that staff had difficulty recognising the impact that delays or errors had on taxpayers
    • it might be timely to consider the role of the Adjudicator
  • The appeals process was thought to be accessible for tax professionals but not ordinary taxpayers. Support for a more formal off line disputes resolution process, but not extension of the VAT process which was seen as slow and ineffective.
  • HMRC published guidance was praised, but internet material attracted criticism.
  • Scope of rulings should be widened and taxpayer should be entitled to assume agreement in absence of a reply.
  • General support for a taxpayer’s charter to include taxpayers’ obligations, rights and safeguards. Set a standard against which HMRC could be measured. Should be drafted to ensure better adherence by HMRC officers to existing codes of practice.

Debt management

Summary of responses from the consultation (closed on Monday 17 September), bilateral meetings and workshops (on Tuesday 11 September):

  • Green and early consultation. Still analysing detailed responses across all consultations. Some big responses still to come.
  • Strong support for the idea of modernising HMRC’s debt management, for greater HMRC support for those who want to pay but temporarily cannot, and for looking at all of a taxpayers dealings with HMRC.
  • Concerns about HMRC’s ability to deliver what it proposes, both operationally (staff numbers and quality) and with computer systems.

Set-off between taxes

  • Accepted in principle – some want it only for VAT, others to extend wider across Government. Must only be used where debts or repayments are established beyond doubt or error.
  • From the workshop, a strong view that set-off should only be at taxpayers’ choice.-this would go against thrust of simplification and reducing contacts.
  • Generally don’t like the idea of extending set-off to related entities.

Flexible payment schemes

Seen as an innovative idea and helpful to businesses – but want to see the detail. They agreed it was best to apply in stages.

Direct attachment

  • Some see as suitable modernisation for the 'won’t pays', but general concern about impact on struggling businesses, and particularly about HMRC errors.
  • Must only be for established debts.
  • Essential to have the right safeguards – and many prefer to keep prior Court involvement.

Paying by credit card

Mixed views on passing on transaction fee, but in any event HMRC should not be making a profit.

Tax Clearance certificates

  • Almost universal dislike – even at such a high level.
  • Doubts about HMRC resources and ability to deliver.

Small debts through PAYE

  • Sensible, so long as only used for established debts and proper appeal rights.
  • Some concern from about impact on most vulnerable.

Alignment of enforcement powers/ award of costs in litigation

Strong support for sensible-looking changes, as long as HMRC does not grant itself excessive advantage over other creditors.

The Committee made the following comments:

Tracing missing persons caused concern in principle without a Court Order and questioned why a power was needed when there was Section 20. HMRC wanted a quicker procedure.

Tax Appeals against decisions made by HMRC

HMRC thanked Committee members for their support of the tax tribunal review. HMRC explained that they had a close liaison with the Ministry of Justice (MOJ) to ensure a smooth transition. One of the major issues was handling ‘internal reviews’ of HMRC decisions before cases went to a tribunal hearing. The thinking behind this came partly from the Safeguards consultation document where it addressed ‘informal disputes resolution’.

The Committee said that not everyone had faith in internal reviews and favoured taxpayers having the option to go to the Tribunal anytime during the internal process. HMRC wanted to maintain a route to resolve issues through discussions, as done at present. The Committee stressed procedures needed to be made clear to unrepresented taxpayers and that they should have an opportunity for an internal review. They stressed that reasoned cases should be put to the Tribunal with a summary of issues/nature of the problem clearly set out. The Committee thought further issues could be considered like the role of mediation and a simpler appeal based on consideration of the file. It was important that appeals did not fall between HMRC and MOJ. There was concern about the training of staff and quality of their knowledge, particularly in relation to interpretation of the law. It was important that cases were settled quickly and that serious cases should not be deferred from going to litigation.

The Committee did not understand why there were different rules about deferring payment of tax in dispute in different taxes and why harmonisation was not possible. HMRC would look at this issue.

The Committee supported the extension of time limits for appeals as practical and sensible.

AOB

None

Next meeting: Monday 5 November: 14.00: HMT Boardroom: 1 HGR