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.
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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:
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.
They pointed out that the current problem areas were Legal Professional Privilege and Money Laundering.
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.
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.
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.
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.
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.
The Committee made the following comments:
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.
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:
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.
Summary of responses from the consultation (closed on Monday 17 September), bilateral meetings and workshops (on Tuesday 11 September):
Seen as an innovative idea and helpful to businesses – but want to see the detail. They agreed it was best to apply in stages.
Mixed views on passing on transaction fee, but in any event HMRC should not be making a profit.
Strong support for sensible-looking changes, as long as HMRC does not grant itself excessive advantage over other creditors.
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.
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.
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Next meeting: Monday 5 November: 14.00: HMT Boardroom: 1 HGR
