Modernising powers, deterrents and safeguards

Meeting of the Consultative Committee Thursday 25th April 2007

Attendees: Simon Norris (Chair), Dave Hartnett, Stephen Alambritis, Derek Allen, David Cruickshank, Peter Gravestock, Penny Hamilton, Mike Hardwick, Professor John Hasseldine, Francesca Lagerberg, Peter Curwen (HMT), Tina Riches, Chas Roy-Chowdhury, Ian Menzies – Conacher, Mike Templeman and Angela Roach (Secretary)

Invitees: HMRC and HMT: Patrick Clarke, Tom Evans, Rachel Button and Juliet Roche.

Apologies: Philip Baker QC OBE, Roderick Cordara QC, Lawrence Longe and Anthony Leonard QC.

Minutes and Action Points from 15 March Meeting

1. None

Phase Two of Penalties Reform – Introductory Paper

2. HMRC introduced this paper, which set out early thinking around design principles that had been developed to extend the proposed new penalty model to some of the key policy areas. HMRC welcomed comments from the Committee.

Design Principles

3. The Committee felt the formula used here was effective but a bullet needed to be added: ‘simple for the taxpayer to understand’. They liked the words for Sanctions ‘visible, understandable and set in statute’ and thought they should be used elsewhere in the document. Visible should be expanded to include ‘communication to those who are affected’.

4. HMRC explained that there were exploring 4 categories of work: Incorrect Returns for other taxes; Failure to notify/register; Regulatory penalties and Late filing/late payments but they stressed that this work was at an early stage of development.

5. The Committee made the following comments:

• A company could be registered with HMRC but not be liable to tax e.g.: flat management companies who do not have any income and therefore not liable to tax. It would seem unfair to penalise in these types of circumstances. In contrast where a company deliberately failed to notify a profitable activity they should be penalised.
• Consideration should be given to an automatic read across from Companies House information to HMRC. But the Committee recognised that this would be of limited benefit as some companies may be ‘off the shelf’ and would not identify whether they were trading or not.
• It was also unfair to charge a penalty for failure to notify when the taxpayer’s tax affairs were up to date and therefore no threat to the Exchequer.
• It was also emphasised that the self-employed were aware that there was a threshold for registering for VAT but not necessarily what it was. It was, therefore, essential that any literature set out their obligations clearly including for VAT.

6. HMRC asked if a degree of lateness in notifying would be a reasonable basis (as a proxy for behaviour) for determining the level of penalty.

7. The Committee made the following comments:

• A presumption could be built in and the taxpayer could have the opportunity to rebut that presumption if they had evidence. But if a taxpayer was, say, 5 years late a larger penalty should be considered, subject to evidence of fraud.
• On a general point companies generally regarded interest as a tax-geared penalty.
• The majority of taxpayers know they need to complete accounts and pay tax. It seemed unfair that, if their tax had been paid on time and was up to date, they might be penalised for late registration.

One-off transactions and the role of third parties

8. HMRC explained that there were a number of taxes, which involved one-off transactions like Inheritance Tax (IHT) and Stamp Duty Land Tax (SDLT). HMRC asked if the Committee thought a tax geared, behaviour-based penalty regime would work for these areas as these situations were complicated and involved more people e.g. Solicitor and/or agent.

9. The Committee made the following comments:

• Initial thoughts were that a normal taxpayer’s knowledge of IHT would be small, therefore to demand a penalty would be unfair. However, it would be different if an agent were involved, as they should ensure the facts were right.
• The nature of these taxes meant distinctions needed to be made between the new penalty model and these one-off taxes. With SDLT, tax liabilities arose when transactions happened, unlike IHT. These were also very different to IT & CT.
• They felt there were more procedural problems with IHT and believed that there was more awareness about SDLT, which involved house sales or leases. But as there were grey areas caution was needed when considering penalty regimes.

10. HMRC confirmed that the intention was to consider Petroleum Revenue Tax and Landfill Tax but only where alignment was appropriate. Thinking was were still open

11. For Phase 1 Penalties the Committee generally welcomed the changes proposed in Finance Bill 2007 which struck the right balance. It was fair that the taxpayer was the responsible party and the penalty was charged to them unless the agent was at fault and the taxpayer could not have known that was the case.

12. HMRC assured the Committee that they were only asking for views and the conclusions were still open. They then asked if the Committee had any data or research on patterns of behaviour, particularly small businesses in respect of the current tax regimes for late filing or late payment. The Committee offered various suggestions such as NAO reports and Tribunal appeals. One Committee member said they may have some information available.

AR1: HMRC to write to the Committee member

Compliance Checks: developing thinking

13. HMRC introduced this paper and welcomed comments from the Committee.

Introduction

14. The Committee questioned HMRC’s assertion that taxpayers preferred the new interventions to traditional enquiries.’ and asked what evidence did HMRC have on this. HMRC confirmed that an external company ran an event in Birmingham with small business who had participated in trials and this had come from the output of the event, which was published earlier that day.

A Cross-Tax Approach to Compliance

Alignment across taxes

Why current arrangements are not effective

15. The Committee advised that research should be used carefully. A Committee member who had attended the Birmingham event added that some self-employed taxpayers thought the tax system was complex because it involved different rules across the different taxes making it all difficult to understand. HMRC would look at this again.

16. The Committee said the large business sector received different treatment for CT and VAT but it was not a problem as different people dealt with each tax. The Committee agreed that it made sense where tax regimes were similar e.g. VAT and Landfill Tax that the same officer should be able to check both. HMRC said they would rarely want to check everything in all taxes in one go, but would target risk.

Way forward

17. The Committee made the following comments

• They agreed with the statement that ‘the Review should therefore seek all opportunities to align rules across HMRC’s responsibilities, where and to the extent it makes sense to do so for the sake of clarity, consistency, efficiency and reduced costs for taxpayers and HMRC.’
• They asked whether HMRC had looked at overseas information where mergers had happened and how they had tackled alignment and also what degree of compliance risk was managed in the UK through compliance checks. HMRC said they were developing their risk base to support compliance checks. The situation was different for foreign countries as they required tax returns quicker. The Committee stressed that there must be alignment of information powers across taxes as this would be the taxpayer’s assumption.
• The Committee questioned what was meant by ‘records’ and ‘information’ as this would need to be tightened up especially given the lack of an appeal right for looking at records. They stressed that it would be essential that any new rule should be proportionate, reasonable and statutory if imposed. It was essential that the operational side of HMRC had clear guidance and there were adequate safeguards. HMRC agreed that there were big behavioural issues to be tackled with HMRC staff and risk assessment should help curb excesses.
• There were mixed views about alignment of information powers. One member thought it would be nonsense for HMRC only to be able to use a particular document for one particular tax and have to ignore others. A taxpayer would assume there would be a joined up approach where information is used for all taxes. Another did not agree with sharing information between taxes as the information gained for example from using VAT powers could then be used in direct tax. HMRC pointed out that once information had been obtained legitimately for one tax it could be used for another.
• Most Committee members thought it was HMRC’s duty to make sure the powers were right across all the taxes, whether diluted VAT powers or CT. HMRC said for penalties they had moved to a system which was based on neither tax but was felt to be an improvement over both. The Committee said HMRC needed to be clear and reasonable about what it asked for as it was no good asking for, say, management accounts if HMRC officers did not understand them. In terms of records HMRC needed to be clear. In VAT, for example, what counts as connected with goods and services?
• The Committee believed that powers needed to be used proportionately, reasonably and in an understanding way with proper safeguards to stop unreasonable requests from the operational side of HMRC. HMRC agreed that training and guidance would be vital.

Non-business taxpayers

18. The Committee were unsure about further requests for information and added that polite requests with timely replies and statutory cover with safeguards was the right way to go.

Unannounced visits

Way Forward

19. The Committee made the following comments:

• They discussed whether approval of an entry warrant should be the responsibility of a Special Commissioner, who had the tax knowledge to do this, or a magistrate, as suggested at the last meeting, who would have experience of issuing such warrants across a range of circumstances.
• They stressed that unannounced visits were acceptable provided they were not used for routine matters. HMRC gave an assurance that this power would not be used for routine work, subject to confirmation on random enquiries. HMRC stressed that there would have to be very good reason and it could not be a trader who simply got something wrong. The Committee thought an unannounced visit would be justified if it was clear that a trader’s figures were suspiciously different from other similar traders.
• The Committee pointed out that it was important to differentiate visits and asked at what point would a visit to ask questions end and a search begin. HMRC pointed out that S20C could be used as a civil warrant, although repealed for criminal purposes in Finance Bill 2007. A Committee member pointed out that magistrates authorise many civil entries, such as for the utility companies.

Arrangements for large corporates:

20. The Committee asked about HMRC requiring information concerning Quarterly Instalment Payments (QIPs) as it was difficult for large businesses to get QIPs right. HMRC assured that penalties would not be used.

21. HMRC agreed that only a small proportion of large businesses who paid QIPs but it was not always easy for HMRC to ask simple questions and receive answers. HMRC assured the Committee that they would use a light touch.

AR2: HMRC would take into account the Committee’s comments

Time Limits

22. The Committee found this a difficult area and thought current arrangements with limited error and mistake relief unfair. In Canada there was a 3 year limit on assessments and changes, plus tax authority discretion to pay claims up to 10 years.

23. A Committee member found the current 1year rule in VAT odd. It had been introduced as a ‘quid pro quo’ for the 3year cap. They felt the current 3 year limit was ineffective and the Exchequer would gain from raising the limit to 6 years. The current misalignment with the statute of limitations caused difficulties, as legal action over a debt could change the VAT position, but a trader would be unable to reclaim the VAT from HMRC.

24. The Committee agreed that the 20 year time limit for negligence was too long and the one-year rule would be useful for direct tax. They did not feel that this package, albeit with removal of the enquiry window, would leave less certainty for taxpayers. HMRC said that the 1 year rule needed clarifying.

AR3: HMRC acknowledged more work was needed on time limits and the 1year rule.

Safeguards

25. The Committee agreed a Code of Practice would be a good thing and should be published before legislation. They felt that core safeguards should go into legislation. HMRC confirmed it would be for more specific material that would not go into legislation, such as how an officer was going to start a check.

Penalties for Incorrect Returns and Criminal Investigations Consultation Documents: responses.

Penalties for Incorrect Returns

26. One Committee member said the ICAEW had a number of concerns about the FB07 legislation particularly over ‘HMRC thinks’ and would be sending a response to HMRC. Some Committee members felt this term created the wrong impression and that appropriate safeguards were undermined. HMRC assured that nothing had changed and each reference gave a right of appeal. HMRC confirmed that they had received a consistent message and were listening. But Ministers had not made any firm decisions.

Criminal Investigations

27. HMRC confirmed whilst the draft Statutory Instrument allowed HMRC to share material found during a search with other agencies, if an HMRC officer found drugs or fire arms during a search they would be passed to the police.

Next meeting:Wednesday 13 June 2007 14.00 until 17.00 in HM Treasury Boardroom:1 Horse Guards Road - CANCELLED.