Review of HMRC's Powers, Deterrents and Safeguards

Contents

Background

HM Revenue & Customs (HMRC) inherited ring-fenced legislation for the taxes it administers from the Inland Revenue and HM Customs and Excise. Many taxpayers interact with HMRC across a range of taxes. But the regimes within which they do so differ significantly in design and effectiveness. The current review of HMRC's powers, deterrents and safeguards provides an opportunity to modernise areas that are not working well, such as the lack of focus on promoting behaviours that support compliance, and to address the extra costs to taxpayers that arise from different regimes.

About the Review

The work started in 2005 and is likely to continue for some time. Our aim, developed through consultation is to support those who seek to comply but down hard on those who seek an unfair advantage through non-compliance.

There are five main areas where legislative change to align and modernise rules across HMRC's tax responsibilities has been made or is being considered by the Review of Powers.

Criminal Investigation Powers

The criminal investigation strand of work was set up to align criminal investigation powers across HMRC in Finance Act 2007, and extend intrusive surveillance powers to direct taxes in the Serious Crime Act which received Royal Assent on 30 October 2007.

Finance Act 2007

Finance Act 2007 (sections 82 to 86 and Schedule 23) included provisions dealing with search warrants, production orders and powers of arrest. These apply the rules in the Police and Criminal Evidence Act 1984 (PACE) to all HMRC criminal investigations. Previously they applied only when investigating criminal offences involving former HM Customs and Excise functions. Some tax specific powers such as the power of arrest in section 72(9) of VATA 1994 have been replaced with the general powers in PACE. PACE does not apply in Scotland. In that case the Finance Act has introduced a set of powers that can be used in criminal investigations in Scotland. These changes were announced in Budget Note 78.

The development of this legislation was the subject of initial consultation published on 9 August 2006: Criminal Investigation Powers: A technical consultation. Responses to that consultation together with draft legislation for further consultation were published on 17 January 2007: Criminal Investigation Powers. A summary of responses to that consultation was published on 29 March 2007.

On 30 November 2007 an article on Criminal Investigation powers and safeguards was published on the HMRC website. The article was published in responses to commitments given during the course of the consultations on the criminal investigation powers included in FA 2007. It describes:

  • the organisation of criminal work investigation work in HMRC
  • the criminal investigation powers available to HMRC
  • the training that staff have in the use of these powers
  • the safeguards that apply to the use of the powers

A separate article describes HMRC's criminal investigation policy

The new powers came into force on 1 December 2007.

Serious Crime Act 2007

The Serious Crime Act includes provisions that will allow HMRC to use its most potent powers in all its investigations into serious crime.

Civil Financial Penalties

The penalties strand of work continues to align, where it makes sense to do so, and modernise the penalties inherited by HMRC.

Finance Act 2007 - penalties for tax errors

Finance Act 2007 (section 97 and Schedule 24) introduced a simpler and more consistent penalty system for tax errors.

The new penalties apply initially to Income Tax (including Self Assessment), VAT, employers paying PAYE, National Insurance contributions, Corporation Tax, Capital Gains Tax and the Construction Industry Scheme.

They will apply, for these taxes, to errors in tax returns or other documents, for periods starting on or after 1 April 2008, that are due to be filed on or after 1 April 2009.

The new penalty framework aims to support those who seek to comply, but come down hard on those who seek an unfair advantage from non-compliance. Penalties will be based on behaviour, with no penalty charged for mistakes where the taxpayer has taken reasonable care. Significant reductions will be available for those who make unprompted disclosures, with smaller reductions for prompted disclosures. Penalties will be charged as a percentage of the tax under-declared.

Importantly, the new penalty framework will be more clearly set out in law aiding consistency. And taxpayers may complain or appeal to an independent tribunal.

Further information on penalties for errors can be found at Take reasonable care to avoid a penalty.

Finance Act 2008 - penalties for tax errors

Finance Act 2008 (section 122 and Schedule 40) extended the new penalty framework to most of HMRC's other taxes, levies and duties. This includes Environmental Taxes, Excise Duties, Stamp Duties, accounting for recovery of student loans by employers, Inheritance Tax, Insurance Premium Tax, Pension Schemes and Petroleum Revenue Tax.

It is expected that the new provisions will cover incorrect returns for periods commencing on or after 1 April 2009, where the return is due to be filed on or after 1 April 2010.

For more information see Budget Notice 96 (PDF 66K).

Finance Act 2008 - penalties for failure to notify

Finance Act 2008 (section 123 and Schedule 41) extended and adapted the new penalty framework to cover penalties for failure to register or notify HMRC of a new taxable activity across all the taxes, levies and duties administered by HMRC, including late VAT registration. New penalties for failure to notify are expected to have effect for failure to meet notification obligations that arise on or after 1 April 2009.

For more information see Budget Notice 96 (PDF 66K).

Penalties for failure to meet obligations to file returns and pay tax on time

On 19 June 2008 the Review of Powers published the consultation document Meeting the obligations to file returns and pay tax on time.

It examines why taxpayers fail to file their tax returns, or pay the tax they owe, on time, and how HMRC can help them meet their obligations. It discusses an aligned approach to penalties - to encourage timely filing and payment - alongside the appropriate taxpayer safeguards. An Impact Assessment Meeting The Obligations to File Returns and Pay Tax on Time (PDF 199K) was published alongside the consultation document. Consultation closed on 11 September 2008.

This consultation is the next stage of the Review of Powers' work to modernise and align civil financial penalties across all of HMRC's taxes.

On the 19 June 2008 HMRC published the consultation document Interest - Working Towards a Harmonised Regime.

This consultation complements the work of the Review of Powers and explores the case for harmonising and simplifying the rules on interest charged by HMRC on tax paid late, as well as interest paid by HMRC on overpayments. It considers the principles that might underpin a modern interest regime that is clear, simple and easy for taxpayers and their advisors to understand.

An Impact Assessment Interest-Working Towards a Harmonised Regime(PDF 108K) has been published alongside this document. Consultation closed on 11 September 2008.

Compliance Checks

Finance Act 2008 - new rules for PAYE, VAT, income tax, capital gains tax & corporation tax

Finance Act 2008 introduced new rules for checking that businesses and individuals have paid the correct amount of PAYE, VAT, income tax, capital gains tax and corporation tax or claimed the correct reliefs and allowances.

The three elements explained by Budget Note 97 are:

The development of this legislation was the subject of initial consultation published on 17 May 2007: A new approach to compliance checks. Responses to that consultation together with draft legislation for further consultation were published on 10 January 2008: A new approach to compliance checks: Responses to consultation and proposals. A summary of responses to that consultation and a Final Impact Assessment were published on 27 March 2008.

Implementation of Finance Act 2008

It is expected that the new information and inspection powers along with penalties for failure to comply with these obligations will have effect on or after 1 April 2009.

Time limits for making assessments and claims will need a transitional period and so would not be expected to become fully operative until on or after 1 April 2010.

An implementation team has now been set up which will be responsible for producing Technical and Operational Guidance and a comprehensive learning package.

Debt Management Powers

On 25 June the Review of Powers published a consultation document on: Payments, Repayments and Debt: The developing programme of work. It invited comment on a range of ideas to make it easier for taxpayers to pay on time and improve the way HMRC deals with those who do not.

Safeguards

The policy and practice of the Review of Powers is that when it considers specific tax legislation, it includes a review of the relevant embedded safeguards.

These safeguards may specify:

  • the purposes for which a piece of legislation may be used
  • the conditions that must be met before it can be used
  • who may use it
  • whom it may apply to
  • any rights of appeal taxpayers may have over its use

The Tribunals Courts and Enforcement Act, sponsored by the Ministry of Justice (MoJ), received Royal Assent on 19 July 2007. Tribunals Reform will result in a combined independent tribunal for all tax appeals. The existing Commissioners and Tribunals used by HMRC will be replaced from April 2009 by the First-tier and Upper Tribunals administered by the MoJ.

To complement the review of embedded safeguards, on 17 May 2007 the Review of Powers published a consultation called 'Safeguards for Taxpayers'. A summary of responses - Safeguards for Taxpayers was published on 10 January 2008 and in response HMRC announced that it would begin the process of working with interested parties on the development of a Taxpayers’ Charter.

Publishing details of deliberate tax defaulters - Finance Act 2009

Legislation at section 94 of Finance Act 2009 will enable HMRC to publish the names and details of individuals and companies who are penalised for deliberate tax defaults: incorrect returns, failing to notify, and certain VAT and Excise duty wrongdoings where the tax lost exceeds £25,000. Names will not be published of those who make a full disclosure whether unprompted or prompted.

The legislation will be brought into effect by Treasury Order with the date that they have effect specified in the Order. The legislation is expected to apply for return periods or failures starting on or after 1 April 2010. No details of deliberate defaults committed prior to the legislation becoming effective will be published.
For more information see Publishing the details of deliberate tax defaulters - Questions and Answers.

Excise Modernisation and Compliance checks

This area of the review’s work builds on legislation in Finance Acts 2008 and 2009 which established a new compliance checking framework. It looks at what compliance checking powers are needed for excise duties and also considers modernisation of excise law more generally.

Excise Modernisation and Compliance checks

Working with Tax Agents

This area of the Review's work, announced at Budget 2009, looks at how HMRC interacts with tax agents to ensure their clients' returns and claims are correct when submitted.

Consultation

The Review of Powers is committed to consulting widely at each stage in the development of policy and legislation. Consultation includes: exploring policy options with the Consultative Committee; publishing documents; holding meetings and workshops with representatives of business and the accountancy and legal professions.

Consultative Committee

In June 2005 Ministers appointed a Consultative Committee to work with HMRC to consider options for future powers, deterrents and safeguards. Membership of the Committee is broad-based to reflect the perspective of the wider community including businesses of all sizes, employees and the tax-related professions.

The Committee continues to meet regularly and to publish minutes on the HMRC website.

Implementation Oversight Forum

The forum will oversee the period of initial implementation including the post-implementation review and benefits realisation work. The first meeting of the forum was held on 30 March 2009 and it is expected that the forum will continue to meet up to four times a year for the next four to five years.

Documents Published

Details of all documents published since the Review of Powers was announced in March 2005, including consultation documents and summaries of responses can be found in the List of Published Documents.

How to contact us

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