CEST la vie, HMRC tells disgruntled contractors

This Committee scrutinises the value for money—the economy, efficiency and effectiveness—of public spending and generally holds the Government and its civil servants to account for the delivery of public services. The Chair of the committee is Meg Hillier, Labour.

Witnesses this week were Sir Jon Thompson, Chief Executive and Permanent Secretary at HMRC, Jim Harra, Second Permanent Secretary at HMRC, Karen Wheeler, Director General Border Co-ordination at HMRC, and Kevin Franklin, Director of Customs Transformation, also of HMRC.

Employment taxes

Following on from a separate committee session with the BBC, Caroline Flint, Labour, asked about PSCs and the BBC – and why changes to IR35 went ahead despite concerns about the timescale. Jim Harra said HMRC had to act faster than perhaps the BBC wanted because of the loss to the Exchequer of £700 million a year because of non-compliance with IR35. He said the public sector dealt ‘admirably’ with that. About £500 million in yield in the first 12 months of operation has come about from the change. Flint asked Harra to explain why he gave so long to private sector to prepare, in contrast to the suddenness of it on the public sector. Harra said there were some policy questions that had to be answered and a consultation undertaken. Why give BBC only two months to test CEST, which led a mass majority of BBC staff shifted to the payroll, which contrasted with the period before when they relied on radio industry guidance to say they were offpayroll, she asked. Harra said CEST proved adequate for most of the public sector. He said the radio industry guidance and CEST give the same result if applied correctly and there is no disconnect between them. CEST is a ‘high quality tool’, he insisted. The average rate of ‘unable to determine’ response from using CEST is about 15 per cent. HMRC is committed to improving CEST. Some BBC people were coerced to go on PSCs, said Flint. Is it not ‘harsh’ to go after them? Harra said that was a matter for the BBC and that PSCs had the compliance burden back then. Harra said it not harsh because people have to pay their tax. BBC practice of requiring PSCs was a transfer risk from BBC to their workers. The PSCs had a responsibility to pay the tax. HMRC had over 100 presenters under investigation long before 2017 changes, he said. Harra added ‘we are open to reaching a settlement as long as we collect the taxes due under the law’. He also said there is a no reason for HMRC not to come to a ‘global’ settlement with the BBC. Harra said HMRC does not use text messages threatening bailiffs to rectify tax bills, sent to people affected by the crackdown on PSCs. Hillier asked affected individuals to send the text messages to the committee, which will be forwarded to  HMRC. If a body that represents affected individuals come to HMRC, global settlements can happen, said Harra.

MP Sir Geoffrey Clifton-Brown complained HMRC was aware in 2004 about wide scale ‘miscompliance’ among PSCs yet it took to 2017 to make employers responsible. It would have been better if HMRC had acted quicker, he suggested. Harra said that since 2000, HMRC have investigated many PSCs to make the existing offpayroll measures work. In the face of widespread noncompliance HMRC eventually made the case to Government that £700 million a year in 2016/17 is too much for the Exchequer to bare.

Lee Rowley, Conservative, asked how HMRC know the CEST results are correct. Harra said HMRC will not challenge the result people get from CEST.  What should the average public sector body do in terms of recordkeeping in order to be clear about their interpretation of the CEST. Harra replied that they need systems and processes that will withstand scrutiny from HMRC, for example are they liaising with front line workers enough? HMRC have tested certain scenarios on CEST, including asking employment status schemes staff at HMRC to check the test results against doing them manually, but he could not say how many changes have been made to CEST as a result of those tests. Harra agreed to write to the Committee to give more information on these CEST tests. About 15 per cent of test cases did not give the right result during tests, he estimated. People are still allowed to use PSCs, he added.

Harra told Hillier that most of the real disputes are settled far sooner than five years, although the length can vary.

Brexit

On a possible ‘no deal’ Brexit, Sir Geoffrey Clifton-Brown, asked HMRC's Sir Jon about his main worries about border functioning. Sir Jon said the readiness of traders for the changes under day one no deal, preparedness in Northern Ireland and what approach EU member states may take to checking. Sir Jon has written three technical notices and written directly on three occasions to the 145,000 VAT-registered traders and been working through 90 trade bodies to get out to the 100,000 additional traders below the threshold. Karen Wheeler, of HMRC, said HMRC have a ‘hard push’ on trader preparedness, for example holding events in the UK and European ports. She estimated 2,000 organisations have had face to face contact with HMRC. The biggest risk comes from the 95 per cent of smaller organisations that cannot or will not come to events.  As of 22 February 46,616 EORI scheme number registrations out of potential 240,000 and the numbers of uptakes have increased since self-assessment deadline.

Harra added that HMRC announced a major simplification to help ‘RoRo’ for people who register for EORI number. About 55 per cent of HMRC’s target population believe they will be ready for Brexit but about 40 per cent have no plans to get ready, which he said is because of uncertainty. In the event that traders bring their goods to UK border and not registered for EORI or signed up for simplification, if they are controlled goods (excise or goods that need a licence) or a ‘high risk trader’, action will be taken straight away by HMRC; Border Force staff may let the goods in but the importers will be told of their responsibilities for next time and the need to catch up on any relevant paperwork with HMRC related to the goods coming in today.

It is HMRC’s priority to keep the flow of traffic going, said Harra. Wheeler added that HMRC will not be stopping every vehicle. She told Sir Geoffrey that EU member states will stop any trucks that do not comply. In the case of the Channel ports, the EU member states are keen to keep traffic flowing and they plan to do some readiness testing before Brexit Day – but HMRC do not have specifics on it. Sir Jon said some modelling has been done on prioritising some imports. He said under reasonable worst case scenario, expect a potential 80 per cent reduction in flow in a short space of time. Sir Geoffrey asked if HMRC have the legislated powers to deal with the need to get very important foods into the UK, to which Sir Jon said he thinks so. Asked what the easements are to prepare for that scenario Harra said they have accede to common transit convention and simplified procedures where any businesses registering for customs using ‘Ro Ro’ port can sign up to simplifications, if they are not using controlled goods they can keep customs declarations on their own records and entry summary declarations will be given a six month phasing in, the Government has also postponed the payment of import VAT which means no cash flow disadvantages for VAT registered businesses. Harra told Sir Geoffrey that the Government has not committed to underwriting costs.

HMRC’s Wheeler told Sir Geoffrey that Irish goods will continue to use the land bridge. If they come through the land bridge, they will go to Holyhead and cross to Dublin and then at that point subject to a controlled process.

On staffing, Sir Jon said at the end of January 2019, HMRC has got just over 4,200 staff of the 5,500 they need for a possible no deal Brexit. HMRC does not need 5,500 on Brexit Day, however, he added. HMRC have reprioritised their projects portfolio twice, such as stopping some projects and in some cases phase other customer service work such as announcing the deferring of levying of self assessment penalties until later in the year.

Asked what the worst effect on UK revenues of a no deal Brexit, Sir Jon said he cannot give the committee an estimate of that; the quantum of revenue in VAT and excise is the same as now but the variable may be on duty.

HMRC’s Kevin Franklin said that from the moment there is decision about the levels of tariffs on different sectors, it takes seven hours for HMRC to get the system ready. Sir Jon said by working with the Brexit committee, HMRC have been able to prepare for changes in tariffs unless the Government changes its tariffs late on.

Chair Hillier asked Wheeler what systems are at risk of not being ready by Brexit Day (29 March 2019). Wheeler said the tariff application is going ok but the one most visibly worrying is DEFRA’s iPass system but it is not keeping her up at night because there are two contingencies which means iPass can still be delivered.

Harra said HMRC have already identified sites for use for Dover, Eurotunnel and Holyhead if needed to ease trade transit congestion/overflow. Most are DfT provided sites.

HMRC are not anticipating a hard border on the island of Ireland or physical checks on the border between NI and Ireland. Harra was keen to say HMRC already manages fiscal risks without a land border at the moment.

Sir Jon told Anne Marie Morris, Conservative, that many amber rated issues will move to green nearer to Brexit Day when the Government’s plan is clearer.

HMRC’s Franklin told Morris that CHIEF will be ready on Brexit Day and it has already been scaled to deal with an increase in volume. CHIEF system is now running at 90 messages per second (compared to current normal of dealing with 13 messages per second). CDS was already on the cards, despite Brexit, because of the need to replace CHIEF. Asked about glitches with CDS, Franklin claimed there has not been any.

Loan Charge

MP Rowley asked for an outline of the rationale for seeking money that is 20 years old. Harra said the expected yield of £3.2billion through settlements with employers (probably 75 per cent of yield) or through contractors or through charging the Loan Charge. Harra went on to say these schemes have been going on for a long time (250 of them) and attempts to close them down often sees the market just move; what HMRC need is a measure that brings in the tax avoided and brings an end to this form of avoidance and enables HMRC to ‘clear the decks’ and go forward with a contractor industry on a less antagonistic basis. More generous terms are offered by HMRC.  The Loan Charge is a ‘back stop’, he said.

Rowley asked why HMRC were no clearer with individuals earlier. Harra said in some cases HMRC knew about a scheme for years, some where there has been partial disclosure and some designed in way to prevent HMRC from finding them – there is a whole range of scenarios.

MP Sir Geoffrey stated there used to be an old tax dictum that if you had not been notified of a tax irregularity in 12 years, that could not be subsequently collected. Harra said there are a variety of time limits in tax legislation for the number of years HMRC can go back and vary depending on culpability of the taxpayer. Harra went on to explain that undoubtabley under the disguised remuneration users there are people who have liabilities which under the normal rules, HMRC do not have assessing rights. In the settlement opportunity, HMRC have asked them to settle for all years, including those years for which HMRC do not have accessing rights. If they choose not to do that, they can settle on a formal statutory basis for the years that HMRC have assessing rights. Unless they repay the loans for the other years they will still have loans outstanding on 5 April 2019 for which they have not settled the tax and the loan charge will apply. Harra said:  “That is why our settlement opportunity asks people to pay voluntarily, so we can get everything cleared up and they do not have to suffer a Loan Charge.”

VAT

Chair Hillier said that when eBay appeared in front of the committee in 2017, it said sellers cannot operate multiple accounts if they are listing products in the same category because eBay has systems to pick up on that (which means sellers are trying to get below the VAT threshold). The committee has learnt that eBay is allowing thousands of sellers to sell exactly the same products on up to 32 accounts without taking any action against them.

Harra said HMRC are aware of that kind of issue. If a seller is overseas, there is no registration threshold that they have to register for, so splitting accounts does not get them below any threshold. If you are a UK business, there is a threshold but fragmenting businesses does not legally allow you to escape the threshold but it does mean you are an evasion target that HMRC have to find. On VAT and online sales, HMRC said measures from 2016 are bearing fruit. Sir Jon said 60,000 new VAT registrations and issued 4,800 joint and several liability notices.

The session can be watched here.

By Hamant Verma.