Compulsory insurance, not regulation, the way to tackle avoidance scheme promoters, says HMRC chief
The House of Commons Treasury Committee held a session on HMRC’s Annual Report on Monday 7 December. The witnesses were HMRC CEO Jim Harra, Penny Ciniewicz, Director General, Head of Customer Compliance at HMRC and Jonathan Russell CB, Interim CEO, Valuation Office Agency.
Topics covered during the session included self-assessment and corporation tax returns and deadlines, Making Tax Digital, regulation of tax agents and customer performance and staffing issues at HMRC. Inevitably coronavirus support schemes and HMRC’s customs responsibilities in relation to Brexit also featured.
Among other things, Jim Harra suggested the cost to UK business of completing customs declarations because of Brexit will be about £15 billion, suggested more people could have been helped under the Self-Employment Income Support Scheme had Making Tax Digital progressed faster, and explained HMRC’s poor recent performance at answering calls from the public. He explained what HMRC wanted from ‘the tax agent industry’ and why the government’s current focus for tackling avoidance schemes is through making professional indemnity insurance compulsory. But, he added, on state regulation of the tax advisory industry: ‘Perhaps one day we will go there’.
Brexit and customs
On Brexit, HMRC are focusing mainly on movements of goods into the UK, rather than movements of goods leaving the country. HMRC consider the latter the responsibility of the Department for Transport and the Borders and Protocol Delivery Group.
Jim Harra assured an anxious Committee Chair Mel Stride, Conservative, that he remains confident that HMRC’s inland sites to enable transit procedures for customs will be ready for 1 January 2021 despite some ‘minor [construction] works’ outstanding. Harra explained that HMRC will use Ashford Sevington and possibly Ashford Waterbrook along with Ebbsfleet and North Weald, but HMRC do not intend to use Manston unless Operation Brock is invoked.
Harra said the Goods Vehicle Movement Service (GVMS) will go ‘live’ this week as planned, although some ports and carriers will not be ready to use it, and HMRC are working on contingency plans for this. In the case of GB-EU movements, that would involve them using a traditional transit procedure, which he says is not desirable. Harra said: “Of the 23 that have said they intend to use GVMS, there are about eight where the level of confidence that they and their carriers will be ready to use it on day one is not where we want it to be.”
Harra explained that HMRC are not in a position to give people moving goods from GB into Northern Ireland the complete certainty they would like because the tariffs that could potentially apply to those goods movements are linked to whatever a free trade agreement between the UK and EU would contain. But the free Trader Support Service (TSS) should enable traders to comply with their obligations. However, he said for most of the customs arrangements, the procedures that businesses will need to follow, whether they are moving goods into GB from the EU or moving goods into NI from GB, are the same whether there is a further agreement between the UK and the EU or not.
Harra said capacity in the intermediaries market has increased ‘significantly’ and is sufficient, but HMRC may need a further increase in the market for the introduction of full import controls at the end of June 2021.
Rushanara Ali, Labour, is concerned about a report back in July in the Financial Times that suggests that British companies trading with Europe will have to absorb a post-Brexit bureaucracy burden and fill in an extra 215 million customs declarations at a cost of about £7 billion a year, according to government officials. Harra said ‘that is a figure I recognise’ and that is largely unaffected by the outcome of negotiations with the EU about the free trade agreement, because, whether or not there is a free trade agreement, customs declarations will have to be made when UK leaves the customs union. He told Ali that, in 2017, there were 54 million customs declarations made in the UK. After the end of the transition period, he expects that to go up to 265 million. That will not apply straightaway, because import controls are being staged in over six months, but that is the rate at which HMRC would expect to see them from July.
He said has not been party to any talks about using the military in relation to COVID-19 vaccine movements across borders.
Harra told Labour’s Angela Eagle that on the UK side the cost to business of completing customs declarations is about £7.5 billion, but it is double that if you consider the costs on the other side, making a total of £15 billion.
Deadlines for tax returns
Harra told Felicity Buchan (pictured thanks to Parliament UK), Conservative, that HMRC cannot help people with their tax debt unless they submit a tax return by 31 January 2021. Harra said: “We want to encourage the maximum number of returns to be submitted, but we stand ready not to penalise people who need more time.”
When pressed by Buchan, Harra said the £100 penalty is not automatically sent to late filers: “they are not just churned out; we do have to make a decision within the Department about whether and when to issue those.” HMRC received representations in the last few weeks about what the likely rate of compliance will be (“we are in discussions with professional bodies to make sure that we understand all of that “) and will keep the matter ‘under review’ until closer to 31 January 2021.
Harra said no-one should be having to pay a penalty if they have a good reason why they were not able to comply. “But it is much better to contact us in advance to explain that you will not be able to comply because HMRC agents can change the due date on our systems for when they expect the return, which would then in turn suppress the issue of the penalties.”
Turning to corporation tax, Harra told Buchan that, while Companies House has extended its deadline for filing company accounts by three months, HMRC are keeping the corporation tax return deadline under review. If a company is unable to compile its accounts or unable to compile its tax return, then it should get in touch with HMRC, says Harra. If a company is going to struggle to pay its tax debts, the first thing HMRC need to do is establish what the liability is, and then HMRC can make new arrangements, he said.
Buchan asked if, come January, when HMRC are reviewing this, they could treat self-assessment differently from corporation tax? Harra replied that it would be possible for HMRC to apply a blanket approach in one and a case-by-case approach in the other but they have made no decisions about that.
Coronavirus economic support – errors, exclusions and transparency
Rushanara Ali asked why it is okay for HMRC to make ‘a £3.5 billion error’ in terms of administration of the Coronavirus Job Retention Scheme (CJRS), ‘while others [many self-employed people] are continuing to suffer and have had no support for months’. Harra replied that the error Ali is talking about is not administrative error by HMRC, it is error or fraud by people making claims. In the case of CJRS, HMRC made a planning assumption that it could be five per cent to 10 per cent (because the general tax gap is 4.7 per cent and HMRC sees 4.9 per cent error and fraud in tax credits, for example). HMRC have already recovered a significant amount and also taken criminal investigation action, he said.
HMRC’s compliance chief Penny Ciniewicz joined the discussion, saying HMRC know from experience that the funds that would be lost to criminal attack are very hard to retrieve, which led HMRC to prioritise designing in controls to prevent those criminal attacks in the first instance. In the case of CJRS, HMRC rejected claims worth £12 million as part of their risking process. The levels of criminal attack are very low, somewhere in the region of zero percent to 0.6 per cent in the case of the CJRS. Around 5,700 investigations are open at the moment, she said. Around 2,000 of those relate to investigations resulting from reports to the fraud hotline.
Harra said HMRC could have helped more people safely if they had had more up-to-date information about the self-employed. In the case of employees, HMRC invested five or six years ago in RTI. HMRC get information basically every time an employer runs a payroll, so they have very up-to-date data, he said. For the self-employed, HMRC are often getting data months after the end of the tax year. It is not current, and that limited what HMRC could do to help self-employed people.
There is an increasing debate about whether, if we had more data about people, we could be more flexible and help people when they need to be helped, said Harra. “One lesson from COVID-19 is that we traditionally see the tax system as a system that takes money off you, but it can be harnessed to give money to people when that is necessary. It was necessary in these unprecedented circumstances, but potentially in the future our national resilience and the data that we hold needs to take account of that.”
Conservative MP Harriett Baldwin asked about the next phase of CJRS, when HMRC will publish which companies have received it. Harra explained that the intention is not to do that ‘retrospectively’, meaning it will apply from 1 November 2020. He revealed that HMRC are looking at whether they can tell employees through their online personal tax account that a claim has been made in respect of them. There is a balancing act between public transparency and maintaining people’s privacy, conceded Harra. The idea to give more information to employees was due to HMRC’s experience during the first scheme and is an extra measure of protection for HMRC in terms of compliance.
HMRC are still considering what information should be published. Harra said: “This is public money. Therefore, people may feel they have a right to know who is receiving the money. What we are doing quite carefully is going through and understanding the balance between the need for public transparency and the need to protect the commercial and indeed personal data of employers.” Penny Ciniewicz added: ‘we also had reports to the hotline that told us that people were not clear all the time about whether or not their employer was claiming for them’.
Baldwin asked what sort of recommendation HMRC will make to ministers as to how the information ought to be publicised. Harra replied, in terms of managing compliance risks, this is something that will have a modest effect. It is more driven by a policy need for greater transparency around the scheme. But Treasury will take the lead on this decision.
Is there is an exemption if you can cite that you are at risk of violence or intimidation? asked Baldwin. Ciniewicz said the controls around this are still being designed but obviously HMRC will want to do what they can to assure people that is being used responsibly. She said: “The threshold for that in terms of people’s own declarations will be relatively high, because I suspect people will want to feel that they are complying with the spirit of that recommendation.” Harra added that HMRC have to devise this in a way that protects the rights of people who are very much in different circumstances, as it impacts on big household names and domestic employers. Harra told Baldwin that there are no plans to extend this to SEISS.
Baldwin closed her questions by asking whether taxpayers should not feel that this opens a ‘floodgate’ in terms of taxpayer confidentiality. Harra said: “The fundamental principle that taxpayers’ information is confidential to HMRC and cannot be disclosed to ministers or other government departments remains. Unless there is a statutory gateway for me to do that, I do not do it.”
Valuation Office Agency (VOA) and the rates system
Steve Baker, Conservative, brought up a Treasury Committee report on the VOA, which made 15 recommendations, many of which called for a broader look at the rates system, of which the VOA is a part. But Baker is disappointed that VOA rejected all the committee’s conclusions.
VOA’s Jonathan Russell countered that the VOA made changes to the CCA (Check, Challenge, Appeal) legislation and the operation of that, after the committee’s report, including 60 digital changes to the software to CCA. And that VOA has prioritised reducing the number of outstanding appeals on the 2010 rating list, again because of the Treasury Committee report.
Russell told Baker that VOA is adequately and appropriately resourced, both for COVID-19 and the requirement to do a revaluation in 2023. He said: “Indeed, the Chancellor announced in November some additional funding for business systems transformation so that we can update our technology, and also additional funding for the revaluation.”
The business rates review is going on. Russell told Baker that it is too early to give an indication of the impact on the VOA. Russell said whatever does come out of it, they need to make sure the policy can actually be delivered in an operational way.
National Minimum Wage
Siobhain McDonagh is a Labour MP. McDonagh referenced media reports about the recent controversy of large numbers of low-paid garment workers in Leicester and asked if HMRC are slow to uncover and act on these things. Jim Harra countered that HMRC have long been aware of the issues in the textile industry and in Leicester, saying ‘they are quite deeply ingrained issues; they are not easy to tackle’.
Penny Ciniewicz claimed HMRC have over 110 ‘live’ investigations into the textile industry - over 80 national minimum wage investigations and 30 tax investigations - very many of which relate to Leicester. In general, around 40 per cent of the national minimum wage teams work comes through self-reporting, which involves workers contacting HMRC to report that they believe they are being underpaid. She said that out of 2,000 complaints HMRC have had so far this year, only nine of those have been from textile workers. HMRC are working with local authorities and others to try to reach into the communities as well as to enforce compliance. HMRC have recently written to 2,500 textile employers, including those in Leicester, signposting guidance and support, but HMRC are also producing multilingual leaflets, around 5,000 of which have been distributed so far in Leicester, we learn. In 2019-20, HMRC completed 25 separate investigations into the VAT affairs of the textile trade in Leicester, she added.
Ciniewicz told McDonagh that around 450 people work in national minimum wage compliance. But she could not give the MP an estimate of the number of employees in the UK being paid less than the national minimum wage.
Making Tax Digital
Conservative MP Anthony Browne asked about Making Tax Digital (MTD). Jim Harra said digitalisation is a direction of travel right across the world by tax authorities. A key aim of MTD is to increase the accuracy of filings and, in particular, to reduce the error gap amongst taxpayers, particularly small businesses, he said. He added that this kind of approach is more cost-efficient for HMRC and less intrusive for small businesses than the traditional approach of HMRC people investigating small businesses and poring over their books and correcting things after the event. HMRC currently have 1.4 million businesses registered for MTD for VAT and more than seven million VAT returns have been made through it.
But Browne came back at Harra to say MTD was launched in 2015 in the Budget, which stated: ‘by the end of the next Parliament over 50 million individuals and small businesses will be able to see and manage their tax affairs online’. Harra accepted that ‘we have made slower progress than we initially wanted to make in 2015, that is in part in response to representations from small-business bodies and the tax profession that we needed to take longer over doing this’. It was not HMRC’s original plan to start with VAT, but it was decided that this was a safer way to roll this out because you were starting with higher-turnover businesses, he said.
Harra went on to claim MTD will bring results for HMRC in terms of managing the tax gap, but it will also bring results for businesses in terms of improving their productivity and making it easier for them to comply with tax responsibilities. The current self-assessment system, which is probably 25 years old, does not give HMRC very current data, complained Harra. He claimed that HMRC could have helped many more people through SEISS during COVID-19 with much more current data if HMRC had those quarterly reports from MTD that they will have in the future. About 1.4 million people have joined MTD for VAT, including about a third of the non-mandated population.
What are the lessons for HMRC as an institution about MTD? asked Browne. Harra replied: “There is one big benefit of hindsight. We very much looked at this initially from the point of view of managing the tax gap. The small-business community also looked at it from that point of view as well, so therefore they saw perhaps not much value for them in it. That is probably one of the reasons it has moved slower than I would have liked.”
On those people who struggle to use IT (such as those below VAT threshold), Harra said ‘we are not going to require anyone to use software who cannot use it, but we are going to expect people who can use it to do so’. MTD is the direction of travel across the world, and ‘I am pretty sure that in a few years’ time we will wonder what all the fuss was about’, he claimed.
Standards for tax advice / regulation of the tax profession
SNP MP Alison Thewliss asked why there have not been many calls for a legal requirement that tax agents are professionally qualified. Jim Harra explained that HMRC’s aim in relation to the tax agent industry is to make sure that they “add value to tax administration, in particular by helping their clients to comply with their obligations and receive their entitlements, but also to protect the tax system and taxpayers from bad actors in that industry.” There are ‘unscrupulous players’ tempting people into things which will cause them grief, and there are some high-volume agents who, in Harra’s view, ‘are exploiting their clients in that they are doing things for them for a fee that are actually very straightforward and easy to do for yourself.’ And in the middle are ‘the vast majority of agents [who] are doing a perfectly good job for their clients and not doing any harm in the tax system’.
Harra explained that in most countries, tax agents are regulated to some extent, whereas here, although about 70 per cent of tax agents are regulated by a professional body, around 30 per cent are not. What HMRC want to do is gather evidence about the extent to which that is actually a problem, he said. “It is not abundantly clear that there is evidence that the unqualified agents are significantly less professional in terms of the service they provide than those who have a qualification, so the Government probably want to move fairly carefully”, he said. The proposition is that the requirement to get professional indemnity insurance will in some ways be self-policing and self-regulating, he added. It would be an offence to give advice for which you do not have cover under professional indemnity insurance (PII). “If that means that there are areas like the promotion of tax avoidance that become economically impossible for advisers to engage in, that is fine by HMRC.”
Harra said that the proposals being made by ministers reflected what HMRC had recommended. HMRC ‘were content’ that PII was the area to focus on.
Harra said he recognized there were some hazards with having the tax authority policing the tax advisory profession, because they need to be able to do their job and not feel constrained by the tax administration from not acting in their clients’ best interests. In tackling tax avoidance, HMRC are increasingly using non-tax means of driving these people out of the market, such as a joint enforcement notice with the Advertising Standards Authority to prevent online advertising of tax avoidance schemes that do not work.
Thewliss asked: “Is that not then just pushing this over to the insurance industry to deal with?” Harra said ‘no’, explaining that the insurance industry will set standards about which policies it will and will not write. If there is an area of tax advice that is so risky that the insurance industry is not willing to write a policy to protect from it, it will not be able to operate lawfully. For example, at the moment no insurance company will write insurance for the types of avoidance schemes that are being promoted by those hardcore promoters.
Thewliss observed that pursuing this through PII seemed “a particularly complicated way of going about things. Would it not just have been simpler to require all tax agents to be professionally qualified and then regulate them in the same way the FCA regulates financial advisers?” It would not be simple to introduce state regulation for the tax advisory industry, explained Harra, but it is an alternative approach. “Perhaps one day we will go there, but in terms of tackling the abuse that this review was aimed at, following Sir Amyas Morse’s report, wholesale regulation of the entire advisory industry, we felt, was not necessary to achieve that objective.”
Harra told the committee that, several years ago, HMRC “effectively drove the banks, the big accountancy firms and the big solicitors out of this [tax avoidance] industry. More recently, in the last six years, we have been using more draconian powers to drive the more boutique end of the market out. What we are left with is a hardcore of about 20 or 30 really, frankly, unscrupulous promoters. What I want to see is them out of the market.”
HMRC customer performance and staffing issues
Angela Eagle (Labour) noted from the HMRC Annual Report that call response times are down in 2019-20 compared to what they were in 2018-19. This deterioration began before the pandemic started and it has continued throughout 2020. Jim Harra said last year (2019-20) HMRC had a pretty bad first half of the year for a variety of reasons, mainly because of undershooting their recruitment towards the end of the previous year, but in the second half of the year HMRC delivered very close to their service standards right up to the middle of March when the pandemic struck. Since then, HMRC have had to redeploy some of their people, particularly at critical dates, to support those COVID-19 schemes, with negative impact on answering calls. But Harra claimed HMRC have improved their ability to schedule ‘adviser resources’ and been able to introduce technology that sends calls out to people at home. “Secondly, we have been able to reduce the amount of resource that we have deployed on those COVID-19 support schemes as we got those big humps of claims into the furlough scheme and the self-employed scheme.”
Why are you making staff redundant when there is this pressure on customer service? asked Eagle. Harra said many redundancies are because of the move from local offices to regional hubs. On why this matters when people are working from home, Harra said it is still the case that HMRC have people who are contractually tied to an office. If HMRC close their office and do not give them another office within reasonable daily travelling of where they live, they are entitled to be offered redundancy. However, he said: “I want to keep redundancies to an absolute minimum, and I want to encourage the maximum number of people to stay with us.”
HMRC have contracted with Fujitsu to deliver the Trader Support Service for Northern Ireland for two years because HMRC want an end-to-end service for customers – but Harra admitted that HMRC do not yet have plans for how to exit from that in two years’ time. Harra said a lesson from Concentrix is that we should take extreme care before HMRC ever ask a private contractor to take on work that relates to compliance activities.
HMRC are taking on 1,500 agency staff rather than recruiting extra staff directly into the organization because HMRC only have temporary funding and this offers a fairly rapid way to increase the workforce.
The session can be read here.
By Hamant Verma.