HMRC signpost changes to legislation on notification of uncertain tax treatment
The House of Lords Economic Affairs Committee’s Finance Bill Sub-Committee has questioned representatives of HMRC, the IFS Tax Law Review Committee and TaxWatch, and a tax tribunal judge, as part of its inquiry into new HMRC powers contained in Draft Finance Bill 2020-21.
The sub-Committee is focusing on three areas of the Bill:
- New proposals for tackling promoters and enablers of tax avoidance schemes;
- New tax checks on licence renewal applications; and
- Amendments to HMRC’s civil information powers.
The sub-committee took evidence from two separate panels during its session on Monday 26 October:
Panel One: IFS Tax Law Review Committee, Tax Chamber, TaxWatch
- Malcolm Gammie QC, Member at Institute for Fiscal Studies (IFS) Tax Law Review Committee
- Greg Sinfield, Upper Tribunal Judge and President of the Tax Chamber at the First-tier Tribunal (Tax Chamber)
- George Turner, Executive Director at TaxWatch
Panel Two: HMRC
- Mary Aiston, Director, Counter-Avoidance Directorate, Customer Compliance Group, HMRC
- Jamie Horton, Assistant Director, Hidden Economy, Customer Compliance Group, HMRC
- Paul Riley, Director of Tax Administration, HMRC
- John Shuker, Deputy Director, International Collaboration and Transparency, Customer Strategy and Tax Design, HMRC
- Angela Walker, Deputy Director, Promoters and Upstream Policy, Customer Compliance Group, HMRC
Sub-committee members present: Lord Bridges of Headley (The Chair); Baroness Bowles of Berkhamsted; Lord Butler of Brockwell; Viscount Chandos; Lord Forsyth of Drumlean; Baroness Kramer; Lord Monks; Lord Rowe-Beddoe.
PubPanel One: IFS Tax Law Review Committee, Tax Tribunal, TaxWatch
Courts and Tribunal Service and information powers
Peers began by posing a number of questions to Judge Sinfield about the work of the Courts and Tribunal Service, particularly in relation to hearing HMRC applications for information notices.
Sinfield began by explaining how the tribunals have adapted to the challenges of Covid-19. “We have adapted at speed to deal with the difficulties imposed by social distancing and other restrictions. We initially cancelled all face-to-face hearings and moved to remote hearings. Some months on, we are now in a position to hold face-to-face hearings again, while observing social distancing rules.” “We have moved to holding applications for third-party information notices, which is the subject matter this Committee is considering, by video. We have entered into a series of discussions with HMRC and have already concluded that, when all the restrictions are lifted, we will almost certainly maintain the use of video hearings, because it leads to a great saving of cost and time for the Revenue.” In particular it has saved HMRC officers travelling around the UK to make short appearances to make applications, as these can now be done by video.
However, Sinfield emphasised, while a move to virtual rather than physical hearings for such applications will save the time of HMRC personnel, it will not speed up the application process itself. Analysis of a sample of cases carried out by a registrar had found that in February, pre-Covid, the average time taken by the tribunal to deal with an application from start to finish was 22 days; post-Covid, it had gone up to 28 days. He explained that the delays referred to by HMRC in the consultation document on this legislation “were delays by the targets, by promoters and by other people who were seeking to avoid having applications for information made against them.”
Under further questioning from Lord Bridges, Sinfield was emphatic: “I am definitely disputing that the delays are caused by the tribunal. I imagine there may be a number of reasons why the process takes considerable time. Internal HMRC processes could be one. In certain cases where notice is given to the target of the information notice, they may take actions to try to disrupt the process. They may make challenges or enter into correspondence with the Revenue.”
HMRC were not wrong to refer to delays, he explained, but they were not the tribunal’s delays. “We are handling the processes as quickly as can reasonably be expected once we get the application. I have seen in the consultation document references to things taking six months or a year. We do not have those documents for six months or a year. I can accept that we may have them for six weeks, but that is not unreasonable.”
Viscount Chandos asked about the information that HMRC have to gather to provide to the tribunal. He suggested gathering this information ‘is where the delay appears to be’, but is this information that HMRC ought to have anyway, whether or not it has to come before the tribunal (and thus the time spent gathering it should not be saved anyway if the need to apply to a tribunal is removed, as is proposed)?
Sinfield said that was difficult for him to comment on. “I can say that the quality of information I have been presented with by HMRC is almost always excellent. They do a thorough job and provide very good information, which enables me and other judges to make a decision in relation to the application for third-party information notices. I can imagine there is quite a lot of work in putting that information together, but I cannot say how much work, how difficult it is or whether that is the cause of delays. That would have to be a question for them.” He added that there is also a first part of the process, where HMRC correspond with the subject whose tax affairs are being looked into. That person is often invited to provide information without the need for an information notice, he said, and that might also be a cause of delay.
Lord Forsyth pursued a similar line of questioning, asking: “In the material that HMRC is required to provide for you to make a decision, is there anything that is unreasonable and that it ought not to do anyway, in fairness to the taxpayer or non-taxpayer, as the case may be?”
Sinfield said HMRC is ‘completely content’ with the information that the tribunal asks it to provide. “I have therefore not considered whether some of it could be dispensed with, thereby speeding up their process of preparing the documentation. They have never raised that with me.” As to whether the documents would still have to be prepared: “We need to see the documents so that we can satisfy ourselves that the application should be granted… If that need to seek our approval is removed, I can imagine that the Revenue would not need to make any bundle of documents, but it would still probably need to have much of the information that we get to see, because it will use that information later as part of its investigations.”
Malcolm Gammie was asked about this issue later in the session. He told Lord Rowe-Beddoe that the Tax Law Review Committee “would probably say that we should be slow to abandon part of the balance that was previously thought appropriate between the Revenue and taxpayers.” “We would question whether there really is evidence that this change is needed. What Judge Sinfield said reflects on that. Is the target of the proposed measure, the financial institution, properly identified or is it too wide? How can that financial institution, without the benefit of the tribunal’s oversight, be clear that the power is being correctly used and targeted? They are some of the questions that we would pose with regard to what is now being put forward, but we should not work on the assumption that the Revenue will not take its obligation seriously in exercising these powers.”
Promoters of Tax Avoidance Schemes
In the next part of the session the sub-committee questioned George Turner about TaxWatch’s work looking into tax avoidance schemes, and his views on how such schemes could be eliminated. Turner said it was ‘a myth’ that there were just a few obscure or black market operators of such schemes left, ‘acting from above a chip shop or something’. “The reality is that these are very highly professional organisations. I was looking for mass-marketed tax avoidance schemes. They need to contact consumers and drum up business somehow, so it was depressingly easy to find these companies.”
Having read that some disguised remuneration providers were targeting people coming back to work in the NHS in the early part of the Covid crisis he decided to look into it and it took him ‘about three minutes just on Google’ to find a provider. He gave his details on a website and somebody called him back. “I did not market myself as wanting tax avoidance. I was trying to say that I wanted somebody to help me with my admin, because I did not want to push the tax avoidance issue, to see how they would come back.”
The scheme was described to Turner as a ‘split payment’. “Basically, your employer would contract with the agency or whichever provider it recommended. You would be paid minimum wage or thereabouts, which would attract no income tax charge or a very, very small one. Then the balance of your payment would be given as an employee advance, as they called it in this case, based on future profits. It was said to me that this was exactly how John Lewis employees were paid, which was a clear and transparent lie.”
Turner told the sub-committee that the marketing material information he was sent “stated categorically that this was all in line with the latest HMRC rules. That is categorically not true.”
He continued: “There are two frauds being committed here. There is a fraud against the taxpayer, the wider public and the Revenue, but there is also a fraud against the scheme users in that they are often provided with reassurances about the legality of these schemes that are simply and transparently not true. Obviously, I set out to look for a tax avoidance scheme. The scenario I presented was that I was earning around £120,000 a year—I wish. I was told that I would be able to retain around 83% of my income.”
Turner said promoters often play on people’s misunderstanding of tax law, identifying “a general perception in this country that tax avoidance is lawful and that there are simple ways to radically reduce people’s tax bills.” But there is another category of people who do not gain any economic benefit from these schemes. They may be basic rate taxpayers, the fees for these schemes are generally around 20%, so they might not see a big difference in their take-home income, but they may have been told by their employers to sign up. In those cases, he said, people really can be unaware.
In one case, said Turner, someone signed up with a company which told its clients that it was paying taxes on their behalf, but actually the provider was keeping the supposed tax bill for itself.
Baroness Bowles asked what HMRC had done after TaxWatch had reported these schemes. Turner said he had submitted some evidence to HMRC’s consultation on these schemes but had not heard anything back. However, there is “zero possibility that HMRC does not know who these people are and what they are doing”, he said, noting the Spotlight alert which had drawn these schemes to his attention. “Research done by Kantar earlier this year on behalf of HMRC found that the 20 so-called hardcore promoters had been engaged in this practice for many years and were all well known to HMRC. It is frankly an absolute scandal and an indictment of the performance of HMRC that these things have not been shut down.”
Questioned further by Baroness Bowles, Turner returned to his theme that a lot of these schemes are fraudulent. “[I]f HMRC were to bring successful prosecutions for fraud, it would be able to pursue these people under proceeds of crime legislation and recoup substantial amounts of money for the Exchequer.”
Lord Butler, like Turner, had heard the recent “File on 4” programme on the loan charge, and found it ‘extraordinary’. ”There is clear evidence of false and fraudulent statements being given to taxpayers, on the basis of which people derive fees,” said Butler. “It is mis-selling. Is it not really a matter for the police and the prosecuting authorities to pursue them? Why do they not? It appears that evidence is very easy to obtain.”
Turner agreed. However, “[l]ooking at the consumer side, there are well-documented and large problems with the prosecution of fraud in this country on all levels, not just disguised remuneration but investment fraud and other forms of fraud. It is not a huge surprise to me that the police may not have pursued these kinds of tax frauds, which they may well perceive to be the responsibility of HMRC and not them.”
Had HMRC been effective in tackling these schemes, asked Brockwell. Turner said they had done a lot of work and been more effective than in the past, but were “shying away from doing the one thing that would be truly effective, which is simply to apply the criminal law. This has been done in the past. There was a case in 1994 called Regina versus Charlton, where three accountants and quite a senior barrister called Cunningham were given prison sentences for their involvement in the design, operation and marketing of a dishonest tax avoidance scheme. It has never been clear to me why, having set that precedent, HMRC did not continue to follow that approach when dealing with tax avoidance schemes. The tax avoidance scheme that those professionals went to jail for was far less controversial, particularly today, than many of the schemes we have seen.”
If someone has been sold a scheme unknowingly or having, quite reasonably, an insufficient understanding of it, should they have any additional rights for redress, asked Viscount Chandos. Turner said there were rights of redress but they were only really accessible to the wealthy. “People who have been sold schemes can sue the scheme promoters for negligence or fraudulent misrepresentation. There is ongoing litigation to do with the Ingenious and Eclipse film partnership schemes… for fraudulent misrepresentation of the schemes. Geraldine Horner, more commonly known to us as Ginger Spice, sued Deloitte for negligence after Deloitte advised her to join the Ingenious scheme. Deloitte settled with her.” He said HMRC would make it easier to bring redress if it pursued fraud prosecutions. “Once there is a successful fraud prosecution, redress through a civil claim by the scheme users would be a slam dunk.”
Lord Forsyth noted some of those caught up in the loan charge were innocent employees of employers who had encouraged them to join schemes. He wondered whether a right of redress where the employer had to pay as opposed to the employees, if it encouraged people to go into the schemes, was a practical proposal. Turner suggested ‘the tort of deceit and bribery’ was available to deal with people who have encouraged you to join a scheme.
Uncertain tax treatments
Peers questioned Malcolm Gammie, representing the IFS’s Tax Law Review Committee (TLRC), on the merits or otherwise of the government’s plans to require large businesses to notify HMRC where they have adopted an uncertain tax treatment.
Gammie said his view was that the government’s consultative document “failed to articulate precisely what compliance or administrative issues the Revenue had encountered and how this proposed new compliance obligation for large business would address the issues identified.”
“The Revenue already has a very clear strategy and, indeed, a bevy of measures for securing co‑operative compliance and working co‑operatively with large business. If, for some reason, those measures are not working as planned, or the Revenue has identified an issue with its tax compliance risk management framework, it is for the Revenue to explain itself. It is not for it to produce a new compliance obligation like a rabbit out of a hat, on a nice-to-have basis, without adequate explanation or justification.”
Questioned by Lord Forsyth on whether it is appropriate to see differences of interpretation in tax treatments as part of the tax gap, Gammie thought it was appropriate to look at it, but said that was a fundamentally different question from whether companies should be subject to an obligation to notify an uncertain tax treatment.
Forsyth also asked about safeguards. Gammie replied that whether there is a lack of safeguards depends upon how you define or identify an uncertainty that has to be notified. “In the absence of a clearly stated view by the Revenue of what the law requires, it is very difficult for a taxpayer to know whether what they are doing departs from the Revenue’s view of the law, as and when it looks at the matter.” He added that many of the uncertainties would already be identified in the reporting that has to be made when filing a tax return, and the interaction of taxpayers with the Revenue through co‑operative compliance and their customer relationship manager. “It is not entirely clear why placing an obligation on the taxpayer to notify under this separate provision advances the Revenue’s knowledge to any positive effect.”
Baroness Kramer asked whether this proposal might be exposing problems in the relationships between customer compliance managers and large businesses. Gammie did not doubt that there would be a variety of relationships between companies and their compliance managers – some good, some bad. But if HMRC has identified a problem with the way that is working or with a particular category of taxpayers they should articulate that, rather than introducing a measure targeted at all large businesses.
Lord Monks asked Gammie what his ‘plan B’ would be if this measure was ‘ripped up’ as the TLRC want. Gammie said the initial proposals “were so poorly formulated that it is difficult to see how the Revenue can press on without going back to square one and explaining exactly what problem it is seeking to address; how it arises; how the proposal, in whatever form it is finally put forward, meshes with other compliance obligations and the multitude of existing measures that apply to large business; and how it justifies the compliance costs and the risk of penalties that are involved for large businesses. The compliance costs for large business, on the proposal in the consultative documents, could exceed very significantly the amount of revenue forecast to be raised by the measure.”
The sub-committee also posed some wider questions to Malcolm Gammie about the extent and oversight of HMRC’s powers. The Tax Law Review Committee’s concern “has been more the gradual accretion of powers for the Revenue over recent years and whether they have been properly balanced with taxpayer safeguards,” he said.
“The oversight is all within HMRC,” observed Baroness Bowles. “How can we be certain that that is happening in the right way, given the history on things such as the loan charge and our concerns about discretion not being exercised in cases that merit it?” Gammie replied that we cannot be, “save to the extent that the Revenue is required to report in one way or another about the exercise of its powers, and to the extent that committees such as yours receive evidence in relation to the loan charge and the like.”
“The current powers evaluation forum is, by comparison to [the Keith Review in the 1980s and the post-merger 2005-12 review], a lightweight affair,” Gammie said. “There is no independent oversight and it does not involve detailed consultative papers. It engages in what are called deep dives on particular topics, which, to my view, have been into sufficiently shallow water that if you actually dived you would hit your head on the bottom. Having said that, the Revenue has devoted a substantial amount of internal resource to the process, at a time when the pandemic has put very considerable pressure on its resources. It has offered the Revenue the opportunity to discuss with those involved the use of the Revenue’s current powers and to exchange ideas on their use and effectiveness.”
Lord Forsyth said he had been ‘quite encouraged’ by the response to the sub-committee’s previous report on the review of powers but was now ‘a bit puzzled’ as to why HMRC were bringing forward legislation demanding more powers before a conclusion has been reached on the powers they already have. Gammie agreed. “It is almost as if every year they have to come up with one or two measures to deal with something else, to which some Revenue number can be attached. I hope I am wrong about that, but that is certainly the impression one gets.”
Panel Two: HMRC
The sub-committee kicked off the session with HMRC officials with some exploration of HMRC’s powers and the current review, which had been prompted by a previous report from the sub-committee. Paul Riley, HMRC’s Director of Tax Administration, said that the review was not (and had not been announced as) a ‘full-throated review of all our powers’ but rather was an evaluation of how HMRC had implemented the powers it had been granted since 2012.
“We worked with the evaluation forum, which is a group of 17 stakeholder organisations, to determine which of those powers they particularly wanted to examine in detail to evaluate the way they had been implemented,” said Riley. “As a result of that, we looked in detail at a smaller group of nine or 10 powers that the stakeholders said they wanted to focus on. We have not looked in detail at every one of the powers introduced since 2012 to evaluate whether it was required or effective.”
The sub-committee chair, Lord Bridges, suggested: “Before you say, “We want new powers”, surely the better thing would be to say, “Can we not use the existing powers effectively?”” Riley said HMRC took a ‘pretty exhaustive’ look at the powers currently at its disposal before asking ministers to go to Parliament to request new ones.
Civil information powers
The peers turned to the question of removing tax tribunal approval for information notices to financial institutions. Lord Forsyth noted that in the sub-committee’s 2018 report, they were not persuaded by the case for this. ”Are we wasting our time having meetings like this and putting forward recommendations, if there appears to be a Statement by the Minister giving support to them, and you continue as before?” No, you are not wasting your time,” Paul Riley replied. “Your input has been incredibly valuable and has guided us as we have undertaken the powers evaluation that we have been pursuing for the last year and a bit.”
John Shuker, Deputy Director, International Collaboration and Transparency, Customer Strategy and Tax Design, HMRC, explained that this particular draft legislation is being taken forward now, because the UK cannot meet the international standards with the current legislation. “We have twice received recommendations for the UK to improve our performance in this area and the next peer review is approaching. If we fail to meet the standard in this area again, there is a real risk that it could drag our overall marking for the UK down to a fail. For this particular area, we have already dropped from “largely compliant”, which is a pass, to “partially compliant”, which is a fail.”
Baroness Kramer challenged Shuker over the premise of the change – that removing the tribunal from the information notice process would have a significant impact on how long the process takes overall. Shuker said HMRC had never said that delay in getting hearings were the cause of the problems. The peer review by independent assessors had criticised the UK for taking an average of 12 months to obtain information, when the international standard is six months. “To be frank, even if we could get hearings a little more quickly, we will not knock six months off the procedure with that approach.”
HMRC had “tried everything we could to meet the standards with the current rules”, said Shuker. “We carefully analysed the timeline and the reasons for delays, including the tribunal process, which is part of that, and support and information from other jurisdictions, translations and correspondence. Under the current rules, we need to give the third party the right to make representations. That takes at least a month, so that is part of the delays.” At the time (2018) the tribunal process took on average 37 days. This has fallen a little since. Shuker explained that for domestic cases HMRC do need all the background information for the tax inquiry later, but they do not need it for the inquiries that are being conducted by other tax jurisdictions. “When we looked at the timeline for obtaining the information, the step of getting the additional information required from the other tax jurisdiction was taking over eight months on average.” So it would be impossible to get the period down to six months or less without reducing that. Some information will always be needed from the other tax authority to show that their request is “foreseeably relevant to the administration or collection of tax” but “[w]e do not think we will need as much background information in the future” after this change.
“There are relatively few international cases,” observed Kramer. “You have just said that the primary problem for the delay is not the tribunal, yet this mechanism will mean that a significant safeguard is stripped away in domestic cases as well. Can you not find a way to leave the safeguard for domestic cases, at the very least?” Shuker said ‘quite a number’ of respondents to the consultation had made that point, but it would be unlawful for a number of reasons. “One is that a number of our international treaties with other countries require us to use the same process and the same methodology to obtain information for exchange as we do for domestic inquiries.” We would, for example, be breaching the UK-US tax treaty if we used the rule solely for international requests.
Lord Bridges was baffled. “The problem… is not the tribunal; it is your own processes.” “It is talking about the UK’s process to obtain third-party information,” said Shuker.
Baroness Bowles asked: “Is the problem not that our domestic procedures and the way you want information from the financial institutions do not fit the international templates, because our domestic legislation is so complicated?” Shuker agreed. “We need to obey the law and follow the legislation as it stands now, so we cannot meet the international standards.” Bowles summed up: “Our tax law is so complex domestically that we cannot fulfil international requirements… Do you not have to go back to basics? We are not internationally compliant because it is so stupidly complicated.” Shuker said HMRC believe that if they introduce the new legislation they will be able to meet the international standards.
Uncertain tax treatment
Turning to the need for large companies to notify HMRC about uncertain tax treatments Lord Monks asked about the claim from Malcolm Gammie that the compliance costs for some large companies could exceed the tax take. Paul Riley said he did not think HMRC have yet made an estimate of compliance costs. He explained that the purpose of the measure “is to help HMRC reduce the part of the tax gap that arises from businesses adopting and applying an interpretation of the law that is uncertain and potentially at odds with HMRC’s view, and that HMRC is therefore likely to challenge. Sometimes it can be many years before we identify that a business has applied a legal interpretation that we dispute. At times, this can mean that the statutory deadline for opening an inquiry has already passed. By requiring the notification of uncertain treatments at an earlier stage, the measure will enable potential areas of dispute to be identified and resolved more quickly.”
HMRC “would expect most businesses to tell us voluntarily if they are applying the law in a way that is uncertain, at odds with standard practice or at odds with what they know is our position,” said Riley. “If they do that, they will not need to tell us again in a formal notification. That is why we think that the compliance costs for the vast majority of businesses will be very low indeed.”
Asked by Lord Monks whether HMRC would ignore criticism of this measure, Riley said no, and identified some areas where HMRC was rethinking. “On reflection, we accept that asking taxpayers to notify on the basis of an interpretation with which HMRC may not agree, as we proposed in the consultation document, is not the right test to apply in the legislation. If we are creating a new obligation that is backed up by a sanction, as this one would be, we need to make sure that those who are affected have a really clear understanding of the obligation on them. We accept that the test we proposed is probably too subjective and difficult for businesses to assess. We are looking at ways to make the definition more objective and more straightforward to comply with. We are keen to ensure that it is very clear what triggers an obligation to notify a tax treatment, while minimising the administrative impact on businesses.”
Riley said the perceived subjectivity and lack of clarity in the proposed definition of what should be notified was one of the points that HMRC took away from the consultation responses. “Connected to that, there were concerns that the new requirement would create a disproportionate administrative burden, because businesses would feel duty bound to err on the side of caution when considering what to notify. We perhaps have not managed to get the point across as clearly as we would have liked that, if a business is already open and transparent with HMRC, this measure is not intended to create any new obligations. We want to make that absolutely clear in the legislation.” HMRC is also seeking to address points made on the question of materiality and any threshold for notification of tax measures, and whether they are trying to cover too many different taxes in the scope of the requirement. “Another issue we are looking at is whether any liability to a penalty for failure to notify measures under this requirement should attach to the business or to a named officer of the business.”
Lord Bridges thanked Riley for “what sounds like quite an extensive rethink”. “What is the process from here on,” he asked. “We will consult on draft legislation,” said Riley. “It will be for Ministers to decide when we bring forward that draft legislation.”
Responding to Lord Rowe-Beddoe, Riley said the Australian system adds a requirement to assess the alignment of a business’s tax treatment with the published guidance. “I certainly think that ought to be part of the objective criteria that we bring forward for triggering a notification."
Baroness Bowles said that witnesses had previously expressed concern to the committee about the introduction of wide‑ranging and sometimes unclear legislation, which is then explained through guidance. “Is there a case, in the first instance, for working to improve the quality of tax law to remove the dependence on guidance? In connection with the uncertain tax treatment and all the changes that we have just heard are under way, will you be able to guarantee that that will happen in the legislation and not be left to guidance?”
Riley replied, stating that he is also responsible for HMRC’s guidance strategy. “I am a passionate believer in the power of great guidance, including its role in explaining tax law that is sometimes more complicated than any of us would wish. We certainly should not rely on guidance as an alternative to clear legislation, and that is not our intention here. We are seeking to establish clear and objective legislative criteria that determine what businesses need to notify and when. We will supplement that, as always, with guidance, which might include examples of issues that might meet the criteria if they have not already been discussed with HMRC as part of the business risk review process that I have referred to.”
Civil information powers – financial institutions
Questioned by Lord Rowe-Beddoe, John Shuker said that the right of appeal that exists against an information notice at the moment “is pretty limited. At the moment, if the notice is approved by the tribunal, there is no right of appeal. If the notice is only requesting what are defined as statutory records, there is no right of appeal either. Currently, the only time the third party has a right of appeal is if the notice is issued without the tribunal’s approval but with the agreement of the taxpayer and is not requiring statutory records. The right of appeal is fairly narrow at the moment.” The only grounds for appeal are that it would be unduly onerous to comply with the notice. “If an institution receives a notice that it thinks would be onerous to comply with… communication with HMRC is key… If we were convinced it was onerous, we would withdraw the notice, or sometimes it is possible to change the wording of the notice to make it easier for people to comply.”
“Why have financial notices been extended to tax debt,” asked Baroness Bowles. “How will this extended power be used?” Shuker replied that an important part of HMRC’s function “is to ensure that the right amount of tax is paid, as far as possible. We sometimes need information to help with that, for example whether people actually own a bank account or whether it is their money. This is another area where we received a recommendation from the OECD’s global forum, because unfortunately we were not meeting the international minimum standards. The recommendation was that the UK should ensure it has powers to access information to respond to requests for information in relation to enforcement of tax claims. That is the debt angle. We will not meet the international standard, I am afraid, unless we can require information for debt collection purposes as well.” He assured her that this was not related to direct recovery of debt measures.
Promoters of tax avoidance schemes
Lord Butler asked Mary Aiston why, when there is clear evidence of fraud, as there was in the examples given in our last session of evidence, HMRC is not more effective in dealing with it? Aiston, Director of HMRC’s Counter-Avoidance Directorate, replied that, “In tackling a promoter, HMRC will always consider the opportunity to go down the route of investigating with a view to a criminal prosecution for fraud. There needs to be evidence of dishonesty for us to pursue an inquiry with a view to prosecution for fraud. A promoter asserting that a tax treatment is successful that we disagree with or that later a tribunal decides does not stand up is not of itself sufficient to demonstrate fraud. We need to look for, and always do look for, things such as schemes being dependent on forged documentation. That is an indicator of the level of dishonesty that we need for a successful prosecution for fraud.”
Aiston said that, since 2016, HMRC has successfully prosecuted 20 individuals for their involvement in schemes that were marketed as tax avoidance. “Those are successful fraud prosecutions. The courts handed down a total of 100 years of custodial prison sentences in those cases. In the tax year 2019-20, we arrested a further nine individuals for their roles in three separate operations involving people selling schemes that purported to get round the loan charge. There is other criminal work under way.”
Asked by Viscount Chandos how HMRC intend to improve the publicising of tax avoidance schemes and their risks, Aiston said yes, we do a Spotlight, but then we “back that up with use of social media, press notices and a wide range of other networks to get that message through, including professional bodies and other representative organisations.” We have plans later in the financial year to do much more in communicating and targeting the areas that we know promoters go after, such as the oil and gas industry, IT contractors and medical professionals, she added. She warned though, that one challenge HMRC faces is “the risk of accidentally implying that tax avoidance is more widespread than it really is. Our behavioural experts tell us that people will generally go with the crowd. If they think everybody is at it, there is a real danger here that, instead of alerting people and putting them off tax avoidance, we make them think they are missing out on something and everybody is at it.” Even in the area of freelancers, HMRC’s data suggests that something like 97.5% are not involved in disguised remuneration schemes.
Lord Forsyth acknowledged the difficulties facing HMRC. “I am 100% behind you in collecting tax that is due, but I have to say I was very scarred by the large number of letters we got from people who were victims of the loan charge scheme. Their lives were ruined and they could not really be expected to second-guess their employer or some dodgy financial adviser.” He asked how far HMRC had got with ideas for dealing with “the unregulated 30% of the market who are giving tax advice. I would be surprised if the problem does not reside there. Have you thought about looking at this from a consumer protection point of view, as opposed to asking, “How much money can we collect from people?” Perhaps indemnity insurance or some form of registration or regulation is needed. How far have you developed your thoughts on really protecting people, not just from themselves and perhaps greed, but from unscrupulous employers and advisers?”
Aiston explained that, “where an employer gets their employees into this sort of scheme, we will always seek to recover the tax from the employer wherever we can. It is not that we default to the individual. We will sometimes need to pursue the tax that is due from an individual where the employer has disappeared. In some of these schemes, it is an offshore employer and is purely a creation of the avoidance scheme. Your general point is well made, and we are thinking very widely.” She mentioned work HMRC are doing with the Advertising Standards Authority and the Insolvency Service.
The consultation on raising standards in relation to tax avoidance has had had 36 round tables and something like 83 responses, noted Aiston. HMRC “are thinking very widely, including in the areas you are referencing. There will be more coming out on the Government’s next steps in relation to the consultation on improving the quality of tax advice.”
Forsyth said in the area of giving financial advice, “the regulations are very clear and strong. There are very severe penalties for people who break them. I am at a loss to see why this could not be extended. You have described how difficult it is to prove fraud, but you could show that people were in breach of the criminal law in telling people to embark on some scheme. You say that you always go after employers. I know you cannot talk about individual cases, but people working for local authorities were encouraged to get involved in loan charge schemes. They have ended up losing their homes and large amounts of money as a result. There was no evidence that the local authorities had been asked to stump up.” Aiston said it depends on the nature of the scheme arrangement. “Where somebody is on the payroll of an employer that has got them into this, we go after the employer. In the circumstances you describe, it is more likely that people were contractors and not employed.”
Baroness Kramer gave an example of the family of an individual faced with the loan charge who had killed himself as a consequence. “The letters they were hit with during the period leading up to the funeral and just beyond were astonishing.” She suggested HMRC look into a consumer protection approach to this issue. She also recommended Aiston read the evidence from TaxWatch’s George Turner in the previous panel on how easy and simple it was to find yourself caught up by an avoidance scheme. “It is beyond our comprehension that HMRC has not closed these people down. It knows who they are. It is easy to gather evidence against them. There is plenty of scope in various aspects of the law to do so. That would be the biggest and quickest mechanism to make tax clean in the way we all think it should be.” “Going after them is a priority for us,” affirmed Aiston.
Aiston repeated HMRC’s commitment that it will not make people sell their main home to pay tax bills relating to disguised remuneration and the loan charge. Baroness Bowles asked whether that meant HMRC would be paying money back to those who have already had to do that. Aiston said that while she could not get into individual cases, “If you have a case where somebody feels that has happened, I am always happy to consider it.”
Finally Lord Bridges came back to the issue of criminal sanctions: “In going after the hardcore promoters, would it not be better to look at the criminal law and other penalties which these promoters could receive?” Aiston responded that while HMRC always consider this, “the promotion of tax avoidance by itself is not a criminal offence in the UK. Therefore, we have to match the approach we take to tackling a promoter to what we think will be effective. These proposals are coming forward in the Finance Bill because we want to be faster. In the time it takes us to tackle a promoter, they are still selling to people who are then getting into avoidance and the problems that go with that. That is why we are looking to tighten this up.”
Tax checks on licence renewals
The committee did not have time to cover the issue of tax checks on licence renewals, having already overrun. The chair indicated that the sub-committee would write to HMRC with specific questions on this area.
By Hamant Verma