Peers want stronger action on scheme promoters, but question the evidence base for new tax checks and information powers
A new report from a House of Lords committee draws on CIOT evidence to make recommendations on new HMRC compliance and anti-avoidance powers.
In its report, ‘New Powers for HMRC: fair and proportionate?’, the House of Lords Economic Affairs Committee’s Finance Bill Sub-Committee (published on 19 December 2020):
- Urges the Government to ‘redouble efforts’ against a ‘hard core’ of avoidance scheme promoters;
- Recommends that the Government consults on options for how currently unregulated tax advisers might be regulated;
- Asks the Government to prioritise action against employers who instigate their employees’ involvement in loan schemes;
- Opposes the removal of taxpayer safeguards for information requests, particularly the need to request permission from the tax tribunal;
- Welcomes the Government’s delay to the start date for the requirement to notify uncertain tax treatment, and recommends this requirement be more tightly targeted;
- States that tax checks on taxi/minicab drivers and scrap metal merchants before they are granted licences should be limited to confirming that the applicant is registered for tax and has a unique tax reference;
- Identifies a general pattern of new HMRC powers being disproportionate, poorly targeted and without sufficient safeguard;
- Argues that HMRC should make full and effective use of its existing powers before considering new legislation.
The report, published on Saturday 19 December, is the committee’s annual assessment of measures in the draft Finance Bill relating to administration of the tax system. Experts from CIOT, the Institute’s Low Incomes Tax Reform Group (LITRG) and sister body, the Association of Taxation Technicians, appeared before the committee as expert witnesses as well as, in the case of CIOT and LITRG, submitting written evidence.
The report draws on CIOT evidence in a number of areas in making its recommendations. This includes the need for measures against avoidance scheme promoters to be carefully targeted so they do not inadvertently impact on mainstream advisers, as well as how demand for tax avoidance schemes can be reduced and the challenges of identifying an ‘uncertain tax treatment’,
LITRG is also cited extensively in the report, including in relation to those on low incomes who get caught up in disguised remuneration schemes, how standards can be improved in the ‘worker supply chain’, and the removal of the need for tribunal agreement before HMRC can require a financial institution to provide information about a taxpayer.
ATT evidence is highlighted in the report in relation to the committee’s conclusions on tackling promoters of avoidance schemes, regulation of tax professionals and the breadth and vagueness of tax checks proposals, among other areas.
Tackling promoters of mass-marketed tax avoidance schemes
Conclusions and recommendations in this chapter of the report include:
- Urge Government to redouble efforts against ‘hard core’ of promoters – while the proposed measures “are worth pursuing, we are unconvinced that they will be sufficient to drive the hard core out of business”;
- New powers against promoters must be appropriately targeted at the few they are intended to affect. “We recommend HMRC revisits the triggers for POTAS to minimise the risk of these rules affecting bona fide professional advisers.”;
- ‘Naming and shaming’ should only be used where clearly justified. The Government should revisit the safeguards in the draft Finance Bill to balance more effectively the importance of being able to name promoters against the risk of identifying the wrong people;
- The Government should prioritise action against employers who instigate their employees’ involvement in loan schemes;
- HMRC needs to do more to protect individual taxpayers, particularly those on lower incomes, from being unwittingly caught up in schemes, including communicating better with taxpayers about schemes;
- Where possible, HMRC should pursue criminal action against promoters, including of loan schemes;
- No public sector body should contract with an intermediary operating a disguised remuneration scheme;
- Recommendation that HMRC creates a dedicated tax avoidance reporting service which enables taxpayers and advisers to report schemes easily;
- The committee support greater protection for those currently using unregulated tax advisers, and recommend that the Government consults on options for how they might be regulated;
- HMRC should work closely with the tax professional bodies on non-legislative action which can be taken in the interim to help taxpayers source reliable tax advice (such as a register of tax advisers) and to improve advisory material.
In this, the longest chapter of the report, the committee welcomed the Government’s intention to take further tough action against the remaining ‘hard core’ of promoters of avoidance schemes. But the Lords urge the Government to ‘redouble its efforts’ in this area, and to take additional measures to combat the continued proliferation of new schemes. The committee’s report also highlights the vulnerability of lower income taxpayers to these schemes, and their continued use by some employment intermediaries.
The committee note the distinction drawn by their witnesses between action against promoters of tax avoidance scheme and intermediaries on the one hand, and the wider issue of whether the 30 per cent of tax advisers supplying day-to-day tax advice and services who are not members of professional bodies should be regulated. (They note Will Silsby’s response to them that: “The professional bodies, without being complacent about the wider picture of standards in the tax market, have tended to see tackling promoters and enablers as a completely separate issue.”) They divide their analysis and recommendations accordingly.
The committee noted that witnesses including Tax Watch, CIOT and the Law Society of Scotland were generally supportive of the action the Government has taken against promoters.
The CIOT told peers of its concerns that a breach of DAC6, the new cross-EU tax disclosure regime, had been included as a trigger for HMRC being able to act under POTAS (the Promoters of Tax Avoidance Schemes regime). The report notes the reference in CIOT evidence to previous assurances from HMRC that DAC6 compliance would not creep into other regimes. Consequently, the committee recommends “that HMRC revisits the triggers for POTAS to minimise the risk of these rules affecting bona fide professional advisers. Specifically, we question whether DAC6 should be a trigger for a POTAS, particularly given the assurances HMRC appears to have given stakeholders that DAC6 would not feed into other areas of the UK tax code.”
The committee did not agree with the professional bodies on everything. In the consultation on changes to the enablers rules, HMRC raised the possibility of making the new penalty regime retrospective to when the rules originally came in (November 2017). The professional bodies who gave evidence to the inquiry, such as CIOT, did not consider that the case for retrospection had been made, noting the ‘high bar’ that applied to justify retrospective legislation. However, while acknowledging witnesses’ concerns, the committee take the view that, “in this case, retrospective action is justified; a robust response is important in demonstrating HMRC’s willingness to tackle promoters effectively”. Neither taxpayers nor promoters should be pursued for actions before HMRC found they were illegitimate, the committee say, but both should be held accountable for their actions after that point.
On the likely effectiveness of the new measures, the report notes that Richard Wild, the CIOT’s Head of Technical, told the committee that the changes to POTAS should mean ‘that HMRC can actually apply the measures it wanted to apply when they were introduced back in 2014’.
Witnesses were clear that no one measure by itself would have much impact and rather the new measures needed to be considered cumulatively. Even then, witnesses such as CIOT were unsure whether proposed changes would have a material effect on those promoters still active in the UK. The Association of Taxation Technicians (ATT) said that, unless something radical is done, there will always be promoters.
There was a feeling from witnesses that the strengthening of powers to deal with promoters also strengthen its ability to deal with a lot of people, because they are so widely drafted.
The committee notes concerns that HMRC was lowering the bar significantly for some of the measures, basing them on “suspicion” of particular conduct. ATT Technical Officer Will Silsby thought that this was ‘not so much a question of lowering the bar as removing it completely’ given that suspicion was part of the job.
A significant chunk of this chapter of the report is devoted to non-legislative ways of tackling promoters by reducing demand for their services. This covers the role of effective communication, tackling employers, and HMRC working with professional bodies.
On communication, the committee cites Richard Wild’s statements to the committee that “there should be simpler messages transmitted in a more mainstream way” and that there is a need to ensure that, when a promoter approaches a taxpayer with a scheme, they know enough to ‘set alarm bells ringing’. The committee agreed, saying that HMRC “must find ways to communicate directly with taxpayers; for example, there could be a single-page warning notice each year as part of its standard communications on self-assessment filing obligations.” It encourages HMRC to look at the Financial Conduct Authority’s communications regarding unscrupulous pensions advisers as a possible model for future communications campaigns.
On reducing demand from employers the committee draws on evidence from LITRG, in particular, to recommend that the Government “collaborates with relevant specialists to decide what further steps could be taken to prevent disguised remuneration schemes being used by employment intermediaries.” It suggests that a first step would be to ensure that no government or public sector body contracts with an intermediary operating a disguised remuneration scheme, and to publicise this requirement along with the protocols that public bodies are expected to follow.
LITRG’s Tom Henderson had emphasised the need to target intermediaries in his evidence to the committee. He explained that although some users of disguised remuneration schemes are still ‘voluntary adopters’, others ‘are often completely unaware that they are in any kind of scheme or, if they are, they have been convinced it is legitimate’. At the lower income end of the market, these schemes still proliferate, often driven by employers seeking to avoid PAYE obligations and employer national insurance contributions, Henderson told the committee. Given that often neither the employment intermediary nor the individual taxpayer sees tax advice as being given ‘you have to place your emphasis on the other approach, which is to stamp out disguised remuneration schemes at each stage of the worker supply chain’, he said. Henderson suggested that one option was to regulate the umbrella companies, and that HMRC could use existing powers, such as requiring security deposits for PAYE debt, to protect the Exchequer.
Under the heading ‘Reducing demand—improved working with professional bodies’ the report notes that, in Richard Wild’s words: “The professional bodies have a vested interest in driving [scheme promoters] out of the marketplace because, for want of a better term, they drag us down.” It notes criticism from, among others, the Law Society of England & Wales, that members had told them that HMRC did not engage effectively with offers of information about promoters’ activities. Consequently the committee recommends “that HMRC creates a dedicated tax avoidance reporting service which enables taxpayers and advisers to report schemes easily. HMRC should work with its communications team to ensure a high level of search engine optimisation for any online reporting service. Any information that helps close down a scheme or promoter should be highlighted by HMRC, with details anonymised.”
Under the heading, ‘Mainstream tax advice and services’, the committee focuses on the 30 per cent of tax advisers who are not members of professional bodies. The report recommends that the Government consults on options for how these advisers might be regulated. It notes LITRG’s support for mandatory professional body membership, and that ATT’s response to the inquiry included a road map designed to bring non-members of professional bodies within the scope of the bodies. Introducing a new form of regulation would be a big step which would require detailed consultation and an extended transitional period, the peers note. The report notes that ATT was also interested in the idea floated in the call for evidence of a public register of tax advisers, which could encompass both tax advisers who are members of professional bodies and ones who are not.
The committee welcome the Government’s response to the call for evidence on raising standards in the tax advice market. However, they express surprise that the Government chose to move straight to consultation on a single proposal - professional indemnity insurance. This seems inconsistent with the Government’s declared approach to tax policy making, and it should reconsider this, say the peers.
The committee also recommend that HMRC work closely with the tax professional bodies on non-legislative action which can be taken in the interim to help taxpayers source reliable tax advice (such as a register of tax advisers) and to improve advisory material.
The report highlights LITRG concerns about people on low incomes. It and ACCA argued that it was wrong to assume the low paid had simple tax affairs and they had an equal need for high-quality advice. LITRG’s Tom Henderson told the committee: “There needs to be a structured provision of non-profit tax advice. The publicly available guidance needs to be as good as it can be. HMRC staff need to be well trained. Funding for charitable organisations needs to be well-targeted. … [HMRC] needs to get better at signposting other sources of independent advice, such as the tax charities Tax Aid and Tax Help for Older People.” The committee acknowledge this point in the report, saying HMRC should consider what more it could do to support charities who provide tax advice.
Civil information powers
Conclusions and recommendations in this chapter include:
- These proposals are poorly targeted, disproportionate in their effect on UK taxpayers and lacking necessary safeguards and rights of appeal;
- The requirement for tribunal approval for a third-party information request to a financial institution should remain;
- Financial institutions should have a right of appeal against any request they consider unduly onerous;
- Given the lack of consultation, HMRC should reconsider the implementation date.
On proposals for amendments to HMRC’s civil information powers, the committee says it is very concerned about the removal of important taxpayer safeguards for information requests, particularly the need to request permission from the tax tribunal. We believe the Government’s reasoning behind these proposals is flawed and not supported by evidence, it says, calling for the tribunal approval requirement to remain and for HMRC to undertake a full review of the information request process to find alternative ways in which it could be streamlined.
Explaining its reasoning the committee says that Tom Henderson of LITRG summed up the concerns of a number of witnesses: “The removal of the tribunal safeguard is just one of three safeguards that are being removed here. We have the removal of the tribunal safeguard, the removal of the right of appeal, and the extension of the purposes for which the notice can be issued. It is hugely concerning to think that HMRC could combine all three new powers—if I can equate a new power with the abolition of a safeguard—and issue these financial institution notices simply as a matter of course or routine whenever a taxpayer has a tax debt.”
The report notes the view offered by Will Silsby for the ATT that the new arrangements for video hearings should remove the need for HMRC officers to travel to London for hearings.
The committee notes that the Investing and Saving Alliance, Building Societies Association, UK Finance and LITRG were concerned about the extension of information requests to financial institutions to tax debt. LITRG felt that the safeguards for Financial Information Notices (FINs) related to debt should be comparable with those for Direct Recovery of Debt. The committee recommends that the Government clarify the interaction between the use of FINs for debt collection and the direct recovery of debt provisions, and ensures that the safeguards for FINs relating to debt are no less stringent than those for direct recovery of debt.
Witnesses were concerned about how HMRC would use FINs once the need to justify their use to the tax tribunal was removed. Tom Henderson said: “If you remove the safeguard you also remove the incentive to take care over the cases that you choose to pursue.”
The committee also recommends that financial institutions should have a right of appeal against any request they consider unduly onerous. And it wants HMRC to review the whole process for dealing with international information requests requiring tribunal approval.
Notifying uncertain tax treatment
Conclusions and recommendations in this chapter include:
- Regret that the Government chose to consult on its uncertain tax treatment proposals at Stage 2. The Government should issue a new Stage 1 consultation, so it can work with business and representative bodies to develop a more targeted, proportionate measure than that now proposed;
- This new measure should be targeted only at the minority of large businesses that are of concern to HMRC;
- Tax is a business-wide matter and liability for failure to notify should sit with the business alone, and not individual officers;
- We recommend that the Government identifies what steps can be taken to support existing customer compliance managers and to expand the number of companies benefiting from a customer compliance manager relationship. If this proposal goes ahead, the Government should commit to ensuring that every business affected has a customer compliance manager.
During the course of the inquiry the Government announced that it will be undertaking a further consultation on plans for notification of uncertain tax treatments, delaying its introduction until 2022. The committee welcome this move, saying ‘it was clear from witness and written evidence that the plans were poorly thought out and difficult to understand and apply in practice. The report goes on to say peers are concerned that the Government only appears to have recognised that there were significant problems with the measure after committing to legislate in 2021. The committee urge the Government to look again at the cost of compliance and to consider whether the measure should apply so widely.
The report took account of CIOT views that, with HMRC estimating an additional £45 million per year by 2023/24 as a result of this new requirement, the impact of this measure on the tax gap was ‘relatively modest’. The CIOT, in response to the consultation, said that the measure risked eroding the collaborative working relationship that had been developed with business. “[I]t seems unlikely to us that this proposal will change the behaviour of those that do not wish to engage with HMRC,” the Institute noted. But both the CIOT and ICAS expected the vast majority of compliant large businesses to make notifications where there was any possibility of uncertainty to avoid the risk of penalties.
New tax checks on licence renewal applications
Conclusions and recommendations in this chapter include:
- Before the legislation is introduced in Parliament, the Government should publish an analysis of compliance in the sectors affected, to demonstrate that the problem of hidden economy activity is such that the tax check proposed is a proportionate response;
- We recommend that the tax check is limited to confirming that the applicant is registered for tax and has a unique tax reference (UTR);
- Before conditionality is applied to other sectors, the effectiveness of the legislation in the private hire vehicle, taxi and scrap metal sectors should be evaluated;
- The application of conditionality to other sectors should be justified by reference to a specific problem in the relevant sector.
Picking up on a concern from LITRG, peers on the committee said that they are worried about a potential ‘mission creep’ in proposals for new tax checks for licence renewal applications which risks them going beyond a simple check for tax registration, which was thought to be the original intention. If the introduction of the checks results in more traders becoming unlicensed so as to avoid them, this could pose risks to the public, they believe. The peers note that ‘conditionality’ is an unproven principle: HMRC should thoroughly assess its effectiveness before extending this principle to other sectors, they say.
The breadth and vagueness of the wording of the proposals worried ATT and ACCA, which wondered what it was supposed to cover, reported the committee. Will Silsby of ATT said that ‘it appears to suggest that the tax check for, say, a taxi driver might require them to provide opinions as opposed to factual information, or perhaps details of other persons in the industry’.
Some witnesses were sceptical about whether conditionality would achieve the Government’s objectives. The British Metals Recycling Association said that ‘this is policing the policed; they are not going to discover those people who are unlicensed and we have a lot of unlicensed operators in the sector.’ LITRG’s Tom Henderson agreed. Witnesses welcomed the requirement for new applicants to be given information about their tax obligations and to confirm that they were aware of them. LITRG thought that this could educate new applicants about their responsibility for tax and how to become fully compliant.
Throughout the consultation process, it has been made clear that tax conditionality would be concerned with whether or not a person had properly registered for tax—and not whether or not the person had submitted a tax return which was complete and correct, LITRG told the committee. The report says LITRG noted that the draft legislation ‘seems to extend this to include a taxpayer’s obligation to file a return. This appears to be outside the scope of the policy intent’ and added that ‘we think there is a bit of mission creep’.
Conclusions and recommendations in this chapter include:
- The Government needs to take more care to abide by basic policy principles when proposing new or extended powers for HMRC;
- HMRC is still not making full and effective use of its existing powers, and should look to how these might be better used before considering new legislation (particular concern that powers are being extended before considering the outcome of evaluation of how HMRC uses its existing powers);
- Government need to be ‘more methodical and rigorous’ in consulting on proposals;
- Concern at lack of strong or transparent evidence base for some proposals. We recommend Government adopts a standard practice of providing detailed analysis to justify any new proposal conferring new or extended powers on HMRC;
- A pattern of new HMRC powers being disproportionate, poorly targeted and without sufficient safeguard;
- When proposing new or extended powers for HMRC, the Government should specifically explain why existing powers are insufficient to achieve the policy objective.
As well as looking at the individual proposals in the draft Finance Bill clauses separately the Lords committee draws out a number of cross-cutting themes in relation to the policy process, which it sets out in the report’s final chapter.
One theme is the need to make full use of existing powers before seeking new ones. “While witnesses were supportive of HMRC’s efforts to tackle promoters of tax avoidance schemes and to plug any gaps in existing legislation which made it less effective than Parliament intended, there was nevertheless a feeling that all the powers already available to them were not being used to the full,” the report states, noting that LITRG said they “would like to see HMRC make greater use of pay-as-you-earn security deposits” and “debts of a limited company might transfer to directors in certain circumstances”.
The committee draw attention to the statement in the tax policy consultation framework that consultations need to be clear as to what has already been decided and where there is scope to influence design. It notes that the CIOT’s evidence stressed the value of not closing off options too early, asking: “are there other options that we can explore? We should explore them fully, rather than just giving HMRC an opportunity to draw a few lines against them in a consultation document”.
Another area of concern for the committee is that it felt that the Government had not presented sufficient evidence in support of the policy proposals it was looking at. More information should have been published to support the case for applying conditionality to private hire vehicle and taxi businesses and scrap metal dealers, it says. Additionally the notification of uncertain tax treatment was predicated on the basis of addressing the tax gap arising from interpretation of tax law, but CIOT pointed out that the impact of this measure would be negligible.