Liveblog - Lords question tax experts on draft Finance Bill 2018
The House of Lords Economic Affairs Finance Bill Sub-Committee took oral evidence on Making Tax Digital and HMRC Powers today as part of its inquiry into Draft Finance Bill 2018. A liveblog appears below.
Witnesses: Mr John Cullinane, Tax Policy Director, Chartered Institute of Taxation (JC) Mr Frank Haskew, Head of the Tax Faculty, Institute Of Chartered Accountants In England and Wales (ICAEW) (FH) Ms Charlotte Barbour, Director of Taxation, Institute of Chartered Accountants of Scotland (CB) Mr Chas Roy-Chowdhury, Head of Taxation, Association of Chartered Certified Accountants (CRC)
The committee members are: Lord Forsyth of Drumlean (Chairman) Conservative Baroness Drake Labour Lord Hollick Labour Lord Hutton of Furness Labour Baroness Kramer Liberal Democrat Lord Lee of Trafford Liberal Democrat Lord Leigh of Hurley Conservative Baroness Noakes Conservative Lord Turnbull Crossbench
Proeceedings can be viewed here.
Liveblog on the committee's preceedings
[NB. These notes are based on a single hearing of the committee's deliberations and we cannot guarantee they are free of errors]
Qn: Devt of HMRC powers - causes for concerns?
CRC - we in the profession have developed PCRT - a way of professional advisers countering egregious avoidance; doing in collaboration with HMRC. Also GAAR which is out on outskirts to stop egregious avoidance. Every Finance Bill we still get raft of anti-avoidance measures. Should we be getting these year after year? Hard to have proper oversight of those measures. Brings extra complexity, he adds.
Qn: What is an egregious avoidance scheme?
CRC - within the law, but where it is highly contrived, gains tax advantage parliament did not intend
CB - you can see tax planning on a range from 1/10 to 10/10. Egregious probably 11/10.
Qn - give examples?
FH - important to remember when IR mergede with C&E - powers review - five years - reviewed all powers. We supported and took part. Always understood that set benchmark for a generation. Since then seeing no. of changes on powers and certain evidence of HMRC on ground, doing enquiries, raising concerns. Support powers work, but lots of 'bolt ons'. We need to take stock. On examples - some in evidence we gave. Raising assessments and enquiries out of time, not always following law. Lack of understanding. Heavy-handed approach to investigations. HMRC guidance says should give taxpayer examples of concern, not always happening. At end of day support HMRC.
JC - responding to taxpayer behaviour, if people deliberately doing wrong things, then tougher penalties. Members pick up allegations that people at deliberate end subsequently not upheld. That distinction being eroded by piecemeal legislation. In contrast to consultative exercise 10 yrs ago, piecemeal measures. Isn't a taking stock of whole piece.
CB - often each measure understandable but looking across piece encroachment. Whether greater powers sit in right place.
Lord Leigh Qn: many of new powers are a result of criticism of tax avoidance. How do you respond to allegation that HMRC cuddles up to large companies?
JC - pre-credit crunch less public outrage about avoidance. Pressure to be efficient and businesslike. Private sector organisations prioritise biggest customers. Large companies can have access to HMRC more easily, Difficult decision for society. Will cost more resources to treat small taxpayers with same degree of courtesy. Don't accept that large companies get special deal but do get access.
CB - we get huge amount of complaints because most of our members do not have compliance manager. Huge issue. Telephone answering - don't know who to contact. Processes in place - we have businesses in Scotland - not large enough to have CRM but still complex affairs. Hard to get proper asnswers and full support.
Leigh: trade off between avoidance and safeguarding taxpayers.
JC - if you get the measure right you can protect both. Problem with avoidance of people giving glib opinions, not warning about risks. Weight placed on them. Government removed safeguard of adviser opinion. Not necessarily effective about avoidance because taxpayer does not know opinion not up to snuff. Should find other ways of doing things - professional code - have to warn about risks of any course of action. HMRC have powers to refer members to our disciplinary processes if opinions not conforming to those rules. Raises question of advisers outside professional bodies. Ways of resolving the problem that do not remove taxpayer safeguards. If start consultation earlier can explore all possibilities.
Qn - powers of HMRC v resources that are too few?
JC - our impression is HMRC are very strapped in terms of resources. Have come under efficiency reviews for a long time. Supportive of digitisation. Tendency to anticipate savings and cut prematurely.
CRC - we always say under-resourced and cuts continue. Not helpful, needs to stop. Needs more people. Can't pass burden to taxpayer. HMRC bring money into government. Need to spend to save.
Qn - draconian to discourage others?
CRC - we are not involved in those areas and by and large mainstream tax profession not involved with egregious avoidance. Why HMRC very much focused at sharp end.
Qn - media figures targeted to get publicity?
CRC - I do not know. You will need to ask HMRC.
Lord Hollick Qn - HMRC require taxpayers to adhere to strict timetable whereas they have no timetable. Example is advance payment notices. Very steep penalty. Cost of pursuing merit of a case rest on taxpayer. Tremendous disincentive to follow. Alleged HMRC takes advantage of this. Now looking for 12 years for offshore... Isn't this wrong approach, wrong culture. Contrast with IRS?
JC - partly comes about because they are subject to political criticisms because they are seen to allow people to get away with things. Eg, extending time limit to 12 years. If involved in deliberate non-payment can already go back 20 years. This extension to 12 years would apply to one off errors.
Qn - are you fighting against this?
FH - all think extension disproportionate; do not think HMRC have made proper case to justify. Taxpayers only have four years to make claims.
Qn - assymetrical. Condones sloppy administration. Pushing back on that good. Are you pushing back on request HMRC made July 2018 that they should be able to get info from third party from example bank without getting agreement of taxpayer and no right of appeal.
CB - we've been heavily critical of it
Qn - does your lobbying include going to MPs?
CB - we tend to aim for HMRC in first instance.
CRC - that is a safeguard removal which goes too far; must be proper recourse before HMRC exercises that power.
Qn - time for another look at powers? protecting rights of citizen?
JC - an open blue skies consultative approach, yes
FH - when we had powers review was in consultation with profession and independent. Now HMRC making all the running.
Lord Forsyth Qn - in old days when taxman said you owe money, was proper system of appeal. Cost on individual v substantial. Use of penalties, if someone settles, understand you can go to everyone else and say 'that's been agreed, therefore applies to you and if you want to challenge it in courts 60 per cent penalty'.Is that not denial of justice? Why not more concern about how individual treated?
CB - difficult balance to cut. HMRC under such pressure over avoidance.
Forsyth - but that does not justify daylight robbery.
CB - all legislation passed through parliament. HMRC have changed position on avoidance, things we are now mopping up on existing schemes, landscape has changed completely.
JC - tax gap figures suggest avoidance coming down while evasion and error remain high
Forsyth - What is appropriate balance for individual? Cost can be enormous. If HMRC do not answer phone and your ability to go to easy to appeal... if you go to courts 60 per cent penalty, has that not tilted the balance in terms of people's rights, saying we ae under pressure to collect the money is not a defence.
JC - most of these powers have been voted through by Parliament.
CRC - we agree with what you have siad. We have said these things in discussion with HMRC. Often they are modified to some extent. Pendulum has swung too far towards HMRC and does not balance rights of ordinary taxpayer. Need to address.
Leigh - Is HMRC using the powers it has?
FH - most people would find powers hard to understand, a real problem area.
CB - we believe the powers given to them should be properly evaluated to see if they are working. Do all the people know about them?
JC - sometimes with new powers the amount of extra revenue not that great. 12 years change very low gain for Exchequer but significant cost for the taxpayer. Does not suggest great need for those powers. Maybe raisable with existing powers at less cost.
Lord Turnbull Qn - process of reversal of burden or proof. Assymmetry of timetable, assymetry of resources?
CRC - on DRD we were very much against, long discussions with HMRC. Do need to look at those powers again, revisit how they are. New penalty regime coming in. Look at holistically. You have noticed more than others in power that they are getting more pwoer.
JC - before credit crunch avoidance was more prevalent. Public climate came about that there was war against this, that was context in which laws passed. We make representations on clauses but powers voted through because of concern about avoidance. Avoidance still exists but more under control. A lot of high profile cases to do with fact people did things many years ago, spent the money and now have problems. Hard to get balance right. Imbalance of power should not be allowed to go on in perpetuity.
Turnbull - public and HMRC probably share view they are not collecting all money to which they are entitled. Should we be prioritising problem of amount paid by global internet companies ahead of further charge through SME sector. Happy myself with celebrity avoidance schemes - no place for them. Not taking on difficult question of international IT companies and preferring to go down MTD route of pressuring small firms the wrong priority.
FH - MNCs clearly a major concern - uk gov looking at unilateral action in that space, being looked at at OECD and EU level too. That will continue. Would refer you to tax gap. Trend of avoidance down, but failure to take reasonable care, evasion, hidden economy rising. If I was minister I'd say those figuress of huge concern. Much of that SME sector.
CRC - UK should not take unilateral action. EU looking at. Need to make sure EU does not take unilateral action. OECD charged with coming up with solutions by 2020. Need to take global view.
Baroness Drake Qn - two tensions - powers and application of them. Where is greater part of the problem? If argument is there are ever-more bolt-ons one would have to look at this against set of principles. What should those be?
CB - principles agreed in 2005 and still apply. Look at taxpayers' charter - for example, assuming people are honest unless prove otherwise. Look to review powers Maybe needs to be oversight body to report on exercise of powers.
FH - we were promised consolidated Taxes Management Act at end of process but has never emerged. Very important area for taxpayers. Need consistency. In words taxpayers can understand.
JC - proportionality and adapting powers to different behaviours of taxpayers very important. Eg 12 years relaxed limit for offshore errors disproportionate. More the powers rather than goiv behaviour. Can always find faults. 12 yearr limit means prudent taxpayers have to have costs of keeping reocrds for that time.
Lord Lee Qn - revolving doors - restrictions on employing ex-HMRC?
CRC - restrictions from government end
Lee Qn - how many?
FH - I have been in tax 30 years and it has been going on throughout.
CB - less now than 20 years ago.
FH - has gone other way as well. Significant nnumber of CAs working for HMRC.
Lord Hollick Qn - any form of indepth oversight that can look into exercise of these powers?
CRC - we engage regularly in meetings with HMRC. Isn't a powers oversight body as there was for a few years. Would be a good idea if we did have such a body.
Making Tax Digital
Baroness Drake Qn - how ready are software developers and HMRC for MTD for VAT?
FH - we undertook a survey over the summer about awareness of MTD for VAT. 500 businesses, statistically valid. Surprising. 44% were aware of MTD. Rose to 51% of VAT registered. 58% of cos that will have to register for VAT. But 42% not aware. Similar story with accounting records. Still signif minority of businesses will go into MTD maintaining paper records. Still a mountain to climb on communication. Also HMRC not ready as yet. In process- back end systems moved over, pilot in private beta, only a couple of a hundred people in it. Even when public beta opened up end Oct potentially 1.1m busiensses could go in but at least 500,000 couldn;t because don't meet criteria - eg trade with EU countries, partnerships... HMRC don't seem to be ready. Also businesses lack awareness.
CRC - Software houses probably will be ready but have been rushed into it. Need to take step back and look - many ill-prepared. Look at whether the right thing to do. One of things I am aware of is MTD seems to have become implementing MTD for sake of it - there to tackle the tax gap, not just implementing a system for sake of it. The driver is tax gap. We still need to look at that as driver.
Drake - HMRC gives impression they are much more confident about the state of the software development and could be available at de minimis cost for business.
CRC - Frank has put no against it - ¬£250. That is fairly realistic. If people already have software. If they have not, significantly more.
Qn - ¬£250? An hour of a good accountant
FH - Software is a small amount of package.
CB - need to change processes.
CRC - was only about software cost.
FH - lack of factoring in of understanding what's out there, what's most appropriate for business, implementing. Implementing changes to accounting systems always has problems - always costs twice as much as you think.
CRC - I question the numbers. Why isn't the gap being closed by data going in to HMRC through VAT returns already?
Lord Turnbull Qn - transitional costs for VAT part - for income tax part they said it could be done for ¬£280 - no-one believed that. Now saying estimated transitional cost to mandated population of 1.2 million businesses is 131m - ¬£110 each. Doesn't sound plausible?
CB - Question marks over it. If you have already got software going to have to upgrade.
Turnbull - smaller you are the more it is going to cost you?
CB - large business will have processes, too. Two years lead in time needed. Sense of uncertainty from members - not sure what required by when. We say to members: speak to software suppliers, they say speak to HMRC.
CRC - we have had meetings with HMRC where they've said if there are extra burdens on business, eg Brexit, and we don't know what those burdens might be, we will defer MTD for VAT. That seems to have been forgotten.
Leigh - does MTD deter start-ups?
JC - younger entrepreneurs you suspect not. More at opposite end. Elderly might reture early or give up. Anecdotal.
Forsyth - when I was running a business you had a gateway, they are going to close that down. Would it not make sense to keep that going?
FH - HMRC want to move to MTD for VAT. Want to move to a new platform. No of businsses currently filing from VAT software - 12%. 88% using gateway. Gateway might have to continue for biz voluntarily registered. Others will have to use new system.
Qn - it's six months away. It will be a car crash.
CRC - in profession we run things in parallel until a new system is up and running, Doesn't seem to be thought through that that might be way to go.
Drake - given concerns about readiness, given it comes in same week as Brexit, particular problems?
CRC - we need to be cautious.
JC - problem for awareness. However good HMRC are at making people aware it will be competing with these wider issues for business awareness.
CRC - why not defer or do on voluntary basis
CB - why make it mandatory?
JC - take a step back. Most business has higher IT costs than many years ago. People do it because of benefits. Benefit HMRC keep presenting is reduction of errors. Struggle to see that if you mandate something and you are up against deadline that the result of what you are going to do is make people make less errors. Whereas if you look at SA returns online, successfully pushed that by making it relatively easy and attractive option.
CB - sensible for vast majority of businesses to use digital processes, our members pushing that.
JC - one of issues is lots of tax numbers aren't basic accounting numbers. In direct tax area when talking about that a lot of errors are about how far a car, say is used for public versus private use. May be to a degree a matter of interpretation. Or in VAT some supplies exempt and cannot recover input VAT. Rules complex. People have almost bespoke deals with HMRC they are negotiating as they come along. Hard to see how those numbers can be accommodated in a completely digitised system.
Lord Lee Qn - campaign from pro bodies to get implementation date altered.
CRC - we did. Income tax date pushed back. So close to date, not properly ready. We want to make this work.
JC - we have wanted to be supportive of MTD. Lots of dialogue with HMRC rather than campaigning.
CRC - also met with ministers
Lee - is the new penalty regime an improvement?
JC - points based system quite attractive. By and large quite a lot of improvement there. Concerns about some categories of business who because of nature of business are in situation of making repayments, and repayment supplement going to be cut back.
FH - agree. If we're going with MTD come 1st April need soft landing on penalties and default surcharge. Want to make this a success. Got to have flexible implementation that recognises steep learning curve.
Qn - I am surprised by extent to which HMRC has outsourced provision of software. Did HMRC issue clear guidelines to software companies and are these available?
CB - ICAS always against all software being contracted out. Basic tax compliance you should be able to do free and on HMRC's systems. Software will need to meet certain criteria but HMRC not approving it or telling us what is needed. Hard to work out if software does what a businessman wants.
Qn - lack of in-house resources?
CRC - HMRC came before PAC and divested themselves of some work - said with Brexit can't do x,y,z. But private sector can't stand up and say 'we can't do this either'. An awful lot going on. Look at doing on voluntary basis.
JC - mandation a signal to software providers there is a ready market there. Companies expected to provide for free. Only going to do so as entry to market, and so they can offer add-ons.
Qn - outcome driven by profitability for software houses?
CRC - HMRC have had separate meetings with software providers. I imagine they will be much more aware of what is required.
Turnbull - common sense prevailed and MTD for taxes other than VAT does not come in until 2020 at earliest. 'The government will not widen the scope of extending MTD beyond VAT until the system has been shown to work and not before 2020 at the earliest. Are they beginning to think about it? Are they in a position to mark own homework?
FH - all focus on getting VAT MTD up and running. Evidence that some of the MTD for individuals has been put on slower track. Already potentially being shunted out.
Turnbull - VAT comes in April 2019. Needs a whole year to see it is working. Before end of that year they will make decision about next stage. 2020 can't make any sense.
CRC - would hope HMRC would take longer than a year to look at. Part of workstream they have stopped.
CB - very minor work on MTD for Business - pilots. Bigger picture lost - gone. MTD for individuals completely put to one side.
Forsyth - you, Mr Cullinane, said you were supportive of this project. Why? Existing system works well?
JC - very supportive of direction of digitalisation. Vision they have it would be better. But I struggle with extent of mandation and pace.
Forsyth - if you are running business and you have Excel spreadsheets and you are putting this info in, why would you want to change that? Evidence overpowering. Information more accurate? Hard to see.
JC - many numbers needed for tax are basic accounting numbers. If went right through the system you would think that would have benefits.
Forsyth - what about a mixed receipt with petrol and a Mars bar?
CB - partly HMRC looking to modernise their IT. What is really wanted is their new system will only accept information in this new format. We would suggest a turnover of ¬£250K upwards, most businesses should be looking to be digital. But if it is a good thing you would do voluntarily.
CRC - these returns five times a year from once a year. Having to keep records up to date on regular basis while running a business. Onerous requirements for tax.
Forsyth - I cannot believe we are talking about something that's going to happen in 6 months time.
The session closed at 5.20pm
George Crozier CIOT Head of External Relations