Peers hear condemnation of loan charge
Peers held three hearings last week as part of their inquiry into the provisions of Draft Finance Bill 2018 (which focuses on Making Tax Digital and HMRC Powers). This followed an earlier hearing with representatives of tax and accountancy bodies, including the CIOT‚ s John Cullinane - see here.
Full transcripts (draft) for the Monday sessions are available here, and for the Wednesday session here. Monday 15 October first session Witnesses: Mike Cherry, National Chairman, Federation of Small Businesses Sion Lewis, Chief Executive Officer, IRIS Software Group Paul Morton, Tax Director, Office for Tax Simplification
Preparedness for Making Tax Digital
The chairman, Lord Forsyth, asked how aware businesses were of MTD. Paul Morton said OTS figures suggest that 85 per cent of agents understand what is required, 25 per cent of the smallest businesses have some awareness of MTD and 70 per cent of other businesses have some awareness. Less than 30 per cent of businesses are confident that they understand what is required, and less than 15 per cent of businesses say that they are prepared, however, he said. Mike Cherry said: ‚ HMRC, despite the deferral of 12 months, could have used the time far more productively to help businesses understand exactly what the detail is. Is it a profit and loss account every quarter or is it simply a VAT return?‚
Viscount Hanworth complained that on the HMRC website he saw something like 70 names [of software] for MTD, as you mentioned, and ‚ one has no indication which are vapourware and which are real‚ . Sion Lewis said the software is ready, with 45 firms that are ‚ up and ready to go‚ and a number of others that no one has ever heard of, although there was an approval process for all. She said that around 70 per cent of the accountants her company surveyed suggest that they will continue to do the filing for their customer, with Lord Forsyth replying that this will mean added costs for businesses. Sion Lewis could not offer Viscount Hanworth an answer as to whether the information come to the HMRC cloud in real time, so it will be privy to it as it arrives.
Costs of digitising
Mike Cherry said the FSB disagrees with suggestions by Sage that 10 or 20 days per annum could be saved by a small business adopting the benefits and efficiencies that digital book-keeping provides. FSB evidence is that there are cost increases for a business to update its software‚ either for an add-on module or for other variations‚ of anything between £300 and £2,000. That also presupposes that the business‚ s hardware is compatible or indeed that the business has computerised software to enable it to submit and do what HMRC may require. Cherry added that the software provision is moving to a subscription basis rather than a one-off purchase, which means companies are tied to it, which means increased expenditure. Baroness Kramer said she is quite disturbed by everything that she has read about the bridging software or the absence thereof.
Morton said during the first year of implementation of MTD, it will be very important than an appropriately ‚ light touch‚ is applied on penalties. Lewis said her company does not know what the penalty amounts would be for either late filing or failing to pay tax, or exactly which taxes will be affected and when, and how appeals will be handled. Cherry said: ‚ At the moment we are not seeing the cost savings, we are seeing penalties, and that inevitably is going to lead to many businesses falling foul of something that they do not yet understand.‚ He added: ‚ Unless the communication is exceptional‚ and we are less than six months away from April‚ I would certainly advocate a delay and a cessation of the penalty scheme until businesses are better able to comply.‚
Sion Lewis said her company needs 12 months‚ notice of MTD expanding to other taxes to be ready. Lord Forsyth said it is very striking that when you read the-then committee chair Lord Hollick‚ s report which led to the delay to MTD in the first place, how the circumstances are exactly the same, and the arguments are exactly the same for VAT as they were then.
Monday 15 October second session
Witnesses: Lydia Challen, Chair of the Tax Law Committee, Law Society of England and Wales Jason Collins, Pinsent Masons Malcolm Gammie QC, Chair of the Tax Law Review Committee, Institute of Fiscal Studies
Lydia Challen said the Law Society had concerns about the number and extent of the accretions to HMRC‚ s powers. Using a nautical metaphor she said that with new provisions it ‚ feels as though each one is an encrustation on the side of a boat that in itself does not affect its stability, but once they are all taken into account the vessel starts to lean rather dangerously away from the conventional taxpayer freedoms that we are used to.‚ In relation to the rule of law she said the most concerning of the measures was the introduction of follower notices which was ‚ effectively a penalty for accessing the courts‚ . Malcolm Gammie agreed, saying it was ‚ the drip, drip effect of further measures that‚ adds up to something that disturbs the overall balance in the system‚ .
Tax avoidance schemes
Lord Lee asked whether there has been ‚ a proliferation of schemes in recent years‚ . Jason Collins said no, in fact quite the opposite. Asked what Parliament could do to address the tipping of the balance in favour of the state, he said that reading many of the responses to the consultation by professional bodies or professional services firms would help. He said the consultation process stopped some of the more egregious powers that HMRC seeks, giving the example of the anti-profit fragmentation rules, which had been amended after disquiet among the professions.
Lord Leigh of Hurley, a chartered tax adviser, asked how HMRC powers compared to those of other countries‚ tax authorities. Collins said we were probably a little more benign than some other European countries. In Italy and France, ‚ if there is a question about whether an international company has been operating within their borders without declaring itself liable for taxes, they tend to take rather a heavy-handed approach. They will often start with a dawn raid in order to establish what is going on. The Revenue here would probably start that process with a letter.‚ He suggested one factor might be a culture of compliance in the UK. ‚ You do not really need such aggressive powers with people who are culturally quite compliant generally.‚
Baroness Kramer observed that a number of people have suggested that there is an argument for an oversight body in relation to HMRC‚ s use of its powers. Collins supported this. ‚ I would say that 99% of the time HMRC is using its powers appropriately and proportionately but there will be instances when it does not.‚ He described letters drafted like formal notices designed to make the recipient think that they are being required to hand data over, when it is a matter of choice for them.
Offshore time limit extension
Lord Leigh probed this HMRC proposal, seeking to identify who it is aimed at. ‚ An example might be somebody who has a holiday home somewhere in France or Spain,‚ said Collins. ‚ You might see a situation where it is owned jointly. Perhaps one of the spouses has not been recording their half of the share of the income, for whatever reason.‚ He explained: ‚ The policy justification is that it takes the Revenue longer to establish facts when the facts may be overseas rather than in the UK. But trebling the time limit in cases of innocent mistake from four years to 12 seems a little excessive.‚
Discussion also covered the blurring of the line between avoidance and evasion, naming and shaming, and clause 35 of the draft Finance Bill which extends the security tax liabilities to corporation tax and the construction industry tax deduction scheme.
Wednesday 17 October
Witnesses: Victoria Todd, Head of the LITRG team and CTA (Fellow), Low Incomes Tax Reform Group of the Chartered Institute of Taxation Graham Webber, Director, WTT Consulting Keith Gordon, Barrister, Temple Tax Chambers
Chair of the committee, Lord Forsyth, asked whether HMRC gets the balance between its powers and taxpayer rights correct. Keith Gordon said he thought not. He accused HMRC of taking a ‚ bullying approach‚ ‚ ì the taxpayer has to assert their right through the tribunal system, but most taxpayers do not want to be in the public domain having an argument with HMRC. Victoria Todd said HMRC need powers to enforce the tax system effectively but these have to be proportionate. Accessible safeguards are needed especially for low income taxpayers. She cited civil information powers as shifting the balance in favour of HMRC. On penalties HMRC have ignored the burden of proof on them and assumed people are acting deliberately or carelessly, she added.
Offshore time limit extension
Lord Lee asked what the 12 year extension for investigations with an offshore element means in practice. Todd said that tax charities have had a huge increase in contact from people in this area ‚ ì many of those it will affect are not on high incomes. The government should not be going ahead with the extension. If they do go ahead it should only apply from 2019-20, and there should be a de minimis level. Gordon emphasised that there is already the ability to go back 20 years for deliberate non-payment. He also stressed that ‚ offshore‚ in this context means anything non-UK, so the Irish Republic would count as offshore for these purposes. He suspected the reason for the extension was that HMRC is inundated with material from overseas but lacks the resources to deal with it.
2019 loan charge
The committee spent a long time questioning the panel on the 2019 loan charge. Graham Webber acts for some of those affected. He told the peers that he regarded the charge as ‚ HMRC's revenge - a panacea for poor HMRC performance identifying who should be investigated at what time‚ . It was ‚ an attempt to bully people into settling in indefensible terms‚ which will destroy lives, cause family break-up and has already caused divorces, he said. He gave an example of a client who had been a social worker, was made redundant, told to join a particular agency and did, and now faces a loan charge equal to a year and a half of her salary.
Webber proposed that the loan charge should be split four ways between the agency, the end employer, the contractor and HMRC. He explained: ‚ the end client of the contractor has benefited because it did not pay employer‚ s national insurance. The promoter/the agency has benefited through fees. Yes, my contractor client benefited because she paid less tax. The Revenue was supine and silent and by its silence gave tacit approval to these schemes‚ There are four parties and the tax due is around 40% in most cases, as that is the band it is taken it into. We propose that each of those parties should pay 10% of the loan balance.‚
Alongside Webber, Gordon was also critical of HMRC, saying the tax authority failed to take action over a number of years. He recommended that the government use the forthcoming Finance Bill to repeal the loan charge. A number of peers also weighed in. Lord Turnbull, former Cabinet Secretary, speculated that HMRC might have taken an attitude of ‚ the more they wait the more back tax they will collect‚ . He wondered if the financial services concept of restitution might apply, with an employee not given the full information not being asked to pay the charge. In response to a question from another peer, Webber said a lot of the intermediaries still exist.
Lord Leigh of Hurley sounded a more sceptical note, asking, ‚ Wouldn't any reasonable person, offered a scheme through an Isle of Man company, ask questions about it?‚ He didn‚ t understand why Webber was surprised that people are going to have to pay tax. Webber replied that often the presence of an Isle of Man or Channel Island company was not clear. Leigh said he had seen the literature and it was. Webber said the literature had said 'HMRC compliant, backed by the finest QCs'. Why would the man on the street not believe an expert, he asked.
HMRC treatment of small business
Baroness Drake said the committee had received evidence that HMRC treats small business less favourably than big. Gordon said his initial response was that they treat everyone with equal contempt; he thought it was a misunderstanding that multinational companies get a cushy ride from HMRC. Todd said large companies get better access because they have compliance managers; it would be great if every taxpayer had these and could ring up and get issues resolved but that's unrealistic. What there should be is an accessible service for all, especially those with extra support needs. She has seen a number of cases reach tribunal where you can see someone has additional needs not picked up by HMRC.
Making tax digital
Leigh asked about the mandatory aspect of MTD. Todd said LITRG was broadly supportive of HMRC's digital agenda but against mandation, including of MTD. If a system is good and has benefits you'd expect people naturally to want to use it, she said, adding that people who can't access things digitally should get a similar level of service to everyone else. Gordon thought MTD was being introduced for HMRC's convenience rather than taxpayers'.
Additional reporting by Hamant Verma