HMRC make announcements on Loan Charge during Treasury Committee inquiry

1 Feb 2019

The Treasury Committee staged the latest witness session in its inquiry into tax enquiries and resolution of tax disputes today (30 January 2019). HMRC made some announcements on the Loan Charge and defended its litigation and settlement strategy.

he Treasury Committee is appointed by the House of Commons to examine the expenditure, administration and policy of HM Treasury, HMRC, and associated public bodies, including the Bank of England and the Financial Conduct Authority. The Committee chooses its own subjects of inquiry. The House has given the Committee the power to send for “persons, papers and records”. Nicky Morgan was elected as Chair of the Treasury Committee in July 2017. The remaining cross party members of the Committee were formally appointed  in September 2017.

The Treasury Committee is examining whether HMRC’s approach to conducting tax enquiries, resolving tax disputes and determining the amount of tax to be paid meets those standards. This inquiry sits alongside the Treasury Sub-Committee’s inquiry into the same topic. 

Witnesses at today’s hearing:

Jim Harra, Second Permanent Secretary and Tax Assurance Commissioner, HMRC  Penny Ciniewicz, Director General Customer Compliance, HMRC  Mary Aiston, Director Counter-Avoidance, HMRC 

Live blog started at 2.20pm:

 Litigation and Settlement strategy

Nicky Morgan (Chair), Conservative, opens the session and asks the witnesses to introduce themselves.

Morgan asks about disputes and the minimum wage. Jim Harra said we want to avoid disputes over NMW. Penny Ciniewicz said there are several lines of defence at HMRC. Morgan mentions the Iceland pay furore; when HMRC identify such cases, are they fed back to the relevant government Departments? Ciniewicz said the question of the policy and intent of the policy in regards to the Iceland story was BEIS responsibility. She said the prinicple is that a worker cannot be taken below the minimum wage and there is guidance on Gov.UK on how to run salary sacrifice schemes that do not conflict with minimum wage legislation. The wage that hits the company's bank account has to be equivalent to the minimum wage, she said. There is a consultation going on about salary sacrifice at the moment at BEIS

On underpayments on minimum wage, why is it not treated as a self correction when savings are paid to the employees, asks Morgan. Ciniewicz  said that is not being paid through their salary - it is taking the salary below minimum wage.

Charlie Elphicke, Conservative, asks about self-assessment. if someone fills their SA onilne but are now asked that they need to wait seven days for them to get login details in the post to do it online - can HMRC give assurances that such people will not be fined? Harra said HMRC would not normally penalise people in that situation.

On the Litigation and Setllement strategy, Elphicke said witneses have said this is applied too rigidly and HMRC not always settle matters in a sensible matter. Harra said HMRC do not get into dispute with most taxpayers. An independent team within HMRC who can confirm, vary and cancel outcome of a statutory dispute - about 74 get confirmed and 26 per cent get varied or cancelled. HMRC has a high litigation success rate, he said. We are taking the right cases to tribunal, he contests. Harra said HMRC will only settle for the amount that is legally due rather than 'some other horse traded' manner.

What scope does HMRC have to exercise discretion? asked Elphicke. Harra said we have discretion round the margins but not on tax that people are due to pay. For example, if they find a case of extreme distress, then HMRC can be flexible. HMRC have improved targetttng of abuse and  even though they are doing fewer disputes, the yield is going up.

On the Assurance Reviews, he said HMRC are looking to make sure governanace is followed and 'Is and Ts crossed', for example delays that HMRC need to address and penalties at the wrong levels and things not reported on  HMRC's internal systems.

On the NAO saying HMRC do not tackle abuse enough, Ciniewicz said HMRC put forward 1,000 cases to CPS (and Northern Ireland's version) and 800 successful prosecutions. These are reserved when HMRC think criminal charges are the best way for HMRC to do a strong job to crack down on criminals who exploit the tax system. Fewer than one per cent of small businesses are subject to a compliance check, said Harra.

Ciniewicz said the tax professionals at HMRC are tremendously passionate about what they do and produce tremendous results. 

Morgan pointed to LITRG's concerns about experiences of unrepresented and vulnerable people's treatment by HMRC. Ciniewicz said she read with interest LITRG's evidence to the inquiry. However, there is a lot in place, we do make sure each customer receives information at the onset of the case and asked about any vulnerabilities and give them clear advice about why they are running a check. They can speak to a complaince office, too. There is more that HMRC can do, she said, and after LITRG's evidence HMRC are looking at what it can do in her area to build a link from compliance department into the Needs Enhance Support Service -  HMRC will report on this at the end of this financial year.

Compliance checks

Stewart Hosie, Scottish National Party, asked how compliance checks are decided. Ciniewicz said these are risk based on where we think tax is not being paid. HMRC do work to prevent non-compliance, such as where people may not be clear of their responsibilites. Connect is the system HMRC uses. Tax evasion does not go unchallenged but the hidden economy is the significant proportion of the Tax Gap, she said.

Hosie spoke about LITRG's concerns that unrepresented people find themselves subject to late filing penalties even though no tax is due. How many issued, asks Hosie. Harra said there is a penalty for filing late, something introduced a few years ago. If you have a reaonable excuse, HMRC will cancel the penalty. He does not have figures for how many cases there are like this. It may be the case that HMRC do not know the reasonable excuse until tribunal stage. If we can find out this beforehand, we can cancel the penalty, adds Harra. Taxpayers do not have to engage HMRC before they go to a tribunal.

Ciniewicz admits that in compliance checks it is not always possible to put messages in the system about people's vulnerabilities.

Loan Charge

On the Loan Charge, Colin Clark, Conservative, asks Mary Aiston when settlement opportunites can be used. She said they are used when there are a large number of taxpayers subject to enquiries on the same topic. They are supposed to help encourage people to sort their affairs and a prompt to settle. The Loan Charge gives taxpayers three choices, one of those is to pay it in April. We hope it helps people to get out of DRS for good. Clark asked why aren't HMRC asking 'umbrella' companies for the Loan Charge? Where an employer still exists, that is who HMRC are engaging with. About 75 per cent of the tax yield from Loan Charge will come from employers but legislation does say if they are offshore or no longer exist, the legislation allows hMRC to go for the individuals.

Clark asks if the Loan Charge is a way of bumping people into waiving their rights? Loan balances could of resulted from loans from 1999 but Aiston added that most are more recent. Clark then  asked if HMRC indiscrimminate in how old the loan? Aiston said there are not special relaxations based on how old the loans were. She accepts some people are facing high bills and HMRC said if someone is earning less than £30,000 they can have seven years to settle. The most important thing is that people come forwards to HMRC.

Clark said: "How many have taken up the contractor loan settlement strategy as opposed to just asking about it?" People are complaining about the length of wait to find out what the computation might be. Aiston said 6,000 cases have been settled but there are about 50,000 to go. In terms of calculations to people, HMRC have issued 9,000. Past experience is that 75 per cent will come back and settle, she said. Many of this group have had chances to settle in the past. Nobody will be out of pocket from speaking to us (i.e. not binding). HMRC will not force anyone to sell their home, although we may put a charge on their home, she said. AIston said typical settlement is £13,000.

She then explains what unprotected years are. Normally, in an ordinary case that will be four years, where a taxpayer has been careless it is six years and deliberate 20 years, Unprotected years are the exception, where HMRC has failed to get an assessment done on time. The Loan Charge applies to all years and not based on the state of assessments of previous years. 

Rushanara Ali, Labour, asked what can be done for people with very large amounts of money where a five year period to repay is not enough. Aiston said HMRC would only consider insolvency for the tiny minority who choose not to settle and do not have 'good intent'. HMRC do not have a maximum period, the HMRC lady said. If taxpayers do not have income that means they cannot pay it off, then something can be done. Ali asks why this Loan Charge was not dealt with back in 1999 or 2005, if these schemes were 'too good to be true'? Aiston said from late 1990s, HMRC never felt these schemes have been fine and we have been actively inquired about. She said as far back as 2004 there was a ministerail statement talking about this type of disguised renumeration. She estimates that about 70 per cent of these people have tax agents. Between 2011 and 2015, HMRC ran a settlement opportunity with employers (writing to 5,000 of them). In 2014/15, HMRC ran another contactor loan settlement opportunity. HMRC have also written articles and attended events that relate to sectors that used these loans.

Harra talked of 'mounting communications' on this. DOTAs came in 2004 to notify users of these schemes and this has led to more legal powers to tackle this. Ali asks if it is fair to say HMRC was not prompting taxpayers because it did not have powers before 2004, to which Harra said this was always income that should of been put on tax return forms. Aiston said HMRC have moved extra staff to deal with the Loan Charge.

Morgan asked about 5 April 2019 cut-off, Aiston replied that it takes about four weeks to comeback to people but if they have contacted HMRC just before 5 April, that is the vital thing.

Wes Streeting, Labour, asked about the justification for the retrospective nature of the Loan Charge. Aiston said it is not retrospective. Streeting: Did HMRC need a legal powers to tackle tax loans as far back as 1999 because of its own failures to open inquires and raise assessments in that proper time? The Loan Charge is an example of HMRC looking at all options. In 2016 when Loan Charge introduced, we were always clear these schemes do not work about there were people arguing the alternative. HMRC suggested using a policy tool was the best way to close DRS once and for all. The Loan Charge applies to unprotected years. Streeting said because HMRC did not do its job at the time, it is now going back in years.

Harra defended HMRC saying there was always an obligation on people to submit accurate tax return forms. He said that there are cases when there were not sufficent disclosures which HMRC finds as it goes through case by case.

Time limits

Streeting asked why we have normal taxpayer protections in terms of time limits that HMRC apply on investigations.

Harra said it gives certainty and it is reasonable to say how much historic information people need to keep, and it is useful to HMRC.

Harra said 50 per cent of MNCs are under investigation but just one per cent of small businesses. For offshore evasion by taxpayers, HMRC have been given 12 years to detect and collect it, Harra said.

This is a live blog, so check against transcript of the session which will be available on the Committee website in the coming days.