Government sticks to its guns on approach to promoters and information requests
The Government has responded to the House of Lords Economic Affairs Finance Bill Sub-Committee’s December 2020 report titled ‘New powers for HMRC: fair and proportionate?’ Of the committee’s recommendations the Government accepted nine and partially accepted six, rejecting nine. The Government outlined more of its thinking on professional indemnity insurance to peers and agreed that HMRC should justify themselves a bit more – but it stuck to its position that people applying for certain licences should be subject to tax checks.
Key committee recommendations accepted by the Government:
- HMRC will revisit the triggers for POTAS to minimise the risk of these rules affecting bona fide professional advisers, and will remove DAC6 as a POTAS trigger.
- Legislation on tax checks on licence renewal applications will be amended to make clearer the information that can be required under this measure.
- The Government will adopt a standard practice of providing detailed analysis to justify any new proposal conferring new or extended powers on HMRC.
But the Government has rejected some of the recommendations:
- The Government will not revisit the safeguards for ‘naming and shaming’ of promoters.
- The requirement for tribunal approval for a third-party information request to a financial institution will not be retained.
- Before the tax check legislation is introduced in Parliament, the Government sees no reason to publish an analysis of compliance in the sectors affected.
Some other measures are ‘partially accepted’. For example the peers asked the Government to consult on regulation of currently unregulated tax advisers, but the Government have replied that rather than moving straight to a fuller regulatory approach, as a first step they are exploring making professional indemnity insurance a compulsory requirement.
In the introduction to the response the Government states that HMRC’s recent evaluation of the implementation of powers, obligations and safeguards introduced since 2012 underlines the importance of the work HMRC are doing to build and maintain public trust in the tax system. The evaluation has also highlighted new opportunities for HMRC to improve public trust in the tax system, they say, explaining that these include deepening engagement with voluntary and community services to help raise awareness of tax obligations among harder-to-reach taxpayers, and taking steps to enhance public confidence in HMRC’s governance, decision-making and operations and improving guidance, for example on the application of ‘reasonable excuse’ provisions.
HMRC powers - overview
The peers said in their December report that the Government should have awaited the outcome of its own review into the operation of its powers and safeguards before further powers were proposed for HMRC. But the Government disagrees, saying the powers granted to HMRC since 2012 were properly scrutinised before being granted by Parliament and that they remain ‘necessary and proportionate’. The Government concludes that a full review of HMRC powers is not necessary currently.
Tackling promoters of mass-marketed tax avoidance schemes
The Government have accepted five of the nine recommendations in this area, partially accepting another two.
The Government agrees with peers that HMRC should revisit the triggers for POTAS (Promoters of Tax Avoidance Schemes) to minimise the risk of these rules affecting bona fide professional advisers. This includes the committee’s questioning of whether DAC6 should be a trigger for POTAS, given the assurances HMRC appears to have given stakeholders that DAC6 would not feed into other areas of the UK tax code. The Government agrees, stating in the response “that it is no longer appropriate to include DAC6 as a POTAS trigger”.
The Government accepted three committee recommendations that amount to keeping measures to target promoters under review and taking new action if existing measures are found to be insufficient, and also strengthening communications to educate taxpayers on avoidance schemes.
Back in December, the committee said the evidence it heard in its inquiry suggests the proposed measures to target promoters are worth pursuing, but peers were unconvinced that they will be sufficient to drive the ‘hard core’ out of business. In response, the Government has said it will continue to look for new approaches to tackling promoters. HMRC are collaborating with partner bodies to tackle promoters. This includes the Insolvency Service and Advertising Standards Authority, and also professional bodies. “Promoters are rarely members of professional bodies that have adopted the rules on Professional Conduct in Relation to Taxation (PCRT),” say the Government in their response, “but where they are, HMRC will refer them to their body where their actions are in breach of PCRT.”
The Government agrees that it should keep the efficacy of measures under review, and not hesitate to respond swiftly if there is evidence that the hard core of promoters are continuing to frustrate HMRC’s ability to stop the marketing of tax avoidance schemes. The government response says HMRC are alert to developments in the avoidance market, for example, targeting promoters who are increasingly basing themselves offshore.
The Government accepts the committee’s recommendation that taxpayers need to have better information about schemes so that they can ‘see through a promoter’s sales pitch’ and recognise when they are being sold an aggressive tax avoidance scheme. Peers suggested a page on a website telling taxpayers how to identify a tax avoidance scheme is insufficient, adding 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. HMRC said they will continue to deepen partnerships with voluntary and community organisations to help raise awareness of tax obligations amongst, and build trust with, harder to reach taxpayer groups. HMRC will also continue to explore opportunities for new and innovative communications approaches to help ensure that taxpayers, including harder to reach groups, understand their obligations.
Disguised remuneration schemes
The peers urged HMRC to prevent disguised remuneration (DR) schemes being used by employment intermediaries and to ensure that no public sector body contracts with an intermediary using a DR scheme. The Government ‘partially accepts’ this recommendation, essentially giving a non-committal answer ahead of the outcome of the call for evidence on tackling DR avoidance that it ran from 21 July to 30 September 2020. HMRC are analysing the responses and plan to publish a summary of responses and next steps in due course.
Reporting tax abuse to HMRC
The Government accepts the committee’s suggestion that HMRC create a dedicated tax avoidance reporting service which enables taxpayers and advisers to report schemes easily, but says such a service already exists. Peers said 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, added peers. The Government highlighted the ‘Tax avoidance: don’t get caught out’ communications campaign launched in November 2020. The campaign encourages contractors to report avoidance schemes via the online form or hotline. As part of this campaign HMRC have paid for messages to be placed on social media platforms and the Google search engine.
Naming and shaming
The Government rejects the committee’s call for the safeguards around ‘naming and shaming’ promoters of avoidance schemes to be revisited. The committee had said this should be done ‘to balance more effectively the importance of being able to name promoters against the risk of identifying the wrong people.’ But the Government says HMRC can only name promoters and inform the public of their activities in limited circumstances as set out in legislation. For example, the POTAS regime, which aims to change the behaviour of a persistent minority of promoters through a tough regime of penalties and monitoring requirements, has a number of inbuilt operational and legal safeguards ensuring only those who do not comply and change their behaviour can be publicly named.
Regulation of tax profession
The Government ‘partially accepts’ the committee’s recommendations in this area.
While this was listed in their report as a single recommendation the peers made three main recommendations within it. First they argued for greater protection for those currently using unregulated tax advisers, and recommended to the Government that it consults on options for how they might be regulated. Second they recommended 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. And third they said HMRC should also consider what more it could do to support charities who provide tax advice.
In response the Government explain that rather than moving straight to a fuller regulatory approach, as a first step they are exploring making professional indemnity insurance a compulsory requirement for tax advisers as a common minimum requirement for all tax advisers. The Government believes that this would allow market forces to drive up standards including potentially removing from the market those advisers who were unable, because of riskier practices, to obtain insurance. It would enable clients of unaffiliated advisers to have a method of redress should things go wrong and therefore improve taxpayer protection. And, they argue, it is well targeted, as initial costs to those already subject to some form of oversight, such as professional body members, and members of other regulated professions, such as financial advisers, are likely to be minimal.
In response to the committee’s third point, the government say that HMRC will continue to work in partnership with the professional bodies and also charities that supporting vulnerable taxpayers such as Low Incomes Tax Reform Group (LITRG), Tax Aid and Tax Help for Older People. They point to the support HMRC provide to charities through grant funding.
Civil information powers (HMRC and tribunal approval)
The Government almost entirely rejects the committee’s points in this area. In the response it splits recommendation 10 – the only one covering this area – into five separate points, and responds to them separately. It rejects four of the five parts of the recommendation, partially accepting the remaining one, agreeing to clarify the interaction between the use of Financial Information Notices (FINs) and direct recovery of debt (DRD) provisions in guidance.
Fundamentally, the Government disagrees with the committee’s wish that the requirement for tribunal approval for a third-party information request to a financial institution should remain. This is because, the Government argue, the UK will be unable to meet the international standard for exchange of information if the need for tribunal (or taxpayer) approval for a third party notice remains. The proposed FIN will allow the UK to meet the standard, while providing appropriate safeguards for taxpayers, and is in line with practice in all other G20 countries, says the Government.
There is also disagreement with the committee’s recommendation that financial institutions should have a right of appeal against any request they consider unduly onerous. The Government does not believe that a right of appeal is needed. The FIN is in line with practice in all other G20 countries and the law will prevent a notice being issued if the HMRC officer considers it would be onerous to comply with.
As noted above the Government partially accept the committee’s points around FINs and DRD. They do not think it is appropriate to compare the safeguards for FINs with those for DRD in the way the committee of peers suggested. DRD, which allows recovery of tax debts direct from the taxpayer’s account, needs its own appropriate safeguards and it would not be proportionate or workable to apply all of these in the case of the FIN, which relates only to obtaining information, say the Government. But the government response accepts that the non-relationship between the two should be clarified in guidance, including in particular that a FIN cannot take the place of an information notice issued under the DRD rules.
The Government’s response also disagrees with the committee’s view that HMRC should “review the whole process for dealing with international information requests requiring tribunal approval, working with financial institutions, the tax tribunal and others, to find other means of streamlining the process”. HMRC have already carefully reviewed the whole process, before and after proposing this legislative change, and have worked with the Ministry of Justice to streamline it, says the Government. The Government also disagree with the peers’ request that HMRC undertake further consultation on this change – but they say HMRC remain committed to working with financial institutions and representative bodies to draft guidance on the FIN and ensure that they can confidently operate the new rules and processes without undue burdens.
Uncertain tax treatment
In March 2020, the Government launched a consultation on a new requirement for large businesses to notify HMRC of any matter where they believed HMRC may take a different view to them on the tax treatment. A large business is one with a turnover of at least £200 million and/or a balance sheet of over £2 billion. The committee argued that this should be targeted only at the minority of large businesses that are of concern. The Government has sought to clarify peers’ confusion and concern by saying the next consultation will make it clear that where a large business routinely discusses uncertain tax treatment with HMRC at Business Risk Review meetings, there will be no requirement to notify them under this measure. The Government is also developing an objective test for uncertain tax treatment and a further consultation will test the scope for reducing burdens on the most compliant businesses.
The peers also asked the Government to identify what steps can be taken to support existing customer compliance managers, and said that, if this proposal goes ahead, the Government should commit to ensuring that every business affected has a customer compliance manager. But the Government says HMRC have no information that the relationship between business and customer compliance managers is under strain. They acknowledge that there are “a small number of businesses that will fall into the proposed regime who do not have a CCM. In the planned further consultation on this measure, the Government will explore what additional support these businesses might need”.
Conditionality (tax checks for licences)
The Government has accepted the need to amend legislation to make clearer the information that can be required as part of the tax check under this measure. It has also accepted the need for evaluation of the measure’s effectiveness as it applies to private hire vehicle, taxi and scrap metal sectors (the initial targets), and for thorough consultation on new forms of tax conditionality before introducing them. But it does not agree with the committee that the evaluation must be completed before any potential wider approaches are developed.
The Government also rejects the rest of the committee’s recommendations in this area. In a forthright response to peers’ scepticism of the need and potential burdens on business of the planned checks, the Government said it has taken extensive views from stakeholders, the majority of whom have supported the principle of applying tax checks to licensing, provided that any administrative burden is minimised. Representative groups such as the Local Government Association and trade representatives have been actively involved in this process, said the Government. Taxpayer representatives have suggested this could be a valuable tool in tackling non-compliance, licensing body representatives have suggested the checks can be incorporated into licensing relatively simply, and some representative groups have said they welcome the check as a way of supporting compliance in the relevant sectors.
Peers said the tax check should be limited to confirming that the applicant is registered for tax and has a unique tax reference (UTR). They said this is the basis on which consultation has been conducted, and they were not persuaded that the case for going further had been made. However, in its response, the Government is adamant that collecting a UTR would not, in itself, be a suitable way to test compliance with the legal obligation to notify chargeability to income tax or corporation tax. The draft legislation will allow HMRC to ask applicants to declare whether they have reported their income from the licensed activity on their tax return. The tax check would not extend beyond this, says the Government. For example, it would not involve HMRC asking how much income has been reported or whether it has been reported accurately, promises the Government.
The committee made three recommendations in the ‘cross-cutting themes’ part of its report, and the Government has accepted all three.
The Government agrees with the committee that it should adopt a standard practice of providing detailed analysis to justify any new proposal conferring new or extended powers on HMRC. The Government also agrees with peers that tax legislation should be targeted on the taxpayers it is intended to affect. It accepts the peers’ recommendation that consulting with stakeholders about how action can best be targeted is made a standard feature of all calls for evidence and consultations.
Peers suggested that for any future proposal involving outsourcing, the Government specifically explains why HMRC is not carrying out the function itself, and what the justification for outsourcing is. The Government accepts this but adds that it can be more proportionate and effective to design tax policy so that trusted third parties are involved in supporting taxpayers, including carrying out suitable activities to make tax easy to get right and difficult to get wrong.
The full government response is here.
By Hamant Verma