The Public Accounts Committee are conducting an inquiry into high net worth individuals (HNWIs) and how HMRC deals with them. HMRC’s High Net Worth Unit raised £416m from its compliance work with this group in 2015–16 according to a report by the National Audit Office (NAO).
Panama Papers: Jon Thompson, Chief Executive and Permanent Secretary at HMRC, told the committee that HMRC has recovered £500,000 from inquiries so far from the Panama Papers leaks. Jennie Granger, Director General, Enforcement and Compliance at HMRC, said HMRC has already ‘made’ the first arrests and that case involves the beneficial ownership of UK property being disguised through offshore structures. Thompson said that HMRC will go after people who claimed they used a disclosure facility in the past but in fact did not fully disclose as shown in the Panama leaks.
Footballers: Thompson said HMRC has been working ‘very actively’ with the Professional Footballers’ Association in a partnership - producing a video and various workshops - so that those individuals in football who are very well paid understand what some of the rules are. Very few footballers are among the 6,500 HNWIs, with the vast majority in business, investments or property. He cited a case from 2000 involving an anonymous sports club against HMRC which established the principle that if you are involved in a sport, you can receive essentially two income streams – one for playing sport and one for image rights; the latter is the ‘most significant risk’ because many players would have incorporated image rights outside of the UK and are registered as non-doms. He said: “The argument from their perspective is that they might see this as just a transitory point of their life.” Granger added that image rights are similar to transfer pricing and such arrangements also apply in the entertainment sector. HMRC is keen to speak to Ministers about this. Granger said 43 players, eight agents and 12 football clubs are currently subject to investigation in relation to image rights issues.
Overseas assets: Grainger said HMRC has done some ‘informal consultation’ on whether to ask HNWIs to do a secondary tax return to disclose assets overseas or wealth held overseas, as something similar is done in Australia and Japan. She was keen to say that a new customer compliance group and Connect system will also tackle this information gap. The area that has always been a challenge to HMRC is making the connection between a different structure, particularly offshore, and a wealthy individual when it is indirectly held.
CRMs: Thompson countered Caroline Flint’s claim that is unfair for HNWIs to have a customer relationship manager when ordinary taxpayers do not and that the title sends out the wrong message. He said it is a response to ‘risk and about proportionality’ and said they have delivered £2 billion worth of additional benefit to the taxpayer. Flint is concerned that the NAO report found a third of HNWI taxpayers are under formal inquiries, with ‘something like’ £1.9 billion of tax at stake and that, from 2012-13 to 2015-16, the HNW Unit issued nearly 850 penalties but of these around 380 penalties with a total value of £4.5 million were suspended. He was also keen to say customer relationship managers are experts who work in teams and that no has ever been fired from the unit.
MP Charlie Elphicke said: “The number of high net worth taxpayers has risen from 5,900 to around 6,500, so there are more rich people, yet over that time the tax take seems to have fallen by £1 billion.”
Marketed Avoidance Schemes: Thompson said there are clearly fewer marketed avoidance schemes out there because, firstly, ‘reputable’ accounting and legal firms have moved away from this kind of behaviour, and secondly, the amount of people who are returning their tax affairs on time has increased. His intention is to expand the range of information that HMRC publishes on HNWIs and he gave the committee an assurance that next year HMRC will try to integrate the annual report and accounts, the tax gap and the risks in the tax gap and the Tax Assurance Commissioner’s report on the health of the tax system.
Prosecutions: Granger told Flint that HMRC is looking at ways for inquiries to move ‘faster’ and blamed the complexity and multinational nature of them for the long time span, as well as HMRC not counting an inquiry as closed until the end of litigation. Caroline Flint asked why only one high net worth individual has been successfully prosecuted, to which Granger said: “It is the same issue. To successfully prosecute, we have to prove beyond reasonable doubt that the intention was to break the law.” Since the NAO report was completed in March, HMRC has a further 10 high net worth individuals under criminal investigation, one of whom has been arrested. Granger said 100 prosecutions annually that relate to complex offshore wealth is the goal by 2020, although this relates to all people not just HNWIs. Granger said HMRC does not have a target proportion of HNWIs because it is ‘about which sets of facts justify the prosecution’. She said: “There are 10 highly wealthy people under criminal investigation right now and 120 offshore individuals under investigation for offshore evasion. That is the area where our goal is to get to 100 per year.”
Overview on the HNW Unit: Thompson considers the Unit to have been a success and told Tory Charlie Elphicke that he is given a compliance yield target and not an overall revenue-raising target when explaining why the report showed that from 2009-10 to 2014-15, the revenues from the super-rich fell by a third. Elphicke said: “The number of high net worth taxpayers has risen from 5,900 to around 6,500, so there are more rich people, yet over that time the tax take seems to have fallen by £1 billion.” Thompson retorted: “The answer to that is that if it wasn’t for spending £14.5 million on this unit you would not have received £416 million-worth of compliance last year.” Elphicke is unimpressed that 70 per cent of HMRC prosecutions are for things such as tobacco duty and VAT. That is only 40 per cent of the value of revenue at risk, according to an earlier 2015 NAO report, he said.
Tax-avoidance and HNWIs: Thompson said £14 billion is at risk from the promoters of tax schemes, overall (not just HNWIs). Elphicke suggested that if ‘marketing a scheme with the sole or main purpose of enabling a person to avoid taxation’ were made a criminal offence it would help recoup some of the £14 billion and ‘send a clear message’. Thompson said that these schemes are not blatantly saying they are tax avoidance schemes.
HMRC powers: Granger said HMRC had been ‘quite fortunate that over the last few years we have been given pretty much what we have asked for—examples of that are accelerated payments, the work around enablers or some of the offshore powers that we have worked on with the Treasury. I don’t have a particular wish list from them for Christmas.” Thompson said that overall the number of employees in HMRC has grown by four per cent year on year and anticipates it growing further.
The full hearing can be read here.
Blog by Hamant Verma, External Relations Officer at CIOT