The House of Lords economic affairs committee is right to call for a new review of HMRC powers as the tax authority over-reaches itself with spurious tribunals and exhaustive investigations, not to mention the introduction of a 12-year time limit set out in Finance Bill 2018-19, says John Cullinane CTA, tax policy director at the Chartered Institute of Taxation.
"HMRC needs substantial powers to enable it to collect the taxes due to it. Few would argue with that. But every year one or more Finance Acts extends these powers further. The CIOT’s objectives for the tax system include ‘a fair balance between the powers of tax collectors and the rights of taxpayers’, but the balance seems to be tilting more and more in one direction. It is time to take stock.
The proposal in this year’s Finance Bill 2018-19 (FB 2018-19) for an extension of offshore time limits is a case in point.
Strong powers to tackle offshore evasion are justified, but HMRC can already go back 20 years where there is evidence of concealment or dishonesty.
The latest HMRC power grab as set out in FB 2018-19 is a measure is about non-deliberate errors and carelessness.
It comes at a time when HMRC has access to a bigger armoury than ever before to deal with offshore non-compliance. They are receiving huge amounts of taxpayer data from other tax jurisdictions through automatic exchange of tax information agreements. It has shown off the powerful internal systems it now has to analyse this data such as HMRC Connect and its successors.
12-year time limit
Given all this, a 12-year time limit that can apply even where a taxpayer has taken reasonable care with their tax affairs does not strike the right balance between the public interest in collecting the right amount of tax, and the right of honest taxpayers to finality in their tax position after a reasonable period of time.
The Lords are right to ask the government to think again on this proposal.
But our concerns, and those of the peers, go beyond any one measure.
In CIOT’s evidence to the committee we highlighted feedback received from our members that suggests HMRC is increasingly taking an uncompromising approach in relation to charging penalties and exercising their powers in a way that erodes the original policy intent.
For example, we have seen a tendency for HMRC to initially suggest, or to settle upon, a category of taxpayer behaviour worse than it actually is, so increasing penalties and prolonging time limits.
These decisions are often overturned on appeal, but not before both taxpayer and HMRC has sustained significant costs.
Careless behaviour accusations
Our members report many penalties for careless behaviour being simply issued with no apparent consideration of suspension, contrary to the law and the instructions in the HMRC manuals to consider suspension in all cases.
Then there is HMRC’s reluctance to suspend penalties for either ‘one-off’ errors, or where it views a mistake as due to a ‘simple human error’. This reluctance has been criticised in numerous First Tier Tribunal (FTT) decisions.
I could go on (and the CIOT submission does).
Exploiting HMRC powers
Of course, there are two different, albeit related, issues in play here – the growing extent of HMRC’s powers and increasing evidence that some in the tax authority are being too aggressive in exploiting its expanded toolkit.
There is no doubt many factors behind this direction of travel.
I identified two during my oral evidence to the Lords committee: the fall in HMRC’s resources, requiring them to do more with less, and the rise in public and political outrage about tax avoidance, putting pressure on HMRC to act more and more aggressively.
On the first of these, it seems that many of the changes to HMRC’s powers have been driven by its limited capacity, but then resourcing pressures have led to inadequate application of safeguards designed to ensure these new powers are applied fairly.
This is unsustainable.
Ultimately HMRC risks being seen as ‘against taxpayers’ so undermining voluntary compliance. The Lords are right to stress the importance of adequately resourcing HMRC to fulfil its obligations.
On the second, it is fair enough to be outraged by companies and individuals who deliberately set out to cheat or game the system – including using highly contrived and artificial structures as well as through outright concealment and dishonesty.
That is why CIOT, along with other professional bodies, have strengthened our professional conduct rules in recent years.
But government, including both HMRC and its political masters, should surely be able to draw a distinction between deliberate and non-deliberate behaviour.
Critical review of HMRC’s powers
There are other changes transforming tax administration: HMRC’s digital transformation; and greater public insistence on ‘transparency’ on many financial arrangements.
The last comprehensive powers review took place before these developments. The nature and operation of HMRC’s powers needs to reflect these fundamental changes.
That is another argument for a new powers review. A new review – albeit not as extensive and lengthy as the last one – is needed to establish the principles that should govern HMRC’s powers in today’s world.
Such a review should start at stage 1 of the consultation process asking what broad changes might in principle be necessary to the 2005-12 framework, and why, taking account of the piecemeal changes that have been made since. We are pleased that the Lords agreed with our call on this.
One thing the Lords have asked the government to consider is the establishment of an independent body to scrutinise the operations of HMRC. This deserves consideration but not uncritically so.
It is worth reflecting that the case for greater scrutiny of HMRC is being made from two very different angles: for the Lords committee it is primarily as a safeguard to protect taxpayers from an apparently overmighty tax authority; for some MPs it is as a watchdog to ensure HMRC is being sufficiently dogged and aggressive in its pursuit of big businesses seen as paying suspiciously low rates of corporation tax.
That does not mean we should dismiss the committee’s suggestion, but we will need very careful consideration of how any independent body would operate and what its remit might be.
Historically great effort has gone into keeping politics out of tax collection at the level of the individual firm or taxpayer.
It is important that any new scrutiny body retains that separation. Abandoning that really would send us out of the frying pan and into the fire."
This article first appeared in Accountancy online, on 20 December 2018