The House of Lords Economic Affairs Committee Finance Bill Sub-Committee are holding an oral evidence session on Draft Finance Bill 2018 with representatives from HMRC. The CIOT are liveblogging the session from 4pm today (Mon).
Theresa Middleton, Director, Making Tax Digital for Business, HMRC (TM)
Ruth Stanier, Director General for Customer Strategy and Tax Design, HMRC (RS)
Lindsey Whyte, Director for Personal Tax, Welfare and Pensions, HM Treasury (LW)
The committee members are:
Lord Forsyth of Drumlean (Chairman) Conservative
Baroness Drake (Labour)
Lord Hollick (Labour)
Lord Hutton of Furness (Labour)
Baroness Kramer (Liberal Democrat)
Lord Lee of Trafford (Liberal Democrat)
Lord Leigh of Hurley (Conservative)
Baroness Noakes (Conservative)
Lord Turnbull (Crossbench)
Proeceedings can be viewed here.
Liveblog on the committee's preceedings
[NB. These notes are based on a single hearing of the committee's deliberations and we cannot guarantee they are free of errors]
4.15pm the committee starts late due to a Lords division.
Making tax digital
Lord Forsyth asks a question of RS about why some businesses get a dferreal of MTD but not others. RS says this is an important milestone of the project. HMRC have reflected carefully on feedback and done comprehensive analysis of business with most complex requirements. Also looked at amount of yield expected. That led to decision to identify very small group of those with most complex requirements in terms of functionality we need to deliver and also those with smallest ytield at stake. Given 6 month delay on mandation. We've made great deal of progress over last 6-12 months but complex needs businesses will get enough time to test.
Forsyth: those who will pay most tax have been singled out?
RS: this is about additional yield we expect to receive as a result of implementing mandation.
Forsyth asks why she thinks that will be the case, Singled out NHS trusts and local authorities as will get most yield? Think they make most mistakes?
RS: looked at complexity and yield. Assessed yield impact will be negligible from 6 month delay to mandation for some.
Forsyth: Must have had number in mind?
TM: More complex than letting out larger biz and keeping smaller biz in. Group allowed more time only a tiny number - some small, some large. Letter sets out types of entities allowed longer - not for profits, CASCs... Not about size, about complexity. We were v mindful that reason for MTD is closing tax gap due to error in making VAT returns. Error mainly among smaller biz population. That's why negligible difference in yield from measure.
Forsyth: Had chance to look at evidence to committee? Overwhelmingly the message from small biz and practitioners - biz not aware of requirements, and MTD will result in more mistakes because of moving from existing process..
TM: Some concern among pro bodies and biz about how this will work. Acknowledge this. People are nervous of change. Our approach is to work with software industry to ensure range of products available at different price points. Challenge for business is transitioning to new way of doing things, Scepticism from some about our tax gap figs but we have persuaded OBR of them and they are not a pushover. Once a business has moved to using software, software will add up expenses and income more accurately, produce 9 boxes of data to send to HMRC seamlessly. At a stroke certain types of error are removed from the process.
Forsyth: Computer can add up but invoices, process can be more complex. Why is your view so out of line with biz and advisers?
TM: Using eg of receipt with Mars bar and petrol on it. Biz gets this wrong now because by time put together VAT return may not notice contents of receipt. Lots of reasons why digital approach reduces risk.
RS: our estimates of yield have been pored over by OBR.
Forsyth: did OBR also look at cost estimates?
Baroness Noakes: do not understand how making process digital affects mixed receipt. Put to us that you've required people to put things on a particular spreadsheet and there's nothing in what you're doing that will affect that. Can't see how you will get any difference in yield.
TM: underlying evidence for reduction of error - arithmetical error, transposition error. Having a piece of bridging software that sucks data from your spreadsheet and sends to HMRC reduces these errors. Lots using paper now. Think will move to software rather than via spreadsheet. If someone is putting data onto sheet shortly after evidence is they will remember, but not if months later.
Noakes: no sense in which there's desire to acquire software packages for businesses...
TM - prof bodies - members do feel those things. We are in contact with wide range of mbrs of those bodies but not all feel the same. There are people who have already started moving clients onto software and are surprised by how well it's gone. You've heard one side of that story from ppl who've given evidence clear.
Lord Turnbull - have OBR had any dialogue with pro bodies and business?
RS: you'd need to ask OBR.
Turnbull: if don't do proper research they can't come to informed judgement. View that errors end up producing more tax and yet also saying things 'disappear altogether'. Just as likely will find too little about inpuyts as outputs. Universal view that errors will end up producing more revenue.
TM - that's right - happens. OBR certified figures are a net figure that take account of that. Don't assume all errors are in taxpayer's favour. OBR scrutinised us quite rigorously on this. Typically erros result in someone declaring less VAT.
Forsyth: what are pilots saying?
TM: too early to say. Pilot was to test system was working rather than effect on tax revenues.
RS: once we're into mandation we will be monitoring whether yield is coming through.
At 4.39pm the sitting was suspended for 10 minutes to deal with a division in the House of Lords.
4.47pm Hearing resumed.
Baroness Kramer: it appears there is one conversation between HMRC & software cos and another between those who regularly work with small biz and have great concern for biz not represnted by anybody. If I understand pilot correctly all piloted so far is the simplest of arrangements?
TM - biz that can join pilot now about half of biz that can do MTD. Enlargement of existing invited pilot. Agile process - start with smaller, more straightforward functionality, build on that. Half million who can joi now are those with most straightforward affairs and up to date. Over coming months going to be adding functionality. By end of month 100,000 more biz in receipt of late payments penalties will be able to join. 23 software products tested fully. First of all in sandbox, then tested with actual business to make sure it works. 23 products working. Another 20 or so where everything right but havent's yet had a customer test the service. Our expectation is those numbers will start to go up. Expect 10s more products available by April. Variety of products for different price brackets.
Kramer: Any idea how difficult for small business to pick its way thru this no of packages? Are you expecting 1m cos will work their way thru that complexity?
TM - most businesses will be using software already or looking to accountants for advice. If you;ve got an accountant ask them for advice.
Kramer: large no of unrepresented cos - over the £85,000 benchmark. Some of software incomprehensible. Drive all small biz into seeking professional support?
TM - not our intention to drive all small biz into professional support. A choice they will make for themselves. Fair point you make - one of the challenges - we can't endorse a software package, we make sure they work.
Forsyth: Gateway does the job at the moment?
TM - software industry much better at this than HMRC is. How can business choose best packagae? We are trying to find a way to show what sort of products do what sort of thing for small business. Some work for people in particular trades.
Kramer - cost. Quotes from software cos completely out of line from what we hear from accountants. Ability to do a one time purchase effectively has dispappeared. Purchasing software recently, becomes redundant. How have you worked with small biz to evrify your talk of reduction in costs. Everything we hear is it's a crushing increase.
TM - we've looked at 5 scenarios - eg business using paper now, moving to software. Then looked at obligations for each of those, what would be different. Big change since original figs. Our figs now show the transition costs have fallen because fewer and bigger businesses. Equally savings...
Kramer challenged the idea that businesses just over the threshold would be using software. TM said many would be, though by no means all. Whereas previously showing small ongoing saving to business, now showing small ongoing cost.
Lord Lee said overwhelming evidence of lack of awareness. Heading for giant car crash. Evidence for your more optimistic position?
TM - only started comms campaign last week. Sugg only heard partial picture from tax and accountancy bodies. Have taken partnership approach with them. Want clients to hear from them when action required, what software they recommend. V high levels of awareness among accountancy profession. With unprepresented we have started campaign - press release last week. We will be writing to every affected business (inc those getting more time). Aware ess levels not hig but where we expected them to be. Judged it wasn't sensible to get people excited too early.
Lee: wish start date was later?
TM - key thing is whether we are ready, Judgment at the moment is we will be ready.
RS: important to be clear that we set out lots of detail on gov.uk through a VAT notice about how this will work. We will follow up with businesses, Have also set out partnership pack - good feedback.
Lord Hollick - deja vu all over again? Biz readiness - same %age as ignorant this year as last. Your comment you don't want people phoning up seems odd. From evidence we've taken this is going to cause vast amount of distress. Only 6 months away. Pilot is good idea - you've narrowed definition of pilot down to testing soiftware. Impression we gained from last year is the pilot will give you a chance to find out how businesses and the customer is going to react. What re you going to do to inform them? How are you going to find out the user experience?
TM - on question about what's different, main thing is we had different scope and timetable - questions were about income tax approach. Following feedback govt made decision to slow MTD and apply only to biz above VAT threshold. Enthusiasm in income tax pilot declined, esp from software industry. Agree pilot not only about testing softare. Also want to test customer support model - u-tube videos, online guidance. Working out if these are what we need. Have bee testing all those things. Want to test at much greater volume.
Turnbull: evidence we've had the same as before. People not ready, etc, Hope you never bring int he smaller businesses. Surely you should have started pilots earlier? If you have a pilot, when you get to income tax and sole traders don't just want to get to 2020, won't have completed full year, wound up year and analysed full data. It would be mistake to go straight into MTD for income tax.
TM - we started pilot earlier but had to satisfy certain eligibility to join. It did start in April so will have run for best part of a year by the time MTD comes in.
Turnbull - still pretty late to be inviting people to join a pilot
TM - VAT is quarterly. If you were talking about income tax I'd agree. But ppl can join during year. We'd like them to do that. We're tracking pilots v carefully.
Forsyth: delay implementation?
RS: no plans to delay mandation date.
Forsyth: you haven't got time to assess this. Have you told ministers about concerns?
TM - our minister is taking keen interest in this, taking representations, as a result of which MTD has been scaled back.
Forsyth: so you;ve made minister aware of evidene we've had, of distress.
TM - yes he's aware of that.
Turnbull: estimate that transition costs will be £130m - £110 per head. You can't get anything for that.
TM - figure is an average. Some business will spend less, some will spend more. Depends how business is keeping records.Transitional costs cover learning on the system.
Turnbull: tells me if you;re highly confident you're already there, novices will pay a lot.
TM - think market will be quite competitive
Kramer: an average number is financially illiterate. What have you actually costed out for small biz?
Forsyth suggested a note would be better on that.
Lord Leigh noted that deferral will apply to people with the most complex VAT affairs. These ppl will all have tax accountants. Is it because they shouted loudest?
RS - we were looking at complexity to make sure necessary functionality in place. Range of biz where we have put in place deferrals a wide range, inc charities,
Leigh: is it really simpler, the new system? What does suspending where businesses are doing best to comply mean?
RS - envisage light touch approach during 2019-20. Don't intend to come down hard where delays due to software problems or genuine misunderstanding over requirements. Will remain the case they are available on deliberate evasion. On reformed pen regime, at earliest from April 2020, but gov will be making further announcement on amounts.
Leigh: shouldn't HMRC be subject to same discipline as taxpayers?
RS - we set out the approach on interest. I checked with team on what responses we'd had to current consultation on draft legn. At this stage there are no concerns with approahc we have set out.
Baroness Drake: We've been shocked by some evidence around amount of aggression faced by taxpayers, coming from HMRC - aggressive use of powers, failing to give information, failing to explain rights, Ware of conerns?
RS: I watched sessions. Was surprised and listened to feedback. Absolutely the case in numerous fora we have with external stakeholders, do hear about indiv cases not handled in way we would have wanted. In session I watched evidence was all in that direction. Our approach is to use powers in interest of vast maj of taxpayers... Help taxpayers get tax right and apply law fairly. Aim is to settle all disputes in line with LSS. Compliance handbook publicly available. Always striving to improve standard. We work to '3 lines of defence' model. First around high standards, second around tax settlement assurance programme (focus on cases closed in large quarter, and talking more customer-focused approach). In terms of cases where there is vulnerability we have range of procedures to make sure people working directly with customers are able to handle anxieties appropriately. NES undertook last year 19,000 face to face meetings with most vulnerable customers & 98,000 issues handled by telephone. Struck by professionalism of people handling this.
Drake: we heard about letters presenting non-statutory requests for info as if were statutory requests, etc. No of examples of way in which HMRC communicates with taxpayers inappropriate. What do you do to make sure this doesn't go on?
RS - complaints processes at the heart of this. Over 77,000 received last year, fairly stable compared to previous year. 54% upheld in full or in part. Positive indication that where concernhs raises with us we don't push them away. We look to get them right. Fewer than 1,000 went all the way to the adjudicator. 39% upheld - lower than level 3-4 years ago. Final stage of redress is to Ombudsman - 90 investgations, none fully upheld, three partially upheld.
Drake: what are you doing? RS referred again to the 3 lines of defence as well as to rule of tax assurance commissioner.
Drake: what do youthink your responsibilities are to unprepresented taxpayers? RS said our staff have training on making sure they are appropriately supported. This includes in cases taken to tribunal, being clear where someone is unrepresneted. In some cases we support them to ensure they are able to make their case.
Drake said she was referring to every day behaviour rather than in disputes. RS said we would want to look into... Vast majority of customers we deal with are unrepresented.
Lee: 300 complaints a day - how do you assess your capacity to deal with that? RS: As of March we had 59,000 FTE staff in place. A v large organisation. Hard to give you a percentage. Our headcount is higher than was expected. Do we feel stretched? Yes.
Forsyth: you send letter saying needs response in 30 days to long and complex list of questions. Then take months to act on it.
RS - some agents have a particular experience of the system. Getting the money in is core purpose of what we do.
Forsyth: you refer to customers/taxpayers. Why necessary if challenge you and go to courts if they lose impose 50-60% penalty on them? Why should they have this penalty?
RS - let me set out safeguard on Follower Notices. Taxpayer can choose whether or not to settle.
Forsyth: putting a price on seeking acces to justice?
RS: only issued where clearly of view that similar scheme has been struck down. V specific set of circumstances.
Drake: evidence consistently showing that system doesn't meet legitimate expectations of taxpayer. You don't seem to be coming up with solid evidene to assert these ppl are wrong int heir views. Section of taxpayer community not being well treated.
RS: not had opportunity to go through all evidence you've had. Session I saw with adviser reps heard anecdotes which gave rise to concern. Didn't hear numerical evidence. Seems to me there is a lot of evidence that as we work through we put things right.
Drake - many of those affected aggrieved that HMRC did not act earlier. Why the inordinate delay?
RS: These schemes are clear examples of avoidance - income disguised as loan. I saw concerns raised about what happened in past. Legislation in 2011 sought to bear down on these schemes. Following that promoters changed way slightly in which they work. Before loan charge legislated for in 2016 we gave opportunity to settle. Legislation was passed with cross-party support. Our position is these schemes have never worked. Concerns raised about avoidane over many yeras. We have taken action to close down. It takes a lot of time to putsue indiv schemes, to litigate through courts, and as we do scehems keep changing.
Drake: time to pay limited to 5 years?
RS: Commissioners made clear for people on less than £50,000 who have stopped using avoidance schemes we've put in place simplified arrangement. Looking at every case on merits, no max or min period.
Drake: Assessment taxpayers would be bankrupted. Why would you do that if they could stay earning to pay the tax? And to whom is HMRC accountable if decision results in bankruptcy?
RS: cases taken through debt management process. Don't want to make people bankrupt. A last resort. Less than 0.01 % of debt management cases end up in insolvency.
Drake: how much Revenue recouped fom these schemes to date? RS: from 5,000 have raised over £500m to date (settlements)
Forsyth: Richest paid first? RS: don't have info on that. We estimate over 50,000 will be caught. On average these people receive twice as much income as average taxpayer.
Hollick: proposing to reach back to 1999. Say you've raised concerns about this over the years, but major public sector orgs (NHS, local authorities, BBC) have not only encouraged people to work on that basis, many have said we can't have you on our staff but you can go and work for an agency... Employing self-employed people using this over last 18 years. Not incumbent upon you to inform ppl at an early stage? Why shouldn't they be treated like Goldman Sacks when deal cut? Isn't this a case where there's been a great dela of uncertainty.
RS: we don't cut deals. Loan charge is not a retrospective measure, not a power, it is a charge.
Hollick - this judgement could have been made in 2002?
RS: is it normal for income to be received as a loan? 50,000 is small proportion...
Hollick - incumbent on HMRC to put out to people to say you shouldn't do this.
RS - we have been pursuing cases, inclduing Glasgow Rangers, over many years. Our view these cases never work. This will not have a significant impact on the NHS.
Forsyth - if you thought schemes were wrong why didn't you tell taxpayers? Seems to breach principle of once matters are closed, they are closed unless there is fraud. Someone employed as social worker, retired, then invited by local authority to come on one of these loan schemes...
RS - on any case where someone concerned we urge get in touch ASAP and will deal sympathetically.
Forsyth - clever, not reopened, gone back retrospectively, people received substantive tax demands, have spent the money
RS: In respect of promoting awareness, HMRC have set out through Spotlight publications to give advice to taxpayers about not believing schemes that are too good to be true, and submitted complaints to ASA about advertising.The Loan Charge is something that was passed through Parliament with cross party support, she added.
Offshore time limits and penalties
Hanworth - is this necessary to expand to five years?
RS - it takes HMRC longer to investigate offshore matters.
Hanworth - you could put more resoruces rather than increase the time?
RS - this is about cases that are very complicated.
Lord Turnbull - concerned about recent restrictions on the ability to go to tribunal - then just have=ing to go to judicial review. Are the restrictions justified?
RS - 19 members of G20 and judicial approval was not required before seeking such information. On the case of Civil Information Powers consultation, the Government has not published a response.
Kramer - asked if there is a need for a new powers review to assess where exactly HMRC stands in this time and place? She thinks the balance is now 'inappropriate'.
RS - HMRC powers are under constant review.
LW - Taxpayer confidentiality and protection remains a prioriity for the Government. The suite of powers have been amended in response to review of powers conducted and other representations, to ensure HMRC has a balanced set of powers in supporting taxpayers to pay the right amount of tax.