The House of Lords Economic Affairs Finance Bill Sub-Committee will take oral evidence on HMRC Powers and Making Tax Digital from LITRG and others today as part of its inquiry into Draft Finance Bill 2018. A liveblog appears below.
Ms Victoria Todd, Head of the LITRG team and CTA (Fellow), Low Incomes Tax Reform Group of the Chartered Institute of Taxation (VT)
Mr Graham Webber, Director, WTT Consulting (GW)
Mr Keith Gordon, Barrister, Temple Tax Chambers (KG)
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.
You can read a liveblog of last week's hearing with CIOT's John Cullinane and others 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]
We're a little late starting... The committee has been talking to other practitioners for the last hour.
Chair asks if HMRC gets balance between powers and taxpayer rights correct.
KG says his concern is that tax avoidance is a diminshingly small proportion of the tax gap - 1/3 of amount lost due to evasion and similar amount lost due to hidden economy - effectively 6 times as much lost due to dishonest conduct and one wonders why everyone is talking about avoidance. Revenue has been successful at eliminating avoidance through changes in legislation. So I think not because I don't see enough action to tackle evasion. Closure of offices means not enough done on the ground. Avoidance treated as low hanging fruit but it is getting higher and higher.
Chair - 'using powers in unfair way?'
KG - bullying approach - assumption you must do this because we are revenue and we say so. Taxpayer has to assert their right through tribunal, but do you want to be in public domain having argument with HMRC?
GW - agree with Keith to large degree. Issue with avoidance is taxpayer has made some kind of declaration, identifiable, therefore HMRC can trace easily. Avoidance gets lot of attention. HMRC has had 100 new avoidance powers in last 10 years. HMRC get new powers every year - like child with toy box. Often no checks and balances. Attitutde of 'throw everything at them, see what's shaken loose'. Eg BPRA scheme - on statute book to encourage people to invest in buildings. All those schemes disclosed under DOTAS. Over half under active enquiry for avoidance. Demonstrates to me where balance has gone.
VT - HMRC need powers to enforce tax system effectively but have to be proportionate. Need accessible safaguards esp for low income taxpayers. Cites civil info powers as shifting balance in favour of HMRC. Penalties - HMRC have ignored burden of proof on them and assumed people acting deliberately or carelessly. We see cases reaching tribunal.
Lord Lee - what does 12 year extension for offshore mean in practice?
VT - tax charities have had huge increase in contact from people in this area - not high income. Tips balance in favour of HMRC. Not tackling deliberate behaviour. For people acting non-delib. Not adequate safeguards in legislation.
Lee - what form should safeguards take?
VT - shouldn't be going ahead with extension. If going ahead should only apply from 2019-20. Should be de minimis level. Current timescales - 4 and 6 yrs are reasonable.
GW - broadly agree. We have enquiries going back to 2004 not settled by HMRC. HMRC missed large number of enquiries. Essentially putting a 20 year enquiry window into the process. Creating uncertainty for my clients.
KG - easy to say when someoe hasn't paid enough tax for offshore reason people think of strange location and HMRC doesn't kniw. That's deliberate conduct and there's 20 years. But easy to be caught. Any 'offshore' (non-UK) connection. Irish Republic offshore for these purposes. HMRC gets so much info from overseas now. Suspect HMRC inundated with material from overseas. Lack resources to deal, therefore seeking to extend time limit. Practical difficulties - taxpayers will have to keep records for longer.Can often take 2-4 further years to get to tribunal.
GW - we have an issue with contractors who have used statutory tax reliefs; lots were told by end client to join particular scheme; lots not aware what they were doing. HMRC have looked and said 'no not true, what you have done is deliberately entered into tax avoidance schemes'. Lots of these schemes disclosed 2004-2010. HMRC didn't start looking till 2011-12. Misues of powers. HMRC have aggravated by playing catch up, applying harshest penalties. Eg client sent list of 65 questions along with request for 40 documents. Took 2 attempts to get clarity on what wanted. Responded and lots of these offshore. Showed HMRC correspondence. Next get 2 penalties - £300 & £760. Challenged. HMRC withdrew higher one on steps of tribunal. Defended £300 penalty. Judge ruled that HMRC systems unclear, invited HMRC to settle by withdrawing. HMRC have refused. Awaiting date for UTT.
Lord - deskilling at HMRC?
GW - if being kind I would say that HMRC moved from beign tax expert organisation to being tax processing organisation - frontline are call centre operators. Spoke to someone two weeks ago who didn;'t know what a 64/8 was. Getting to policy team v difficult. Callous indifference. Officers operating within known boundaries, scared to step over.
Baroness Noakes - asks about 2019 loan charge. Lots of responses to call for evidence about impact. Asked views on application of HMRC powers in this instance.
GW - affects my client population hugely. We regard as HMRC's revenge - a panacea for poor HMRC performance identifying who should be investigated at what time. Attempt to bully people into settling in indefensible terms. Will destroy lives. Will cause family break-up. Has already caused divorce. Clients who go bankrupt and will never work again because work in fin serv. Client a social worker - told to join particular agency and did. Now faces loan charge equal to year and a half salary.
Noakes - anyhting that can mitigate?
GW - a number of proposals made which recognise the fact that loan charge should be tailored to fit those who benefited. HMC were silent and gave tacit approval to these schemes - was used in marketing of these schemes. We propose each of four parties should pay a quarter of amount due. Most of my clients would settle in a heartbeat.
Noakes - is that within legislation?
GW - could easily be done. Been trying to get traction for this for a long time. Hoping that your report and two from Commons Committee will provoke a debate and get HMT to see impact. Changing loan charge to 10% does not require change of govt policy just recognition of facts
Forsyth enquired about social worker case.
GW - local authority, south of England, made redundant then told she could come back as a contractor. Very selective about what they told her. Maybe she should have asked more questions but she is a social worker.
Noakes - unsophisticated taxpayers get enough warning?
GW - HMRC have started doing that but these schemes much older. We have scheme from 2008, got closure notice last month. Gap between closure notice and tribunal can be long time. Some of my clients are tax savvy, most don't have a clue.
Baroness Kramer - would you say that an unsophisticated employee should be expectd to be able to rely on instruction of employer in this circumstance. Local council with legal dept and advisers. Took position that they could instruct employee in this way. Surely liability has to rest there rather than on individual?
KG - legislation just targets worker. GW has come up with sensible, practical compromise. But not only does HMRC take long time to investigate, but HMRC deliberately tries to slow down proceedings with objections. Looks like they are trying to find ways to delay.
Kramer - record on Hansard of what gov said?
KG - first port of call usually employer. Tax legislation treats standard employees generally as not having to think about tax. Improtant qn - how did this legn hit statute books? HMRC said this is aggressive schemes involving loans which noone expects to be repaid and we want people to pay right amount of tax. But didn't say HMRC failed to take action over a number of years. My recommendation is use forthcoming FB to repeal loan charge.
Lord Turnbull - this is about backlog. Doctrine of knowing something about it and not having stopped it? Seems this is what HMRC are doing. The more they wait the more back tax they collect. Notified under DOTAS? No warning from HMRC - if you're being paid in this way these consequences apply?
GW - tax law has concept of legitimate expectation. In case of these contractors they claim it never happened - 10 years of silence.
KG - HMRC needed Parliament to introduce new legn to overcome statutory safeguards. New legn could be attacked in courts.
Turnbull - financial services has concept of treating taxpayers fairly. There was restitution. Here is a case where employee not treated fairly, not given full info. and should be entitled to same rights of restitution, not being asked to pay this money.
GW - could legitimately ask why HMRC not pursuing employer
Forsyth - same kind of issue as BBC cases?
GW - it is same kind of issue. Rangers case - EBT used to pay for footballers. HMRC took case through courts, eventually Supreme Court. Judge said yes this is taxable income and employer should pay. July 2017. Some months later HMRC said loan charge agrees with Rangers decision - a liability - but employees pay. For us loan charge is HMRC trying to rewrite that Rangers decision. Won the case after many years.
Peer - do intermediaries still exist?
GW - Lot of intermediaries still exist, lot of agencies still exist. Not hiding. HMRC know where they are. So for us and our clients we have this massive sense of injustice. Loan charge there to hide HMRC inadequacies over 20 years. Retrospective. Believe HMRC briefed FST Mel Stride inadequately and he said tax avoidance is illegal. Never has been. Also, number of MPs signed EDM, close to 100, against loan charge.
Lord Leigh - wouldn't any reasonable person, offeerd a scheme through an Isle of Man company, ask questions about it? Don't understand why you are surprised that people are going to have to pay tax.
GW - often presence of IOM or Channel Island company not clear
Leigh - it was. I saw the literature.
GW - if you mean some of individuals didn't undertake suitable due diligence I'd agree. Should have questioned something which appeared too good to be true. But literature says 'HMRC compliant, backed by finest QCs'. Why would man on the street not believe an expert?
Leigh - your view is HMRC ignored because couldn't deal with it?
GW - if you believe HMRC these schemes have never worked. So why weren't they saying that back in 2005?
Turnbull - isn't it the case that this should be liability on employer and HMRc are saying can't get from employer so going to someone else. Looking for a pocket. HMRC entitled to establish this was abusive, artificial. What we're questioining is whether employee is person to pursue.
GW - most of my clients accept some degree of culpability, therefore accept share of charge. Galling that others benefited and have got away with it.
Baroness Drake - We've received evidence HMRC treats small business less favourably than big. True in your view?
KG - my initial response is they treat everyone with equal contempt. Big biz get more professional service. General view that MNCs get cushy ride from HMRC. A misunderstanding. Easy to misunderstand how MNCs are taxed. Many changes to rules. Think HMRC will go for anyone they can.
Drake - going back to comment about HMRC taking bullying approach disproportionate on smaller business. How address?
KG - give the FTT greater powers to hold HMRC to account, esp for judicial review. Approach of HMRC changed in 2005, then changed back. Cites case taken to JR where HMRC bullied taxpayer, spending 38K of legal expense to recover 16K.
VT - LITRG has suggested that there should be greater power for UT to rule on some of these points. JR out of scope for most. If question is do large companeis get better access then yes, because they have compliance managers. Would be great if every taxpayer had these who they could ring up and get issues resolved but that's unrealistic. But what there should be is accessible service for all, esp those with extra support needs. Seeing no of cases reach tribunal where you can see someone has additional needs not picked up by HMRC - HMRC haven't done anything to support the person with regard to what safeguards might exist. Represented taxpayers have help making their case,
Leigh - On MTD, view of making it mandatory? Safeguards re digital exlcusion?
VT - broadly supprotive of HMRC's digital agenda but against mandation, inc MTD. If a system is good and has benefits you'd expect people naturally to want to use it. Safeguards - ppl who can't access things digitally should get similar amounts of service. We supported case to FTT in 2013 where taxpayers were mandated to file VAT returns online - no exemption in legn. As result of winning that case exemptions put into place and carried through to MTD. But exemptions only helpful if work in practice. With MTD don't know what form exemption will take. Exemptions must be made clear to ppl. If look at targets - online i-form target 95% within 7 days, postal target 80% in 15 days so can see better service for online. Not just digi excluded but also people who need help transacting online.
KG - see MTD as being introduced for HMRC's convenience rather than taxpayers'. Forcing ppl to put records electronically. Case in FTT a year ago after RTI for PAYE came in. HMRC started advertising all advantages. Case picked up at year end. Taxpayer said should have been picked up in year. All promises went.
Lord Hanworth - you've given some quite powerful examples. Could you provide them anonymised.
GW - happy to provide dossier of 100 stories for you to draw on.
Hanworth - also Hansard reference to FST comment.
The session concluded.