The House of Commons Treasury Committee has questioned senior HMRC officials on the organisation's annual report and accounts - a general hearing on a range of aspects of HMRC's work, including planning for Brexit, the 2019 loan charge and IR35.
House of Commons Treasury Committee
Subject: HM Revenue and Customs Annual Report and Accounts
Witnesses: Jon Thompson, Chief Executive and Permanent Secretary, HM Revenue and Customs, Jim Harra, Deputy Chief Executive, HM Revenue and Customs, and Justin Holliday, Chief Finance Officer, HM Revenue and Customs
You can view the proceedings live here.
The meeting of the committee was scheduled to start at 2.15pm.
Committee chair Nicky Morgan opened proceedings at 2.33pm.
Child benefit charge
Catherine McKinnell asked about the effect of the child benefit charge and whether there had been any change in the way people are applying or changing recipient of NI entitlements.
Jon Thompson said there had been no clear changes. People were still being encourgaed to apply for child benefit even where they would be liable to the charge, because of its impact on entitlements. HMRC has commissioned some research, which was due to be published in October but has not yet been published.
McKinnell said it would be helpful to know the scope of the research and when it would be published. She said she had a family in her constituency who had been notified they had a bill of £1700 to pay for HICBC by Nov 10th which was distressing. Thompson said HMRC were happy to strike flexible payment agreements. He encouraged the constituent to get in touch with HMRC. Asked by McKinnell, Thompson accepted the charge had complictaed what was previously simple benefit. That was a consequence of the policy.
Thompson said HMRC was talking to DWP about policy development in relation to making sure people get their NI contributions correctly and don't fall foul of child benefit requirements.
Nicky Morgan asked how the terms of the political agreement differs from being in a customs union. Thompson said it was close to that but the government had published proposals for a customs arrangement, and this differed from a customs union in various respects.
On the N Ireland backstop, Thompson said it was 'really difficult' to answer whether the backstop would be able to be put in place by the end of 2020. HMRC would require further clarity on what is required in terms of IT systems. They would also require businesses operating in N Ireland to adapt their own systems. HMRC think it could be up to 30 months to achieve that, he said.
Thompson said that while the withdrawal agreement assumes UK will lose access to HMRC databases in relation to customs the political agreement puts that back on the table. "If we do not have access to those databases we might be put in a situation where we have to build them ourselves, or have to worki around operationally what is the impact of the loss of those databases" said Thompson.
On VAT, Harra said the withdrawal agreement provides that we will still have access to relevant VAT systems to the extent that is needed to run the backstop provision in relation to Northern Ireland, but not in relation to the rest of the UK.
If the backstop came in in January 2021, what would that mean practically, asked Morgan. Would it harm revenue gathering? Thompson said you might have to make some trade offs between the strategic objectives of free flow of trade and raising of revenues. Alternatively there is 'managed transition', putting practical arrangements in place for a period of weeks or months until new systems can be put fully in place. That work is ongoing, he said.
John Mann asked about small business. If there is no deal what does that mean for a small business that is buying in from the EU and selling a service back to the EU? Thompson replied that, assuming full rules of being a third party applied, there would be a customs declaration, tariffs may apply... Harra said thereafter, temporary movements of machinery to do a job would have some bureaucracy involved. Thompson said the costs to business of no deal would be twofold - administrative and tariffs. Would there be border delays, asked Mann. Thompson said this was plausible, but there was an unknown factor - how the French authorities would react when your lorry landed at Calais. It was highly likely there would be a queue in France in the event of no deal, he said.
Harra said HMRC had identified 145,000 small businesses that trade between UK and EU only. They think there are about 100,000 further who they haven't yet been able to identify, They have written to the former group and are implementing a communication plan to raise awareness and encourage the businesses to take the steps they need to take.
Morgan asked about financial services. She noted some firms in this sector were reorganising because they are worried about Brexit. Harra said moving an asset out of the UK to another country can give rise to an exit charge - a tax liability in the UK. HMRC have been talking to businesses to make sure they understand what they need. HMRC have several working groups working with businesses in different sectors to do this.
Are you passing on to ministers your impressions or numbers of companies asking for restructuring advice, and so on, asked Moragn. Yes, said Harra. HMRC keep ministers appraised of these things.
Charlie Elphicke asked why we think the French might allow queues to build up when they benefit from trade. Thompson said he had merely said it was an unknown. Can 'max fac' systems be ready for end of Dec 2020, Elphicke asked. Thompson said the facilitated customs arrangement (FCA) requires a dual tariff. HMRC's estimate is that takes 24 months from certainty to implement. Morgan asked whether the political declaration, if approved, could be taken as that moment of certainty. Harra said it could be done but he would be 'pleasantly surprised' if the political agreement gave that level of certainty. He added that the repayment mechanism would be the first of its kind in the world so could not be bought 'off the shelf'. Thompson said he did not know when the 'moment of certainty' would come. There were some testy exchanges about what would happen if systems were not ready, with HMRC reluctant to be drawn on whether the transition period would need to be extended. Harra emphasised that 24 months was the timescale for an operational system but not everyone who needed to access the system would be able to do so at that point. Would you be able, with more resources from the Treasury, to speed up the process to less than 24 months, asked Elphicke. You might be able to shave a bit off it, said Thompson, but you couldn't reduce it to, say, nine months. Elphicke also pressed HMRC on contingency plans in the event of the French 'playing games'.
Elphicke asked how the proposals in the political declaration differ from a customs union. Harra said the UK was clear it wants an independent trade policy and to be able to negotiate its own trade agreements, while retaining as frictionless trade as possible within that.
Simon Clarke asked HMRC about the necessaity of a backstop - citing remarks at the N Ireland Affairs Committee by a former President of the Dutch Customs Association that there was no need for a backstop. Harra said that the transition agreement provides the option for an alternative to the backstop and HMRC are very open to doing that. The backstop will only happen if something better cannot be agreed. Clarke said there had been reports that 'max fac' was back on the table. Had HMRC been asked to look at this? Thompson said yes, they were being asked to look at what might be the technical solutions to the problem. Harra said he envisaged that HMRC would be both scoping out how to deliver the backstop and looking at alternatives.
Clarke asked what activities, as necessity, need to be carried out at the Irish border. Harra said they did not envisage checks at the border, even in the event of no deal. Thompson said if you need to physically inspect something you can do it away from the border. Harra said there are cross-border VAT and excise rules implemented at the moment without border inspections. But the UK does use EU systems which it will lose access to after Brexit. Potentially additional controls might therefore be needed. The challenge would be very significant, he said. The more cooperation we have with the EU the more we can achieve.
Wes Streeting took up questioning on the 2019 loan charge and disguised remuneration. In the letter sent to MPs HMRC asked how individuals involved in the arrangements were allowed to go on for so long before they were told they were unacceptable tax avoidance that would be challenged. Thompson said HMRC had told organisers of schemes that they did not believe they were within the frame of the law. In the 2016 Budget the government took the view that these schemes were contrived. Ministerial statements going back to 2004 made clear that these schemes were contrived and that they were avoiding tax. He offered to provide an anonymised real example to bring it to life but Streeting said the committee had a large number of examples.
Streeting said he had a constituent given tax advice, facing a bill now fro £100,000. He is allowed to pay back over five years but is not super rich and is still worried about bankruptcy. What are you doing about the people who gave him the tax advice in the first place? Thompson replied: "Our view is the vast majority of tax advisers don't get into this. For the ones who do we have a range of powers to pursue those. We do actively pursue many of them. The other track for us is to go through the various regulators. We are not the regulators of any of these markets, so for example Jim and I regularly speak to the Institute of Chartered Accountants in England and Wales or the Solicitors Regulatory Authority about the some of the promoters of these schemes, and HMRC has been able to pursue and I think prosecute some of the promoters. There have been some extreme cases where there has been criminality by the promoters and we have had to take a position on what does that mean about the taxpayer where there has been some criminality against them. And in those cases, one of which I have personally been involved with, with a group of customers, we have suspended all actions while the criminality is worked through the criminal justice system, in order to revisit what we would do in those circumstances, so it is theoretically possible that if a crime was committed and you were not aware of that, then ultimately you might not actually be liable."
Harra said, if you take disguised remuneration schemes, the players are contractors. If you look at HMRC's past counter-avoidance strategy our focus until about five years ago our focus was on the employers and the users. "But since about 2014 we have got increasing powers to pursue [promoters] as well... also we have worked with the professional bodies, for them to strengthen their codes of conduct and the disciplinary action they can take against their members. So we now really tackle the whole of the supply chain, and that is clearly having an impact on the supply of avoidance schemes as well as demand for them, so that for example back in 2005-6 we got 600 schemes registered under our disclosure scheme; in 17-18 that was down to 15. So we believe that we are having an impact on the whole of the chain. But it is fair to say that that until about five years ago we didn't really have the range of pweors that we needed to go after the promoters and enablers of these schemes that we now have." He said POTAS legislation provided some quite penal powers. Some of the highest profile enablers had given up altogether.
Streeting asked how someone involved in such a scheme, on the basis of advice given by their tax adviser, might reasonably have known what they were doing was outside the rules. Thompson referred to an anonymised case. "In Leeds an IT contractor earns £100,000 a year. He has the £100,000 paid gross into a trust in the Caribbean. They pay him £12,000 a year so he has enough to create a national insurance record. They deduct a fee of £14,000 and then they lend him £74,000. So he has received an income of 12 and a loan of 74,000. So out of 100,00 he has had 86,000. Now that is clearly contrived to avoid the income tax. That was sold to them for a fee of £14,000. That just looks 'too good to be true' doesn't it? To some degree you have got to think, there are very, very limited ways in which you can reduce your income tax bill. Washing it through a Caribbean trust does look like it's going to be breaking the law to me. I appreciate that some people may have recourse to their advisers and we have certainly seen some cases where some people who are in schemes have tried to take recourse against their advisers... There is clearly a route for people to, frankly, sue their advisers for this and we have seen some of those cases."
Streeting asked if HMRC had analysed earnings levels of people targeted with the charge. Thompson said this had been done. Harra said it was estimated that 50,000 had used the schemes, about 10,000 self-employed and 40,000 employed. On average their incomes were about twice the average UK income. Streeting observed that they did not sound rich. His sympathy 'vanishes' in a case like that outlined by Jon Thompson, but how representative was that? Harra said the schemes were highly contrived and artificial. He did not think many people would expect to be remunerated by means of non-recourse loans from an ofshore trust. "I would describe disguised remuneration schemes as marketed avoidance schemes for the middle class as opposed to very bespoke schemes that might have been constructed for very wealthy people".
Streeting asked how many had taken up the facility to pay off the loan, and also about the sense the charge is retrospective. Thompson said the charge was not retrospective because it was on the outstanding loan balance in April 2019. "It gave people three years to resolve the situation. So if there was a legitimate reason for having that loan from the Cayman Islands, say, then it gave you three years to unwind that". Morgan said the point was that it had not been cracked down on when people took the advice in the way that has subsequently become very clear. Streeting said HMRC was making a reasonable case about the sort of behaviours it wants to crack down but there is a criticism of HMRC that some of these cases go back over a decade so why have HMRC not been cracking down on these schemes. He also asked for assurance that other schemes were not currently in place and something similar would happen in years to come. Thompson said the number of schemes had plummeted because of registration requirements. 24,000 people have come forward to settle, he said. On why HMRC took so long to clamp down, Harra said HMRC felt they had been active throughout, citing the Rangers case and noting that the first port of call had been the employer. HMRC had sent 'plenty of signals' going back to 2009, and increasing in recent years, that they did not believe these schemes worked, they did take up thousnds of investigations and take cases to court, but 'in marketed avoidance generally you have very, very large numbers of cases of people who are very determined not to pay the tax, and in recent years we got increasing powers that enable us to both crack through the casework and to change the economics of avoidance but also reduce the demand".
Streeting said he accepted the point that HMRC had and was using new powers, 'but your position and the government's position, is that these schemes have always been illegal, and yet we have got constituents who have been using them going back well over a decade, and I don't think 'we didn't have the powers' or 'we've been clamping down recently' is actually very satisfactory in terms of explaining how HMRC has allowed some of these schemes to operate for so long". His final question was about whether HMRC was adequately resourced in this area to deal with all the cases. Thompson said he believed so but HMRC was keeping this under review.
Colin Clark took up the questioning, noting that he had a lot of oil and gas contractors in his constituency. He asked how liable the employers were who 'industrialised' this process and encouraged people into it. Harra said employers were the first point of call - they were expected to operate PAYE on their employees and HMRC took the view that this remuneration despite it going into trusts was remuneration which they should have been operating via PAYE. However in many of these schemes individuals signed up to schemes designed to be opaque, including to some employers, and many entities were created as employers that were only put in place for the purposes of the avoidance scheme, and were later closed down. Where they cannot go after employers they go after workers. It was overly cynical to suggest it was easier to go after workers rather than employers, Harra said.
EU customs disputes
Rushanara Ali asked about customs disputes with the EU, noting the Commission had accused the UK of failing to prevent the fraudulent valuation of Chinese textiles. Does the UK owe the EU 2.7 billion euros? Thompson said the government was considering the opinion but does not accept the liability or the quantum estimate. The government would respond as appropriate he said.
Ali asked what steps HMRC has taken to reduce the risk of customs fraud. Thompson said inland processing centres had been set up to inspect containers and conduct more physical checks. That had deterred some Chinese exporters from exporting to the UK.
Ali referred to HMRC's estimate of the cost to business of 'max fac' of £17-20 billion a year. Do they stand by that? Thompson said previous policy decisions were all in the past. We have the political declaration of zero tariffs, etc. - pricing that up we need a bit more information about where appropiate declarations might be required. And in relation to the N Ireland backstop it is again hard to estimate because we need to understand how that might be operationalised and what level of declarations might be required, so at this point in time he could not give an estimate of the costs required.on either of the options.
Morgan asked if HMRC had been asked to do this work in preparation for release ahead of the 'meaningful vote'. Thompson said they had the earlier work on no deal they could refer to - £13 billion for the admin and then £4.5-6 billion for tariffs. It would be around £700 million for the FCA.
Ali said she was struck by a recent pilot by the behavioural insights team about what motivates taxpayer behaviour. She asked how many people in a situation where they were getting compliance notices from HMRC and ending up in the criminal justice system or facing bailiffs, whether they were being treated too harshly in some cases. Thompson said HMRC strived to avoid bankruptcy because if you go down that route you rack up huge fees, they have a dedictaed debt management system with trained staff; they have a dedicated 'needs enhanced service', that is highly rated both by customers and by the voluntary and charity sector. The best thing to do is to talk to HMRC, he said. He said HMRC was trying to learn from banks in how they deal with debt.
Morgan asked whether the interest rate for those who owe money is 3.25% while the rate for those who are owed money is 0.5%. Harra said the rates were different though he could not confirm the exact numbers. Morgan asked if that should be the case. Harra said he was not sure of the rationale for it but it was longstanding. Thompson agreed to go away and look at this.
IR35, taxing contractors and umbrella companies
Colin Clark noted that the Budget stated that there was going to be an expansion of IR35 measures from the public sector to the privtae sector. Are the government outsourcing their responsibility for making sure contractors pay the right tax? Thompson said the government had been clear what they were trying to do. How will the legislation give contractors a clear route of appeal if they disagree with a decision over employment status, Clark asked. Harra said that the private sector engager makes the decision. Anyone who feels the wrong decision has been taken has the ability through self-assessment to challenge that. But most of these decisions are straightforward, he said, adding that there had been a 'very high level of non-compliance with the old IR35 rules'.
Clark asked if these problems arise because the self-employed, owner managers and employed are all being taxed differently, even when they are doing the same job? Harra said this was not about self-employment generally, but the system does create incentives for people to shift themselves into lower tax groups. We understand the policy reasons for those differences, but that creates incentives, he said.
Is IR35 part of a much wider reform that is required, asked Clark. Harra said that in the vast majority of situations it was an easy decision to make. But government was looking at the case for reforming employment status. He referred to the government's tool for determining employment status, which gives an answer in about 85% of the cases, 'and provided you use that tool in accordance with our guidance we will always treat ourselves as bound by its outcome'. Clark said there had been a lot of criticism of the tool. Harra said a lot of the criticism came from people who would rather not be caught by IR35. "We have had the CEST evaluated, including bringing in external experts. We are satisifed that it provides a good service and it gives a robust and correct answer in about 85% of cases. No-one is bound by its decisions other than us, so if someone uses the tool and it either doesn't give them an answer, or they believe it gives them a wrong answer they are not bound by it". HMRC are constantly trying to improve it, he added.
Clark asked when the government would respond to the Taylor Review. Harra was not able to say. It was being led by BEIS.
Clark turned to umbrella companies: "One of the issues that has come up, from the Low Incomes Tax Reform Group, is that people could be pressurised into umbrella companies. What consideration have HMRC given to these concerns? Is that a risk that people, low paid, could be forced into umbrella organisations?"
Harra replied: "Yes, I think there is a risk. There are two parties that can save tax if they can get themselves out of IR35 and one is the worker themselves, but actually the engager can potentially save employers NICs so there can be incentives for engagers to get their workers into arrangements which save the engager employer NICs. So I think that workers do sometimes need to be protected. They are not necesarily the people who are taking steps to try to avoid tax themselves. I think that the rules that we have put in place for the private sector, which will apply from 2020 in the private sector, do help to address that, because it is ultimately the engager, the organisation for which they are truly working, who will have to make the decisions about whether it is an employment."
Clark asked about a case lost by HMRC in a tribunal recently where someone was incorrectly deemed to be an employee. Justin Holliday said the case in question had been settled rather than lost and it was on the application of the agency worker regulations. It had caused HMRC to check that agency workers were getting same benefits as permanent staff about they had been in place for more than 12 weeks. It was not an employment status case.
Nicky Morgan asked why HMRC had been made a preferential creditor. Thompson said it was only in respect of taxes collected by the entity. It was a principled decisin, said Harra, noting the difference between money collected on behalf of your employees and money 'in your own pocket'. At the moment in insolvencies HMRC collects about 4% of the tax at stake. That is expected to rise to 14%.
The session concluded at 4.32pm.