A House of Commons Committee has said that HMRC must do more to support vulnerable taxpayers involved in tax disputes, after taking oral and written evidence from CIOT and LITRG and others.
The Treasury Committee published the report ‘Disputing Tax’ on 31 July. The report covers two of the investigations of its Treasury Sub-Committee:
1) Tax Avoidance and Evasion
2) The Conduct of Tax Enquiries and the Resolution of Tax Disputes
During the course of the inquiries, the sub-committee received oral and written evidence from CIOT and its Low Incomes Tax Reform Group (LITRG), with both organisations featuring prominently in the final report.
Key recommendations and other relevant extracts from the report follow.
Part One - Tackling tax avoidance and evasion
Landscape of tax avoidance schemes
- HMRC should write to the Treasury Committee on an annual basis with a summary of the number and characteristics (sector, income, profile etc) of people it knows to be involved in tax avoidance schemes
The report says it is important for Parliament and taxpayers to be confident that HMRC have a robust picture of the number of people that are involved in tax avoidance schemes or whose past involvement in tax avoidance remains unresolved, how much tax is at risk and the years involved. It is equally important to know all the parties involved, which of those parties may ultimately be liable to pay any unpaid tax and what means they have to settle. That information allows proper transparency and scrutiny of the performance of HMRC. People who take a tax position that they know might be challenged by HMRC should be aware, regardless of how strong they believe their argument to be, that they may ultimately have to pay the disputed tax, adds the report.
Combatting disguised remuneration schemes (the Loan Charge)
- HMRC should closely monitor its response times and report back to the sub-committee on progress in providing settlement calculations
- HMRC should provide an update on the number of cases that have been brought to a conclusion under the Contractor Loan Settlement Opportunity—and how many of the liable population chose not to take it up—providing details of the range of settlement terms and the amount of tax and other duties covered
- The Government should report on how many individuals this will impact, and the amount of money being written off
Some taxpayers have fallen foul of anti-tax avoidance measures because they followed professional financial advice to engage in disguised remuneration schemes or were persuaded to do so by their employer, says the report. The sub-committee concludes that HMRC has adopted a sensible administrative approach to the payment of large unexpected tax bills by people with limited resources. However, it concludes, there can be no doubt that the delay in this clarification caused widespread anxiety and distrust of the Contractor Loan Settlement Opportunity. There have been delays in providing settlement terms to those who wished to settle their affairs under the Settlement Opportunity. On the face of it, the Financial Secretary to the Treasury’s announcement that HMRC would not pursue the charge on individuals in ‘closed’ tax years in which participation in a loan-based scheme had been fully disclosed ‘seems sensible’.
This section of the report quotes the evidence of then CIOT President Ray McCann – who gave oral evidence to the sub-committee – in a number of places. Mr McCann, it says, told the sub-committee, that it was hard to feel sympathy for most of the individuals affected, ‘in the sense that I do not understand how they could get into this type of arrangement and not think that there was something untoward about it’. He went on to describe a category of individuals who were given Hobson’s choice—i.e. to enter the scheme or become unemployed. He expressed some doubt as to the scale or truth of that. While he believed that most individuals were probably aware that they were involved in tax avoidance against the want of the tax authority, HMRC was still required to treat them fairly and take their appeals into consideration—particularly when someone had disclosed information previously but was only being charged now. Mr McCann’s comments on the reasons for the widespread use of the schemes are also quoted.
The role of tax advisers in marketing avoidance schemes
- HMRC should work with the professional bodies to consider whether their standards are sufficiently clear about conduct relating to all stages at which their members may be called upon to provide advice on tax avoidance. HMRC should report back to the Committee with progress against this recommendation by June 2020
- HMRC should produce (and share with the committee) a clear strategy for dealing with tax advisers that continue to promote or enable tax avoidance
The committee notes the role of professional bodies in developing standards in this area, and specifically the addition of the new standards for tax planning to Professional Conduct in Relation to Taxation. Ray McCann’s view that tax professionals would breach PCRT if they gave the sort of advice today that some had given in the past to encourage clients to use disguised remuneration loan schemes, is quoted. Although tax advice is not regulated and not all tax advisers are necessarily members of professional bodies, clear standards of conduct endorsed by influential professional bodies provide the public with a valuable benchmark against which to judge the conduct of any tax adviser, professionally qualified or not, the MPs say. HMRC should vigorously pursue the promoters and enablers of avoidance schemes to the full extent of their powers—whether they are members of a professional body or not, says the report.
Offshore tax evasion
- HMRC should produce an annual report on what the bulk data it receives reveals about the scope and scale of offshore non-compliance, including any particular areas of risks identified and how it is addressing those risks
- Proper regard must be given to the potential impact of the use of extended time limits by HMRC. HMRC must ensure that it leaves good time to ensure that enquiries are opened and, where necessary, assessments made or amended. HMRC should ensure that frequent and regular contact is maintained with the taxpayers involved, that appropriate channels of communication are used, and that sufficient resources are allocated to resolve cases quickly
The committee is supportive of the use of bulk data such as that obtained under the Common Reporting Standard (CRS), but says it must be explained. The MPs do not believe HMRC knows what its baseline is—i.e. what stock of enquiries it already has on hand and what the data is already telling it about the tax at risk from offshore evasion.
The report notes LITRG’s concerns about elderly people and migrants who may have small amounts of income from overseas sources.
Tackling offshore promoters of tax avoidance
- HMRC should set out which—if any—powers and measures it feels need tightening, as well as which resources need strengthening when it comes to dealing with offshore promoters, taxpayers or jurisdictions concerning tax avoidance and evasion
- HMRC should report back to the sub-committee on progress made ‘on promoting comparable standards for UK tax advice in other jurisdictions’
The report cites Ray McCann’s evidence that there is “no real sanction that the UK can apply against [a promoter] based, say, in the Isle of Man”. It notes the intention expressed by HMRC in the No Safe Havens 2019 report to “explore opportunities to work with other jurisdictions to promote comparable standards for UK tax advice in their jurisdictions”. From the context the committee seem especially keen to find out how much HMRC are doing to get the Isle of Man and Channel Islands authorities to crack down on avoidance promoters based there.
Part Two - HMRC’s approach to dispute resolution
- HMRC should provide a clearer explanation of its definition of ‘vulnerable’
- HMRC should report on how it has reflected on the insights of groups such as LITRG, the tax charities and other advice bodies to gain a full insight into the difficulties faced by taxpayers who cannot afford to pay for advice
The committee reports in detail what HMRC told it about the care it seeks to take when dealing with vulnerable taxpayers, and praises HMRC’s efforts to improve its approach in this area. However it then cites evidence that HMRC’s conduct has often fallen short of these ideals. In particular LITRG’s Victoria Todd – who gave oral evidence to the inquiry – is quoted noting that most unrepresented taxpayers would never have heard of the litigation and settlement strategy, and that facilities such as HMRC’s needs enhanced support (NES) service are unmentioned in guidance. Ms Todd is quoted praising NES and the team running it, but noting that they can only start work when a need has been identified by others at HMRC – ‘that is where we feel things fall down’.
Litigation and Settlement Strategy and governance framework / Penalties
- The sub-committee reminds HMRC that it must be fair and consistent in its application of tax measures
The sub-committee quotes evidence from tax advisers dealing with large corporates (Pinsent Masons, Slaughter and May, KPMG) that the perception HMRC takes a ‘lighter touch’ with large corporates is wrong. The report notes the CIOT view that HMRC will often “initially suggest an inappropriate category of behaviour (in the sense of categorising the behaviour as worse than it is). This not only affects both the level of any penalty, and whether it can be suspended, but importantly also affects the time limits for assessing the underlying tax amounts”. It goes on to quote CIOT as saying the decisions made in such circumstances ‘often leads to decisions which are overturned on appeal’ and that ‘such litigation is normally a costly exercise for both the taxpayer and HMRC’.
The sub-committee’s conclusions in this section of the report are cautious, noting approvingly the evidence that HMRC is stringent when applying penalties, but reminding the tax authority of its obligation to apply tax law fairly and consistently.
- HMRC should urgently review and improve the accessibility, quality and level of detail of guidance it makes available to vulnerable taxpayers. It should set out a clear timetable to achieve this
This section of the report cites extensively the evidence of Victoria Todd (LITRG) that the poor standard of guidance available to unrepresented taxpayers is increasing errors and therefore raising the number of enquiries and disputes. The report also highlights CIOT concerns on the quality of guidance on the gov.uk website: Guidance, as saying that: “We understand the basic guidance on gov.uk is written for persons with a reading age of nine; in practice this means that the information available to ordinary taxpayers can omit important points of detail to such an extent that it is actually inaccurate.”