The House of Lords Economic Affairs Committee’s Finance Bill Sub-Committee is looking at Draft Finance Bill 2020-21, focusing on three areas of the Bill, all related to the powers of HMRC:
- New proposals for tackling promoters and enablers of tax avoidance schemes;
- New tax checks on licence renewal applications; and
- Amendments to HMRC’s civil information powers.
The sub-committee held its first hearing of this inquiry on Monday 5 October, with a session divided into two halves. For the first there was a panel consisting of Richard Wild, Head of Tax Technical Team, CIOT; Frank Haskew, Head of Tax, ICAEW; and Susan Cattell, Head of Tax Technical Policy, ICAS. The second half of the hearing featured a different panel, consisting of Lydia Challen, Chair of Tax Committee, The Law Society; Yvonne Evans, Tax Law Sub-Committee, The Law Society of Scotland; Fiona Fernie, Tax Investigations Practitioners Group.
Proposed measures against promoters
Sub-committee Chair Lord Bridges of Headley (pictured thanks to Parliament UK), Conservative, asked which of the proposed measures is likely to be the most effective. Cattell said individually, the measures will not have much impact. Haskew said we are now approaching a real hard core of promoters who are very difficult to crack but, taken together, the measures will certainly have some impact. Wild said the CIOT is very much behind the measures that drive out unco-operative and unscrupulous promoters who ‘dodge, sidestep and even operate outside the rules’ and are not typically members of professional bodies.
Lord Forsyth of Drumlean, Conservative, suggested HMRC’s efforts have been ‘pretty pathetic’, if you look at the number of people who have been prosecuted or fingered by HMRC and compare that with the vigour with which it has pursued, for example, victims of the loan charge.
Haskew said we are down to a group of 25 to 30 promoters who seem to be operating below the radar and are proving an ‘exceptionally difficult nut to crack’. HMRC have used their existing powers to bring down the tax gap significantly, but we have reached a hard core of people who it is very difficult to address through the existing powers, he said. Cattell said there are approaches through the tax legislation, but other approaches would be HMRC directly contacting taxpayers when they think someone is getting drawn into a disguised remuneration scheme and advising the taxpayer that they will be looking to challenge those schemes.
Baroness Kramer, Lib Dem, suggested HMRC should eliminate the hard-core group of 25-30 promoters first, rather than ‘picking the easy target’. Wild said a ‘very small bunch of people [promoters], invisible to the likes of most such as the Institutes’ are to blame.
Publicity and regulation of the tax advice market
Baroness Bowles of Berkhamsted, Lib Dem, asked if HMRC are doing enough to publicise warnings about schemes to potential users. Haskew said more needs to be done on publicity. Spotlight (where HMRC published information about suspicious schemes) is not the right name, and certainly taxpayers would struggle to find them. Wild said there should be simpler messages transmitted in a more mainstream way to hit a wider population. Cattell called for an expansion of a current HMRC pilot, which sees the tax authority use the data they get from PAYE through real-time information to try to identify people who sign up to suspicious schemes, explaining that they will challenge them and why they do not work.
If you had a fully regulated market, it would not necessarily drive out that sort of behaviour, opined Haskew. Those people are not providing tax advice; they specifically say that they are not tax advisers. We need to get to those people, but whether regulation is the answer is not clear, he said.
All three witnesses supported Bowles’ call for something such as what the FCA is doing on pension scams, on television and elsewhere, to tell people that if somebody offers you something of a particular nature it is probably a scam, especially if you are lower paid.
Viscount Chandos, Labour, is concerned that the only safeguards on appropriate targeting of the measures will be set by HMRC’s internal governance processes. Wild replied that CIOT was slightly reassured by the scope of the measures being very focused on the ‘hard-core rump’ of promoters with most professional advisers not in their scope. But they should be kept under review, particularly because there is no right of appeal against the new information notice that forms part of the DOTAS changes.
Forsyth worried that the main objective of HMRC is to get in as much revenue as possible, and bit by bit additional powers that reduce the freedom of the individual and the fairness of the system are being added. HMRC does not seem very fast on its feet, while taking powers that it does not demonstrate great effectiveness in applying, added the peer.
Haskew shares Lord Forsyth’s concerns about a drip by drip increase in powers. That is why they need to be exercised proportionately, and why there needs to be scrutiny and oversight. It is important that the HMRC Powers and Safeguards Review is allowed to conclude after a delay because of COVID-19, he added.
Cattell remarked that HMRC so far have not issued a single monitoring notice under the POTAS regime, but it is probably a mistake to see that as its being completely ineffective. She said POTAS is deterring tax abusive promoters, not least because HMRC would be able to name them, and their details would be published.
Tax checks for licence renewal applications
Baroness Kramer, Lib Dem, asked Wild for his view on the concept of making licences to trade conditional on compliance with tax obligations in England.
Wild said as a concept, it seems like a good idea. Why would you not use information that the government already hold on somebody’s legitimacy to trade and read that information across to their tax affairs?’ But he is anxious that we do not want to drive people further into the hidden economy by them operating on an unlicensed basis. We need to make sure that the system is easy to use and that it works effectively, he said, and make sure that it is up and running and tried and tested before it starts from April 2022. And we must ensure that an alternative process is in place for those who are digitally excluded, and protect people’s livelihoods in case there is a risk of something going wrong within HMRC such that the tax check or the authorisation is not granted.
Haskew said in the Republic of Ireland they have found tax clearances very successful in attacking the hidden economy and evasion.
Civil information powers
Lord Butler of Brockwell, crossbencher and a former cabinet secretary, asked for opinions on HMRC removing the requirement to get tribunal authority before seeking information.
Haskew said his concern is not so much with the offshore element as with the onshore element. The proposal is billed as an attempt to speed up exchanges of information in relation to requests from overseas tax jurisdictions, which is probably not unreasonable, he said, but it is also proposed that that cannot be done without extending it to the UK as well, onshore.
Haskew complained that we have not had a real discussion about the underlying policy rationale for this measure and whether there are alternatives that could be explored. Wild agreed with Haskew, adding that we should flesh out what the options are and see whether they are viable alternatives.
Haskew told Lord Bridges of Headley that the measure talks about an annual report to Parliament, which, he said, is certainly going to be needed. And we need to understand how the provision is going to be used. Up to a point, it overrides the existing Schedule 36 provisions, he said. Cattell remarked that a risk-averse bank might decide to stop dealing with a customer because it thinks that issue of the notice indicates some sort of wrongdoing.
Notification of uncertain treatment
Wild said he is not convinced that this measure will help HMRC to address areas of dispute more quickly, that it will resolve matters quickly or that it will have a material impact on the legal interpretation part of the tax gap. He predicted that HMRC would get bombarded with notifications. The penalty itself is not substantial, because businesses, especially large ones, want to be fully compliant, he added.
Cattell also suspects HMRC is likely to get lots and lots of disclosures it does not want, which will put pressure on the customer compliance managers, who already seem to be struggling, she said. She remarked that the measure would be better targeted if it applied only to businesses that get a high risk rating in the business risk review process, or if HMRC was given the power to issue a direction that a business should be within the proposals, therefore restricting it to businesses that HMRC is concerned about. Haskew said the consultation document talks about Australia and the US having such a provision, but with no explanation of how theirs works and why they need it.
Corporate interest restriction
The draft legislation on the corporate interest restriction retrospectively provides a ‘reasonable excuse’ provision as a defence against penalties. The government has suggested that there is a case for making the new penalty provisions for enablers of tax avoidance schemes retrospective.
Wild is happy with the ‘reasonable excuse’ provision being built in retrospectively, saying it should have been there all along. But he is sceptical about the enabler penalty being backdated. A firm decision has not been made on that as yet. It was always intended that the penalty would be in place from the outset, but if we are to respect the policy on retrospection it should apply from a future date, he said.
On the enabler penalties, Cattell said as a policy principle in general ICAS does not agree with retrospection. Her view is that the changes there should take effect from Royal Assent, which is the current proposal, but the question in the consultation said that because there had been some issues with applying the penalties there may be a case for retrospection.
This 5 October 2020 session can be viewed here. A full transcript of the session is available here.
The second panel for this hearing consisted of Lydia Challen, Chair of Tax Committee, The Law Society; Yvonne Evans, Tax Law Sub-Committee, The Law Society of Scotland; Fiona Fernie, Tax Investigations Practitioners Group.
Proposed measures against promoters
Lord Bridges of Headley (Conservative), chair of the sub-committee, said HMRC claims that there is a ‘hard core’ of 20 to 30 promoters still operating and asked if the tax authority needs more powers to tackle them. The Law Society’s Lydia Challen hopes the ongoing review of HMRC’s powers and safeguards will be allowed to take its course before additional powers are taken. She worries that the proposals in the Finance Bill risk penalising legitimate advisers without necessarily having the effect that HMRC want on the hard core. She thought rules alone would probably not be enough against this hard core, and suggested dealing with it largely through the demand side of the market and wider public education on tax issues.
Fiona Fernie of the Tax Investigations Practitioners Group commented that it is ‘incredibly questionable’ whether the measures will change any of the behaviours of the 20 to 30 hard core, because in many situations the arrangements that are being peddled by that remaining hard core are not tax avoidance schemes; they are fraudulent. Fernie added that it is quite difficult to impose sanctions once people have disappeared offshore.
Lord Rowe-Beddoe (crossbencher) asked if the new measures would be more effective in tackling the remaining hard core. Fernie said HMRC being able to issue an SRN is helpful especially against people who think their schemes are fine because they have a DOTAS number. She estimates there will still be 15-20 promoters in the hard core category in a couple of years’ time.
Lord Forsyth of Drumlean (Conservative) is pessimistic that the proposals will stop HMRC going after the ‘easy targets’ rather than promoters. Maybe we should look at criminal law in respect of tax abusive promoters, he asked. Forsyth continued: “The huge change that we achieved on health and safety regulation was when we made the directors of the company personally responsible.”
Challen agreed that criminal proceedings may be appropriate in some circumstances but warned HMRC finds them expensive, time-consuming and difficult to prove. Separately, she remarked that the tax avoidance market is no longer the preserve of high net-worth people, with everyday people now suckered into some of these schemes. She said that while she thought the government’s measures would be helpful she was concerned that because they are based on the widely drafted DOTAS regime, some of the measures draw in advisers who are not in the hard core and do not deserve to be dealt with in the same way.
Fernie suggested firms should be required to have the equivalent of a senior accounting officer or an anti-money laundering officer who would be personally responsible. The rogue firms would find it much more difficult to operate if they had to have that, she claimed.
Lord Monks (Labour) is concerned that safeguards will be dealt with largely through internal governance procedures. Yvonne Evans (Law Society of Scotland) said it should at least be senior officers, who have not been dealing with the taxpayer previously, who make the decisions. Challen agreed with Evans and said there is no right of appeal in advance of HMRC naming somebody. And there is a right to make a representation to HMRC, but nothing more.
Challen told Lord Bridges that DAC 6 is a very difficult bit of legislation. It is extremely vague and riddled with difficulties of interpretation and traps for the unwary, she said. A lot of completely mainstream advisers will routinely fail to notify things that they should notify under DAC 6 because the rules are so difficult to apply. It does not seem to her to form a good basis for disclosure were POTAS rules to apply.
Publicity and regulation of the tax advice market
Baroness Kramer (Lib Dem) suggested HMRC use a template in the way the FCA tries to communicate with people over pension scams, for example, with broad television ads and alerts of a very different nature. Fernie replied that HMRC has a ‘very blinkered view’ as to how it should communicate with people and do not seem incredibly willing to come out of that. She said: “I think its view is that they are very expensive for what they achieve.” HMRC were not supportive of Fernie’s suggestion that they put Spotlight on the front page of GOV.UK. She added: “Anyway, the HMRC part of the Government website changed a few years ago and it is so unnavigable now that most of us just google everything anyway. It is ridiculous.” There ought to be a route for people to challenge HMRC’s view of a scheme before the matter becomes public or reputationally damaging, she said.
Baroness Bowles of Berkhamsted (Lib Dem) asked if there a case for reversing the burden of proof so that you cannot implement a tax scheme unless and until it is explicitly allowed. Challen said it would have such wide-ranging potential effects that she cannot quite visualise how you would craft such a thing so that it would be workable. Fernie suggested HMRC does not have the resource to have people to do it though it would be quite helpful if HMRC could help tax professionals to interpret the law.
Lord Forsyth said he had been shocked to discover that 30% of tax advisers were not members of professional bodies. He asked why the professional bodies did not advertise, such as: “Don’t take advice unless somebody is a member of our body, because it could get you into trouble”? Challen said that is possibly anti-competitive and would not necessarily increase access to tax advice for the low-paid. More resources should go to charitable bodies that advise the low-paid, she added.
Fernie said she thought the professional bodies could do a bit more. There is an element of making sure that those who are in the professions keep an eye on what is going on, she added. Challen remarked that bodies have not had communications from HMRC about schemes that it would like organisations to disseminate to their respective members.
Lord Butler of Brockwell (crossbencher) asked about HMRC’s proposal that it should be able to require information without first being authorised by a tribunal. And also, if the witnesses see a way through the bar on discriminating between overseas tax authorities and domestic cases. Evans said it is an important balance and a check for taxpayers that the information is reasonably required. She is not convinced that an internal process would scrutinise that so carefully.
HMRC complain that a backlog at tribunals is delaying their ability to get approvals. However, Challen spoke positively about the streamlining of the tribunal process forced because of COVID-19. Not only are the tribunals adopting virtual hearings, but more judges have been trained in dealing with the applications and there has been the development of a standard form of application, which encourages the Revenue to have assembled all the correct information for the tribunal to deal with, she said. This should deal with a lot of the concerns that HMRC has raised about the tribunal process.
Fernie said there could be a situation in which the taxpayer has no idea at all that a financial institution notice is being issued. HMRC can stop the bank telling the taxpayer that it has happened, she said. If you do not have to go through a tribunal to get there, you have the problem potentially of no visibility. Challen has looked at the more recent peer reviews for France and Germany in comparison with the UK, and they did not seem to be materially different. In many respects, the UK was actually timelier.
Viscount Chandos (Labour) asked for views on the claim that there is no real scope for speeding up the tribunal approval process. Challen thinks there needs to be a certain amount of education of UK’s treaty partners about the kinds of information that the tribunals require before they will make the orders, and ensuring that it is provided by those tax authorities in a timely way.
Notifying uncertain tax treatment
Fernie said there is so much in the tax statute that is grey that, if everything that is uncertain has to be declared, HMRC will be overrun with declarations. Challen complained that you are introducing legislation that affects everybody for the purpose of dealing with a small minority – businesses in this case. Evans said the majority of large businesses, which this proposal deals with, are compliant.
Tax checks for licence renewal applications
Lord Rowe-Beddoe is worried about the safeguards for this proposal. Challen said these are insufficient: if you are going to introduce a regime that involves a penalty, you need something that a court can adjudicate. This is not something on which a court could sensibly give a view, because the test for what HMRC considers the position to be is subjective. She is concerned that you could end up with any form of regulation pulling people into a regime relating to tax. She said: “A system that requires you to be registered for tax in order to get a licence may not be disproportionate. My concern about the legislation as drafted is that there is no indication that it is as limited as that.”
Fernie said: “It is interesting that it is targeted only at certain people. Whether it is meant or not, it gives the impression that the Revenue [HMRC] assumes that a taxi driver or a scrap metal merchant is inherently likely to be dishonest and likely not to want to file their tax returns. The Revenue’s charter says that it will treat everybody as being honest in the first instance. Therefore, I worry about that a bit.”
The draft legislation on the corporate interest restriction contains a retrospective provision allowing a ‘reasonable excuse’ defence against penalties. The consultation document on the promoters and enablers legislation suggests that the penalty provision for enablers might be made retrospective. Evans said she generally does not support retrospective measures, because of the rule of law and because it can create a lot of uncertainty, but in these two quite narrow circumstances ‘it fixes a problem’. Challen said she is happy with the corporate interest restriction retrospectivity because it fixes something that should have been there from the outset. But she is less comfortable with the provision for enablers being retrospective, on the basis that it is introducing a penalty. Whatever the arguments for whether it should have been there in the first place, people will have acted on the basis of the law as it stands, she said.