Peers raised concerns over the 2019 Loan Charge and the preparedness of business for digital tax reporting, during a debate this week (29) on two reports from the House of Lords Economic Affairs Committee’s Finance Bill Sub-Committee.
The two reports - ‘The Powers of HMRC: Treating Taxpayers Fairly’ and ‘Making Tax Digital for VAT: Treating Small Businesses Fairly’ – sprang from the sub-committee’s inquiry into the draft Finance Bill published in July 2018. An earlier attempt to hold this debate had been postponed due to the need for peers to debate urgent Brexit-related legislation.
Committee Chair Lord Forsyth of Drumlean said there seems to have been no effort to calculate a cost for the smallest businesses, which will need more agent support and may be more likely to use paper records, when it comes to MTD. HMRC have still not done enough to raise awareness, he said, and ‘serious questions’ remain about the expected benefits of the wider MTD programme. HMRC do not seem to account for the fact that mistakes can run in both directions, and there is no convincing explanation of how businesses are meant to cope in rural and other areas where broadband connections are insufficiently good. All this led the committee in 2018 to recommend that that no further mandation takes place until April 2022, to allow the Government to properly analyse and learn lessons from the implementation of MTD for VAT. The committee also asked the Government publish a revised long-term strategy for MTD.
In a separate report, the committee concludes that HMRC’s powers have outpaced taxpayer safeguards, saying several powers had been introduced with insufficient safeguards attached for taxpayers, particularly those on lower incomes or without agent representation. For example, accelerated payment notices and follower notices. The committee wants to see a new ‘collaborative review’ of powers between government and the tax profession, repeating an exercise successfully conducted between 2005 and 2012 when Customs and Excise merged with the Inland Revenue, Lord Forsyth said. He also complained about an ‘aggressive and uncompromising’ culture of enforcement at HMRC such as presenting voluntary requests for information as statutory requirements and making inappropriately harsh decisions on penalties.
The committee suggested that HMRC’s adjudicator should proactively investigate the conduct of HMRC investigators in the manner of an inspectorate, or simply expand the types of taxpayers’ complaints that she can hear and strengthen her power to settle them. The committee also recommended a review of the case for an independent body to scrutinise the operations of HMRC.
Lord Forsyth cited the 2019 Loan Charge as an example of HMRC’s disproportionate powers and an ‘overtly aggressive’ culture. On this matter, the committee recommend that the charge be disapplied to any disguised remuneration which occurred in years which would otherwise have been closed to HMRC inquiry, and it found no evidence that HMRC is showing enthusiasm in pursuing either the employers or the promoters of the schemes.
Forsyth said the gravity of the evidence the committee received in the HMRC powers inquiry required a ministerial response and he is angry that Tax Minister Mel Stride declined to attend the committee four times, with the Treasury ‘asserts a convention we do not recognise, claiming that the fact that no Treasury Minister has attended a sub-committee before represents a precedent’.
Lord Tugendhat said that if one compares HMRC’s record with that of the various departments which at different times have had responsibility for social security, HMRC emerges rather well from any such comparison. However, he agrees with Lord Forsyth’s strictures about the pace at which MTD is being introduced.
HMRC should do more to publicise action against promoters of tax avoidance schemes, Tugendhat continued, and he greatly regrets the Government’s rejection of the proposal that naming and shaming should be restricted to those who have actually broken the law, as distinct from those engaged in legal activities of which HMRC disapproves. He is upset at the rejection of the proposal to give the First-tier Tribunal the power to conduct judicial review.
Procedural fairness should be a hallmark of our tax system, but it is not clear that the Government share this ideal, said Baroness Noakes. She complained about a ‘common HMRC and government tactic’ that when asked what is fair, they answer by saying what is unfair.
On MTD, the Baroness said it is wrong for the Government to mandate digital solutions until it is clear that the vast majority of taxpayers can comply with ease and with minimal additional cost.
Viscount Trenchard wants the Tax Minister to look again at definitions of tax avoidance because while the definition of tax evasion is clear enough, on the definition of tax avoidance, is it right that HMRC can opine on exactly what Parliament intended? He added: “There should not be any room for the subjective judgment of HMRC on the supposed failure to comply with the spirit of the law on the part of a taxpayer.”
On the proposal to treble the time limit for assessing income tax and capital gains tax from four years to 12 years, he said he agrees with Victoria Todd, of the Low Incomes Tax Reform Group, that the current timescales - four years normally and six years where a taxpayer has failed to take reasonable care - are reasonable. The Viscount said extensions of the time limits are very bad for honest taxpayers because present limits make it incumbent on HMRC to look into all disputed cases relatively quickly. And if HMRC does not have to raise any queries with taxpayers for 12 years, it will significantly reduce the incentive for HMRC staff to do so.
He is also disappointed at the Government’s response to the committee’s recommendation that they should start a fresh dialogue with representatives of tax professionals, especially because of the impact of the unprecedented amount of information available to HMRC because of the common reporting standard.
On the loan charge, Viscount Trenchard expressed regret that the Government rejected the committee’s recommendation to exempt from the loan charge those loans made in years when taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been closed.
On MTD, Trenchard said many firms of accountants only contacted their clients about the changing requirements immediately before, or even after, 1 April 2019. He supports the ICAEW and the Chartered Institute of Taxation that have supported the committee’s recommendation that the mandatory date for digital VAT be deferred by at least one year.
Labour Treasury spokesperson Lord Davies of Oldham said the problems assessed in both reports are a consequence of efficiency savings at HMRC. He spoke on the Loan Charge, saying: “If there is one thing which stands out in this whole sorry saga, it is that HMRC persisted with conduct which was already causing enormous consternation not to people who were adept at tax evasion or those who employed professionals to look after their tax affairs, but to ordinary citizens applying for jobs.”
On MTD he said the Opposition “understand the argument for Making Tax Digital and endorse it, but it has to be introduced and developed in a better way, as the reports have identified.”
Lib Dem speakers
Lib Dem small business spokesperson Baroness Burt of Solihull said introducing MTD on 1 April 2019 is disastrous because small businesses are simply not ready, but she welcomed that sanctions will not be levied where companies can show that they have been doing their best to comply. She approved of the likelihood that HMRC will wait until at least April 2022 to implement the next stage of MTD so lessons can be learned. Just only one in 10 small firms responding to the Federation of Small Businesses (FSB) believes that MTD will have a positive impact on tax reporting and financial management processes, with more than a third believing that it will have a negative effect, she said.
On MTD, Treasury spokesperson Baroness Kramer said she would rather go with the estimates from the FSB than with ‘the, frankly, rather silly numbers that we heard from HMRC, which seem to suggest that it is completely out of touch with the real world of software costs in the marketplace’.
On HMRC powers, she called the 12 year time limit for assessing offshore tax ‘nonsensical’ and an example of the Government ‘throwing the burden of its own incompetence on to the taxpayer’.
On the Loan Charge, Kramer said we have a population here who did not understand what they were getting into. They did not intend this - and intent is significant and important when you go after people for what effectively are their life savings, she said. Being told that payment could be spread over three years is pretty meaningless because the number is so ‘fantastically large’. The Baroness also complained that only a single promoter of a loan charge scheme, Hyrax, had been successfully prosecuted, but on the grounds that it breached DOTAS rules, not because it sold the schemes to people.
On the Loan Charge, Lord Kerr of Kinlochard accused HMRC of being ‘disingenuous’ by saying it is not retrospective when to him ‘it is true only in the sense that the catastrophic cumulative charge resulting from retrospection accrues and must be paid 100 per cent in the current year – but it has accrued because of actions in previous tax years, those that would otherwise have been said to be closed’. HMRC should all along have been warning those who were signalling on their tax returns that they were using such schemes that HMRC clearance was not certain and that there was a legal uncertainty here, he added.
Lord Judge said that while the liability to pay tax depends on legislation, tax legislation over the past 10 to 15 years has made understanding tax liabilities virtually impossible: “The legislation is virtually unintelligible. Sometimes no one - not HMRC, not the taxpayer, not good sensible accountants and not even wise judges - can be too certain about what the legislation actually provides.”
On HMRC powers, he said: “If HMRC tells you that if you challenge its analysis of a problem and you lose and it can cost you, as your accountants will advise you, a huge penalty, what is your reaction likely to be? It turns HMRC into judge and jury in its own cause.” He even suggested that courts be able to impose a penalty for misconduct by the taxpayer, not only on the taxpayer but on the taxpayer’s advisers and on those who promoted what the court had found to be an abusive scheme.
Speaking for the government Lord Young of Cookham observed that, “although we have debated these two reports together, they are very different. The one on powers is wide ranging, hard hitting and contains some radical proposals… The one on making tax digital is more narrowly focused, more consensual and concerned with the pace of travel… rather than its direction.”
Lord Young defended Tax Minister Mel Stride’s no-show at the committee hearings, saying his own understanding is that the sub-committee’s inquiry was focused on the Finance Bill, which is properly the preserve of the Commons, and as such, no Treasury Minister has given evidence to the sub-committee in the nearly 20 years of its existence.
Commenting on HMRC powers, Lord Young said the purpose of the powers is to allow HMRC to collect the tax that we need to fund vital public services.
On the loan charge, Lord Young said that the schemes concerned are not and have never been effective, and that tax was always due, that HMRC have been investigating more than 100 promoters and others involved in marketing tax avoidance, including many who sold disguised remuneration arrangements.
In exchanges with Baroness Kramer and Lord Forsyth, Lord Young disputed the claim that the Supreme Court had ruled, in the Rangers case, that the tax liability was with the employer. However he made clear that ‘HMRC will seek to collect the loan charge from employers in the first instance’. Baroness Kramer suggested that as many of the contractors had worked for public bodies, it should be straightforward to collect money due from the employers in those cases. Lord Young repeated that HMRC will seek to collect the loan charge from employers in the first instance, and only pursue individuals for the tax due where it cannot reasonably do so from the employer.
Since the 2016 Budget announcement, around 6,000 people have agreed settlement, raising £1 billion for the Exchequer, said Lord Young. These numbers will continue to increase as more settlements are agreed, he speculated. HMRC’s analysis shows that around three per cent of those individuals who used a disguised remuneration loan scheme worked in medical services and teaching, he added.
Baroness Kramer said that in the one case of potentially loan charge-related suicide that she is personally aware of, HMRC is now pursuing the heirs for the loan charge. Was the minister aware of this, she asked. Lord Young said he was unaware of that and will take the matter up with HMRC.
On the vexed issue of retrospection, he added that the Loan Charge is a new charge on disguised remuneration loan balances outstanding on 5 April. It does not change the tax position of any previous year or the outcome of any open compliance checks. Where DOTAS numbers were provided, HMRC routinely opened inquiries, and it will look carefully at cases where individuals provided evidence that they fully and properly disclosed their use of a DOTAS at the time and where HMRC closed an inquiry with that evidence. However, it does not believe that there are many cases where that has happened, he added.
On wider matters, Lord Young said the Government have always provided HMRC with the resources that they need. On accelerated payment notices and follower notices, he said the rules do not affect a taxpayer’s right to appeal against an HMRC decision or assessment concerning their tax liability. If the taxpayer successfully appeals the actual liability, the follower notice penalties will no longer be due.
The powers review was a major project coming alongside the merger of HMRC and Customs and Excise. There has not been a similar fundamental change to justify another such review, Lord Young argued.
Lord Young also spoke about MTD, saying it gives UK businesses more control over their finances and allows them to manage their tax more easily so that they can focus on what they do best—innovating, expanding and creating jobs. The peer said businesses that are unable to go digital will not be forced so to do.
The full session can be read here.