New powers for a new era

THE DEBATE ON the powers required by the new merged department was thrown open by consultative document issued on 24 March, as it expanded the debate to seek views on fundamental issues concerning the relationship between taxpayers and the tax authorities. The consultation takes place in the light of the recent publication of the Hampton review of regulatory bodies, their powers and practices, see 'Reducing Administrative Burdens: effective inspection and enforcement'. While the activities of the Inland Revenue and Customs were expressly excluded from Sir Philip Hampton's brief, the Treasury has clearly taken account of his findings when framing its consultative document.

The consultation document

During the second reading of the Commissioners for Revenue and Customs Bill, the Paymaster General announced the purpose of this review, saying it would address 'the requirement to provide information; interest and surcharge regimes for late payment; penalties for non-compliance and rights of appeal; and the modern regulations and practices that HMRC will need to be a high-performing 21st century tax administration'. The document recognises the scope for aligning and rationalising existing powers, and makes it clear that the focus, for the time being at least, is on the way in which the tax authorities deal with businesses.
The recommendations of the Hampton Review have been recognised in setting the standard to which HMRC will be expected to work. The HMRC consultation paper suggests:

• information should be provided only once;
• agreement of tax bills should be easier and quicker;
• the way in which information is obtained should be aligned to the systems and preferences of taxpayers;
• sources of error and inefficiency should be removed;
• powers for different taxes should be aligned as far as possible;
• inspection and investigation should be streamlined;
• information obtained from taxpayers should be used to provide targeted support and education.

Hampton is also followed in offering a fair and risk-based approach to information gathering by suggesting:

• better understanding on the risks of non-compliance between different taxpayers and different taxes;
• concentration of efforts into areas of high risk;
• dealing effectively with those who do not comply.

This may all sound eminently reasonable, almost motherhood and apple pie for any politically correct and cost conscious modern Government department. Indeed, the opportunity to help shape the powers of the department that we deal with every day should be too good to miss for any self-respecting accountant. However, cynics may suspect that the specific issues to which respondents are steered, see Box, are designed only to highlight possible problem areas in rules that may already have been drafted, at least in outline.
We are pleased to see that comment is invited on procedure as well as on specific powers. In practice, it is often the way in which powers are applied which causes more dissatisfaction and injustice than the design of those powers.

The Hampton Review

The Hampton Review offers interesting insights into the way in which the Government views regulation. A closer look reveals some less comforting proposals.
While it suggests information gathering should be aligned to the taxpayer's own systems where possible, Hampton raises the possibility that regulatory bodies might obtain direct and automatic access to business records. Hampton also envisages much wider sharing of information between regulators. If HMRC were to adopt these proposals, the balance of power between the tax authorities and businesses would swing substantially in favour of the authorities. This could help the authorities to close the 'tax gap'; it may also trigger an increase in time-wasting enquiries from HMRC officers who had obtained information that was only a small part of the overall picture.

Speak now!

Turning to the specific points raised in the HMRC consultation document, we offer our personal views in the hope that this will trigger a debate in the pages of Taxation. A radical change in the administration of taxes is in prospect and the tax profession should not miss the opportunity to influence the shape of the new system.

Are there aspects to the existing system which do not support the Government's objectives?
Transferring most of the burden of compliance to the taxpayer through self assessment administered at national centres, means that most businesses have direct contact with the authorities only when something is perceived to be wrong. Occasionally, this seems to lead to a presumption by some officers that all taxpayers are in some way in default, or worse, that any supposed error that can be found to help close the tax gap is fair game.
There may never have been a golden era of relations between taxpayer and tax gatherers, but the relationship can only be soured by such an approach. While this attitude is by no means the norm, it damages the reputation of the tax authorities and discourages willing compliance.
Another area of great concern is a continuing lack of joined up government and the red tape burden this places on businesses. For example, does the requirement to provide information under the Taxes Management Act breach the Data Protection Act? The Information Commissioner has suggested that businesses must notify customers that their data may be disclosed, and make the appropriate entries in their data protection register. This potentially affects all businesses.
There is already a 'joint convention' between 17 prosecuting authorities to co-ordinate criminal prosecutions: it should also be possible for HMRC to compare notes with other Government departments before creating new legislation. Perhaps regulatory impact assessments need to be carried out more rigorously.
The conflict between Code of Practice 9 and the Human Rights Act is another example of unnecessary disruption to the working of the tax system. Code of Practice 9 has been dealt a grievous blow by the courts' interpretation of the Human Rights Act 1998. If our obligations under the European Convention on Human Rights preclude redrafting tax legislation to breathe new life into Hansard, a new approach should be found which allows most cases to be dealt with by means of pecuniary settlement but retains the real threat of prosecution.

Which improvements can be made to support the Government's objectives?
It appears that the Government may be looking for affirmation of wider investigatory powers. It is true that honest and compliant taxpayers lose out to defaulting ones, very directly on occasion, but, in practice, it is conscientious taxpayers who are often most startled by demands for information during enquiries. 
The main difficulty with the existing system is the complexity and obscurity of the basic legislation. The tax law rewrite programme has helped a great deal in those areas which have been covered, but the sheer volume of legislation with which the unrepresented taxpayer is required to comply is unmanageable.
Politicians must cut down the volume of new law which they produce. For example, the CGT indexation allowance was replaced with taper relief for individuals, but left in place for companies and then supplemented by the substantial shareholding relief.
Some areas of new law are given only a cursory examination by Parliament. Stamp duty land tax, ITEPA 2003, Sch 22 and the pre-owned asset legislation are examples of recent premature births. New legislation should be enacted only once it has been fully thought out, and should be accompanied by guidance which details all the implications. If the full meaning of a law is not known even to those who must enforce it, how can a taxpayer be expected to comply with it? 
Once an official view of legislation has been stated, HMRC should stand by it. The trend towards the clarification and reinterpretation of established legislation undermines the perceived integrity of the tax law. The application of TA 1988, s 660A to husband and wife businesses in Jones v Garnett or the attempt to classify a dividend as a transaction in securities in CIR v Laird Group plc [2003] STC 1349 illustrate the problems such clarification or reinterpretation can cause. The authors have experienced a number of instances when officers have sought to interpret legislation in a manner contrary to that intended by Parliament.
The new taxes management provisions should take the form of a single consolidated Act, which should arrive as a complete package without leaving detail to be filled in by means of statutory instrument at some later date.

Which principles should inform the design of HMRC powers?
Powers should be reasonable and proportionate to the ills they seek to address. The power of entry into premises for the purpose of inspecting VAT records does not appear to be used in practice. The Revenue seemed to get by with its information powers, and this should be the standard for all tax investigations.
An understanding of the effect on taxpayers of applying information powers should be built into the system. Explaining why an officer is requesting information could tip off an errant taxpayer, but explaining the reason for an enquiry to an innocent taxpayer at the end of the process would go some way to justify the extra expense that the taxpayer has been forced to incur. It may also deter officers from undertaking loosely targeted fishing expeditions.

How best to build in safeguards?
The temptation to officers to test the boundaries of their powers was far less when investigation and default cases came more frequently before the local General Commissioners. An opportunity to have a case impartially reviewed locally and without a formal approach to the Adjudicator should increase the confidence of taxpayers and their advisers in the system.
The authorities maintain the principle that taxpayers should not be told what information was held by them until the resolution of the investigation, if at all. Yet, one of the most common causes of conflict during investigations is the continued refusal to either accept the taxpayer's explanation or to reveal what evidence was held. In some cases, it is a matter of the officer misinterpreting information which comes into his hands. If the policy of secrecy over information is to be maintained, there should be a system of automatic redress for errors. In an era when errors on the part of taxpayers lead to automatic penalties, some form of local sanction and redress for HMRC errors seems only fair.

How can technology be used to ease the compliance burden on taxpayers and enable effective detection and deterrence of non-compliance?
If data could reliably be taken straight from taxpayer's records to produce a reliable computation of tax liabilities, the accountancy profession would be doing it more widely. Smaller businesses that, on the evidence of the Hampton Review, suffer a disproportionate compliance burden, are currently the least inclined to computerise their records. Widening computer literacy and the declining cost of hardware should gradually eliminate this issue, but tax gatherers should accept that there are some individuals who will never cope with computerisation. We believe that HMRC will be obliged to wait for changes in business practices before it can fully exploit the potential of technology.
It is hinted in the Hampton Review that businesses might willingly give regulators direct access to their raw data. The Revenue has been poorly served by the suppliers of some of its software in the past. We believe that a radical change in procedures would be needed to protect taxpayers before the volume of information passed to the Revenue was increased.

How far is possible to adopt a consistent approach across the range of taxes?
The first step should be to align the technical rules and definitions across the business taxes, so that, for example, a single definition of income applies to both income tax and NIC for employees. Once this has been achieved, a single set of information gathering and regulatory powers will be feasible.
However, in other taxes there are vast differences in the operating mechanisms as well as in the nature of the taxpayers. For example, petroleum revenue tax is the preserve of larger corporations, whereas inheritance tax generally affects recently bereaved (and often elderly) individuals. 
The range of work which HMRC will cover would seem to preclude a single set of regulatory powers. Some form of tiered system, based on the potential tax loss and expertise of the taxpayer, and the officer, may be more appropriate and easier for all to understand. Consolidating the myriad provisions that are spread across a variety of acts, some not even tax based, would make this easier to achieve. 
Ian Mills is tax partner and Martin Bradney is a senior manager at PKF, both specialising in tax investigations.
Readers can make direct responses to the Treasury consultation by 13 June, by writing to: Angela Shore, HMRC and the taxpayer, Room 1C/03, 1st Floor, 1 Parliament Street, London, SW1A 2BQ, e-mail: Angela.Shore@ir.gsi.gov.uk. The consultative document, 'HM Revenue and Customs and the taxpayer: Modernising powers, deterrents and safeguards'. can be found at www.hmrc.gov.uk/consult_new/hmrc-taxpayer.pdf. The Hampton Review, 'Reducing administrative burdens: effective inspection and enforcement' can be found at www.hm-treasury.gov.uk/media/AAF/00/bud05hampton_641.pdf.

Issue: 4009 / Categories: Comment & Analysis , HMRC powers