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THE COMEDIAN DAVE Allen used to delight in finding the worst examples of illogical English notices. For example, he once remarked that 'Slow Children Crossing' was a particularly poor advertisement for the educational system! However, HMRC have managed to excel themselves in the last few months in offering the worst examples of consultations since those surrounding the implementation of IR35.
Trust changes
Pick of the crop (or should it be bottom of the heap?) were the inheritance tax trust changes that were announced to an unsuspecting public in the Budget in March 2006. These saw the biggest overhaul of trusts for 20 years and the issue has been covered in depth in Taxation; see for example 'Will trust be lost?' by Chris Whitehouse and Emma Chamberlain, 8 June, page 257, 'Lack of trust?' by Emma Chamberlain, 29 June, page 343, and 'The end of an era' by Malcolm Gunn, 27 July, page 431.
From a consulting perspective, these changes seemed to take even certain senior members of HMRC by surprise. The volume of taxpayers affected was a moot point but, potentially, it was millions, since anyone with a trust clause set up in a will had every reason to be concerned about whether they were affected. Clients were very worried. For many the worry did not abate for several months, until the various amendments to the Finance Bill were put forward and considered.
This development was particularly disappointing because HMRC had been consulting on other trust changes with experts from the tax profession for over 18 months. This proved to be a fruitful discussion on many trust changes and the results have found their way into the Finance Act 2006, e.g. common residency rules. However, HMRC then opted not to use that knowledge base for the more seismic changes they had in mind in relation to the inheritance tax rules for trusts. Any argument that this was due to the fear of forestalling seems pretty unconvincing. To be charitable, HMRC are not masters of their own fate and political decisions which are out of their hands probably led to a last-minute dash for reform, which was pushed through leaving HMRC with insufficient time to be prepared.
Some major amendments were made to the Budget announcements and huge effort went into this process from all the tax representative bodies. The point is, however, that much time and energy could have been easily avoided if HMRC had used or had been allowed to use their normal consultation channels.
E-filing and deadlines
The next worst consultation was the income tax e-filing date debacle. Again, an important tax change was being considered by HMRC which affected many taxpayers and their tax advisers, i.e. the need to file tax returns at an earlier stage than currently. This was based on an independent report produced by Lord Carter of Coles, which was issued with the Budget in March 2006.
No formal consultation took place before the Government announced its commitment to change and any informal discussions were either too late or too little considered. The tax representative bodies had to spring into combined action, and due to a magnificent amount of thought, input and co-ordination, some sanity prevailed. Lord Carter announced a change in his recommendations at the Tax Faculty's Wyman event in July 2006. This was then accepted by Government, which means that the e-filing deadline for self assessment returns remains at 31 January, although in 2008 the hard copy deadline changes to the end of October.
Huge amounts of work went into getting a result that would save problems for so many taxpayers and advisers. But where was the initial thorough consultation that would have removed the need for such barnstorming efforts?
HMRC powers issues
The third issue deserving a dunce's cap for contribution to consultations was the programme of 'interventions' introduced in July 2006. This is the first public example of the results of the continuing review of HMRC powers. Thus it would have been an ideal chance to put cynical thoughts at bay that the powers review would be little more than an opportunity to extend rather than revise powers. Sadly so far it has raised plenty of concerns among taxpayers and tax advisers.
I will look at the issue in context. An extensive review of the compliance and enforcement powers of the new-look HMRC is under way. The main purpose of the HMRC review is to draw together the two old departments of the Inland Revenue and Customs, to combine their powers in a way that is not a power grab but improves the existing situation. A consultation document outlining the thought processes to date on the powers review was issued shortly after the March 2006 Budget. It can be viewed in full on www.hmrc.gov.uk/about/powers-appeal.htm. Many views have been expressed on this consultation; not all are complimentary. For example, there is a detailed and strong response from the Tax Faculty of the ICAEW (TAXREP 17/06) which can be viewed at www.icaew.co.uk/taxfac.
The first involvement most of us have had with the powers review is likely to be the interventions programme. These pilots are voluntary reviews, whereby HMRC can seek to discuss situations with taxpayers. The worthwhile intention is to ensure people's tax affairs are compliant without the formality of the enquiry procedures. It may bring about swifter resolution of issues, and there is no doubt that this will be a major plus if achieved. The problem is whether these good intentions have been fully reflected in the programme itself.
There are six types of intervention being tested in pilot exercises now. These have been covered in Taxation, but here is a brief recap:
Real time record review: This is a review of current business record-keeping, i.e. checking current records and record-keeping procedures to make sure that they meet the standards HMRC consider to be appropriate in order to record the results and make returns accurately. It is likely that HMRC will focus on cash transactions and will look at both direct and indirect taxes. HMRC will advise taxpayers where improvements are needed.
Short risk review: This is a questionnaire sent to a business based on a risk profile developed for the particular trade, industry or behaviour grouping to which the business belongs. HMRC aim to obtain explanations about the business and weigh up if there are likely to have been understatements.
Self audit: This uses letters or telephone calls (or both) requiring the taxpayer to consider potential risks around specific entries on his return, make any necessary adjustment and notify HMRC of the adjustment made.
Telephone contact: HMRC staff telephone taxpayers, or their agents, to outline why HMRC consider that an error has been made on the return and how any underpayment can be settled. The staff use prepared scripts.
Correction challenge: This is similar to self audit but is used where HMRC hold 'good quality information from a reliable source' that there is an error; this includes reports of interest income from banks. HMRC will make an assessment or change a PAYE code to collect the apparent underpayment, tell the taxpayer they are doing so and ask for an explanation as to why the taxpayer included the wrong figure.
Real-time health check: This is approaching a target population where HMRC believe there are risks of non-compliance, telling the taxpayer what the risks are, and suggesting that he considers them when completing his return.
Participating in the trials of the interventions is voluntary. HMRC have confirmed this. Indeed, at present they do not have formal powers which would enable them to carry out all of these procedures for direct tax on any other basis. It is therefore for the taxpayer to decide, with his agent, if there is one, if he wants to take part. Tax advisers will need to consider if it is in their clients' best interests to co-operate with these trials. There are many aspects to consider and the rushed nature of the project is not helping.
The trials are being carried out at selected locations around the country, and the target sample of taxpayers has been selected on the basis of risks which HMRC have identified. HMRC's press office has said around 14,000 initial interventions will be initiated. The programme may be extended and could even become compulsory in the future.
HMRC have said that where they are aware that an agent is acting, they will include the agent in any initial approach to the taxpayer.
Experiences to date
So how has this programme stacked up as an example of a consultation? The interventions programme was initially referred to in the review of HMRC powers consultation document, issued in March 2006. There was no date fixed for the start of the trial. The document was then altered, without publicity, to include a start date. The intervention programme began on 10 July 2006, which was only a short time after the official consultation period for the consultation had finished, leaving little time for any changes to reflect the consultation responses. There is no fixed date for the pilot to end.
Poor initial publicity and a lot of unanswered questions surrounded the advent of the interventions. HMRC are still, at the time of writing, trying to put out helpsheets and more guidance but it is clear that the project was forced through with inadequate preparation time.
There was no time to consult properly on all its ramifications. Operational issues were discussed as the project was almost beginning. This appears to have been pushed on with indecent haste in order to allow for some statistical data to be collated to help determine if Finance Bill 2007 legislation is required to make these pilots permanent. HMRC officials are trying to do their best but within impossible time frames and without the chance to stop and assess if the approach is right. The relentless need to get work done to meet Parliamentary deadlines (Finance Bill legislation is normally a once-a-year opportunity and there is limited space) means that everything is rushed and there is little time for consideration.
The resulting experience on interventions at the time of writing has not been good. The following three incidents were not uncommon in the first weeks of the intervention project.
Sanity check
First, HMRC did not always sanity check some of the information they were receiving. One member told us of a client who had an intervention. It took the form of a telephone call, where the precursor letter said that the individual may have omitted property income from 2003-04 from his tax return. Apparently this information was based on details from the local authority to the effect that the client owned 17 properties let for a total of £4,500 a year. In fact the client has just one property and full details including the correct letting income were on the taxpayer's return. Seventeen properties let for that amount of money equates to £22 a month income per property — a rather weak investment one might have thought! You do not have to sit as a panellist on 'Dragon's Den' to work out that the information may not have been all it appeared. HMRC simply pursued it without question or even any quick review for its quality and validity.
Discovery
Second was the issue of discovery and closed enquiry periods. The Tax Faculty posted an item on its website in August 2006 to alert members to this. It seems that in some cases, HMRC's opening letter refers to information about income which appears to have been omitted from the return for the year ended 5 April 2004, the enquiry window for which, in most cases, closed on 31 January 2006.
HMRC confirmed that this was not an error but that they envisaged using the interventions in relation to closed years where they considered it appropriate. Where the self assessment enquiry window for 2003-04 has closed, HMRC can use their formal powers relating to 'discovery'. HMRC can make a discovery assessment under TMA 1970, s 29 if they discover, in respect of a particular taxpayer for a particular year of assessment, that:
- any income which ought to have been assessed has not been assessed;
- an assessment is or has become insufficient;
- a relief given is or has become excessive.
The discovery has to be of something concrete; just a risk that the return could be incorrect is not enough. Furthermore, discovery cannot be used where the taxpayer has made a return in accordance with prevailing practice at the time, even if prevailing practice has since changed. In addition, a discovery assessment may be made if, and only if:
- The under-assessment (or whatever situation has given rise to the discovery) is attributable to fraudulent or negligent conduct on the part of the taxpayer or his agent.
- At the time the enquiry window closed, or when a closure notice was given, HMRC could not reasonably have been expected to be aware of the under-assessment on the basis of information made available to them before that time (this includes the taxpayer's own return, accounts and other documents submitted with the return, any claim by the taxpayer, or any documents furnished as part of the enquiry).
The Tax Faculty advice was:
'Think very hard before co-operating in an intervention on a closed year. Remember that participation in the interventions pilots is entirely voluntary and the taxpayer, or his agent on his behalf, would be entirely within his rights to refuse to take part.
'However, remember also that where they raise issues in relation to a closed year HMRC believe that they have information that indicates the return is wrong — and are likely to contend that this arises from negligence. It would be sensible to check with the client that the return is believed to be correct before deciding what to do.
'In the absence of co-operation with the intervention, HMRC may well choose to issue a discovery assessment. This will bring with it the protection of the formal self assessment framework including the right of appeal. It will also mean that HMRC reveal what information they hold.
'On the other hand, the lack of co-operation with the intervention may influence the Inspector's approach to penalties. We do not think that in law HMRC are entitled to take that into account, as insisting on one's legal right cannot be non-co-operation, but the risk is clearly there.
'It goes without saying that a tax adviser should consider and discuss with the client whether there might be any omissions from the year in question, and regularise the position if need be.
'Be conscious though that the fact that HMRC believe that something may be wrong does not necessarily mean that anything is wrong. The third party information which has prompted the intervention may be wrong, or there might be details sent with the self assessment return or in the white space which would explain any anomalies but which HMRC have not looked at before starting the intervention.'
Voluntary — or not?
Third was a more general concern. What if a taxpayer chose not to comply with an intervention? The pilots are voluntary but if the adviser, or the client, decides not to help, will this be held against either party? This fear had, at the time of writing, not been addressed by any public pronouncement from HMRC. Also what happens if the tax adviser says 'don't do it' but the taxpayer, fearing reprisals, wants to proceed? Suddenly the client/agent relationship is under strain.
Interventions have proved to be a PR disaster for the HMRC powers review. Borne out of good intentions, this poorly implemented project has caused many advisers to distrust deeply the motive of the exercise. It has highlighted some weak HMRC internal communication and one wonders if any results from the programme can have any statistical relevance to determine if the project has been a success or not. HMRC appear interested in making interventions not just a pilot but a part of standard working practices and a compulsory part of it. They need to do a lot of work before this can be justified.
Consultation conclusion
So what can we learn from these three examples of poor consultation?
- To be effective, consultation needs time. A complete absence of discussion (trusts), or last-minute consideration (e-filing) or insufficient time for consideration (interventions) all cause huge practical problems. Consultation purely driven by Parliamentary timetables is likely to be rushed and leave little time for proper thought.
- An absence of proper, open consultation will erode trust between HMRC and tax advisers. The latter will begin to fear the worst and doubt even good intentions.
- Consultation must be more than 'rubber-stamping' (interventions). Suggested changes may not always be accepted but the tax profession needs to be confident that they are being listened to. Without that confidence, the whole consultation process is undermined.
- After consultation there needs to be a sound implementation plan (interventions) and thorough training for the appropriate HMRC staff to progress the changes (trusts and interventions).
If every failure is in fact just a step towards future success (as per the personal development guru Anthony Robbins), then we have seen some valuable progress to help everyone do a lot better next time!
Francesca Lagerberg is national tax director of Smith & Williamson and chairman of the Tax Faculty of the ICAEW. This is an abridged version of an article Francesca has written for the annual TAXline Tax Planning book which is due out in October 2006 and is free to all members of the Tax Faculty. Call 020 7920 8100 to find out more about the Tax Faculty.
