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Participants
- Mike Down (MD), tax investigations partner, Baker Tilly
- Kevin Igoe (KI), head of claims, Professional Fee Protection
- Jane Moore (JM), technical manager, ICAEW Tax Faculty
- Robin Williamson (RW), technical director, Low Incomes Tax Reform Group
- Mike Truman (MT), editor, Taxation
Relationships with HMRC
MT – How have relationships been between the profession and HMRC over the past eighteen months to two years, and what is the trend?
KI – At PFP we’ve seen a hardening of approach – a deterioration of relationships across the board. This predated the interventions letters last year. The merger with Customs seems to have led the Revenue side to harden their approach – they seem to envy the powers and tactics of Customs.
RW – From the point of view of the low income taxpayer, the Revenue seem to be expected to do more with less. That has affected front line delivery – for example the remoteness of enquiry centres for those reliant on bus travel. You can’t now always make the journey there and back in a day, and in most cases you can’t now join a queue at the enquiry centre and get a query answered there and then.
MD – More and more enquiry work is going out as well – a Kingston case I have is going to be worked in Glasgow. Surely even the costs of the Inspector coming down to see me and the client must be uneconomic?
JM – We’ve been collecting feedback from members about the current standard of service from HMRC. We have had some positive feedback, and members are sympathetic to the problems of HMRC staff at the coalface, but overwhelmingly it has been tales of woe about lost post, phone calls not answered and so on. Unopened post seems to be particularly problematic at Leicester and Northants office, which is handling the repayment claims and retirement annuity contract work.
KI – But it doesn’t stop s 19A notices being issued, where the information is already in the unopened post pile somewhere. And then the client is told that the accountant hasn’t answered the letter… Some districts seem to have 19As ready in advance, and on the day the information is due, or the day after, they are sent out.
RW – We have similar problems with the tax credits office – claims go in and get lost without trace. So we say that claims should be sent in recorded delivery.
JM – At the ICAEW Tax Faculty roadshows the Revenue have taken away some of these issues and have responded in TAXline by saying that post-handling is going to get better because they have invested in new ways of working, and that ‘customers will receive consistent service on a first in first out basis’. But this doesn’t explain what you do if you have a post problem at the moment.
MD – How has the tax credit renewal gone this time? Have they had to use staff from other parts of HMRC?
RW – They did in July, but otherwise it has not been bad. In the first two years when calls were farmed out to private operators, a lot of calls were not recorded and not dealt with. Now when the overpayments that resulted are being collected, HMRC say there is no record of the call.
JM – Which is true …
RW – So the tax credit claimant is now given the benefit of the doubt. Now all calls are supposed to be recorded, but we have still had some cases where calls we know were made cannot be traced.
MD – The problem is the inability to talk to a person at the other end of the phone who really understands and who can act on the case.
KI – Tax credits have generated masses of complaints, and we’ve been told that the Ombudsman can’t deal with other cases because of it.
MD – When you can get to talk to people properly, you can get a very good response.
KI – That’s true, we see the cases of individual rogue Inspectors who are asking for too much information that they are not entitled to, but they don’t represent HMRC as a whole – there are a lot of good, competent Inspectors out there. But they are geared to results. In their last annual report they were targeted to collect tax in 80% of full enquiry cases last year – how do you square that with the opening letter that says they are just trying to get the right amount of tax? 82.4% of enquiries did get in more tax last year, but 83.1% were apparently conducted satisfactorily – does that mean that they only went for a nil settlement in 0.7% of cases …? These figures are in the Revenue’s annual report.
The new penalty regime
MT – So which bits of the new regime look like they may be helpful, and which could be disastrous?
JM – It all comes down to what is ‘taking reasonable care’ and what is ‘careless’.
KI – We can really see that being troublesome for the taxpayer.
RW – A lot was said in the consultation, and was taken on board in responses. We hope to see recognition that reasonable care depends on individual circumstances and capabilities.
KI – There are going to be problems though. We already see horse-trading on enquiry cases, now they seem to have raised the bar to 30% penalties if reasonable care has not been taken. We saw a case where there was a small unexplained cash balance. The accountant agreed a settlement for one year, before the Inspector said that this was a case of neglect and wanted to go back 14 years. That might be similar in the new regime if you can’t explain that reasonable care has been taken.
MD – We read the new rules as being kinder to people who make genuine mistakes, but stronger at the serious end. Once you are into an SCI type of case, what would now be around a 25% penalty goes up to a starting point of 30%, so there is bound to be more reluctance to make a voluntary disclosure.
JM – And what is an ‘unprompted’ disclosure?
MD – At the moment, it must be when you are completely without fear of being found out. But how is a simple taxpayer going to know that he has made a mistake?
RW – And sometimes if they are challenged by HMRC, they will assume that HMRC are right.
JM – There’s an assumption that if there is a big mistake it must be negligence, but sometimes one simple error can make a big difference, particularly in tax credits.
KI – It is really going to hit the people wanting to own up to having done unreported cash jobs, for example, where the penalty is going to start at 30%, or possibly even more.
RW – There was a recent report on the informal economy which says many of the problems come from the way the tax and benefits system don’t coalesce. Income support is withdrawn pound for pound of earnings over £20 a week. There is a huge gap between that and getting into working tax credit at sixteen hours of work a week on minimum wage. What happens to all the people in the black hole in between? I’m not condoning it, but it explains why some people resort to the informal economy.
MD – I’m worried more by the top end cases, and the disincentive for people to come forward. SCI are already going for higher amounts, and will argue that it’s not enough to disclose in the report; if it wasn’t said at the first meeting, it’s not a spontaneous disclosure. I think settlements that are at 40-45% now may be 50-55% under the new regime.
KI – Does a higher penalty mean that people will just want to hide tax evasion all the more, and hope that they won’t get caught? If so, the new penalties will be counter-productive.
Powers of entry and search, etc.
MT – What are the problems with the current powers of entry and search, and what would be the effect of the new proposed powers?
JM – There is a lot of concern about the power to enter domestic private premises just because there is some business element there. There is a general feeling that strong enough powers are there already – what is wrong with using those?
MD – We looked at it on the basis that VAT is an impersonal tax so you have more impersonal powers – direct taxes are more personal and so need more control like warrants to enter the premises. It’s like the business and non-business segmentation, only broader.
KI – I don’t think HMRC should be allowed to enter private premises. Going back to an earlier point, one of the problems is that the foot soldiers in HMRC don’t follow instructions from above. We saw one case where the Inspector went round on his day off to see the client, saying that ‘your accountant is getting in the way of a settlement; if I can come in we can sort this out’. The accountant received a letter of apology, but the Inspector still chanced his arm. We still see letters coming through asking for personal bank statements at the start of an enquiry, which many unrepresented taxpayers are going to let them have, because they are worried ‘if I don’t hand these over the Inspector is going to think I have something to hide’. We also see inspectors trying to insist on seeing the records at the client’s premises when the accountant wants it to be at his office.
JM – That’s another thing in the Compliance Checks consultation document, isn’t it? HMRC want a power to enter the premises, see the records there, and see the owner – but it’s a fallacy to think you are necessarily going to get the information you need that way.
MD – There seems to be an automatic feeling that seeing them at the business premises is better. We weigh it up as advisers – where is this enquiry going to go and where is it best dealt with? If we think it is best, they can go to the business premises, but properly ring fenced – they are in a room, with one nominated person from the company to talk to if they want anything, and someone from our office sitting in on meetings.
RW – The problem for unrepresented taxpayers is that they don’t know they don’t have to let them in. Where in Revenue literature is the advice that tells them that? In the case of distraint, are they told that there are certain assets that they are not allowed to take away? These are potentially criminal proceedings, and in police stations you would have a duty solicitor to protect the accused’s rights. There are no equivalent rights to public representation here. Maybe there should be some form of public funding when unrepresented taxpayers are investigated?
KI – One of the live issues we have on power of entry is on the PAYE side. It’s more common than not that the agent doesn’t hear about the visit. When there are problems over employment status issues, for example, clients often don’t understand the importance of the questions, and don’t always mean what they say in reply. I feel accountants should always be notified of upcoming PAYE visits. It’s particularly important after Demibourne, where we are now seeing individual taxpayers arguing that they were employed when they had been treated as self-employed, because they get all their self-assessment tax back.
Debt, repayment and recovery
MT – What was your reaction to the consultation on debt, repayment and recovery?
JM – Repayment doesn’t feature very much, there’s nothing about how to get tax back. Repayment should be just as important as debt recovery.
RW – Particularly where reliefs and allowances are not given. It is fairly well-known that the age allowance is not given straight away when you reach 65, because they want to see if your income is too high. But only a very few get it all withdrawn, so for most people a repayment is due, and when it’s not given at 65 it can get overlooked. Tax Help for Older People had a case where someone had not been given the allowance for eighteen years – but of course they could only go back six to claim it.
KI – We’ve also seen cases where HMRC have been coding out state pensions that have not been claimed – they’ve been deferred.
JM – A lot of the proposals in the debt consultation document are good, but it all hinges on HMRC having top-notch systems for handling payment by instalments, offsetting and so on - not just IT but administrative systems too. There will always be a need for third party scrutiny of any powers, so I don’t support the idea of attaching bank accounts, but offsetting of liabilities and repayment would be good if the records were up to date and the taxpayer concurs.
MD – Paying by credit card is a good idea, provided the charge is paid by the taxpayer rather than being subsidised out of public funds.
JM – But HMRC are only proposing to allow it for overdue amounts, because (as I understand it) they are not yet geared up to take them from everyone. So how long do you have to wait before it is overdue and you can pay by credit card? It’s a bad message to send out to people.
RW – Credit cards do raise the problem of people who are already in debt, who are going to have to make decisions about which bills they pay – their rent, their food or their tax.
Intervention letters
MT – What was your past experience of intervention letters, and what do you think are the possible future initiatives?
JM – A current letter which has come our way is the road haulier letter, looking at the VAT mistakes that they typically make – it’s just like one of the original pilot intervention letters. We know that we are going to get more letters using the intervention ideas, but they need to be well written and clear in what they are asking, which this one isn’t.
MD – And as a profession we need to know that they are coming.
JM – Representative bodies like the Tax Faculty haven’t been saying that we shouldn’t have intervention letters, but we have said that ‘if you do it, do it properly’. The idea of a targeted letter is fine, but this has all the things that were bad from last year’s letters.
MD – We had one for an antique dealer on valuations. We responded cooperatively, and after the information went in we heard nothing. Then we got an enquiry because they hadn’t matched up the intervention letter with the case.
KI – They were a very blunt instrument, and they weren’t well received. A lot of accountants told clients not to co-operate because of the lack of protection.
MD – We took a positive view of it, and a couple of times it worked really well, particularly when they were quick phone calls to sort out an issue.
KI – But is it in the client’s interest to have an intervention letter rather than an enquiry, which gives protection once it is closed?
JM – Possibly, if they are more like the pre-SA days where the Inspector would just say ‘this looks a bit odd’ and ask a simple question about it.
KI – But HMRC are different now. Personally I’m not in favour of intervention letters, I’d far prefer to have an enquiry notice.
JM – HMRC say that enquiries can be cumbersome, but we pointed out that they don’t have to be. If HMRC said what the problem they were investigating was, it would be easier, and I know that they are looking at that.
KI – It worries me that in discussions like this we come across as suggesting we don’t respect the right of HMRC to investigate. We do, but they need to do it properly and with some consistency.
MD – Proper risk assessment is the key to everything. If they become more open it would help a lot.
MT – What about the suggestion that accountants could become part of the risk assessment process?
JM – I think the idea is to look at the practice assurance and internal policing that professional bodies have for their members, because HMRC can then be reassured that those advisers are more likely to be doing a proper job. But what about competent people who aren’t members of professional bodies?
KI – Some Inspectors certainly thought it was agents who scuppered the intervention letter pilot scheme, not clients. However, a common approach for agents was to say to clients ‘it’s your call’. There was a concern that if the agent advised a client to co-operate the relationship could suffer if further tax arose as a result.
JM – People were worried about their insurance, and there wasn’t time to get the information and explain it to people.
MD – Did you cover it for fee insurance?
KI – Yes we did, I think most of the insurers did.
RW – A more educative intervention letter would be much more welcome, helping people in advance to get it right. It’s particularly important when paper-based information from HMRC is being cut back, affecting the low paid taxpayers with no internet access.
Taxpayers’ rights
MT – What do we need to protect taxpayers rights?
KI – We need a universally followed code of conduct. At the moment it depends too much on the individual Inspector; asking too soon for personal bank statements, insisting on meetings, etc.
RW – On top of any code of practice we need some statutory, or quasi-statutory base, which prevents them being radically changed or withdrawn at will.
JM – I think there is something to be said for codes of practice if they contain the core information that you really need. But then the guidance on reasonableness should also be a code of practice.
KI – It would be nice to have HMRC acceptance that agents do not help their clients defraud the taxman. They don’t seem to understand that agents simply will not accept clients who are defrauding the Revenue and are not prepared to own up to it.
MD – A good Inspector will appreciate the line we take, and most of them are good Inspectors, but there are intransigent ones that upset it for everyone.
JM – We did suggest that Inspectors should go and sit in a professional firm and see what happens. The Varney report suggested senior people should go out into offices for a day, but it should be for a lot more than that. They would then realise that practitioners don’t have time to sit there devising tax schemes.
