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KEY POINTS
- Proportionality, effectiveness and the adequacy of safeguards are key to changes in HMRC powers.
- Each power should have a corresponding safeguard.
- Safeguards should be statutory and ones the taxpayer can rely on.
- Certain safeguards, e.g. court action, are beyond most taxpayers’ means.
- There is still time to ensure proper safeguards are in place.
The debating motion at the ICAEW’s Tax Faculty Wyman event was ‘this house believes that the balance between the rights of the citizen and the powers of the taxing authority has tilted too far towards HMRC’.
In a good-humoured but challenging debate I spoke for the motion and the following article is an outline of my speech.
In a perfect world we would not need any powers or related rights. Every taxpayer would file a perfect return and there would be no errors and no misunderstandings. Every tax official would act proportionately and reasonably. All would be smooth and harmonious.
Life is not like that though. People get things wrong, sometimes deliberately. Taxpayers make mistakes. Equally, the tax authority oversteps its rules from time to time.
It goes on fishing expeditions rather than targeting its enquiries. We can probably all provide numerous toe-curling examples of where it can go wrong.
It is clear therefore that we need a balanced and proportionate system that provides both sides with appropriate powers and safeguards. However, so far I think that the time and effort being put into developing new powers have not been matched by the effort given to developing full safeguards.
The powers review
I have no objection to HMRC having new powers where they are better targeted, proportionate and more appropriate. I have sat on the HMRC consultative committee on powers since it was founded, and I strongly support most of the aims and ambitions behind its work.
The system that is being replaced is far from perfect. It can be inconsistent, and it is hard to argue for the retention of some powers that belong to a different time.
The review of powers, which began in 2005, was an ambitious undertaking: it was a once in a generation opportunity to take a good look at what the legacy revenue departments had and what they needed for society today.
The review has given rise to some changes, primarily around penalties and inspections. Some of these were in last year’s Finance Act and more are now enshrined in the Finance Act 2008.
While the review is still in its legislative early stages, there are a few prime areas which I believe should be at the forefront of any future changes on powers. They are about proportionality, effectiveness and the adequacy of safeguards.
Matching safeguards
In an equitable and fair society every power of the state should have a matching safeguard. In tax this will normally be the right of appeal to a tribunal against any decision of HMRC.
This is to ensure that if a power is operated without proportionality, without appropriate reason or without fairness, the taxpayer will have the right to challenge it.
Yet if you look, for example, at the Finance Act 2008, not every power is matched with such a safeguard. The new business premises power of inspection does not come with the right of appeal. Sometimes the right exists but is incomplete.
Schedule 36 para 3 is now worded so that HMRC cannot require a third party (such as a tax adviser) to give information about a taxpayer without either his or her agreement or the approval of what will be the First-Tier Tribunal.
However, it is HMRC who will be putting the summary to the First-Tier Tribunal and there is currently no right for the taxpayer to appear in person.
This situation can be seen elsewhere. A long-standing problem has been the lack of any right of appeal against a decision to recover a tax credit overpayment.
In relation to the Finance Act 2008, HMRC have gone on record stating that they believe you have to see how a power will bed down to work out the appropriate safeguard. Why? I do not think you need time to work out that every power should be matched with a safeguard.
I do not think you need time to see that primary legislation is where that safeguard should be. A ‘wait and see’ approach is not an appropriate formulation both to be just and to be seen to be just. The members of HMRC’s powers team have worked hard on the legislation to date. Their skill and energy are outstanding.
They have pondered hard questions and come up with some innovative solutions. But they will move on, e.g. they will be promoted, opt for new challenges and some may even retire.
The concern is that the thought and ideas they have invested in framing today’s rules will not all be passed down to the next generation of tax officials.
All that will remain is the core legislation and there have been various recent examples of how time can erode the understanding behind the statute. The settlements legislation debacle is just one instance.
I want my core rules in black and white, as I want to be able to rely on them in court. I want to know that I can be sure that the safeguard exists. This does not mean that every nuance has to be put into the legislation, rather the basic safeguard just has to be enshrined.
Supplementary guidance can then help understanding and, if consulted upon, it can be very useful. But safeguards are too important to be left as an after event addition.
Guidance is not enough
Clear examples show that guidance alone is not enough. Tax credits (as ever) provide the horror stories here. There are many instances of HMRC not recording telephone calls from claimants although they had committed to do this. What then happens if the claimant says he called HMRC but no record exists? How is the claimant to challenge it? Does he get the benefit of the doubt?
Similar problems can arise with other forms of guidance. Although extra statutory concessions (ESCs) are gradually being eased out, they are still in operation.
ESC A19 provides a mechanism for HMRC to write off tax arrears if they have not made proper and timely use of information in their possession. Their view on this area often conflicts with what taxpayers think is reasonable and the last Adjudicator’s report highlights this issue.
Extra-statutory Concession A19 stipulates that it must be reasonable for the taxpayer to think that his or her affairs were in order, but who decides what is reasonable? HMRC decide, and the taxpayer has no recourse if HMRC’s decision on the matter is unreasonable. It is an instance where HMRC act as judge and jury in their own cause and there is no adequate safeguard to assist.
Is the safeguard usable?
It is not enough to have a safeguard alone. It must be one that a taxpayer can use and which is effective.
The reality is that costs are likely to deter most taxpayers from challenging HMRC before the courts. Therefore it is important to pursue other adjudication methods to help resolve issues.
This makes it even more important that well constructed safeguards exist to assist those on lower incomes. These should be contained in appropriate legislation and supported by such structures as the much-needed Taxpayers’ Charter. The charter could become a very powerful safeguard for all but only if it has teeth and can truly be relied upon. How much more useful will it be if it is enshrined in legislation rather than becomes a plaque on a wall in the head offices of HMRC that gradually falls into disuse?
There are certain safeguards that are financially beyond the reach of almost all, judicial review being the most shining example. How real is a safeguard that is so expensive to obtain and so unlikely to result in success?
Another example would be where a taxpayer faces an exchange of information with another revenue authority and wishes to prevent that. As there is no obligation to notify the taxpayer (even in cases of exchange on request that relates only to that taxpayer), there is no effective remedy. It is hard to fight what you do not know about.
The future
We are in the relatively early days of the HMRC powers review. There is still time to take on board the need to balance each power with a statutory safeguard and HMRC have done a lot of work on researching this area.
There is also still time to fight for Parliamentary time to make sure that safeguards are not left until later.
In addition, it is necessary to set out clearly and concisely where the HMRC powers programme is heading, its remit and its guiding principles. These should be open and transparent to all.
This could recognise that a taxpayer’s rights should be part of the primary legislation.
If we had that level of clarity, that proportionality, and strived for those core guiding principles, I believe we would not need the debate we have today.
Francesca Lagerberg is the head of the national tax office at Grant Thornton UK LLP and is chairman of the Technical Committee of the Tax Faculty of the ICAEW. The views expressed in this article are her own.
