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KEY POINTS
- How confidential is information provided to HMRC?
- HMRC’s powers have a detrimental effect on the integrity of the tax system.
- Burden of proof lies with the taxpayer.
- HMRC should confine their attention to tax.
Jonathan Schwarz gave an inspiring Hardman Memorial Lecture on 18 November.
The theme of Jonathan’s presentation encourages me to comment on two key issues surrounding the powers of HMRC and on the increased disclosure of all manner of personal and financial details.
Not fully understood
Many views have been expressed about the disclosure requirements.
However, there is one aspect of this subject which I believe is not fully appreciated by HMRC – the genuine concern of many people about the security of information provided to the department.
HMRC do not see any particular problem with receiving confidential information about people’s financial affairs from which they can verify the propriety of their tax position.
Why should the taxpayer worry if his tax affairs are in order? Unfortunately, this misses the point.
Most people brought up in this country know that HMRC officers are highly professional and that information disclosed to them will remain confidential.
However, many people in the UK have been brought up in other countries which do not have the same tradition of public service that we enjoy here.
Many of them believe that if they disclose details of their wealth to the tax authorities, there is a strong likelihood that their wife or children will be kidnapped and held to ransom or, more prosaically, they will simply be robbed.
It takes them a long time to gain the confidence that this will not happen here.
Accordingly, they get extremely concerned about the increasingly intrusive disclosure requirements and seriously alarmed to learn that details of their bank accounts are going to be supplied to HMRC.
This has nothing to do with tax; they generally deal with their tax affairs perfectly properly. It is all about security and, although they want to comply with the law, they do not want to put themselves and their family at personal risk.
Not so confidential
If a fraud is perpetrated on my wife’s credit card or on my aged mother’s bank account, I can do nothing about it because the banks will not speak to me; they will only speak to the account holder, presumably to avoid identity theft.
(The fact that they conspicuously fail in this purpose seems not to make any difference.)
However, the tax authorities have no such difficulty. They only have to think that information might be relevant to somebody’s tax liability and they can get past all the barriers and even gain entry into our property.
Banking confidentiality has been cast aside simply on the grounds that some of the banks’ customers will not have dealt with their tax affairs properly.
Such is the size of banks that some of the banks’ customers will have perpetrated every crime known to man, but that does not mean that every bank customer should be arrested in the hope that if we arrest everybody we are bound to arrest lots of criminals.
Of course not, that would be absurd – but these are the grounds on which HMRC have been allowed to override banking confidentiality and gain access to their customers’ private accounts.
Great anxiety
The erosion of banking confidentiality allied with the efforts of the OECD to extend exchange of information around the globe also cause perfectly honest and law abiding citizens genuine anxiety.
It is deeply unfortunate that the situation has been made considerably worse by the extraordinary series of data losses by government departments including HMRC, so that no matter how much confidence may be gained in the integrity of HMRC, it is difficult to get over the hurdle that the information may not be secure.
Before HMRC take greater and greater powers, I think it is important for them to address the reasonable anxiety of taxpayers regarding what happens to the information and the perceived risks which they are being asked to take.
Of course HMRC have tax to collect and the integrity of the tax system must be maintained, but that is the whole point. The integrity of the tax system is best maintained when it is admired, supported and honoured by most of the population.
That reputation should be cherished and not be put at risk on grounds of expedience. The integrity of the system is positively damaged by the assumption of excessive powers by HMRC; that is to say powers which reasonable people will regard as excessive.
Fast track for tax
Another crucial issue is the extraordinary place which is inhabited by taxation in our legal system.
There seems to be something special about tax which puts taxpayers at a significant disadvantage when compared with other areas of the law.
An individual is better protected by the law if he is suspected of a serious crime than if he is suspected of not paying even a comparatively small amount of tax. HMRC can demand information, enter premises, raise assessments and enforce the payment of tax on grounds which would barely scratch the surface in the criminal process.
Why is it that taxpayers do not have the benefit of safeguards which exist for anybody else suspected of wrongdoing – and for more serious wrongdoing at that? I have never understood why this is the case. If the state or anybody else wants to take away my property, or my liberty, they have to prove their case.
But somehow tax is not thought of as the state taking my property, so HMRC barely have to prove anything.
Burden of proof
One might say that this reflects the difference in the burden of proof under the criminal law and the civil law, but it goes much further than that. HMRC do not have to prove their case even to the civil standard. It is the taxpayer who is to prove he is innocent to the civil standard.
As a suspected burglar, I would have a number of legal protections available to me; whereas if I am suspected of having failed to disclose all my income, I forfeit nearly all the protections which would be available to the burglar.
How can we have got into this position, because surely any reasonable person would say that something has gone wrong?
No one can blame HMRC for wanting more and more powers to make their jobs easier, but somebody has to look at the wider picture and ask where are we going with this.
Of course, we must catch the criminals and of course we must ensure that taxes are properly paid, but giving the tax authorities tyrannical powers is not the way. That is the way to somewhere else and, goodness me, there are enough examples around the world to give anybody a wake up call.
Too great a portfolio
Part of Jonathan’s thesis was that HMRC simply have too broad a coverage and it would be much better for them to confine their attentions to taxation and not to be burdened by social security benefits at one end and criminal activities such as the importation of endangered species at the other.
The tax system ought to be suitable for the vast majority of law abiding citizens who genuinely want to deal with their tax affairs properly. To burden such citizens with legislation designed to detect and apprehend serious criminals is simply inappropriate and counterproductive.
Jonathan is so right. HMRC are being asked to do too much, and in trying to meet this challenge with an inevitable broad brush, they risk destroying the very prize they seek: the willing co-operation and compliance by the majority.
Jonathan interestingly explained that the UK system of taxation and the way we deal with things here has set the gold standard for countries around the world. That is something of which we can be proud, but it carries a responsibility too.
I therefore urge that those who are responsible for the examination of HMRC powers which is being undertaken at the moment, take careful note of Jonathan’s concerns and, if necessary, pause until they can come up with a system which will be regarded as fair and reasonable for most of the population, while being harsh and uncompromising for those at the margins who break the law.
This may be difficult but the effort must surely be worth it.
Peter Vaines is a partner with Squire, Sanders & Dempsey
