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KEY POINTS
- So far there have been no ‘horror stories’ as the powers are implemented.
- Advisers actually want more checks on smaller businesses.
- Penalties are in danger of collapsing to the ‘soggy middle’ again.
- Discovery, SP 1/06 and Langham v Veltema need to be revisited.
One of the problems for CIOT presidents is that they only have a year to really make something of their presidential theme.
As their implementation coincided with his twelve months in office, Andrew Hubbard wanted the CIOT to look at how the new HMRC powers worked in practice.
Last week, at a mee
ting chaired by John Whiting, Hubbard introduced the CIOT’s report on this subject and discussed it with an invited ‘round table’ from the profession and the media.
HMRC had been invited and were expected to attend. Unfortunately, the full Government had not been announced by the date of the meeting, and so the department was still in post-election ‘purdah’.
The overall conclusion of the report is that, on the basis of the limited evidence so far available, ‘the changes on the ground have been introduced in a gradual, measured way, with no “horror stories” emerging’; hence the title of this piece, chosen for a CIOT president who is also a musician (it means, I hope, ‘rather slow and dignified, and fairly quietly’).
The evidence for this has come from a survey carried out by the CIOT which was completed by over 250 members, and from the views of members at branch meetings and conferences.
During his presidential year, Hubbard had made HMRC powers the topic of the talks that he gave when visiting branches, and it had been on the agenda in one form or another at over 50 CIOT events.
Hubbard had also had the opportunity of wide-ranging discussions with groups of HMRC staff from the ‘front line’.
A slow burn
Few practitioners have yet had experience of negotiating penalties – only 12% of those who responded to the survey.
However, the consistent response was that ‘the early concerns about excessive and inappropriate use of the powers by HMRC have not proved to be correct’, disproving the fears of some commentators.
As one of the people who expressed those fears, and published the fears of others, I would agree with the report that they have not yet materialised, but I would also agree that ‘it is still early days’.
The concern was never (in my mind at least) that the vast bulk of HMRC inspectors would misuse the powers, it was that a small number would use them in ways which were outside the spirit of the consultations but still within the law and therefore unappealable. That is far more likely to happen later if it is going to happen at all.
However, the other main finding of the report is that both practitioners and HMRC staff seem to have had either too little training, or training at the wrong time, with the initial training too early and the detailed training on the new regime coming too late.
In the round table, the idea of more joint training between HMRC and professional staff was widely supported; it was unfortunate that HMRC were prevented by the political situation from attending, and it is to be hoped that they pick up this suggestion.
As the report says, ‘the information and inspection powers rely on the concept of reasonableness’. 63% of those who responded to the survey thought that the powers were being used reasonably by HMRC, with 37% disagreeing.
While this is rightly identified as an area for future research, some of the comments indicate that it may be a matter of practical issues such as timing rather than heavy-handedness: checks carried out in December and January when advisers are at their busiest, HMRC taking months (in one case three years) to respond and then setting unreasonable deadlines for a response to reach them, etc.
This was recommended as an area for joint work between HMRC and the professional bodies.
Compliance checks
Perhaps a surprising, but certainly a very common, theme expressed by the advisers was that ‘HMRC’s compliance activity is not visible or extensive enough and that, consequently, it is all too easy for clients to “get away with it”’. There was concern that ‘small clients do not seem to be at any risk of an enquiry’, and that if this continues ‘we will get a culture of non-compliance among very small businesses’.
This, of course, is the point which Philip Fisher made in his article two weeks ago (A challenge to the Chancellor); a reduction in staff may well mean a reduction in overall yield, not only because of the investigations they could carry out and don’t, but also because of the precautionary effect on taxpayers when they know that an enquiry is a real possibility.
However, there were also criticisms of the way compliance checks were carried out, and particularly of the standard of basic training which HMRC staff carrying out cross-tax compliance checks had received.
‘This sense of “more in sorrow than in anger” is typical of the views of many advisers. Tax advisers are proud of their professionalism, and genuinely want their opposite numbers in HMRC to demonstrate the same level of professionalism.’
The report notes that the low amount of contact between advisers and HMRC staff in face-to-face enquiries may mean that this represents a small number of HMRC staff with problems, but this will still colour an individual adviser’s perception. At the round table the same point was made about a small business receiving a heavy-handed compliance check.
Soggy middle
This section of the report was introduced by the comment that ‘penalties were always likely to be the most controversial part of the new powers framework’. In the round table, it certainly turned out to be the most controversial part of the report.
The disagreement centred on a recommendation concerning the range of penalties. Pointing out that the old regime tended to result in penalties being concentrated around the ‘soggy middle’, and that the new regime was meant to correct this and apply different levels of penalty to different categories of behaviour, the report said ‘this concept may be being compromised at both extremes’.
In one of these areas there was broad support from the round table: some HMRC investigators simply did not accept that a mistake could be made innocently and therefore attract no penalty.
This turned in particular on the issue of ‘reasonable care’ and whether HMRC were applying standards for advisers and their clients which were ‘either unattainable in absolute terms or, at least, unattainable in the market place in which tax advisers currently operate’.
Advisers have often raised this issue with the CIOT in connection with the toolkits produced by HMRC, and this is an issue we at Taxation hope to return to shortly, particularly in connection with associated companies.
The report also highlighted this area specifically with VAT officers, saying that they were even less likely than those in direct tax to accept that errors were innocent, or that errors involving large amounts of tax did not necessarily imply a large penalty.
It was felt that the department was tolerating, and even encouraging, a number of ‘rogue’ officers in indirect taxes.
There was rather less consensus, however, on the other end of the scale, where the report recommends that HMRC staff are given the confidence to ‘charge high penalties in cases where there has been very clear evidence of deliberate understatement’.
Concern was expressed, particularly from the ICAS and ACCA representatives, that this was a hostage to fortune, and some of the recent cases on lack of reasonable care were quoted.
In general, there was concern that the boundaries between innocent error, careless error and deliberate wrongdoing were causing problems, and that higher penalties should be resisted until these had been sorted out.
While accepting that it was an area on which a conversation could be had, Hubbard was adamant that whose who ‘fiddle their taxes’ should face high penalties, and I agree.
It was rather depressing to see the lack of recognition around the table that high penalties for deliberate wrongdoing were just as much part of the new system as no penalties for innocent error.
This aspect of the new regime is fundamental to its concept, and was fully explored and accepted in the consultation prior to its introduction. As the report concludes, ‘reverting to the soggy middle ground achieves nothing and risks undermining the principles of the new regime’.
Geography
Finally the report commented that many advisers and HMRC staff felt they understood each power in isolation, but did not understand the geography of how they all fitted together. As the report puts it:
‘It is rather like having a guide book which has separate pages on each visitor attraction but without a note of opening hours, no map showing where they are relative to one another, and no index.’
Central to this breakdown in understanding is the extension of the discovery principle by Langham v Veltema and the lack of certainty for taxpayers and their advisers as to when liabilities are final.
Combined with the power to ask for information relating to past, present and future liabilities, and the suggestion in Patullo that information notices can be used to obtain information to evaluate whether or not a discovery can be made, there seemed to be no limit on HMRC’s power to re-open cases, and hence no certainty for taxpayers.
Discussion at the round table centred on the guidance given by SP 1/06 following the Veltema case, and there was broad consensus that this was no longer workable (if it ever had been) as a modus vivendi given the much wider powers HMRC now had.
The final recommendation of the report is that the CIOT should revisit the area annually for the next few years. It is to be hoped that it does, as the body of information about how the powers were being implemented on the ground would then build up into a valuable resource.
