Are HMRC’s powers tilted too far against taxpayers?

Key points

• Have the principles in the powers review been forgotten?
• HMRC has been granted many more powers since 2012, especially in relation to avoidance and evasion.
• Individuals with overseas pensions are unlikely to understand the ins and outs of double tax agreements.
• Distinction between those who try to comply but make a mistake and deliberate evaders is blurred.

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Over the past few years, while HMRC has been allocated tougher powers to crack down on tax evasion and avoidance, an uneasy sense has grown that the proper balance between the powers of the tax authority and protection of taxpayer rights has tilted too far in favour of the former. But where exactly does that finely calibrated balance lie and, if it has become distorted, what is the remedy?

In December 2018, the House of Lords Economic Affairs Committee issued its report Powers of HMRC: treating taxpayers fairly (tinyurl.com/yangjk2y). Their lordships fully supported HMRC’s efforts to deter aggressive avoidance and deliberate evasion, but concluded that pressure on HMRC to do so had left it with inadequate funds to fulfil its obligations towards taxpayers in terms of treating them fairly and in accordance with the charter.

It also concluded that the principles set out in the powers review (Modernising Powers, Deterrents and Safeguards) ten years earlier were being forgotten in the push to tackle avoidance and evasion with fewer HMRC resources. There was a ‘clear difference in culpability, for example, between deliberate and contrived tax avoidance by sophisticated, high-income individuals, and uninformed or naive decisions by unrepresented taxpayers’, and clearer distinctions on these lines were needed in the government’s approach and rhetoric about tax avoidance.

Their lordships’ report proved influential and the government responded thoughtfully to the ensuing debate. In a written answer on 22 July 2019 (vol 663, col 78WS), the financial secretary to the Treasury Jesse Norman announced: ‘I have … asked HMRC to evaluate the implementation of powers introduced since 2012 in relation to the powers and safeguards principles, engaging with stakeholders, including taxpayers and their representatives. This will be published in early 2020.’

There followed a consultation exercise to establish whether the right balance was being struck between HMRC powers and taxpayer safeguards in the light of the powers review principles their lordships had invoked. While we await HMRC’s evaluation to be published, it is as well to remind ourselves of what the powers review was and of the principles that underpinned it – principles which at the time commanded the broad agreement of the professional bodies.

The powers review

After the merger in 2005 between the Inland Revenue and HM Customs and Excise to form HM Revenue and Customs (HMRC), a series of consultation documents were published under the generic heading Modernising Powers, Deterrents and Safeguards. These consultations paved the way for legislation intended to align and update the powers of the two former departments and to make tax penalties better reflect the taxpayer’s culpability.

The powers review (as it was called) took place between 2007 and 2012, by which date a new range of penalties for inaccuracy, failure to notify chargeability, late payment of tax and late submission of returns had entered the statute book, alongside new information and inspection powers and revised time limits for assessing tax and claiming back overpaid tax. The review was accompanied by a major reform of the tax appeals system, along with a new taxpayers’ charter setting out the standards of behaviour and values to which HMRC would aspire when dealing with taxpayers.

The review was underpinned by a set of principles which were set out in HMRC, Modernising Powers Deterrents and Safeguards: the review’s work programme (November 2008) (tinyurl.com/y7lkazum) as follows:

‘Powers and the statutory obligations they impose need to be:

• set within a clear statutory framework;
• easily understood – by taxpayers, their agents and HMRC staff;
• straightforward to comply with;
• proportionate to what HMRC needs to discharge its responsibilities or to protect the Exchequer from the risk assessed;
• used consistently; and
• effective in providing the information HMRC needs to assess risk, and effective in discovering and dealing with non-compliance and in helping people to return to compliance.

‘Safeguards for citizens and businesses must be:

• clear;
• publicised;
• accessible;
• effective;
• responsive to the nature and purpose of particular powers and sanctions; and
• conformant with human rights and other relevant non-tax legislation.

‘Sanctions for non-compliance must be:

• set in statute;
• clear and publicised;
• proportionate to the offence;
• used consistently; and
• effective in deterring non-compliance and returning the non-compliant to compliance.’

Overall, the government’s aim was to ‘support those who seek to comply but come down hard on those who seek an unfair advantage through non-compliance’.

By and large the reforms introduced between 2007 and 2012 adhered to those principles and preserved a reasonable balance between state powers and taxpayer safeguards. For example, someone who made a genuine mistake in a tax return or other document despite taking care would not be liable to a penalty; someone who made a careless error but disclosed it of their own volition without being prompted could have their penalty reduced to nil; inaccuracy (and other) penalties were carefully graded according to how culpable was the taxpayer’s conduct.

Penalties for failure to notify a liability were similarly graded, and reduced – in some cases to zero – if the taxpayer notified HMRC late, but within 12 months of when they should have done so. Later, higher penalties were introduced for errors and omissions involving an offshore element, but those too could be mitigated and even eliminated for unprompted disclosure of a careless inaccuracy, or unprompted late notification of a liability within 12 months.

Apart from mitigation, other safeguards included special reduction, suspension of a penalty for a careless inaccuracy, reasonable excuse, and rights of appeal against both the imposition of penalties and their amount. More controversial were automatic penalties for late filing of tax returns: these were often harsh, but nevertheless graded according to the lateness of the return, cancelled if there was a reasonable excuse for lateness and, from 2013, subject to a power for HMRC to withdraw tax returns that had been issued inappropriately. The information and inspection regime introduced in 2008 has only limited appeal rights, arguably justified by the need to forestall complex and sometimes fraudulent arrangements designed to avoid tax and frustrate or delay HMRC’s investigations. Nevertheless, it gives an extensive monitoring role to the tribunals and mostly restricts the exercise of powers to senior HMRC officers.

Post-2012 powers

The powers review officially ended in 2012. Since then HMRC has been granted many more powers, nearly all geared towards countering tax avoidance and evasion. The general anti-abuse rule (GAAR) was introduced in 2013 and the follower notices and accelerated payments regime the following year. In addition, a range of new powers deal with promoters of tax avoidance schemes and ‘enablers’ of various kinds of avoidance and evasion.

Perhaps the biggest and most complex of these new powers are the regimes aimed at inaccuracy and non-disclosure in relation to offshore income, assets and activities – ‘asset moves’ penalties; asset-based penalties; the new 12-year time limit for assessing offshore income and gains; criminal liability for non-disclosure of offshore accounts, assets and activities, even if there is no criminal intent; and the ‘requirement to correct’ offshore non-compliance and swingeing penalties for any failure to do so.

Those last two in particular are indicative of a departure from the guiding principles of the powers review. Individual taxpayers who by any reasonable yardstick would be regarded as law-abiding and by nature compliant are being caught up in complex anti-avoidance legislation, while the penalty regimes make little distinction in terms of severity between them and determined evaders.

The Low Incomes Tax Reform Group, in responding to the evaluation announced by the financial secretary in the written answer quoted above, tells of pensioners whose overseas pensions are taxed at source abroad, leading them to believe that their pension income is taxable overseas and not in the UK. In fact the relevant double taxation arrangements give taxing rights to the UK.

Once HMRC has become aware of the overseas pension, it has charged a failure-to-correct penalty of 150% of the UK tax due, reduced from 200% on the grounds of prompted disclosure. Reasonable excuse claims on the grounds that the taxpayer cannot be expected to know the ins and outs of the double taxation arrangements and that it is reasonable for a lay person to think that if tax is deducted abroad the underlying income source is taxable abroad, are brushed aside.

Similarly, HMRC has resisted attempts to secure remission of the debt on grounds of financial hardship.

Blurred distinctions

It would seem that in the requirement-to-correct regime, practically no distinction is made between those who try to comply but make a mistake, and those who seek an unfair advantage through deliberate non-compliance – the same severe penalties apply to both.

Similarly the loan charge, introduced in 2017, drew criticism from their lordships in their Powers of HMRC report referred to above. They said: ‘It is unfortunate that the loan charge does not discriminate for different intents and circumstances.’ They noted that the people appearing before their committee were ‘very different from those generally perceived to be involved in tax avoidance’ – very often individual workers, working for the NHS or local authorities, who had been denied the opportunity to enter into a normal employment contract and who were told that the schemes they were asked to sign up to were legal and approved by HMRC.

Hard cases make bad law. One cannot help feeling that the principles enunciated 13 years ago – easily understood obligations which are straightforward to comply with, clear and accessible safeguards, support for those who try to comply while coming down hard on the deliberately non-compliant – have taken a back seat in the past few years. It is vital that pressure is kept up against the more egregious forms of non-compliance, in particular as the economy struggles to recover from the current pandemic. But it is just as important that the balance be redressed towards fairness for taxpayers by restoring the differential treatment between the naturally compliant and the deliberately non-compliant that was a hallmark of the powers review – not an easy task, but one in the execution of which HMRC deserves the full support of the tax profession.