Is the tax system fit for the 21st century?

Key points

• In March 2021, the government issued a number of consultation documents. Two of them related to improving standards for a minority of tax advisers and making the current tax system fit for purpose. Both might need to be addressed together.
• Currently HMRC has set out ‘standards for agents’, but as part of the consultation process, these standards and the sanctions are being reviewed to see whether any changes are necessary.
• The government wants to update the tax system so that it can cope both with what is happening now, and also to be flexible enough to deal with the future. Some proposals are to be welcomed, but will HMRC and government be able to deliver?

In March 2021, the government issued a number of consultation documents. Two of these, relating to improving standards for a minority of tax advisers and making the current tax system fit for purpose, are considered in this article.

On the face of it they can seem to be two different issues, but on further consideration, are they interconnected? If so, they both need to be addressed together to achieve the desired benefits for taxpayers, HMRC and the government.

Having reflected on the consultation documents there are a number of common themes arising. One of these highlights the direction of travel from the government relating to the overall tax system – namely to try and reduce the cost of running the tax system by making the day-to-day operation of HMRC more efficient through the introduction of making tax digital, but also reducing the existing ‘tax gap’ and ensuring that when the tax is due, its payment is advanced, such as the sale of UK residential property. This is particularly important as we try and rebuild public finances following Covid-19.

In the case of taxation, do the events of Covid-19 help the government to consider changing the narrative around taxation? In the past 40 years there has been a strong message from some political parties that tax should be viewed as bad, and that more funds should be left with the taxpayers, who can then decide how they spend their money. However, as was shown by both the 2008 financial crisis and now the pandemic, there are certain events that can only be managed by government – but those come at a cost, namely the likelihood of extra taxes.

A sobering thought is that current debt levels compared to GDP are similar to the levels that occurred during World War II. The last of this debt was repaid on 31 December 2006.

It therefore helps to highlight the importance of closing the tax gap, and for HMRC to be able to act more swiftly against the minority of advisers who reduce tax liabilities by interpreting tax legislation contrary to parliament’s intention.

Raising standards in tax advice

In August 2020 there was an initial consultation which, while acknowledging there was an issue with a minority of advisers, noted that there was no clear consensus on how to resolve the concerns highlighted.

In the latest consultation, HMRC has suggested some options to resolve the areas of concern.

The area that HMRC has highlighted is that about 30% of advisers providing tax advice are not affiliated to any professional body and that possibly 50% of them do not have any professional indemnity insurance (PII). There may be good reasons for being unaffiliated and failing to be a member does not automatically mean that those advisers’ advice is substandard. If HMRC has a concern about the conduct of a member of a professional body, they can contact that body to air their concerns. This is not an option for those unaffiliated advisers.

Additionally, where advisers have no PII cover, this can adversely affect a taxpayer where the advice received is not to the expected standard. Equally, HMRC wants to ensure that they have appropriate sanctions that they can exercise in such cases.

Currently HMRC has ‘standards for agents’, which set out their expectations around integrity, professional competence, professional behaviour in their interaction with HMRC and appropriate principles when advising on tax planning. HMRC has existing powers when these standards are breached. As part of the consultation process, these standards and the sanctions are being reviewed to see whether any changes are necessary.

It would be interesting to understand how often these powers are currently used and whether they extend to stopping serial offenders from continuing to provide tax advice.

What is tax advice?

There is currently no standard definition of either tax advice or tax adviser. HMRC’s view is that those providing tax advice are tax advisers, and that the nature of the services are diverse, so any definition needs to be widely drawn.

The parties and services potentially caught include accountants preparing corporation tax or income tax returns, bookkeepers preparing accounting records, and a payroll bureau running a payroll.

I sympathise with the concern that if a service is not included, it may be viewed as a way to circumvent the proposals. However, where is HMRC seeing material tax loss occurring, and from what types of transactions? Could this help them to focus on the areas where tax advisers will need PII cover, and failure to have such cover will mean that those services can’t be provided? This would be similar to what currently exists relating to the provision of financial advice.

What are the current proposals?

First, all tax advisers need to have a minimum level of PII cover, where they are providing UK tax services either in this country or from abroad.

Secondly, there should be a system in place where HMRC and individual tax clients can easily check that an adviser has the relevant PII cover. If an adviser fails to have PII, HMRC have suggested they may decline to interact with the adviser or give them access to online systems. However, this raises a practical issue: would HMRC have a responsibility to inform the taxpayer who otherwise may be unaware of the issue?

If for any reason the tax adviser still fails to arrange PII cover, then one suggestion being considered is that the adviser will be joint and severally liable for any additional tax payment due from the taxpayer or there will be civil penalties payable. However, in practice, this may be difficult to enforce where either the tax adviser ceases to trade or is based overseas.

Thirdly, when raising awareness of the current HMRC standards for agents, it is unclear whether this is to all agents and their clients, or simply to those advisers who may be perceived to be falling short of the required standards.

If it is the latter, does HMRC have a responsibility to inform the tax clients of that adviser? This could be something fraught with legal issues. However, if that is not possible, then how will HMRC respond when the taxpayer comes under enquiry?

The latter issue may be covered by providing more assistance to taxpayers, firstly around tax generally, but more importantly educating them about the implications of being involved in what may be high-risk arrangements, and reminding them that if something seems too good to be true, it probably is!

Clamping down on promoters of tax avoidance

The desire to improve the standards of tax advice provided by a minority of advisers is also connected to the government wanting to increase their existing powers to act more swiftly against promoters of tax avoidance schemes based either in the UK or overseas.

The government recently issued a summary of the responses to the consultation that they issued in March 2021. The proposals made in March included giving HMRC the powers to apply to the courts for either orders to ring fence the advisers’ assets or apply for a petition to wind up the promoters. The proposals were generally well received, subject to ensuring that further conditions need to be satisfied to apply the new powers. This will be included when the legislation is introduced, possibly in the next Finance Bill.

The desire is to ensure that promoters do not have the ability to avoid financial penalties arising from their activities, while at the same time ensuring HMRC is able to share information about enquiries they are making into either specific promoters or their schemes much sooner than they currently can. This may help to avoid taxpayers falling foul of such schemes.

However, HMRC needs to consider how they support taxpayers who have already joined such schemes, to unwind their positions and settle the outstanding tax.

Is the tax system fit for the 21st century?

The short answer is no. The Taxes Management Act was introduced in 1970 and additional sections have been added to it over time. The world we live and work in now is different, and this is not reflected in the current administrative system. The internet did not exist in 1970, and neither did online shopping and cryptocurrencies, just to name a few changes.

The government wants to update the tax system so that it can cope both with what is happening now, and also to be flexible enough to deal with the future.

There are a number of aspirations for the new system. These include giving taxpayers certainty and safeguards, being flexible to changing circumstances and providing targeted support to taxpayers, making tax easy to comply with and hard to get wrong, building trust that the system is fair and even-handed, providing simplification and transparency and finally reducing time and costs for all stakeholders. The challenge is how to achieve all of these, how in some cases to measure success and whether, with all of its other commitments, HMRC can deliver.

The past 18 months have been challenging for many organisations, including HMRC, which has been given additional responsibilities linked to the furlough arrangements.

Recently, we have seen delays in receiving unique taxpayer reference numbers, impacting when tax can be paid. Late payment generates interest, penalties and correspondence to cancel these, which could have been avoided. This small example seems to unfortunately fail a number of the aspirations the government has highlighted. Proposals under consideration include the following:

• Currently there are different rules for different taxes when a taxpayer needs to register or deregister in the UK tax system, submit tax returns, make claims and pay tax. Having consistent rules for all taxes and using information provided, either by third parties or from other government agencies, can simplify the process, avoid duplication and help to simplify the whole tax return process.
• Moving to earlier registration can assist with gathering real time information, which may in turn help reduce the period between when income or gains are earned, and the tax is paid. Many employees have tax on their salary deducted at source, compared with the self-employed, where tax is often paid many months after receipt of the income. It may be under consideration whether the self-employed will need to pay their tax on a more regular basis. If this is the desire, there may be a number of tax and commercial hurdles that will need to be overcome.
• Taking best practice from other countries and applying it in the UK. This may include prepopulating tax returns with information received from third parties, being able to review tax returns, make claims and pay tax or request tax repayments online. This would be a major breakthrough and should simplify the tax process for most taxpayers.
• Using digitalisation to gather real-time information which can be used to calculate income and gains and the resultant tax payable, while at the same time enabling clients to access a single digital account to see their income/gains, tax liabilities and the ability to make claims for allowances and reliefs.
• One of the areas under consideration is harmonisation of when different taxes are paid and specifically, changes to the accounting and basis periods. A proposal aired is to tax the self-employed on income generated in the relevant tax year, rather than using the basis periods. If there were to be a change in the basis of assessment, then there may need to be some form of transitional period, otherwise self-employed taxpayers may suffer short term cash flow problems at the time of the changeover. However, it might help to make the tax process simpler and more transparent for those struggling with the existing concepts.
• The government wishes to use simplification, harmonisation, co-operation and support of taxpayers and their agents to build trust and confidence in the tax system. This involves improving the experience for taxpayers, harmonising tax rules where possible, ensuring the information received by HMRC from third parties is accurate and having one digital account that is based on real time information from different sources.
• Improving the systems for calculating tax payments and repayments, while at the same time having a system that is flexible for those whose income varies either due to their working patterns or the nature of their business. This aims to enable taxpayers to satisfy their tax obligations, while giving HMRC access to live data – which helps them risk assess and possibly intervene at an earlier stage. There is also the benefit of reviewing and identifying any weaknesses in the current administrative framework and rectifying these.

Summary

Overall, the existing administrative system is not benefiting any of its stakeholders – which, due to its age, is not surprising. The proposals that HMRC have highlighted are to be welcomed, for if some or all of these can be achieved it may help to reduce the number of taxpayers who are failing to engage with the current system, reduce time spent on administrative matters and improve the overall experience of dealing with tax obligations.

However, there is a valid area of concern; are HMRC and the government able to deliver on these proposals? HMRC is stretched and there will be further pressures to minimise any future tax leakage, while at the same time revolutionising the tax administration framework.

If successful, then major benefits could be achieved, but there will need to be collaboration between taxpayers, their agents and HMRC to ensure that all parties share the benefits that are achieved. Failure to do so may adversely affect success.

However, it needs to be remembered that there will be taxpayers whose affairs are more complex, and so may not fit easily into the new framework. It is hoped that as the system becomes more automated for the majority of taxpayers, this will enable HMRC to redeploy staff to be available to assist with more complex affairs and not simply to reduce staffing levels.

There is also a need to continue the education of taxpayers, which has been helpful to see over the last few years. Taxpayers and their agents need to actively engage with this process, for failure to do so may have adverse consequences if tax errors arise subsequently.

Suitable action also needs to be taken regarding those tax advisers who are perceived to be failing to reach the appropriate standards of service. This may require a ‘carrot and stick’ approach, as there may be a number of reasons for the failure to meet standards. However, where the problems can’t be resolved, failure to take action results in tax leakage, and taxpayers will suffer the consequences of poor advice. No party benefits from that scenario.

There is a further need to ensure that HMRC staff are also adequately trained and conversant in the tax legislation that they are required to operate and that where differences exist these can be resolved in a more timely fashion.

Issue: 4805 / Categories: Comment & Analysis