HMRC and the changing tax compliance landscape of 2015

The end of the year inevitably brings out a blend of nostalgia and hope in all of us. The tax world is not immune from this seasonal rite and provides the opportunity to replay some recent developments, rehearse what might be coming and generally be more thoughtful about tax. 

 

There have been some cracking combinations of headlines about HMRC this last year, from the press release accompanying its annual report, ‘Another good year for HMRC’, through to the Financial Times’s comment on the Public Accounts Committee report, ‘HMRC under fire for attitude to taxpayers’. One might have thought these were talking about different organisations, rather than about the same one seen from each end of the telescope.

 

However, I am not here to take cheap shots at HMRC. Which of you, readers, would like to lead HMRC through the rest of the decade to attain its tough targets? These include aims to increase tax collected, reduce costs and slim headcount, while maintaining relations with the unions, cutting tax evasion – even when activity takes place outside our jurisdiction – and moving into the 21st century in terms of digitalisation. And achieving all this while also juggling the longest tax code in the world and keeping a media with a thirst for tax stories on its side.

 

 

One very recent development triggered a ‘they cannot be serious’ comment. An article in the FT announced that Lord Strathclyde, who is currently reviewing the role of peers, is expected to propose that the Lords should lose its veto over delegated or ‘secondary’ legislation. This was no doubt triggered by the recent tax credit debate – a debacle for the government.

 

There has been a long held concern in the tax profession about the sections inserted into primary legislation that enable HM Treasury to issue statutory instruments (SI). Some of these sections permit the issue of new powers with wide impact. Known as ‘Henry VIII clauses’, on account of their unfettered power, these are dotted throughout the legislation, particularly among the powers introduced under the 2005–2012 review.

 

While the House of Lords rarely uses its veto, and its position with ‘money matters’ is weak, abolishing the Lords’ veto may mean that it loses the nuclear weapon from its armoury. Consequently, its usually measured view (often along the lines of the House of Lords Secondary Legislation Scrutiny Committee choosing to ‘draw the special attention of the House to…’) may carry less weight, increasing the potential for a government to advance poorly thought through or unclear measures with less Parliamentary scrutiny, let alone public consultation.

 

In practice, having that extra layer of scrutiny permits ministerial assurances to be sought on how an SI will be implemented. In addition, effectively abolishing it could encourage a future HMRC to ask for, and a government to accede to, more measures being legislated by SI rather than by primary legislation. Surely less scrutiny cannot be good in the long term.

 

 

No doubt like many other tax practitioners, I read the job specification for the ‘independent members’ on HMRC’s refreshed charter panel. As someone with many years’ experience in tax policy, who has worked in a variety of practices and run a business, I wondered, for a moment, if I might have something to offer, alongside my current role, to help HMRC. How wrong could I be?

 

The spec was clearly not aimed at many of us with much past and current experience of the tax world. Challenge is never comfortable, but surely constructive challenge is necessary to attain improvement. Will HMRC think again about who it invites into its tent to help make a difference? 

 

 

Those who can remember doing their CIOT exams a decade or more ago may recall how little time was spent on tax administration. Oh, how times have changed. The plethora of HMRC powers adds significant extra weight in our Yellow and Orange tax handbooks. 

 

Writing this on ‘L-day’, I have the luxury of being able to look back and forward at recent and planned changes. Though having only had a glance through the detail of the draft clauses, this forces a big picture view of the latest developments.

 

Direct recovery of debt is now in force. Rejected in 2007 as impracticable, it has come into force in the second 2015 Finance Act with barely a whimper. Let us hope that its use is strictly limited to the ‘can pay, won’t pay’ that HMRC says it wants to use it against.

 

Talking of strict, the Autumn Statement confirmed that several other powers consulted on over the summer are to be introduced in Finance Bill 2016, many of which appear in the new draft clauses. Firstly, there is the Queen of Hearts power – not quite an ‘off with their heads!’ measure, but certainly a strict liability criminal offence for the ‘most serious cases’ of failing to declare offshore income and gains, for which there will be no need for HMRC to prove intent. It’s good to see that HMRC has listened, to the extent of raising the threshold to £25,000. 

Secondly, there will be new higher civil penalties for deliberate offshore tax evaders, including a new penalty linked to the value of the asset on which tax was evaded and more public naming of tax evaders. 

 

Thirdly, civil penalties are to come in for those who enable offshore tax evasion, including public naming of those who have enabled the evasion. A significant and welcome provision in the draft clause is that not only must the enabler have carried out a deliberate action which assisted the evasion, but he must have known when his actions were carried out that they enabled, or were likely to enable, the other person to carry out offshore tax evasion. 

 

These measures, together with GAAR and other penalties, naming and further criminal offences, will make the UK a very tough place for anyone attempting to evade tax. This should level the playing field in favour of the compliant, yet even those who always try to be compliant feel uncomfortable when working within such a regulated framework. This is especially relevant to areas such as tax planning and whether it strays into GAAR territory. The amount of compliance training within organisations will need to increase, meaning we will still all be paying for this. 

 

 

Offshore disclosure is also stepping up a gear. The existing offshore disclosure facilities for Liechtenstein and the three Crown Dependencies are to close on 31 December 2015. The former was an experiment for both Liechtenstein and HMRC and has to some extent been very successful in bringing in otherwise undisclosed tax to HMRC. It has also put Liechtenstein firmly on the map. There are, however, only a few days left for any taxpayers wishing to make use of these facilities to register – or face a formidable alternative.

 

HMRC plans to consult on a new statutory requirement for taxpayers to disclose and correct any offshore compliance issues within a defined window. For those who do not, there will be tougher sanctions, including a fixed penalty of 30% of the tax owed for all relevant years and no immunity from criminal investigation. 

 

 

HMRC also has an insatiable hunger for gathering data and is continuing to invest in software. Its Connect system now continues to evolve, matching up data that could not have been linked in the years of manual interrogation. This development is continuing apace – and needs to do so, given the volume of data on its way to HMRC with the common reporting system (CRS) coming on stream over the next couple of years and new data gathering powers in the draft clauses. Yet it seems quite inequitable that HMRC has devoted resources to seek yet more powers, while still not producing guidance well in advance of the start of the CRS in 2016.

 

Having information about an individual’s overseas assets, which were previously unknown to HMRC, permits it to approach overseas authorities to seek further information. The CRS may be just the tip of the iceberg and the key to what lies underneath, representing a sea change in how compliance work will evolve.

 

 

And what else is coming down the track? Given HMRC’s need to reduce its headcount and also the tax gap, it is not surprising that it has been looking at how taxpayers interact with it. HMRC says it already handles over one billion online transactions per year and stores more information than the British Library. It plans to encourage more online submissions and payments, further automation and less need for human interaction with taxpayers. So how will this pan out?

 

The Autumn Statement referred to the apparent leap in logic from more digitalisation and greater simplicity (both fine in themselves) to more, i.e. quarterly, returns to HMRC from all but the very largest businesses. 

 

Given many people’s propensity to run their lives through smart phones and apps, it is only natural that HMRC wants to make the most of this and encourage businesses to record everything digitally and send it to HMRC in that format. Keeping good records can aid compliance – we all have anecdotal evidence of that.

 

However, the move to quarterly profit returns has yet to be fully explained. The idea seems to be a leap of faith and having all this in place within a very short space of time would require a huge commitment from HMRC, tax agents, the software industry, the tax technology people within many firms and, last but not least, almost all businesses. Feeling the effects will be organisations ranging from the smallest self-employed business through to large partnerships and corporates, which already wrestle with international accounting standards, cross-border transactions, transfer pricing reporting and other complications. 

 

We do need to embrace the new digital tax world, but equally it needs to have an achievable roadmap. The problems that are still occurring with RTI indicate that HMRC must not rush this if it is to take the business community with it. 

 

Before the new digital reporting can take off, it will be vital to have better interaction between HMRC systems and agents, who are getting increasingly frustrated at not being able to do things their clients can do. We may have the software at our end and HMRC at theirs, but the systems need to join up and speak to each other, designed with all users in mind. 

 

 

Is it time for HMRC to be more transparent about its problems and what it is trying to do and why? Is it time for taxpayers and tax agents to be more transparent? Is it time for the tax profession to be the critical friend – helping HMRC as well as challenging it? Is it time to celebrate the New Year?