HMRC's approach to tax compliance

This article provides an overview of HMRC’s approach to tax compliance. I am interpreting ‘tax compliance’ broadly to cover all kinds of risks to the collection of revenue across all HMRC regimes.

So I am including tax avoidance and debate about the application of the law to complex transactions under that heading, as well as the more obvious problems that arise from error and attempted fraud, though for brevity I will not keep spelling that out. As avoidance is currently my ‘specialist subject’ I will use some of the latest developments in that area as an illustration.

What are HMRC trying to achieve?

In some respects, the title of this article suggests starting in the wrong place. In fact, HMRC would much prefer not to have to enforce compliance. Instead, we want to make it easy for our customers to pay what they have to pay without any need for action from us.

Our customer-centric strategy sets out the different approaches we adopt for different customer groups to achieve this; for avoidance, our aim is expressed in the anti-avoidance strategy published at Budget.

Realistically, though, we know that there will always be a need for targeted intervention to respond to the way that particular customers choose to behave. Increasingly, our approach to compliance is not a question of how HMRC choose to engage but a response to choices made by customers.

HMRC have set themselves three objectives: maximising revenue flows, improving customer experience and reducing costs in a sustainable way. These objectives are central to HMRC’s published Business Plan for 2011–2015.

Where we can, we look for opportunities to make progress on all three objectives at once, though sometimes there are tensions between them. But our aim is to get the right balance between the three in the way we operate the tax system.

The best way to meet HMRC’s objectives is to ensure that as much as possible of the revenue we are charged with collecting flows into the Exchequer without the need for intervention by HMRC, which is costly for customers and for us.

This is at the heart of our ambition to make it easy for customers to understand what they have to do and meet their obligations at minimum cost.

We aim to do this by delivering Ministers’ policies through clear and simple legislation; through accessible guidance; through simple and effective processes that minimise the room for error; and through the support we offer to customers when they need help.

The more we can do to support voluntary compliance and prevent accidental non-compliance, the more HMRC can focus interventions on those whose behaviour puts tax at risk.

Customer focus

Our customer-centric strategy sets out our approach to different customer groups according to their needs, the complexity of their tax affairs and their behaviour.

We recognise that the vast majority of our customers want to, and do, pay the right amount of tax. So for the millions of our individual customers in employment and paying tax at the basic rate, we want to maximise accurate deduction of tax at source, so that they do not have to contact us.

We know that the introduction of our new PAYE system has caused problems for some people, and we are sorry for that.

It is, though, already improving the accuracy of the tax collected from people and will continue to so in the future.

The anti-avoidance strategy puts the emphasis on prevention rather than cure

We do recognise that there will be times when customers need more support from us than usual – for example, when there is a big change in their circumstances such as retirement – and that some customers will always need help. We want to target that kind of support to where it is needed most.

For other customer groups, we know that we need a more active relationship because their tax affairs are likely to be complex.

So for wealthy individuals we have introduced customer relationship management, following the model used for large businesses, to ensure HMRC have a clear understanding of those individuals’ activities and can address any tax risks early and effectively. This model is already well established for large business, as the best way both to manage risk and provide customer service.

For small and medium-sized enterprises, we offer support to get things right from the start, targeted education and simpler processes, backed up by compliance activity to tackle evasion and deliberate non-compliance.

And, of course, we know that our systems can be subject to organised criminal attack, where our aim is to crack down and stop the activity as early as possible.

To recap then, HMRC’s approach to compliance is, first and foremost, to minimise the need for enforcement – it is in everyone’s interests to do that. But where a risk of non-compliance is identified, we aim to detect that as early as possible and resolve it as quickly as we can.

I’d like to illustrate this approach by reference to our anti-avoidance strategy, published as part of the Tackling Tax Avoidance Budget document.

Prevention

The anti-avoidance strategy puts the emphasis on prevention rather than cure. This covers the way we frame legislation, where we aim to make tax law more robust by ensuring it brings out the underlying principles.

Measures introduced in Finance Bill 2011 to counter financial products avoidance schemes involving group mismatches were developed in this way. Budget 2011 also announced the first two in a programme of reviews designed to strengthen strategic defences in areas of the tax code that have repeatedly been subject to avoidance attack.

These will cover income tax losses and unauthorised unit trusts, and will draw on consultation with external interested parties as an important part of the process.

Where a risk of non-compliance is identified, we aim to detect that as early as possible and resolve it as quickly as possible

The Budget also announced that there will be consultation on a proposal targeting specific listed aggressive avoidance schemes, intended to encourage early payment of tax in dispute.

The listed schemes proposal should have a deterrent effect on take-up of avoidance schemes. Deterrence is another aspect of our focus on prevention.

Our Spotlights publication provides a consumer protection message to customers offered tax avoidance schemes by highlighting specific schemes that HMRC will challenge, along with generic indicators of avoidance likely to prompt a challenge.

HMRC also use their customer-managed relationships to provide an early indication of our view on proposed transactions and to seek to influence behaviour.

Detection

The emphasis on preventing problems before they arise is clearly right from both the customer and HMRC’s point of view. But prevention is unlikely ever to be the complete answer. So where non-compliance persists, we aim to identify the risks as soon as we can and to target those cases where intervention is needed.

We use a range of sophisticated data analysis techniques to look for cases showing the characteristics of non-compliance, supplemented by third party information where available.

Most of our compliance work is based on our assessment of risk in the specific case, although we also have a random enquiry programme which provides information for estimating the tax gap and validates our assessment of risk.

Targeting our resources according to risk maximises the impact of our compliance work and ensures the compliance costs of intervention are borne by the riskiest cases.

For avoidance, our ability to detect risk has been significantly improved by the Disclosure of Tax Avoidance Schemes regime, which has recently been extended and strengthened, although we also draw upon other sources of information.

In April, the new requirement came in for promoters of avoidance schemes to provide quarterly lists of clients supplied with scheme reference numbers. This information will allow HMRC to assess the scale of an avoidance risk earlier and will also in time support risk assessment in specific cases.

We will be testing the quality of the data we receive and will use it with caution, especially in the early stages.

In the field of cross-border tax avoidance, HMRC have stepped up their ability to identify and curb avoidance by working with the tax administrations of Australia, Canada, China, France, Germany, Japan, the Republic of Korea and the United States through the Joint International Tax Shelter Information Centre (JITSIC), of which the UK is a founder member.

Counteraction

Where a risk of non-compliance is identified, HMRC use a range of ways to tackle the problem.

We still carry out traditional enquiries across our regimes. But we are also using innovative techniques to minimise cost and maximise impact. For example, drawing on third party information, we are using a campaigns approach in specific sectors or risk areas.

We have launched our offshore disclosure initiatives to encourage people to get their tax affairs back on the straight and narrow.

And where we have established non-compliance, we have new powers enabling us to publish the names of serious defaulters and to monitor the tax affairs of those who have evaded tax to ensure that the problem does not recur.

For avoidance, significant risks may be tackled by amending the legislation in question, if necessary making an immediate change outside the Budget. The Protocol published in the Tackling Tax Avoidance document sets out the circumstances in which Ministers will be willing to make such changes.

We also tackle avoidance through operational challenge across different customer groups. Where the same avoidance risk is present in multiple cases, for example, where a disclosed scheme is widely used, HMRC project-manage the cases to ensure that our challenge is effective and leads to consistent outcomes.

Resolving disputes

My colleagues Geoff Lloyd and Anthony Inglese recently wrote in Tax Journal on the subject of dispute resolution (‘View from HMRC: our approach to dispute resolution’ Tax Journal dated 10 January 2011).

I do not want to repeat what they said but there are a couple of points it may be worth emphasising in this context.

Even where agreement can’t be reached on a point in dispute, we will seek to work collaboratively with customers and their agents wherever possible.

We want to be sure that we have fully understood the facts and the arguments being put to us and we are open to discussion. In this spirit, we will consider the different ways available to resolve the dispute, including Alternative Dispute Resolution.

This shouldn’t be seen as a soft option, however, or as a signal that any fig leaf to cover a proposed settlement approach will do. Any resolution proposal will comply with the law and must be consistent with the Litigation and Settlement Strategy.

And we are relentless in challenging aggressive avoidance – where the options for resolution by agreement are exhausted, we do, and will continue to, take cases to litigation.

Conclusion

HMRC’s aim is to minimise the need for intervention to ensure compliance, so as to ensure maximum revenue flow at least cost to customers and HMRC alike.

But where intervention is needed, we aim to target the biggest risks and to challenge them efficiently and effectively.

We will adopt the same approach in using the Spending Review re-investment in HMRC’s activities to tackle avoidance, evasion and criminal activity, providing assurance to the compliant majority of our customers that the minority that try to avoid paying their fair share will also pay the tax that they owe.

Sue Walton, Head of HMRC’s Anti-Avoidance Group