Conclusions and recommendations
1.HM Revenue & Customs (HMRC) lack of transparency has eroded public trust in a fair tax system and makes it more difficult for the department to explain what it does well. HMRC told us that its compliance work with high net worth individuals has been a success. Its approach to high net worth individuals has changed over time and it now appears to be taking a tougher line with those who break the rules. However, HMRC publishes little information about the approaches it takes or the number of criminal investigations and prosecutions in progress. The lack of transparency leaves the Department open to the perception that, in its dealings with taxpayers, there is one rule for the rich and another for everyone else. This is reinforced by the income tax paid by high net worth individuals having fallen from £4.4 billion in 2009–10 to £3.5 billion in 2014–15. We welcome the new Accounting Officer’s commitment to greater transparency and his intention to expand the range of information HMRC publishes. However we are concerned that HMRC could not explain why income tax receipts from high net worth individuals has fallen by £1 billion (20%) since 2009–10, while income tax from all taxpayers has increased by £23 billion (9%) over the same period.
Recommendations:
HMRC should publish more information about its work generally alongside its next annual report and at regular intervals thereafter. We would expect the information to include: descriptions of key areas of its work, such as its approaches to tackling non-compliance and prosecutions; annual data on its operations, such as the number of criminal investigations in progress; and, progress updates on areas of public interest, such as its actions to investigate the data leaked in the Panama Papers. HMRC should include the information in its next annual report.
In its response to this report HMRC should explain how income tax receipts have fallen by £1 billion for high net worth individuals while income tax paid overall has increased by £23 billion.
2.HMRC’s approach to dealing with the very wealthy suggests that they get help with their tax affairs that is not available to other taxpayers. HMRC provides each high net worth individual with a personal “customer relationship manager” to make sure they pay the right amount of tax. The term customer relationship manager gives a misleading impression of what these staff do, and risks sending out the wrong message to other taxpayers about extra help being available to the wealthy. HMRC repeatedly told us that it does not give advice to taxpayers. However, we were not convinced by its assertion that there is a clear line between giving its view on potential transactions and giving tax advice, and we do not think there is enough clarity about what customer relationship managers can and cannot do. In addition, while calls from most taxpayers to HMRC call centres are recorded routinely, meetings and phone calls with high net worth individuals are not recorded.
Recommendation: HMRC should revise and publish guidance to remove any scope for ambiguity about what staff in its high net worth unit can do. It should change the name of its customer relationship managers to something that better describes what they do, and does not suggest an overly close and inappropriate service to the wealthy.
3.HMRC has not been tough enough in dealing with tax evasion and avoidance by the very wealthy, and it does not know whether its activities are enough to deter non-compliant behaviour. HMRC told us that almost all of the very wealthy have professional advisers to deal with their tax affairs. But this sees many of them paying the wrong amount of tax. HMRC has enquiries open into about a third of all high net worth individuals at any one time, and is investigating cases with a potential value of £1.9 billion. Since 2012, HMRC has issued 850 penalties totalling £9 million to high net worth individuals; an average penalty of £10,500. That seems too small an amount to change the behaviour of multi-millionaires, particularly as avoidance is moving from off the peg marketed tax avoidance schemes to complex bespoke schemes, in effect from a high street equivalent of off the rail Primark or Next to made to measure Savile Row. In the five years to 31 March 2016 HMRC completed investigations into just 72 of these people for potential tax fraud. In 70 of these cases it used its civil powers: two were criminally investigated, of which just one was successfully prosecuted. This is a dismal record. We have previously recommended that HMRC should increase the number of investigations and prosecutions, and the Department tells us that it has opened ten more criminal investigations since March 2016. HMRC has also committed to increasing the number of prosecutions of serious and complex tax crime, with a particular focus on wealthy taxpayers and corporates, by 2020. This matters because high net worth individuals’ avoidance through marketed schemes is the thin end of the wedge; £1.4 billion compared to a total of £14 billion from marketed schemes as a total.
Recommendation: HMRC should assess what more it could do to deter very wealthy taxpayers from bending or breaking the law, particularly in the light of changing behaviour. This should include what new powers might increase its impact. HMRC should report back to this Committee by July 2017.
4.Collecting the right amount of tax from high net worth individuals is made harder because they do not have to declare details of their wealth. Unlike some other countries, such as Australia and Japan, high net worth individuals do not need to provide information about their assets in their tax returns. HMRC has access to other sources of data to help it understand the risks associated with an individual high net worth taxpayer, but it is difficult for it to know if it has a full picture. HMRC has been looking at what further information high net worth individuals could be required to report to help improve its understanding of their wealth. The Department told us the issue is currently being considered by ministers.
Recommendation: HMRC should consider what further powers could help it improve its understanding of high net worth individuals, including requiring these taxpayers to provide HMRC information about their assets, and report back to this Committee by July 2017.
5.The rules on ‘image rights’ as they are applied in football and some other industries are being exploited. HMRC told us that it has a specialist team looking at the potential abuse of the rules relating to image rights, which it described as the most significant tax risk amongst footballers. The same risks apply to the entertainment industry and anywhere else where a taxpayer’s image has a market value. The rules allow income for image rights to be treated as a separate revenue stream. Particularly when combined with ‘non-dom’ status, this creates an incentive for the individual to maximise the proportion of income that is deemed to be for image rights in order to reduce their tax liability. HMRC told us that it has open enquiries about image rights on 43 footballers, 8 agents and 12 clubs. We were appalled to hear that not all football clubs are providing HMRC with data under a voluntary agreement struck with the English Premier League. We welcome the refreshing evidence of the HMRC Accounting Officer and his willingness to go back to ministers with a view to reforming the current law on image rights.
Recommendation: Government should take urgent action to address image rights taxation. This must be included in the next Finance Bill to ensure this tax revenue is no longer lost.
6.HMRC has not yet assessed the strengths and weaknesses of its approach to collecting tax from high net worth individuals or considered the different approaches it could take. HMRC’s high net worth unit has increased the amount of compliance yield it has collected each year since it was set up in 2009. However, HMRC has yet to work out exactly what works and why in its current approach, or where and how it might be improved. For example, despite compliance yield and the number of high net worth individuals increasing since 2009, HMRC could not explain why income tax collected from high net worth individuals had fallen by nearly £1 billion (20%), while income tax from all taxpayers had increased by £23 billion (9%). HMRC accepts that it should reflect on its approach to see how it could be improved.
Recommendation: HMRC should conduct a formal evaluation of the high net worth unit and routinely monitor, analyse and report on the tax receipts from this group of taxpayers. It should set out a timeframe for reporting back to this Committee on the results of its evaluation.
24 January 2017