Summary of conclusions and recommendations
The evolution of HMRC’s powers
1.Deliberate evasion and aggressive tax avoidance are clearly unfair on other taxpayers. We fully support HMRC’s efforts to recover tax owed and deter such behaviours. (Paragraph 25)
2.However, the Government’s approach does not appear to discriminate effectively between the full range of behaviours and circumstances it describes as tax avoidance. There is 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. Clearer distinctions are needed in the Government’s approach and rhetoric towards tax avoidance. (Paragraph 26)
Proposed new power: offshore time limits
3.Under the proposal, all those with offshore elements to their tax affairs would have to wait for a lengthy period before they can achieve certainty and matters are finally settled. In the meantime, they would have to retain records to deal with any questions HMRC may ask. The longer after the event a question is raised, the more burdensome it would be for taxpayers to find the answer. (Paragraph 38)
4.This proposal places burdens on all those with offshore elements to their tax affairs to retain records for long periods of time to deal with potential HMRC questions. HMRC already has a 20-year time limit to deal with fraud. We consider the extension of time limits to 12 years for offshore matters unreasonably onerous and disproportionate to the risk. (Paragraph 41)
5.It is difficult to understand why this measure has been introduced now. We see no logic in applying an exclusion from the time limit to situations where information has been supplied by overseas tax authorities, but not where that same information has been supplied by the taxpayer. (Paragraph 42)
6.It is wrong if, rather than funding HMRC sufficiently to conduct offshore enquiries in a timely manner, the Government is placing disproportionate burdens on taxpayers and eroding important taxpayer safeguards. (Paragraph 43)
7.There was deep and consistent opposition from our witnesses to the proposed legislation to extend the offshore time limits for assessment. Witnesses felt this measure was unnecessary and undesirable. We recommend that it is withdrawn. (Paragraph 44)
8.The Government should start a fresh dialogue with representatives of tax professionals to consider how offshore tax matters can be managed more effectively. Any revised measure should be more proportionate and targeted. (Paragraph 45)
Proposed new power: civil information powers
9.Oversight by the tax tribunal of HMRC attempts to obtain information from third parties is an important taxpayer safeguard, which should not be removed without good reason. HMRC has not offered a convincing rationale. (Paragraph 50)
10.We recommend that this proposal is withdrawn until a full consultation can take place on how new legislation could be better targeted. (Paragraph 51)
The 2019 loan charge
11.HMRC has a range of powers at its disposal to deal with promoters of tax avoidance schemes, but we have seen little evidence of action taken against those who promote disguised remuneration schemes. In the absence of publicised actions, HMRC appears to be prioritising recovery of tax revenue over justice by targeting individuals, rather than promoters (who could be considered more culpable), so it can more easily recover liabilities. (Paragraph 67)
12.We encourage HMRC to do more to publicise any actions it is taking against promoters of disguised remuneration schemes. “Spotlight” publications are neither well-known nor well-read, and are therefore insufficient for this purpose. (Paragraph 68)
13.The individuals affected by the loan charge who gave evidence to this inquiry are very different from those generally perceived to be involved in tax avoidance. While they must accept some responsibility, they are not as culpable as those who are much better off, extensively advised and whose involvement in such schemes may be regarded as more egregious. In many circumstances, individuals were being directed to use these schemes by their employer, who would have been in a better position to determine the consequences for the employee of taking a loan. It is unfortunate that the loan charge does not discriminate for different intents and circumstances. (Paragraph 70)
14.Disguised remuneration schemes are an example of unacceptable tax avoidance that HMRC is right to pursue. All individuals using these schemes must accept some degree of culpability for placing an unfair burden on other taxpayers. (Paragraph 75)
15.The loan charge is, however, retrospective in its effect. Parliament has laid down time limits for tax matters of four, six and 20 years which give certainty to taxpayers about their affairs. It undermines this framework to artificially trigger a future charge. (Paragraph 76)
16.In its retrospective effect, and its failure to pursue taxpayers proportionately to their circumstances, HMRC’s approach to the loan charge diverges substantially from the principles in the Powers Review. (Paragraph 77)
17.We recommend that the loan charge legislation is amended to exclude from the charge loans made in years where taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been “closed”. (Paragraph 78)
18.We were disturbed to hear accounts of HMRC threatening individuals with arrangements that could result in bankruptcy, where individuals clearly have no assets to settle liabilities. Whether these threats were explicit or perceived, they have caused considerable anguish for a number of individuals. (Paragraph 79)
19.We recommend HMRC urgently reviews all loan charge cases where the only remaining consideration is the individual’s ability to pay. We also recommend that HMRC establishes a dedicated helpline to give those affected by the loan charge advice and support. Such action should take place well in advance of the loan charge coming into effect in April 2019. (Paragraph 80)
20.HMRC failed to make its position on the schemes clear enough. We do not consider a notice in “Spotlight” on a website sufficient when in many cases HMRC knew which taxpayers and employers were using the schemes and could have communicated with them directly. There were unreasonable delays in legislating and in failing to progress those enquiries which were opened into individuals’ tax affairs, depriving them of certainty even in situations where they were actively seeking to engage with HMRC to finalise matters. (Paragraph 81)
21.HMRC failed to communicate effectively with some users of such schemes on a timely basis as its approach to tackling disguised remuneration schemes evolved from the first disclosure of the schemes after the disclosure regime was introduced in 2004, to legislation in 2011 and through the judicial process ending in 2017. (Paragraph 82)
22.To avoid the delay and uncertainty that has accompanied HMRC’s approach to disguised remuneration schemes, we recommend that HMRC makes a declaration, in a clear and accessible public statement, as soon as it begins investigating a potential tax avoidance scheme. Such a declaration should be targeted at those most likely to be affected by the scheme in question. Publishing online guidance, such as through “Spotlight”, will not be sufficient. (Paragraph 83)
23.HMRC should also notify a taxpayer that it is investigating an avoidance scheme as soon as possible if that individual declares the scheme on their tax return. (Paragraph 84)
Taxpayer safeguards and access to justice
24.All HMRC determinations and notices should be appealable to the tax tribunal. This is central to the protection of the taxpayer and the balance between taxpayer and tax authority. (Paragraph 93)
25.We recommend the Accelerated Payment Notice/Follower Notice legislation be amended to include a right of appeal to the tax tribunal. (Paragraph 94)
26.Whenever a new power is introduced or an existing power significantly extended it should be accompanied by a right of appeal against the exercise of the power, not just against the underlying tax liability. (Paragraph 95)
27.Penalties associated with General Anti-Abuse Rule and Follower Notices are draconian and restrict access to justice. We recognise that they were introduced to inhibit taxpayers from delaying settlement by appealing, but at their present level they are disproportionate and cannot be justified. (Paragraph 103)
28.Taxpayers who challenge HMRC’s view of the law and pursue litigation after a Follower Notice or General Anti-Abuse Rule ruling should not be penalised if they are ultimately unsuccessful. We recommend that these penalties are abolished. (Paragraph 104)
29.Judicial review proceedings in respect of HMRC decisions may only be brought in the High Court, which makes them prohibitively expensive for most taxpayers. We recommend that the Government legislates to give the First-tier Tribunal (Tax) the power to conduct judicial reviews. (Paragraph 109)
30.Statutory review appears an effective mechanism for appealing HMRC decisions. We regret that it is not more widely used. Whilst it is understandable that some taxpayers may be cynical about a system by which HMRC reviews its own decisions, the evidence shows statutory review can play a useful part in overturning poor decisions. (Paragraph 111)
31.We recommend that HMRC ensures that all taxpayers are made aware of the option of statutory review, including a clear explanation of the process and the independence of the reviewer. (Paragraph 112)
32.The extension of the naming sanction to taxpayers and promoters whose behaviour is legal, but of which HMRC disapproves, blurs an important boundary between those who break the law and those who do not. (Paragraph 114)
33.We recommend that naming and shaming provisions should be restricted to those who have broken the law. (Paragraph 115)
The tax policy process
34.Consulting on policy objectives before a specific solution has been identified is fundamentally important to the policy making process. This step is too frequently omitted with inadequate justification. (Paragraph 121)
35.We recommend that consultation should begin at this stage whenever the introduction or expansion of powers is under consideration. (Paragraph 122)
36.Tax legislation should be narrowly targeted at the taxpayer groups it is intended to affect. Broad, badly targeted legislation is unsatisfactory because it can adversely affect compliant taxpayers, leaves too much to the exercise of HMRC discretion or to guidance, and is more difficult to challenge by judicial review. (Paragraph 127)
37.When preparing legislation that is properly targeted and effectively drafted we recommend HMRC should listen more carefully to representations from the expert tax and business representative bodies. (Paragraph 128)
38.Evaluating changes to HMRC powers enables review of their effectiveness, addresses unintended consequences, informs future policy developments and ensures the balance between HMRC powers and taxpayers’ rights is maintained. It is important to consider their cumulative impact. (Paragraph 133)
39.We recommend that all powers granted to HMRC since the conclusion of the Powers Review in 2012 should be evaluated, and those evaluations published. All future powers should be evaluated after five years. (Paragraph 134)
HMRC’s changing culture
40.The Adjudicator has an important role in providing an independent overview of HMRC’s treatment of taxpayers. Consideration should be given to widening the role to increase taxpayer access, or increasing HMRC obligations to respond to and act on Adjudicator recommendations. (Paragraph 150)
41.The new Customer Experience Committee should have an important role in considering taxpayers’ perspectives on how HMRC staff engage with them and in ensuring high standards of customer service. It should include representatives of all types of taxpayer, agents and tax professionals. (Paragraph 154)
42.The evidence suggests that, in compliance and enquiry cases, the behaviour of some HMRC staff falls well below the standard set in the Charter. HMRC needs to have better systems in place to identify and address any problem behaviours as a matter of urgency. (Paragraph 157)
43.HMRC has recently been given greater powers. It is being asked by ministers to collect more tax with fewer staff. These cultural drivers may have pressured staff to take a more aggressive approach to tax collection, and in doing so impaired the ability to be fair to taxpayers and act in accordance with Charter values. HMRC needs to consider how staff can be supported to ensure the right balance is achieved. (Paragraph 158)
44.We recommend that the Government requires that the annual report on the Charter is agreed by the representatives of the tax community (not just individuals on the Committee) and that it is drawn up with the involvement of the Adjudicator. (Paragraph 159)
45.We recommend that the Charter is amended to clarify HMRC’s responsibilities towards unrepresented taxpayers including that issues are clearly set out, legislation is explained and rights to review and appeals are made accessible. (Paragraph 160)
46.We recommend HMRC undertakes a full inquiry into behavioural trends and cases of aggressive treatment, then publishes a clear statement of what leadership behaviours, training or policy clarification is required to ensure all staff are aware of what is and is not acceptable behaviour towards taxpayers. (Paragraph 161)
Powers Review principles revisited
47.The Powers Review demonstrated the importance and advantages of developing a tax powers framework on an agreed set of principles. These principles are being forgotten in the push to tackle tax avoidance and evasion with fewer HMRC resources. (Paragraph 169)
48.HMRC’s declining resources have rendered it unable to effectively perform its dual roles of tackling avoidance and evasion and ensuring taxpayers are treated fairly. Pressure to improve its counter-avoidance and evasion performance could understandably have resulted in neglect of its other responsibilities. This would not only explain the erosion of the Powers Review principles, but also reports of increasingly aggressive behaviour towards taxpayers. (Paragraph 170)
49.The Government has a responsibility to ensure HMRC has the funding it requires to treat taxpayers fairly. We recommend that the Treasury, as part of the next Spending Review, assesses whether HMRC is adequately resourced to fulfil its Charter obligations. (Paragraph 171)
50.Concerns that inadequate funding has caused HMRC to neglect its obligations towards taxpayers were also apparent in our Making Tax Digital for VAT Report. The Government should consider an independent review of HMRC resources more widely. (Paragraph 172)
51.As reliance grows on third party providers, any weaknesses in their systems and processes may have implications for data accuracy. Digital developments do not themselves drive a need for new principles of tax administration. However, we recommend that the rights of the digitally excluded and the proportionality of the burdens placed on third party information providers should be adopted as important principles. (Paragraph 175)
52.Recent developments have highlighted concerns on retrospective legislation. We recommend that the Powers Review principles should be updated to ensure that powers should not be sought that inappropriately apply to income profits or gains for tax years ending before the tax year of the announced change. (Paragraph 178)
53.We recommend that the Government recommits to the principles set out in the Powers Review, with the additions we have proposed. They should be formally incorporated into the Government’s policy-making process and monitored by the Tax Professionals Forum. (Paragraph 180)
HMRC’s powers and accountability
54.We recommend that the Government establishes a new Powers Review, both of the cumulative effect of recent developments and what is needed for the future as tax administration moves to digital systems. This should replicate the successful features of its predecessor in order to update the established principles. (Paragraph 187)
55.While a number of entities have oversight of HMRC much of their activity is focused on specific cases or subject areas rather than how HMRC treats taxpayers generally. (Paragraph 193)
56.It may be time for Parliament to rethink how it holds HMRC and the Treasury to account for the fair treatment of taxpayers. There is considerable support for new oversight of HMRC and a compelling need to address the view that HMRC is not sufficiently accountable. It has not been practical to explore this fully and effectively in the course of our inquiry, and we are mindful of the House of Commons’ pre-eminence in financial matters. Further work is needed to determine what new oversight might be established and how it would fit with existing arrangements. (Paragraph 194)
57.We recommend that the Procedure Committees of both Houses review the mechanisms by which HMRC’s powers are considered by Parliament, to ensure HMRC’s powers are given sufficient scrutiny and the Treasury is held accountable for its role in tax administration. (Paragraph 195)
58.We recommend an independent review, commissioned by the Treasury, to consider the establishment of an independent body to scrutinise the operations of HMRC. (Paragraph 196)
59.A collaborative body with a focus on powers, within a broad remit, could monitor the balance between HMRC and the taxpayer, consider new proposals for legislation, including taxpayer safeguards, and provide oversight of the issues around HMRC culture and deteriorating customer service which have caused our witnesses concern. (Paragraph 199)
60.We recommend that a Joint Consultative Committee on Powers, modelled on the Joint Consultative Committee on VAT, be established to fulfil this function, with wide representation from tax professionals and business organisations. It should also oversee any new powers review. (Paragraph 200)