Summary
In the draft Finance Bill 2021, the Government has set out legislation for new powers in a range of areas to combat tax avoidance and promote compliance. Our inquiry into the draft Bill focuses on the more notable of these proposals. We welcome some of the measures in the draft Bill, but we conclude that others need be revisited wholesale.
In relation to the specific proposals, our conclusions are as follows:
On the proposals for tackling promoters of mass-marketed tax avoidance schemes, we welcome the Government’s intention to take further tough action against the known ‘hard core’ of promoters, but urge it to redouble its efforts in this respect, and to take further measures to combat the continued proliferation of new schemes. We also highlight the vulnerability of lower income taxpayers to these schemes, and their continued use by some employment intermediaries.
On proposals for amendments to HMRC’s civil information powers, we are very concerned about the removal of important taxpayer safeguards for information requests, particularly the need to request permission from the tax tribunal. We believe the Government’s reasoning behind these proposals is flawed and not supported by evidence. We call for the tribunal approval requirement to remain and for HMRC to undertake a full review of the information request process to find alternative ways in which it could be streamlined.
With regard to plans for notification of uncertain tax treatments, we note that the Government has now said that it will be undertaking a further consultation, delaying its introduction until 2022. We welcome this move: it was clear from our evidence that the plans were poorly thought out and difficult to understand and apply in practice. We are concerned that the Government only appears to have recognised that there were significant problems with the measure after committing to legislate in 2021. We also urge the Government to look again at the cost of compliance and to consider whether the measure should apply so widely.
On proposals for new tax checks for licence renewal applications, we are worried about a potential ‘mission creep’ in the proposals which risks them going beyond a simple check for tax registration, which was thought to be the original intention. If the introduction of the checks results in more traders becoming unlicensed so as to avoid them, this could pose risks to the public. We also note that ‘conditionality’ is an unproven principle: HMRC should thoroughly assess its effectiveness before extending this principle to other sectors.
We also came to a number of cross-cutting conclusions that apply to all of the proposals.
First, the Government needs to take more care to abide by basic policy principles when proposing new or extended powers for HMRC. Without following such principles, there is a risk that measures will be poorly targeted, ineffective and counterproductive.
Second, we believe that HMRC is still not making full and effective use of its existing powers, and should look to how these might be better used before considering new legislation. We are concerned that the Government has decided to initiate and extend the powers of HMRC before considering the outcome of its evaluation of how HMRC uses its existing powers, which has yet to be published. We also call for HMRC to look more closely at how it might use non-legislative actions to deal with problems in this area before seeking further legislation.
Third, we are concerned that the Government does not always follow good practice for consultation when initiating new policy proposals, and that it should be more methodical and rigorous in consulting, so that plans are properly tested before they become draft legislation.
Fourth, some new Government proposals do not appear to have a strong or transparent evidence base, and this is particularly concerning when plans have been turned into draft legislation.
Fifth, we note that there is a pattern of new HMRC powers being disproportionate, poorly targeted and without sufficient safeguards. In some cases, expansive new powers are being granted to deal with problems that appear to be marginal and only affecting a small minority, increasing compliance costs for everyone. The Government should review its approach in this respect. Similarly, the Government appears to be too cavalier in removing safeguards over the use of HMRC’s powers: internal procedures can never be a substitute for independent oversight.
Finally, there appears to be an increasing trend of HMRC outsourcing its compliance responsibilities—for example, in requiring licensing authorities to undertake tax checks. For any future outsourcing proposal, the Government must explain what the justification for it is, and why it cannot be done by HMRC.