Chapter 2: A principled approach to powers
7.This report is about proposals in the draft Finance Bill which would confer on HMRC new or extended powers. In our 2018 report The Powers of HMRC: Treating taxpayers fairly,3 we commended the policy design principles adopted in the review Modernising Powers, Deterrents and Safeguards (commonly known as the Powers Review). We recommended that the Government recommits to these principles, with additions which we proposed in the report, and that they should be formally incorporated into the policy-making process.4
8.It remains important to have a clear set of principles by which to judge proposals for new HMRC powers, or for the extension of existing powers. For the purposes of this inquiry, the following principles are most relevant:
- A clear policy objective and justification: the purpose of a proposal should be clearly explained and the need for any new or extended powers justified by reference to the problem they are intended to address—and why existing powers are insufficient. Good policy needs to be evidence-based;
- Simplicity: the definition of the new power, and the laws or regulations which govern its use, should be easy to understand;
- Targeting: a proposal should be closely targeted on the population of taxpayers it is intended to affect. If a proposal is directed only at a subset of those taxpayers, every effort should be made to restrict the effect of the legislation to that subset;
- Proportionality: the effect of a proposal needs to be proportionate to the issue which it is intended to address;
- Safeguards: there should be safeguards for taxpayers and others affected to provide a check on the use of HMRC’s powers. These need to be independent of HMRC if they are to have credibility and maintain confidence in the fairness of the tax system. Safeguards should include rights of appeal whenever a new power is introduced or an existing power is extended—such rights are fundamental to the protection of taxpayers and the balance between taxpayer and tax authority; and
- Sanctions: sanctions for non-compliance must be proportionate to the failure being punished and effective in deterring non-compliance.
9.In response to our 2018 report on HMRC powers, the Financial Secretary to the Treasury made a written ministerial statement on 22 July 2019.5 This included an announcement of the commissioning of a review by HMRC of its operation of powers and safeguards introduced from 2012 to 2018. This review should have reported earlier this year, but work on it was paused because of the COVID-19 pandemic. As a result, a report is not expected until the end of 2020.
10.The Government chose to proceed with proposals in the draft Finance Bill, which introduce new powers for HMRC or extend existing powers, before the report of its review was published. The report could have informed the decisions on and design of those powers. We put this point to the Financial Secretary to the Treasury. His response was:
“We are simply trying to improve our understanding of powers and safeguards as we go, and that work is already bearing fruit. We do not need to delay work that is already in progress in order to do that. In fact it would be wrong to delay things, because HMRC has a statutory duty to try to collect tax … the evaluation goes to the implementation of powers rather than the passage of powers. The passage of powers is for Parliament, but our focus is on making sure they are appropriately and properly implemented.”6
11.In our 2018 report The powers of HMRC: treating taxpayers fairly,7 we said:
“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 taxpayer rights is maintained. It is important to consider their cumulative impact.
“We recommend that all powers granted to HMRC since the conclusion of the Powers Review in 2012 should be evaluated, and those evaluations published.”
12.We believe the Government should have awaited the outcome of its own review into the operation of its powers and safeguards before further powers were proposed for HMRC. The outcome of its review should have been used to inform and frame the draft Finance Bill proposals. Evaluation of what has gone before must always be a useful means to determine the best way forward.
3 Economic Affairs Committee, The powers of HMRC: treating taxpayers fairly (4th Report, Session 2017–19, HL Paper 242)
4 Ibid.
5 HC Deb, 22 July 2019, col 78WS
7 Economic Affairs Committee, The powers of HMRC: treating taxpayers fairly (4th Report, Session 2017–19, HL Paper 242)