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New powers for HMRC: fair and proportionate? Contents

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Chapter 6: New tax checks on licence renewal applications

163.A new measure proposed in the draft Finance Bill would require a person applying to renew a licence to drive a private hire vehicle (taxi or minicab), operate a private hire business, or carry on a scrap metal business to undergo a tax check. Unless this check is successfully completed the licensing authority will not consider the application for renewal. The purpose of the tax check is to establish that the person is appropriately registered for tax and has been reporting income from the licensed activity to HMRC. The measure applies to initial applications, but here the licensing authority only has to signpost applicants to guidance about their tax obligations and obtain confirmation that the applicant is aware of them. The difference in treatment seems to be because first-time applicants may not begin trading until after the licence is obtained. The new rules will come into effect in April 2022.

164.The measure introduces a new concept of ‘conditionality’ into the tax system, essentially in this case making a licence which a trader needs to run their business legally conditional on compliance with their tax obligations. The Government says it is being introduced to tackle the hidden economy and prevent non-compliant businesses gaining an advantage over compliant ones.232 Although tax law already requires taxpayers to notify HMRC of liability to tax, to make returns of income as required and to pay tax due with penalties for non-compliance, and HMRC already has powers to obtain information from licensing authorities, HMRC finds it difficult to track down non-compliant traders operating in the hidden economy and enforce these rules. HMRC estimates that this measure will result in £155million additional revenue between 2022/23 and 2025/26.233

165.The Law Society of England & Wales referred to a 2020 Budget announcement: “Tax conditionality refers to a principle whereby businesses are granted access to government awards and authorisations (such as approvals, licences, grants) only if they are able to demonstrate good tax compliance”.234 This appeared to add a further dimension to the concept.

166.The new legislation is expected to affect 400,000 businesses, the majority of them small or micro businesses. The individuals affected are more likely to be male, in older age groups and from BAME groups than in the working population as a whole.235

167.Conditionality has been the subject of two rounds of public consultation. The first consultation document Tackling the hidden economy: conditionality,236 published in 2016, was a high-level ‘Stage 1 type’ consultation exploring the concept and the areas of activity in which it might be applied. A response document issued in March 2017 reported that the response was broadly favourable. A second consultation document, Tackling the hidden economy: public sector licensing,237 was published in December 2017. This focused on particular businesses licensed by public authorities considered suitable for conditionality and on how the system could work in these cases, including the roles of the applicant for a licence, the licensing authority and HMRC; how administrative burdens could be minimised; and what information should be shared.

168.A response document was published in November 2018. This consultation produced a more mixed response and, in light of the feedback, some of the sectors originally discussed were deemed to be unsuitable for conditionality. In the response document, the Government announced its intention to introduce tax checks for licence renewals in the private vehicle hire, scrap metal and waste management industries.238 However, only private hire vehicle, taxi and scrap metal trades are in the draft legislation.

Policy objective

169.The draft legislation was published on 21 July 2020 but the accompanying policy paper239 did not explain why the particular sectors affected had been selected, for example by reference to their compliance record. (The 2017 consultation focused on licensed trades because the licence provided the mechanism for applying the tax check, but did not consider the compliance records of the particular sectors.) Witnesses from the licensing authorities and trade sectors did not know why these sectors had been chosen. They speculated that this might be because of a perception of a prevalence of cash transactions in the private hire vehicle and taxi trades (although this is changing, particularly in larger cities) but this is not relevant to scrap metal dealers who are not permitted to trade for cash.240 Antonia Gray of the British Metals Recycling Association made a Freedom of Information request to HMRC to find out why scrap metal dealers had been chosen, but said the department refused to answer it.241

170.The professional bodies were not unsympathetic to the concept of conditionality but had questions. Lydia Challen of the Law Society of England & Wales said:

“There is a philosophical question about conditionality that needs to be addressed. The Revenue says that the justification for it is that if you have access to a government authorisation there are prices to be paid for that, including being compliant and showing you are compliant. I question whether the range of things it has suggested really falls into the bucket of authorisations. We license taxi drivers, because otherwise anybody could get in their car and perform a taxi service.”242

171.Fiona Fernie of the Tax Investigations Practitioners Group thought that the way conditionality was being applied seemed at variance with HMRC’s charter:

“Whether it is meant or not, it gives the impression that the Revenue assumes that a taxi driver or a scrap metal merchant is inherently likely to be dishonest and likely not to want to file their tax returns. The Revenue’s charter says that it will treat everybody as being honest in the first instance.”243

172.Against this background we asked HMRC why these sectors were chosen. It told us:

“An initial list of six licensed areas was included in consultation; these were—alongside other criteria—because a number of factors make them vulnerable to hidden economy activity. However, the decision to proceed with the two sectors included within the draft legislation was based on a wider range of criteria and informed by feedback from stakeholders. In particular, stakeholders reported that existing licence conditions aligned with the concept of a tax registration check. … this reflects a careful approach towards identifying licensing schemes where there is suitable alignment with the aims of a tax check.”244

173.We asked for the analysis on which the decision was based. HMRC gave general information about the tax gap attributable to the hidden economy, adding: “although HMRC does not narrow down these tax gap estimates by sector, we have considered other information to develop understanding of the sectors included within the draft legislation. This includes data from HMRC systems, insight from compliance activity, consultation responses and the experience of other tax administrations”.245

174.Before 400,000 businesses are required to undergo a tax check, we would have expected HMRC to publish an analysis of tax compliance in the relevant sectors to support the decision to apply conditionality first to them. In line with the policy principles set out earlier in our report, more information is needed to support the application of tax checks in these circumstances.

175.Therefore, before the tax check legislation is introduced in Parliament, the Government should publish an analysis of compliance in the sectors affected, to demonstrate that the problem of hidden economy activity is such that the tax check proposed is a proportionate response.

Effectiveness

176.Some witnesses were sceptical about whether conditionality would achieve the Government’s objectives. They argued that traders who were non-compliant for tax might be non-compliant with the licensing rules, and so would not be affected. Antonia Gray of the British Metals Recycling Association said: “I fear it will not work, because a lot of non-compliant operators in the scrap metal business are not licensed and therefore not visible to HMRC in that way” and “this is policing the policed; they are not going to discover those people who are unlicensed and we have a lot of unlicensed operators in the sector”.246 LITRG agreed.247

177.Concern was expressed that, rather than improving compliance, the checks might deter some traders who are currently compliant for licensing, but not for tax, from renewing their licences and so becoming non-compliant for both. Antonia Gray commented: “We will see people deciding not to renew”.248 John Miley of the National Association of Licensing and Enforcement Officers (NALEO) agreed: “There is always potential for it to drive those dishonest people underground”.249 LITRG said “those determined to avoid paying tax may even be encouraged by the measure to operate on an unlicensed basis”.250

178.Another risk was ‘phoenixism’, whereby traders change the name or status of their business when a renewal was due, so that each application appeared to be a first one and thus escapes the check. Witnesses noted that while the tax check established whether a trader was registered for tax and returning income from the trading activity, it would not in itself tackle the problem of traders underreporting income. James Button of the Institute of Licensing told us that: “It does not go any further to ensure they put all their cash income though their books”.251 This raises the question of whether it would have been more effective for HMRC to tackle those active in these sectors who are evading tax or under-reporting their income through increased compliance activity.

179.The Law Society of England & Wales argued that HMRC could have used its existing powers to target evaders more effectively: “We would question whether HMRC’s existing powers are insufficient to tackle these issues in a more targeted way, for example by themselves cross-checking tax details against the relevant registers of licence holders, which seems unlikely to be more onerous for HMRC than responding to individual taxpayer requests for tax checks”.252

Information for first-time applicants

180.Witnesses welcomed the requirement for new applicants to be given information about their tax obligations and to confirm that they were aware of them. LITRG thought that this could educate new applicants about their responsibility for tax and how to become fully compliant. Tom Henderson of LITRG said: “This has the potential to be really useful, because it will help people who would otherwise end up in the hidden economy out of ignorance or neglect of their obligations, and not as a result of any deliberate avoidance motive”.253 Similarly, the Law Society of England & Wales said: “We support the proposal that for first time applicants, the licensing authority should give them information about their potential liability to be registered for tax. This seems to us a helpful addition to public awareness of tax issues”.254 When it comes to evaluating this policy it would be helpful to evaluate this aspect separately, as it may achieve more than the ‘stick’ of tax checks and would be relatively easy to extend to other areas.

Concerns

181.In evidence, representatives of the licensing authorities and trade sectors and representative bodies such as the Low Income Tax Reform Group were under the impression that the tax check was to be confined to ensuring that the applicant was registered for tax. LITRG told us:

“Throughout the consultation process, it has been made clear that tax conditionality would be concerned with whether or not a person had properly registered for tax—and not whether or not the person had submitted a tax return which was complete and correct.”

182.However, LITRG noted that the draft legislation “seems to extend this to include a taxpayer’s obligation to file a return. This appears to be outside the scope of the policy intent”,255 and added that “we think there is a bit of mission creep”.256

183.The Law Society of England & Wales said: “In our view the limit of this should be registration for tax. The range of information that HMRC can request in the current draft legislation appears to go well beyond that”.257 John Miley of NALEO said: “We are happy to support [HMRC] on drivers being registered. We would not want to go any further than that”.258

184.The draft legislation goes beyond registration for tax to reporting relevant income. It is not clear whether this was a misunderstanding of the policy intention, or if the policy developed after the response to the second consultation document (that consultation document discussed the tax checks in terms of registration). The policy paper published with the draft legislation refers to “applicants completing checks that confirm they are appropriately registered for tax”.259 LITRG said: “it is quite bizarre that on the same day, 21 July, you have the policy paper on this matter confirming that conditionality would just relate to registration, yet the draft legislation seems to say something different”.260

185.New proposals must be clear and comprehensive. Once there has been a consultation, major changes to proposals should not be made without explanation. We are concerned about the possibility of ‘mission creep’ in cases such as the tax check proposals. HMRC must communicate clearly with licence holders about the new tax check policy before it is introduced in 2022, so that any misunderstandings are dispelled.

186.We recommend that the tax check is limited to confirming that the applicant is registered for tax and has a unique tax reference (UTR). This is the basis on which consultation has been conducted, and we are not persuaded that the case for going further has been made.

187.One concern raised by witnesses related to paragraph 5(1)(b) of the draft Schedule on tax checks.261 The breadth and vagueness of the wording here worried ATT and ACCA, who wondered what it was supposed to cover. Will Silsby of ATT said that “it appears to suggest that the tax check for, say, a taxi driver might require them to provide opinions as opposed to factual information, or perhaps details of other persons in the industry”.262

188.HMRC explained that this provision was “to evaluate the effectiveness of the measure in bringing people out of the hidden economy. It is important to clarify that any information requested as part of the tax check would relate solely to the applicant’s own affairs”.263 The Financial Secretary to the Treasury said:

“There was a concern about some language in the legislation about evaluation and whether it might open the door to something wider. I hope I can give you reassurance on that. All that language says is that HMRC needs to be able to run evaluations of its own on how effective the policy is. I think, therefore, that it should be taken entirely at face value”.264

189.Paragraph 5(1)(b) of the draft Schedule in the legislation should be amended to define more tightly the information which can be required of applicants for licence renewals.

190.Institute of Licensing expected to pass the costs they would incur in operating the new system to applicants in the form of increased fees: “Any additional costs of administration incurred by licensing authorities can be recovered via the licence fees”.265 This might appear to be unfair and a ‘double whammy’ for compliant applicants who paid their taxes and had to meet the cost of tax checks seeking to identify the non-compliant. The Financial Secretary said “HMRC has had extensive consultation on this and would expect to support licensing bodies, local authorities and Transport for London with financial assistance in the event that there are costs”.266

191.A third concern was that the purpose of licensing—to protect consumers in the case of private hire vehicles and taxis—might be lost in adding a tax check to the process. If, as a result of the new rules, some licenced operators became unlicensed, this would also adversely affect consumers. The Financial Secretary did not think this was a risk: “in some respects the system can be made more effective if there is a bit more linkage and joining up”.267 James Button of Institute of Licensing said: “I do not see this will dilute the overriding aim that public safety is paramount. Drivers have to be assessed for fitness and propriety. Operators have to be assessed for fitness and propriety”.268 John Miley of NALEO agreed.269

Future plans

192.The Government has ambitious plans to extend conditionality. The second consultation, published in 2017, described its proposals as “a first step in a longer-term roadmap for delivering conditionality”.270 The 2018 response document271 referred to “conditionality offering an important step towards integrating the tax system with wider government regulation”. In that response document and in the policy paper published in July 2020 it said it is considering extending this measure to Scotland and Northern Ireland (the measure applies to England and Wales only at present), and intends to consult on extending the principle of conditionality to other sectors over time. We heard no objection to applying this measure to Scotland and Northern Ireland, provided that the devolved authorities are consulted and fully involved in the extension.272

193.On conditionality generally, the Law Society of England & Wales told us “conditionality is a big stick and there may be unintended consequences, so any measures introducing it should be strictly limited to prevent disproportionate effects”.273

194.Conditionality is an unproven policy. It remains to be seen whether it will achieve the Government’s objectives for it. The Government should proceed cautiously. We recommend:

• Before conditionality is applied to other sectors, the effectiveness of the legislation in the private hire vehicle, taxi and scrap metal sectors should be evaluated. This evaluation should look separately at the educational and information element relating to applicants for new licences, and at the impact of the tax checks, in particular whether it has led to unintended consequences, such as an increase in unlicensed operations;
• The application of conditionality to other sectors should be justified by reference to a specific problem in the relevant sector; and
• Before introducing tax checks, HMRC should work with stakeholders to communicate clearly to applicants for licences what the tax check is for and what it consists of, bearing in mind the diversity of the sector and the need to cater for those who cannot be reached using digital methods and for whom English is not their first language.

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