Chapter 7: Cross-cutting themes
195.This final chapter will cover themes that emerged during our evidence gathering which go beyond the specific points of draft legislation and consultation discussed in earlier chapters. It is intended to highlight issues that recurred across the topics and discuss how they might be addressed, both through the Finance Bill and in how HMRC approaches these matters more generally in future.
Use of existing powers
196.One question often posed in the course of our inquiries is “are new or extended powers really needed?”. Another common theme is that HMRC were being given new powers when it was not making optimal use of the powers it already possessed, or pursuing other non-legislative ways of tackling issues. The alternative approaches our witnesses suggested often involved the use of powers or processes that HMRC already has. For example, HMRC could use information to which it already has access and its existing enquiry powers to deal with evasion in the sectors covered by tax checks.274 Similarly, it could use the Business Risk Review process to tackle uncooperative large businesses275 without resorting to wide-reaching new powers.
197.While witnesses were supportive of HMRC’s efforts to tackle promoters of tax avoidance schemes and to plug any gaps in existing legislation which made it less effective than Parliament intended, there was nevertheless a feeling that all the powers already available to them were not being used to the full. LITRG said: “we would like to see HMRC make greater use of pay-as-you-earn security deposits” and “debts of a limited company might transfer to directors in certain circumstances”.276 There was also a perception that HMRC were not making sufficient use of criminal prosecution.277
198.When proposing new or extended powers for HMRC, the Government should specifically explain why existing powers are insufficient to achieve the policy objective. This was done in the case of the promoters legislation where the problems with the current legislation were explored in the consultative document, along with the impact this was having on HMRC’s ability to defeat promoters’ activities in a timely way.
199.We also recommend that the Government adopts a standard practice of providing detailed analysis to justify any new proposal conferring new or extended powers on HMRC.
Non-legislative action
200.When assessing whether new powers are needed, another question that needs to be asked is whether there are alternative non-legislative approaches that will enable the policy objective to be met, obviating the need for new legislation. Although tax obligations themselves must be clearly set out in legislation, the issues considered in this inquiry all highlight the usefulness of non-legislative approaches in helping the Government achieve its objectives. This is particularly relevant to issues relating to compliance, where good communication and well-designed and straightforward processes play an important part in ensuring taxpayers understand their obligations.
201.The need for effective and straightforward communication with taxpayers was raised in the evidence we heard on both the tax check provisions and also the promoters measures. It is clear from the legislation in these two areas that the Government recognises the role communication can play in supporting its policy aims. For example, the tax checks measure includes a statutory obligation on licensing authorities to provide information to first time applicants, which was welcomed by witnesses.278 Witnesses were also encouraged, in the context of the promoters measures, by HMRC’s focus on getting information early enough to allow it to issue warnings and contact scheme users. But witnesses stressed the importance of HMRC structuring its communications on tax avoidance effectively—so that they not only reach their intended audience, but also can be understood easily. One witness commented that HMRC has “a very blinkered view as to how it should communicate with people and did not seem incredibly willing to come out of that”,279 and, as in 2018, we heard criticism of HMRC’s Spotlights as a means of warning individuals about new schemes.
202.The evidence also highlighted the use of non-legislative action as a means of addressing particular issues, particularly around compliance. We were encouraged to learn of how HMRC has used customer compliance managers to improve its engagement with the majority of large businesses: for some witnesses, these relationships, rather than a broadly drawn notification requirement, are seen as the best way of identifying areas of uncertainty.280
203.We welcome the steps taken by the tribunal service to deal with the impact of COVID-19; the new processes around virtual hearings offer an opportunity to improve efficiency, and to reduce some of the delays that can result when a case is referred to a tax tribunal. We have highlighted in Chapter 4 the scope for HMRC to improve processes in relation to third party information notices and international information requests to help speed up the process.
204.We consider that non-legislative solutions, whether operating independently or in tandem with legislation, can usefully support the Government’s policy aims in relation to tax, and so recommend that they should be considered as an important element in the development of policy solutions.
Tax policy consultation framework
205.A framework for carrying out consultations on tax policy was set out by the Government in 2011.281 It consists of a formal commitment to full and open consultation, except in exceptional circumstances, at every stage in the development and implementation of a new tax policy proposal. Five specific stages for the development and implementation of tax policy are outlined, with Stages 1 to 3 covering development of policy and legislation.282
206.In our inquiry into the Finance Bill 2011, we welcomed the new approach to tax policy making reflected in this framework and noted the importance of the Government abiding by its own rules.283 In that, and subsequent inquiries,284 we have referred back to the framework to check whether the Government has, in practice, lived up to the standards it set itself. We have done the same this year.
207.In terms of the measures to be included in this year’s Finance Bill, we consider the Government’s performance against its own standards mixed:
(1)Consultations on only two of the measures officially started at Stage 1 (tax checks on licence renewals and civil information powers), but, of those, one then leapfrogged to Stage 3 (civil information powers) after a hiatus of nearly two years.285
(2)The consultation on uncertain tax treatment was a Stage 2 consultation (and no explanation was offered as to why Stage 1 had been omitted).286 Our witnesses were clear that this proposal should have begun at Stage 1. The issues raised by stakeholders during the consultation were such that the Government has recently announced it will delay this measure in order to get both policy and legislation right. This shows the Government has listened to stakeholders—but a ‘start/stop’ like this should not be necessary if the consultation framework is followed.
(3)Although the general tenor of the promoters measures was announced (without consultation) in response to the Independent Loan Charge Review, a consultation on certain aspects of the policy was published alongside the legislation—and, as these measures are about revenue protection, this approach can be understood. The consultation document provided details on each of the measures, both in relation to context, objective and intended outcome, which was helpful and ensured that questions for stakeholders were put in context.
(4)The framework says that the policy objectives and broader policy content need to be set out clearly. On uncertain tax treatment, witnesses felt that consultation had not explained the nature of the problem properly—even tax professionals were struggling to understand what the problem is.
(5)The framework also says that the consultation needs to be clear as to what has already been decided (and where there is scope to influence design). A Stage 1 consultation generally invites broader discussion on options, yet, on civil information powers, one stakeholder said “we have not had a real discussion about the underlying policy rationale for it, and … whether there are alternatives that could be explored”,287 a point also made by UK Finance (who said it would have preferred HMRC to spend more time exploring alternatives)288 and the CIOT who asked, “are there other options that we can explore? We should explore them fully, rather than just giving HMRC an opportunity to draw a few lines against them in a consultation document”.289
(6)On tax checks for licences, although overall it seemed that the Government had consulted widely, both formally and informally, on both policy and design,290 we noted that there appeared to be a disconnect between what witnesses understood the check to involve from the consultation process, and what the draft legislation actually provided for.291
208.Our inquiry also extended to two calls for evidence published by the Government in connection with its promoters strategy. Calls for evidence are not provided for in the tax consultation framework; they represent a preliminary step, intended to inform and assist the Government in identifying next steps in relation to specific issues. If the evidence received confirms the Government’s assessment of the need for action, we would expect that those next steps would include consultation on options in accordance with the framework. However this does not seem to be what the Government is proposing on tax advice. Instead of a consultation on possible options, it is instead planning to take four specific steps, including a consultation on a single option, that it “believes … will significantly move the market towards the desired outcomes”.292
209.Consultation plays an important role in getting tax policy and its implementation right. Views of stakeholders help ensure that Government objectives are met in a proportionate way; they look at proposals through a different lens to that employed by HMRC. Taking account of those views—and being seen to take account of them—assists in building confidence in the tax system.
210.As we said in our 2011 report, the Government should abide by its own rules: it is disappointing to have to note, once again, that in relation to certain of the measures we consider in this report, it clearly has not.
211.Starting a consultation at the right stage is important to ensure that ‘start/stops’ do not happen: it does not inspire confidence in the Government’s own policy making process if it publicly commits to a measure which it then has to admit was wrong.
Lack of evidence
212.Another area of concern is that the Government has not presented sufficient evidence in support of the policy proposals we have looked at. We emphasised the importance of this in Chapter 2. However, as noted in Chapter 6 above, more information should have been published to support the case for applying conditionality to private hire vehicle and taxi businesses and scrap metal dealers in terms of analysis of those sectors and the impact on the hidden economy. Otherwise, there is a sense that the government has determined the policy in simply because licensing affords it the opportunity. That is an inadequate foundation on which to base a tax check for hundreds of thousands of businesses. Similarly, the notification of uncertain tax treatment was predicated on the basis of addressing the tax gap arising from interpretation of tax law, but our witnesses pointed out that the impact of this measure would be negligible.293
213.On civil information powers, the case made for changing the process and removing safeguards did initially appear to be evidence-based—on the OECD review of the UK’s performance in dealing with international information requests. However those facts and figures were not set in the context of third party notices to financial institutions or international information requests as a whole. Once that was done the evidence demonstrated that this was actually a minor problem, and the case for removing the safeguards fell away under scrutiny.
214.In the case of the promoters legislation, HMRC helpfully provided evidence about the problems it had been encountering in applying the existing provisions and the adverse effects this had had in terms of delaying or frustrating action against promoters.294
215.Good tax policy needs to be evidence-based and not just with a theoretical justification or rationale but with analysis, facts and figures. We are concerned that in some cases policy and legislative proposals are being advanced without providing the evidence to back them up or with a flawed analysis that takes account of only part of the available evidence leading to the wrong solution. This should not happen even in consultation, let alone in legislative measures being brought before Parliament.
Disproportionate and poorly targeted action
216.The three proposals for tax checks, notifying uncertain tax treatments and civil information powers also shared a further common characteristic. In each case, witnesses told us they were poorly targeted and disproportionate to the problem they were intended to tackle. The Government appeared to acknowledge that only a minority of licensed private hire vehicle, taxi and scrap metal businesses are believed to be evading tax,295 and only a small minority of large businesses are not already voluntarily notifying HMRC of uncertain tax treatments,296. In addition, we established that the number of Financial Institution Notice cases going to the tax tribunal to approve use of HMRC’s civil information powers which involve international requests are only a small proportion of the total.297
217.In the case of the promoters legislation, it was the broad scope of the legislation which caused concern that “although intended to capture only the hard core of 20 to 30 promoters, the way in which [the proposals] are drafted … is quite broad and could cover an awful lot of advisers who are advising in the mainstream of the tax advisory market”298. We were also told that “you are introducing legislation that affects everybody for the purpose of dealing with a small minority.”299
218.We understand that it is not always possible to target tax measures precisely and that this is generally accepted but, as one of our witnesses put it in relation to tax checks, this is only justified “provided that the compliance burden on the compliant is outweighed by the benefit to compliant taxpayers”.300 The risk of broad, badly targeted legislation is that, as we concluded in our 2018 report, not only can it adversely affect compliant taxpayers, but it also leaves too much to the exercise of HMRC discretion;301 this was criticism we heard about some of the measures discussed in this report.302
219.Our witnesses suggested that the perceived problems with these tax measures could have been dealt with in other ways which would have focussed action on the taxpayers the proposals were intended to impact, rather than the much larger number of taxpayers in the relevant sectors. For example, ICAS suggested that notification of uncertain tax treatment could be limited to companies receiving a high risk rating under HMRC’s Business Risk Review process.303 Similarly, the Law Society of England & Wales felt that HMRC could use information already available to it to target evasion in the private hire vehicle, taxi and scrap metal trades.
220.It seems wrong to legislate powers which operate in a scattergun way, burdening thousands with additional compliance obligations, depriving hundreds of safeguards or rendering compliant businesses vulnerable to sanctions, in order to address minority problems. Better ways should be found of targeting more directly those uncooperative taxpayers whose behaviour needs to change.
221.In line with the principles we set out in Chapter 2, tax legislation should be targeted on the taxpayers it is intended to affect. We recommend that consulting with stakeholders about how action can best be targeted is made a standard feature of all calls for evidence and consultations.
Safeguards
222.In our 2018 report The powers of HMRC: Treating taxpayers fairly, we discussed the importance of adequate taxpayer safeguards.304 Our recommendations related to particular areas where we considered safeguards needed to be strengthened, particularly in relation to ensuring taxpayers had recourse to an independent review of HMRC’s actions. We commented:
“HMRC’s internal governance procedures, however robust, cannot be infallible”.305
223.As a result, we recommended that where HMRC was given a new power, the exercise of that power should carry a right of appeal to a tax tribunal. The Government’s response said that, although a right of appeal was considered as part of the policy process for all new powers, there may be cases where it was not appropriate; for example, where it risked slowing down the process and thereby rendering the measure ineffective.306
224.In 2018, our concern was that, whilst HMRC continues to expand its powers, taxpayer safeguards were not keeping pace. In relation to the measures considered in this inquiry, our concern is that the safeguards taxpayers currently have are being reduced, given the shift away from independent scrutiny to self-policing. Under the promoters measures, we set out in Chapter 3 the concerns expressed by witnesses about the reliance being placed on internal HMRC governance to monitor how the new powers will be used, in particular given that action can be taken under certain of the provisions simply because HMRC ‘suspects’. The justification given for this is that safeguards delay HMRC in taking action against promoters.
225.In relation to Financial Institution Notices, the Government seems to be relying heavily on the aim of meeting a specific OECD target in relation to a relatively limited number of international requests for information. Where HMRC wishes to access taxpayer data held by a financial institution, the reassurance obtained from the independent scrutiny provided by the need to obtain tax tribunal approval (and, for the financial institution, its right of appeal where a notice has been issued) will be lost. Instead, HMRC will itself determine if the conditions are met, with internal processes the only protection against the risk of misuse.
226.We are troubled by HMRC’s seeming increased reliance on internal processes as a means of governing the exercise of its powers . However rigorous the processes put in place, non-statutory internal processes are not, and cannot be, an adequate substitute for independent oversight.
227.HMRC cannot be infallible. Public confidence in the tax system, and those who administer it, requires there to be a proper balance of interest between individual and tax authority. That balance relies on independent scrutiny and oversight of HMRC.
Outsourcing compliance
228.In our last report Off-Payroll working: treating people fairly307 we noted that HMRC had acknowledged that over a period of 20 years it had been unable to enforce compliance with the IR35 rules, and the effect of the off-payroll legislation was to shift HMRC’s responsibility for compliance with those rules, first to public sector engagers, and then to private sector businesses using contractors. One of our witnesses said: “It seems quite wrong that HMRC is effectively delegating its enforcement role to business”.308
229.We have noted two more examples in the course of this inquiry. The proposed tax checks on public sector licence renewals appear to be a response to HMRC’s struggles to tackle the hidden economy effectively. Part of HMRC’s role is to enforce the rules on those who try to evade them. However, tax checks will effectively outsource part of that responsibility to licensing authorities, who will have to ensure that applicants for renewal of licences demonstrate that they are registered for tax and reporting relevant income before they can be relicensed.
230.It was clear that our witnesses from the licensing authorities were not entirely comfortable with the role the tax checks proposal would thrust upon them. John Miley of NALEO told us: “I have a concern that we are being used as an HMRC resource”,309 and added that “my honest opinion is that I would rather do without it”.310
231.Similarly, the proposals for notifying uncertain tax treatment effectively transfer to large businesses the responsibility for identifying (and drawing to HMRC’s attention) applications of tax law which HMRC might want to challenge. That, again, is HMRC’s responsibility as part of its compliance role.
232.We are concerned that this outsourcing of HMRC’s responsibilities seems to be a developing trend. We had assumed that this might be due to resource issues within HMRC. However, when we asked the Financial Secretary about HMRC resourcing in the context of uncertain tax treatment, he told us: “The answer to the question whether this measure is driven by HMRC’s resources is absolutely not… HMRC has been well-resourced for the purposes of managing its business”.311 This was not, however, the perception of our witnesses.312
233.If resources are not the issue, we want to understand what is. With tools provided by the internet and digital data bases it seems that HMRC has never before had so much access to information to assist in enforcing compliance. It also appears to be relatively straightforward to find promoters online.313 The source of the problem is therefore not clear.
234.This issue is becoming particularly important as the Government clearly has ambitions to use conditionality more widely, not just in terms of extending it to other licensed trades but potentially to other situations where something a person needs for their livelihood can be withheld until they can prove their tax status.314 James Button of the Institute of Licensing, who is a solicitor, told us: “I have to have a practising certificate… it would no surprise me if at some stage in the future I had to tick a box and produce a note that I am registered with the taxman”.315
235.The trend towards outsourcing HMRC’s responsibilities seems to be happening without any public or parliamentary debate about whether this is an acceptable direction of travel. HMRC is funded to do tax compliance work, not so that it can outsource its responsibilities to licensing authorities, public sector engagers or private sector businesses who are understandably reluctant to take on that work.
236.We recommend that, for any future proposal involving outsourcing, the Government specifically explains why HMRC is not carrying out the function itself, and what the justification for outsourcing is.
Principles for action
237.In Chapter 2, we set out the principles by which to judge proposals for new HMRC powers, or for the extension of existing powers, based on those set out in the Modernising Powers, Deterrents and Safeguards Review. These were a clear policy objective and justification, simplicity, targeting, proportionality, safeguards and sanctions. The evidence we have heard in our inquiry, and the themes that have emerged through it, have suggested HMRC may not always be adhering consistently to these principles.
238.When considering the introduction or extension of powers, HMRC must have regard to core principles to guide their approach and ensure public and business confidence. We hope that, as it considers the draft Finance Bill and related legislative plans, HMRC refers back to such principles and applies them as a standard.
281 HM Treasury and HMRC, Tax Policy Framework (March 2011): https://www.gov.uk/government/publications/tax-consultation-framework [accessed 15 December 2020]
282 Stages 4 and 5 are implementation and review.
283 Economic Affairs Committee, Finance Bill 2011 (4th Report, Session 2010–12, HL Paper 158)
284 For example Economic Affairs Committee, The Draft Finance Bill 2014 (2nd Report, Session 2013–14, HL Paper 146), Chapter 6.
285 Q 58 (Sarah Wullff-Cochrane, UK Finance). The consultation on HMRC’s civil information powers was launched on 10 July 2018, with the Government saying it would publish its response in Autumn 2018. The summary of responses was, however, not published until 21 July 2020, alongside draft legislation implementing the Government’s preferred policy response. No explanation for the delay was given.
286 In paragraph 7 of the 2011 framework, the Government said where it was necessary to deviate from the framework, it would be “as open as possible about the reasons for such deviation”.
291 See Q 25 (John Miley, NALEO), QQ 32-33 (Steve Wright, LPHCA), Q 41 (Will Silsby, ATT) and Q 43 (Tom Henderson, Low Incomes Tax Reform Group). See also written evidence from Law Society of England & Wales (DFE0019).
292 HMRC, Raising Standards in the Tax Advice Market—summary of responses and next steps (November 2020): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/934614/Raising_standards_in_the_tax_advice_market_-_summary_of_responses_and_next_steps.pdf. [accessed 15 December 2020]. These four steps are: (a) certain actions linked to HMRC’s standard for agents; (b) working with professional bodies; (c) an internal HMRC review of options for action in relation to the costs of obtaining tax refunds (which could lead to a subsequent consultation) and (d) a consultation on requiring all tax advisers to have professional indemnity insurance.
294 HMRC, Tackling promoters of tax avoidance (21 July 2020): https://www.gov.uk/government/consultations/tackling-promoters-of-tax-avoidance [accessed 15 December 2020]
295 HMRC, Tackling the hidden economy (8 December 2017): https://www.gov.uk/government/consultations/tackling-the-hidden-economy-public-sector-licensing [accessed 15 December 2020]
297 See table in Chapter 4 above.
301 Economic Affairs Committee, The powers of HMRC: treating taxpayers fairly (4th Report, Session 2017–19, HL Paper 242)
302 Q 8 (Susan Cattell, ICAS), Q 14 (Lydia Challen, Law Society of England & Wales), Q 46 (Will Silsby, ATT) and Q 50 (Jason Piper, ACCA and Tom Henderson, LITRG)
304 Economic Affairs Committee, The powers of HMRC: treating taxpayers fairly (4th Report, Session 2017–19, HL Paper 242) Chapter 5
305 Ibid.
306 HMRC, The powers of HMRC: treating taxpayers fairly: Government response (22 January 2019): https://www.parliament.uk/globalassets/documents/lords-committees/economic-affairs/Govt-HMRC-Powers-report-22-Jan-2019-.pdf [accessed 15 December 2020]
307 Economic Affairs Committee, Off-Payroll working: treating people fairly (1st Report, Session 2019–20, HL Paper 50)
308 Ibid.