Draft Finance Bill 2021

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.

We welcome the Government’s continued focus on tackling promoters of tax avoidance schemes through the Finance Bill measures and the related calls for evidence. Aggressive tax avoidance is unfair on those taxpayers who follow the rules. However, it is critical that the Government takes effective action against the people who promote aggressive tax avoidance.

Although the loan charge is outside the scope of this inquiry, the evidence we received in 2018 suggested that HMRC has spent considerable time and resources focusing on individuals who participated in disguised remuneration schemes, while some of those who promoted such schemes have continued to be able to profit from their activities. We question whether HMRC has struck the right balance between focusing on individuals who used these schemes and the promoters of such schemes. HMRC must prioritise taking effective action against promoters.

We accept that HMRC has faced some significant challenges in applying the existing rules, given the steps taken by promoters to frustrate their efforts. We are, however, concerned that it is only now that HMRC is proposing changes we are told are needed to ensure existing rules apply effectively. Nevertheless, we welcome the action being taken by HMRC to rethink its approach to promoters in light of its experience.

The evidence received in our 2018 inquiry concerning the loan charge showed how individuals can become involved in disguised remuneration schemes without being aware of their true nature—and the harm and distress, both financial and emotional, that then results where the scheme is challenged. We are troubled that these types of scheme continue to proliferate, and that many of those people unwittingly caught in these schemes are on lower incomes. The continued sale and marketing of disguised remuneration schemes, most recently to returning NHS wor kers earlier this year, shows the need for the Government to act more effectively, using the full range of measures at its disposal, if it is to be able to close these schemes down.

As was the case with the loan charge, it seems that the involvement of some individuals in these schemes is at the instigation of their employer, and solely for their employer’s benefit. The Government should prioritise action against such employers, to stop the growth in lower paid workers at risk of being targeted by scheme promoters. HMRC also needs to learn from the loan charge experience and do more to protect individual taxpayers, particularly those on lower incomes, from being unwittingly caught up in such schemes.

We are disappointed that, notwithstanding the various powers HMRC has accumulated in recent years, a number of promoters—the so-called ‘hard core’—remain in business, despite HMRC knowing who these promoters are. Action against this remaining core of promoters must be a priority.

We agree that HMRC needs to ensure that the new measures cannot be gamed by promoters trying to argue that they are not within scope. However, these new HMRC powers must also reflect the design principles established by the 2012 Powers Review and, in particular, need to be appropriately targeted at the few they are intended to affect.

We recommend HMRC revisits the triggers for POTAS to minimise the risk of these rules affecting bona fide professional advisers. Specifically, we question whether DAC6 should be a trigger for a POTAS, particularly given the assurances HMRC appears to have given stakeholders that DAC6 would not feed into other areas of the UK tax code.

Retrospective legislation should only be introduced in exceptional circumstances, and the case for doing so must be clearly made. Although we acknowledge our witnesses’ concerns about the proposed retrospective changes to the enablers rules, we consider that, in this case, retrospective action is justified; a robust response is important in demonstrating HMRC’s willingness to tackle promoters effectively. In taking any such action, HMRC must apply symmetry to taxpayers and promoters; neither should be pursued for actions before HMRC found they were illegitimate, but both should be held accountable for their actions after that point.

Although the evidence we heard suggests the proposed measures to target promoters are worth pursuing, we are unconvinced that they will be sufficient to drive the hard core out of business. The Government should continue to look for new approaches to tackling promoters.

The Government should keep the efficacy of measures under review, and not hesitate to respond swiftly if there is evidence that the hard core of promoters are continuing to frustrate HMRC’s ability to stop the marketing of tax avoidance schemes.

In our 2018 report we recommended that new powers should be accompanied by a right of appeal against the exercise of the power and not just against the underlying tax liability. This is not the case in the draft Finance Bill clauses. Although we acknowledge that at some point a right to appeal may be available, this will generally only be available later, by which point the relevant person will have had to deal with the consequences of HMRC’s exercise of its new power, including being named as a promoter. Whilst we appreciate HMRC’s concerns about promoters abusing safeguards, we regret that the measures do not include anything more than HMRC discretion as the means of protecting mainstream advisers from being caught.

‘Naming and shaming’ is an important weapon in tackling the hard core of promoters; shining a light on their activities is key to ensuring HMRC’s warnings are effective. But it should only be used where clearly justified. The Government should revisit the safeguards in the draft Finance Bill to balance more effectively the importance of being able to name promoters against the risk of identifying the wrong people.

Where possible, HMRC should pursue criminal action against promoters, including against those who have sold schemes in the past to which the loan charge applied. This could be a valuable deterrent, and we recommend that more publicity is given to these cases.

Taxpayers need to have better information about schemes so that they can see through a promoter’s sales pitch and recognise when they are being sold an aggressive tax avoidance scheme. A page on a website telling taxpayers how to identify a tax avoidance scheme is insufficient. HMRC must find ways to communicate directly with taxpayers; for example, there could be a single-page warning notice each year as part of its standard communications on self-assessment filing obligations.

HMRC should be capable of planning a communications campaign to provide such warnings, without these warnings acting as a perverse incentive to take part in these schemes. It could look at what other agencies have done for guidance—for example, the Financial Conduct Authority’s communications regarding unscrupulous pensions advisers.

Although the call for evidence on tackling disguised remuneration schemes is welcome, it is disappointing that it has taken until now for the Government to seek external input on tackling disguised these schemes, given the high public profile of this issue in recent years.

We recommend that the Government collaborates with relevant specialists to decide what further steps could be taken to prevent disguised remuneration schemes being used by employment intermediaries. A first step would be to ensure that no government or public sector body contracts with an intermediary operating a disguised remuneration scheme, and to publicise this requirement along with the protocols that public bodies are expected to follow.

To be effective, the new measures depend on HMRC becoming aware of new schemes. We recommend that HMRC creates a dedicated tax avoidance reporting service which enables taxpayers and advisers to report schemes easily. HMRC should work with its communications team to ensure a high level of search engine optimisation for any online reporting service. Any information that helps close down a scheme or promoter should be highlighted by HMRC, with details anonymised.

We welcome the Government’s response to the call for evidence on raising standards in the tax advice market. However, in light of evidence we have heard, we are surprised that the Government has chosen to move straight to consultation on a single proposal (professional indemnity insurance). This seems inconsistent with the Government’s declared approach to tax policy making, and it should reconsider this.

We support greater protection for those currently using unregulated tax advisers, and recommend that the Government consults on options for how they might be regulated. We also recommend that HMRC works closely with the tax professional bodies on non-legislative action which can be taken in the interim to help taxpayers source reliable tax advice (such as a register of tax advisers) and to improve advisory material. HMRC should also consider what more it could do to support charities who provide tax advice.

The case for this removal of safeguards for taxpayers and financial institutions has not been made. It is wrong in principle and not justified by the small proportion of international information requests which require tribunal approval to obtain the information. The overwhelming majority of cases which go to the tax tribunal are domestic. It is disproportionate to deny UK taxpayers the tribunal safeguard for the sake of speeding up a small minority of cases involving international requests.

The civil information powers proposals are poorly targeted, disproportionate in their effect on UK taxpayers and lacking necessary safeguards and rights of appeal. They remove safeguards for taxpayers and financial institutions which prevent arbitrary use of the information powers, and are not supported by the evidence. We regret that the Government did not take the opportunity following its 2018 consultation to consider alternatives to these measures before taking them to this stage.

We recommend that: The requirement for tribunal approval for a third-party information request to a financial institution should remain; Financial institutions should have a right of appeal against any request they consider unduly onerous; The Government should clarify the interaction between the use of Financial Information Notices for debt collection and the direct recovery of debt provisions, and ensure that the safeguards for Financial Information Notices relating to debt are no less stringent than those for direct recovery of debt; HMRC should review the whole process for dealing with international information requests requiring tribunal approval, working with financial institutions, the tax tribunal and others, to find other means of streamlining the process; and Given the lack of consultation, HMRC should reconsider the implementation date. In doing so, they should undertake further consultation and communication to ensure that financial institutions are fully appraised of the implications of the measures and have sufficient time to prepare for them. Any revised implementation date should be determined in light of this consultation.

We welcome the Government’s delay to the start date for the requirement to notify uncertain tax treatment and its commitment to engage with stakeholders to get the policy right. However, the Government should learn the lesson from this episode: until a measure co mplies with the policy principles set out above in Chapter 2, it should not be proposed.

We regret that the Government chose to consult on its uncertain tax treatment proposals at Stage 2. A Stage 1 consultation would have much more appropriate.

When the Government consults on new proposals, it should clearly state its case and the evidence for it. This is common sense and is what the Government’s Tax Consultation Framework requires. It is clear from our evidence that these requirements were not met by this consultation. We recommend that the Government should issue a new Stage 1 consultation, so it can work with business and representative bodies to develop a more targeted, proportionate measure than that now proposed.

While it is positive that HMRC has established a constructive relationship with most large businesses, it seems unnecessary and counter-productive to make a requirement to notify uncertain treatment apply to all, regardless of their risk status. We recommend that this new measure should be targeted only at the minority of large businesses that are of concern to HMRC.

We are concerned that HMRC did not recognise the likely difficulty of applying the test for uncertain tax treatments when the policy was being formulated for consultation. Tax obligations should be based on objective criteria that can be easily understood, and a business should not have to second guess HMRC to know if it is subject to a tax obligation. We therefore welcome the Government’s acceptance that it got the test for uncertain tax treatments wrong.

Tax is a business-wide matter and so liability for failure to notify should sit with the business alone, and not individual officers.

HMRC’s ability to create a failure to notify simply by challenging the position a taxpayer has taken in its tax return creates a ‘Catch-22’ for businesses. The Government needs to remedy this: a taxpayer should not be at risk of a penalty because of a mistaken or overzealous inspector raising an enquiry without merit.

Businesses could face significant costs in seeking to comply with the proposed measure on uncertain tax treatment. We are also concerned that this could lead to an overall negative yield for the Exchequer, to the extent that those additional costs are themselves tax deductible.

Any measure which risks costing taxpayers more in compliance than the revenue it generates is not good tax policy. Businesses should also not be asked to incur costs in providing information to HMRC which it accepts is already being provided in most cases. We welcome the Government’s commitment to look into the costs to business of complying with this measure.

The relationship between a business and its customer compliance manager appears to be key to HMRC’s success in managing large business tax risk. We are concerned to hear that this may be under strain. We recommend that the Government identifies what steps can be taken to support existing customer compliance managers and to expand the number of companies benefiting from a customer compliance manager relationship. If this proposal goes ahead, the Government should commit to ensuring that every business affected has a customer compliance manager.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.