This year was unusual as we did not get the usual raft of announcements closing down loopholes with immediate effect and we have to wait until 23 March for most of the consultation documents. However, there were a number of announcements and confirmations in relation to enforcement and compliance.
Large businesses will welcome the sentiment of item 2.92 of the Red Book, which proposes a review of the way in which HMRC administers the tax system for large businesses – noting the role that such administration can play ‘in supporting the UK’s competitiveness and promoting investment’. Whilst we doubt that the UK plans to fully ape, say, the approach of Dutch tax administration, this review sounds like a step in the right direction to improve relations.
The review will cover large businesses’ experience of UK tax administration, including ‘the degree to which it provides businesses with early certainty where appropriate, ensures the efficient resolution of disputes in accordance with the law, and promotes a collaborative and constructive approach to compliance with the law.’ This review we’re sure will be welcomed by many large businesses. You would be hard pressed to find a head of tax that considers that collaboration to achieve early certainty exists in large measure; in fact, to steal a concept from the Saatchi & Saatchi ad in the warm up to the 1979 election campaign, we would even go so far as to say that ‘real-time isn’t working’.
When real-time working was introduced in the early 2000s, there were some concerns expressed about what was essentially a non-statutory system for gaining early agreement on issues, usually before a return had even been filed so that the submission of the return could be considered ‘final’. Corporates have been encouraged to share confidential information with HMRC outside the niceties of the protections in legislation for information notices, in return for speedier resolution. Over time, it has tended to resemble more of a one-way street: lots of information being provided, some teeth-sucking, and often a detailed enquiry in any event once the return has been filed. Don’t get me wrong, HMRC can be a truly pragmatic and collaborative organisation when at its best. But it struggles to make decisions on a timely basis or at all, often due to the (necessary) governance which has to apply to its work. For us, it would be better to put real-time working on to a more formal footing – with some of the features of a tax ruling process – or do away with it altogether.
When it comes to dispute resolution – as opposed to dispute avoidance, which is the essence of real-time working – again HMRC can present a mixed bag. In any dispute, it is natural for both sides to take a partisan view. The skill is in remaining objective. Professional advisers can try to bring objectivity (not always!) to the business and the board and other decision-makers, who will rely on what is advised. The same doesn’t always ring true for HMRC, given the issue has to be passed on through the hands of many people with a view of the subject and without the flexibility to take a litigation risk view – making it difficult to obtain the required objectivity. The role of the customer compliance manager (CCM) could be put to better effect here. In essence, the CCM is there to ensure compliance across the board – and when it comes to dispute resolution it would be helpful for CCMs to remain neutral, such that the taxpayer obtains a ‘fair audience’ internally within HMRC. Unfortunately, that is not always the case.
A review of the way in which HMRC and large business engage looks very timely also because the hike in corporation tax to 25% is likely, of itself, to create uncertainties and disputes.
HMRC has been given significant additional funding to improve compliance. The Red Book (para 2.104) refers to a further £180m to be invested in 2021/22, forecasted to bring in over £1.6bn of additional tax revenues between now and 2025/26. It was also specifically mentioned that the government will invest over £100m in a ‘Taxpayer Protection Taskforce’ of 1,265 HMRC staff to combat fraud within covid-19 support packages, including the CJRS and SEISS.
It has become commonplace for new measures or investment to tackle non-compliance being used to predict increased tax take without changing the underlying tax base. The same has happened again this year – although the sums pale into insignificance when viewed against the additional taxes that are to be collected from increasing corporation tax and, in real terms, VAT, income tax and NIC.
The government has been consulting since 2015 on changes to the penalty regime. It has finally announced that it will reform the penalties for late submission of returns and late payment in relation to VAT and income tax self-assessment. The new late submission regime will be points based, a bit like for speeding offences, with a financial penalty only being issued when the relevant points threshold is reached. A major criticism of the current late payment system is that the penalty for filing one day late and/or only owing a small amount of tax was the same as someone whose behaviour was much more egregious. Under the new late payment regime, the penalties are intended to be proportionate to the amount of tax owed and how late the tax due is. In addition, interest charges and repayment interest for VAT will be aligned with other tax regimes. The government predicts that these new regimes will bring in an additional £505m between now and 2025/26.
These reforms will come into effect for VAT taxpayers, from periods starting on or after 1 April 2022; for taxpayers in ITSA with business or property income over £10,000 per year, from accounting periods beginning on or after 6 April 2023; and for all other taxpayers in ITSA, from accounting periods beginning on or after 6 April 2024.
The Budget confirms that a number of other measures which have previously been consulted upon and where draft legislation has already been provided, will be introduced. These include the new financial information notices (FINs), which will enable HMRC to request information from a financial institution about an identified customer for the purposes of domestic or overseas tax investigations, without having to obtain the approval of the FTT or consent of the taxpayer. Despite originally looking to extend this approach to notices received by any third party, a proposal which faced stiff opposition, the government has confirmed that it will retain the current system of taxpayer consent/FTT approval in such cases.
There are also some minor changes which apply to normal third-party notices as well as FINs, such as enabling the notices to be issued for the purposes of debt collection and not just to check a person’s tax position. There is also a measure which corrects a drafting error in the existing regime and creates a new anti-‘tipping off’ power, which forbids the recipient of a notice telling the taxpayer about it, subject to the FTT’s approval.
The package of measures previously announced and consulted upon for strengthening the rules for tackling promoters of tax avoidance will be implemented. The government is also pressing ahead with changes to the follower notice penalties, which were the subject of a consultation in December. The House of Lords Economic Affairs Committee recommended that the ‘draconian’ follower notice penalties be abolished on the basis that they restrict access to justice. Instead, the government is tinkering around the edges by replacing the 50% penalty for failing to settle the dispute after receipt of the notice with a 30% penalty. An additional 20% penalty could be imposed if a tax tribunal or court strikes out the taxpayer’s appeal on the grounds that it has no reasonable prospect of success or that there is an abuse of process or alternatively if the tax tribunal or court makes a statement that the taxpayer has acted unreasonably in bringing or conducting the proceedings.
The government intends to introduce new powers to make the possession, manufacture, distribution and promotion of electronic sales suppression (ESS) software and hardware illegal. This will make it easier for HMRC to prosecute anyone found to be using such software and hardware to hide or reduce the value of transactions and evade tax. There will also be new information powers associated with this, including an express power to obtain the software developer’s code.
There are a number of schemes in relation to excise duties where businesses have to be approved by HMRC to carry out certain activities, such as operating an alcohol warehouse. If HMRC decides to revoke this approval, this effectively destroys the operator’s business, and even though the operator can appeal against the revocation of the approval, that is not a satisfactory remedy if the operator has gone out of business by the time a successful appeal is determined. The government has therefore decided to allow HMRC to grant temporary approval in some circumstances to allow a business to continue to trade while an appeal is brought. However, the policy paper says that, in order to be successful in an application for temporary approval, a business will need to provide evidence to support its application and any temporary approval granted would be subject to case specific monitoring conditions. Full details are awaited.
The government has indicated that it will consult on the implementation of OECD rules which will require operators of digital platforms (such as market places or sites connecting sellers and buyers of services) to automatically provide HMRC and the sellers with the total revenues passing through the hands of the seller/service provider via the site. Billed as helping the seller or service provider to complete a return as easily as possible, the government also notes that such a system will help HMRC to detect and tackle non-compliance.
As first announced at the end of last year when HMRC quickly changed the implementing regulations for the EU’s DAC 6 in order to restrict of the scope of the regime to the minimum required to meet its obligations under the Trade and Cooperation Agreement, the government will consult on removing the remnants of these regulations altogether and replacing them with a set of rules which meet the OECD’s model rulebook without the need to piggyback on to the EU’s hallmark D.
There was, as expected, no word on HMRC’s next steps regarding the proposal to introduce a regime requiring the notification of uncertain tax treatment for large businesses. However, we do expect a consultation document at some stage, as HMRC has been rethinking how to define an uncertain tax position after concerns were raised that the original proposal required the taxpayer to work out whether HMRC may disagree with the position taken by the taxpayer.
The Finance Bill is due to be published on 11 March and then the next date in the diary is 23 March when, in a break with normal operating procedures, HMRC will publish the supporting details for the Budget measures and consultations – in its rather grandly titled Command Paper: Tax Policies and Consultation (Spring 2021).
This year was unusual as we did not get the usual raft of announcements closing down loopholes with immediate effect and we have to wait until 23 March for most of the consultation documents. However, there were a number of announcements and confirmations in relation to enforcement and compliance.
Large businesses will welcome the sentiment of item 2.92 of the Red Book, which proposes a review of the way in which HMRC administers the tax system for large businesses – noting the role that such administration can play ‘in supporting the UK’s competitiveness and promoting investment’. Whilst we doubt that the UK plans to fully ape, say, the approach of Dutch tax administration, this review sounds like a step in the right direction to improve relations.
The review will cover large businesses’ experience of UK tax administration, including ‘the degree to which it provides businesses with early certainty where appropriate, ensures the efficient resolution of disputes in accordance with the law, and promotes a collaborative and constructive approach to compliance with the law.’ This review we’re sure will be welcomed by many large businesses. You would be hard pressed to find a head of tax that considers that collaboration to achieve early certainty exists in large measure; in fact, to steal a concept from the Saatchi & Saatchi ad in the warm up to the 1979 election campaign, we would even go so far as to say that ‘real-time isn’t working’.
When real-time working was introduced in the early 2000s, there were some concerns expressed about what was essentially a non-statutory system for gaining early agreement on issues, usually before a return had even been filed so that the submission of the return could be considered ‘final’. Corporates have been encouraged to share confidential information with HMRC outside the niceties of the protections in legislation for information notices, in return for speedier resolution. Over time, it has tended to resemble more of a one-way street: lots of information being provided, some teeth-sucking, and often a detailed enquiry in any event once the return has been filed. Don’t get me wrong, HMRC can be a truly pragmatic and collaborative organisation when at its best. But it struggles to make decisions on a timely basis or at all, often due to the (necessary) governance which has to apply to its work. For us, it would be better to put real-time working on to a more formal footing – with some of the features of a tax ruling process – or do away with it altogether.
When it comes to dispute resolution – as opposed to dispute avoidance, which is the essence of real-time working – again HMRC can present a mixed bag. In any dispute, it is natural for both sides to take a partisan view. The skill is in remaining objective. Professional advisers can try to bring objectivity (not always!) to the business and the board and other decision-makers, who will rely on what is advised. The same doesn’t always ring true for HMRC, given the issue has to be passed on through the hands of many people with a view of the subject and without the flexibility to take a litigation risk view – making it difficult to obtain the required objectivity. The role of the customer compliance manager (CCM) could be put to better effect here. In essence, the CCM is there to ensure compliance across the board – and when it comes to dispute resolution it would be helpful for CCMs to remain neutral, such that the taxpayer obtains a ‘fair audience’ internally within HMRC. Unfortunately, that is not always the case.
A review of the way in which HMRC and large business engage looks very timely also because the hike in corporation tax to 25% is likely, of itself, to create uncertainties and disputes.
HMRC has been given significant additional funding to improve compliance. The Red Book (para 2.104) refers to a further £180m to be invested in 2021/22, forecasted to bring in over £1.6bn of additional tax revenues between now and 2025/26. It was also specifically mentioned that the government will invest over £100m in a ‘Taxpayer Protection Taskforce’ of 1,265 HMRC staff to combat fraud within covid-19 support packages, including the CJRS and SEISS.
It has become commonplace for new measures or investment to tackle non-compliance being used to predict increased tax take without changing the underlying tax base. The same has happened again this year – although the sums pale into insignificance when viewed against the additional taxes that are to be collected from increasing corporation tax and, in real terms, VAT, income tax and NIC.
The government has been consulting since 2015 on changes to the penalty regime. It has finally announced that it will reform the penalties for late submission of returns and late payment in relation to VAT and income tax self-assessment. The new late submission regime will be points based, a bit like for speeding offences, with a financial penalty only being issued when the relevant points threshold is reached. A major criticism of the current late payment system is that the penalty for filing one day late and/or only owing a small amount of tax was the same as someone whose behaviour was much more egregious. Under the new late payment regime, the penalties are intended to be proportionate to the amount of tax owed and how late the tax due is. In addition, interest charges and repayment interest for VAT will be aligned with other tax regimes. The government predicts that these new regimes will bring in an additional £505m between now and 2025/26.
These reforms will come into effect for VAT taxpayers, from periods starting on or after 1 April 2022; for taxpayers in ITSA with business or property income over £10,000 per year, from accounting periods beginning on or after 6 April 2023; and for all other taxpayers in ITSA, from accounting periods beginning on or after 6 April 2024.
The Budget confirms that a number of other measures which have previously been consulted upon and where draft legislation has already been provided, will be introduced. These include the new financial information notices (FINs), which will enable HMRC to request information from a financial institution about an identified customer for the purposes of domestic or overseas tax investigations, without having to obtain the approval of the FTT or consent of the taxpayer. Despite originally looking to extend this approach to notices received by any third party, a proposal which faced stiff opposition, the government has confirmed that it will retain the current system of taxpayer consent/FTT approval in such cases.
There are also some minor changes which apply to normal third-party notices as well as FINs, such as enabling the notices to be issued for the purposes of debt collection and not just to check a person’s tax position. There is also a measure which corrects a drafting error in the existing regime and creates a new anti-‘tipping off’ power, which forbids the recipient of a notice telling the taxpayer about it, subject to the FTT’s approval.
The package of measures previously announced and consulted upon for strengthening the rules for tackling promoters of tax avoidance will be implemented. The government is also pressing ahead with changes to the follower notice penalties, which were the subject of a consultation in December. The House of Lords Economic Affairs Committee recommended that the ‘draconian’ follower notice penalties be abolished on the basis that they restrict access to justice. Instead, the government is tinkering around the edges by replacing the 50% penalty for failing to settle the dispute after receipt of the notice with a 30% penalty. An additional 20% penalty could be imposed if a tax tribunal or court strikes out the taxpayer’s appeal on the grounds that it has no reasonable prospect of success or that there is an abuse of process or alternatively if the tax tribunal or court makes a statement that the taxpayer has acted unreasonably in bringing or conducting the proceedings.
The government intends to introduce new powers to make the possession, manufacture, distribution and promotion of electronic sales suppression (ESS) software and hardware illegal. This will make it easier for HMRC to prosecute anyone found to be using such software and hardware to hide or reduce the value of transactions and evade tax. There will also be new information powers associated with this, including an express power to obtain the software developer’s code.
There are a number of schemes in relation to excise duties where businesses have to be approved by HMRC to carry out certain activities, such as operating an alcohol warehouse. If HMRC decides to revoke this approval, this effectively destroys the operator’s business, and even though the operator can appeal against the revocation of the approval, that is not a satisfactory remedy if the operator has gone out of business by the time a successful appeal is determined. The government has therefore decided to allow HMRC to grant temporary approval in some circumstances to allow a business to continue to trade while an appeal is brought. However, the policy paper says that, in order to be successful in an application for temporary approval, a business will need to provide evidence to support its application and any temporary approval granted would be subject to case specific monitoring conditions. Full details are awaited.
The government has indicated that it will consult on the implementation of OECD rules which will require operators of digital platforms (such as market places or sites connecting sellers and buyers of services) to automatically provide HMRC and the sellers with the total revenues passing through the hands of the seller/service provider via the site. Billed as helping the seller or service provider to complete a return as easily as possible, the government also notes that such a system will help HMRC to detect and tackle non-compliance.
As first announced at the end of last year when HMRC quickly changed the implementing regulations for the EU’s DAC 6 in order to restrict of the scope of the regime to the minimum required to meet its obligations under the Trade and Cooperation Agreement, the government will consult on removing the remnants of these regulations altogether and replacing them with a set of rules which meet the OECD’s model rulebook without the need to piggyback on to the EU’s hallmark D.
There was, as expected, no word on HMRC’s next steps regarding the proposal to introduce a regime requiring the notification of uncertain tax treatment for large businesses. However, we do expect a consultation document at some stage, as HMRC has been rethinking how to define an uncertain tax position after concerns were raised that the original proposal required the taxpayer to work out whether HMRC may disagree with the position taken by the taxpayer.
The Finance Bill is due to be published on 11 March and then the next date in the diary is 23 March when, in a break with normal operating procedures, HMRC will publish the supporting details for the Budget measures and consultations – in its rather grandly titled Command Paper: Tax Policies and Consultation (Spring 2021).
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