Budget 2020: Compliance and enforcement aspects

This year’s Budget was delivered in the shadow of the mounting coronavirus crisis, with much of the chancellor’s speech devoted to the government’s £30bn fiscal package aimed at boosting the economy in light of COVID-19. In a welcome move, the government unveiled multiple tax compliance measures to ease financial pressures on businesses and self-employed individuals during these uncertain times, including setting up a dedicated COVID-19 helpline and re-launching the ‘time to pay’ initiative, offering taxpayers a deferral of tax liabilities and a pre-agreed time period to pay these back. The government has further committed to waive late payment penalties and interest where a business experiences administrative difficulties due to COVID-19.

However, as foreshadowed in its manifesto, the government also took the opportunity to continue its long-established pursuit of ‘fairness for everyone’ in the tax system by announcing a set of targeted measures ‘to ensure that businesses pay the tax they owe’ by clamping down on tax evasion, tax avoidance and tax non-compliance. In the Red Book, the government reiterates that, since 2010, it has secured and protected over £200bn of tax that would otherwise have gone unpaid and states that Budget 2020 will build on this through the introduction of further measures to tackle all forms of tax non-compliance, with the ambitious aim of raising an additional £4.7bn by 2024/25. However, the basis for this target remains a mystery; it is, for example, not entirely clear how the tax yield from these measures (as recorded in the Red Book) will increase from £85m in 2019/20 to £1.075bn in 2023/24.

Key to achieving this is the announcement that the government will invest in additional compliance officers and new technology for HMRC, to enable the tax authority to ‘further reduce the tax gap through additional compliance activity and expanding debt collection capabilities’. It is not known how many new compliance officers will be hired and where their focus will lie. It is hoped that the increased resource will enable HMRC to progress enquiries more promptly, and to resolve disputes without the severe delay that many taxpayers have experienced. However, there is a real concern that any new officers may be focused on opening ever more enquiries and investigations in order to achieve the government’s targeted revenues. Transfer pricing and diverted profits tax disputes, in which there are typically a range of outcomes and are therefore likely to result in some tax yield for HMRC, are expected to increase as a result.

A number of additional compliance measures have been proposed, which are summarised below. At the time of the writing, the only details we have in respect of these measures are those contained in the Red Book and the OOTLAR; the underlying consultation documents and calls for evidence are yet to be published by the government.

Taxpayer focused measures

The package of measures targeted at taxpayers comprise both proposals to counter specific types of avoidance and non-compliance, and measures which are centred on the promotion of good corporate behaviour in relation to tax.

Countering tax fraud and avoidance

• Non-compliance in the construction sector has not gone unnoticed in this Budget. The government will introduce legislation in next year’s Finance Bill to prevent non-compliant businesses from using the construction industry scheme (CIS) to claim tax refunds to which they are not entitled. The measure will allow HMRC to reduce or deny the CIS credit claimed on employer returns where the sub-contractor cannot evidence the deductions and does not correct their return when asked. It will also expand the scope of the penalty for supplying false information when registering for CIS. The government will publish a consultation on how to promote supply chain due diligence, including ideas for tackling fraud in supply chains.
• As expected, the government announced that, in the Finance Bill 2020/21, it will legislate in accordance with its response to Sir Amyas Morse’s independent loan charge review. However, while the government accepts the outcome of the review, it says ‘disguised remuneration schemes continue to be used’ and so the government will shortly issue a call for evidence on further action ‘to stamp out these schemes’. While many will welcome the government’s confirmation that it will implement all but one of the recommendations from the independent loan charge review, the government’s stated determination to clamp down other schemes shows that the disguised remuneration scheme saga is far from over.
• It is, however, of note that the government has not followed up on its intention to double the maximum prison term to 14 years for individuals convicted of tax fraud, which was proposed in the Queen’s speech of 19 December 2019.

Corporate governance

• From April 2021, large businesses will be required to notify HMRC when they take a tax position ‘which HMRC is likely to challenge’. The government comments that this policy will draw on international accounting standards which many large businesses already follow. A consultation on the detail of the notification process will be published in due course. The forecast, as set out in the Red Book, estimates that there will be a yield of £10m from this measure in 2020/21, which is surprising given that this measure is only meant to be introduced in April 2021. This announcement is a continuation of the theme that has emerged in recent years, of measures which shift responsibility away from HMRC and onto taxpayers by imposing a burden on corporates to effectively police themselves and self-report their own conduct and that of persons with whom they engage. The question which arises in relation to this new notification measure is how and in what circumstances can a corporate taxpayer be expected to conclude that they have taken a position which HMRC is likely to challenge? What will be the implications for a large business which does not make a notification, but later finds itself in a dispute with HMRC over a genuine disagreement as to the interpretation of the relevant law? It is hoped that the awaited consultation document will shed some light on these issues.
• In the spring, the government will publish a discussion document seeking views on the wider application of tax conditionality, the principle whereby businesses are granted access to government awards and authorisations only if they are able to demonstrate good tax compliance.

The tax compliance supply chain

Promoter focused measures

In addition to introducing measures focusing on taxpayer behaviour, the government has also announced a number of initiatives targeted at those who facilitate tax non-compliance by taxpayers, namely promoters and enablers of tax avoidance. This focus on promoters is not new. The government’s approach remains that, in order to successfully combat the tax avoidance industry, it has to tackle, deter and penalise the behaviour of those who assist taxpayers to enter into these arrangements. Accordingly, the government’s view is that HMRC must be empowered to take action against those involved at every stage of the so-called tax avoidance supply chain.

As announced in its response to the independent loan charge review, the government will legislate in the Finance Bill 2020/21 to take further action against those who promote and market tax avoidance schemes. The legislation is intended to achieve a number of objectives as follows:

1. allow HMRC to obtain information about the enabling of abusive schemes as soon as they are identified by strengthening information powers for HMRC’s existing regime to tackle enablers of tax avoidance schemes;
2. ensure enabler penalties are issued without delay for multi-user schemes, meaning anyone enabling tax avoidance arrangements that are later defeated will face a penalty of 100% of the fees they earn;
3. enable HMRC to act promptly where promoters fail to provide information on their avoidance schemes;
4. ensure promoters fulfil their obligations under the promoters of tax avoidance schemes (POTAS) and make further technical amendments to the POTAS regime. The government states that this will include ‘preventing spurious legal challenges from disrupting the process of scrutinising promoters, so the regime can continue to operate effectively’; and
5. make additional changes to the general anti-avoidance rule to allow HMRC to tackle avoidance using partnership structures, although it is at this stage unclear what these changes will be.

It appears as if these measures, which are at this stage only described in outline, will build on HMRC’s existing powers, and focus on better implementation of those powers, in particular in relation to the enablers regime, which was introduced in 2016, and the GAAR.

The government also announced that it will publish a new strategy for tackling the promoters of tax avoidance schemes. The government said this will outline the range of policy, operational and communications interventions both underway and in development ‘to drive those who promote tax avoidance schemes out of the market, disrupt the supply chain to stop the spread of marketed tax avoidance, and deter taxpayers from taking up the schemes’. In the Red Book, the government described the new strategy as ‘ambitious’; we await with interest details of what this strategy will comprise.

Raising standards in the tax market

Budget 2020 also states that the government intends to publish a call for evidence in the spring on raising standards for tax advice. The government says that this will seek evidence about the providers of tax advice, current standards upheld by tax advisers, and the effectiveness of the government’s efforts to support those standards and aims to give taxpayers more assurance that the advice they receive is reliable. This measure is further evidence of the government’s overall concern about the role of tax advisers in facilitating ‘unfair outcomes’. It is hoped that the call for evidence will provide a real opportunity for tax industry bodies to engage with HMRC in a balanced and considered way.

Confirmation of compliance and enforcement measures previously announced

The government has confirmed that a number of measures previously announced would be going ahead as planned. For example, as announced at Budget 2018, the government will change the rules so that when a business enters insolvency, more of the taxes paid in good faith by its employees and customers, and temporarily held in trust by the business, go as intended to fund public services, rather than being distributed to other creditors. The commencement date of this measure has been delayed until 1 December 2020.

Although the chancellor did not mention this in his speech, the Budget documents confirm that the changes to the off payroll working rules for the private sector will proceed and will not be delayed. The changes to IR35 will be legislated in Finance Bill 2020 and implemented with effect from 6 April 2020, as previously announced.

Comments

Tackling COVID-19 clearly remains the government’s top priority. The Budget did, however, reveal an interesting insight into the areas of tax compliance of most concern to this new majority government. The government’s main objective remains to ‘crack down’ not just on abusive behaviour and avoidance, but on conduct which leads to ‘unfair outcomes’. It is not entirely clear what is meant by this; by which criteria will any particular tax result be assessed by HMRC to be ‘unfair’? Taxpayers are therefore left with a fair amount of uncertainty as to the approach HMRC will take to their affairs going forwards.

The Budget forecasts huge increases in additional tax revenue through what it refers to as HMRC’s ‘additional compliance activity’ and ‘expanding debt collection capabilities’. While this may demonstrate some political appetite for intensifying HMRC’s presence in the market, it is, at present, not obvious how such drastic increases in revenue will be achieved. Taxpayers should therefore be prepared for the increased prospect of an HMRC enquiry, and they should take practical steps to prepare for this as far as possible.