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Opinion: Why it’s time to redress the imbalance on HMRC powers

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Many of the restrictions which have limited HMRC’s powers to pursue unpaid tax have been relaxed over the past decade. HMRC now seeks the power to issue notices under FA 2008 Sch 36 to taxpayers as it sees fit, raising concerns for taxpayers’ rights. HMRC’s annual compliance yield continues to increase, whilst the tax gap has plummeted. Increasingly, however, its powers can only be challenged through expensive and uncertain judicial review. Achieving a balance between HMRC’s powers and taxpayers’ rights requires improved internal controls, and a much greater degree of independent oversight and openness in how HMRC operates.

Over the past decade, Parliament has provided HMRC with more and more ‘tools’ with which to pursue unpaid tax. HMRC claims that many restrictions have been holding it back in this pursuit. Many of these have now been relaxed and the balance of power (which has always been in HMRC’s favour) is now very decisively against the taxpayer.

HMRC is still not content, however. On the basis of its recent consultation on amending its civil information powers (see, if HMRC gets its way (and based on recent experience, who would bet against it?), any remaining vestige of independent oversight as to the use of statutory information powers will be washed away. HMRC will be free to issue Sch 36 notices to taxpayers, and anyone else, as it sees fit.

Why not, you might think. After all, if you have nothing to hide, you have nothing to fear. But is that right? What if the enquiry is unwarranted; or if nothing can persuade HMRC that it is barking up the wrong tree; or if the inspector has it in for you or is incompetent? What if you cannot provide HMRC with what it wants either because it does not exist or it has long ago been lost or destroyed? The hunt for information will go on regardless, and soon you find your bank, business associates, clients and friends all being contacted by HMRC. Worse still, what if HMRC thinks you do have the information it needs and are just being obstructive?

You might have nothing to fear but that will not prevent the costs going up very substantially and an enquiry going on and on. Recently, I was challenged about whether I agreed that the rights of every taxpayer had been reduced. I did not agree but that does not mean I don’t have doubts.

Revenue pressures

Statistically, HMRC’s annual compliance yield continues to increase, whilst the tax gap, especially that attributable to tax avoidance, has plummeted. Yet HMRC continues to ramp up the pressure on non-compliance and avoidance with more law and more resources, whilst its customer service standards show no improvement at all despite many obvious tensions across various taxpayer groups. It does not matter whether you believe the numbers (I confess I find some of the yield and tax gap conclusions challenging), but the direction of travel suggests that the annual compliance yield will soon exceed the total annual tax gap. And that is before HMRC’s estimated yield benefits from making tax digital start to flow in to the exchequer.

HMRC has benefited from the public disdain of tax avoidance and offshore evasion. It is clearly operating on the basis that its compliance yield will increase every year. Hands up who wants to be the HMRC official tasked with explaining to the Treasury or the minister that yield has actually fallen? And who could blame them, since it is almost certain that any such fall would not be regarded as good news by many of those critical of HMRC and the professions.

But HMRC’s aggressive pursuit of tax avoidance has found its way into every aspect of HMRC’s business. Parliament is clearly concerned by this; indeed, we all are. HMRC’s powers are under scrutiny by both the Treasury Select Committee and the Economic Affairs Committee of the House of Lords (more directly by the latter). HMRC should, of course, have modern powers, and those powers should be sufficient to deal with even the most determined non-compliant taxpayer. Increasingly, though, those powers have no independent oversight and can only be challenged through expensive and uncertain judicial review.

Some have suggested openly that HMRC cannot be trusted. I don’t go that far but, based upon some of my own client experiences, I do understand what they mean. Who would ever have believed that HMRC would be prevented by a tribunal from presenting its own case or that the ban would be upheld by the courts as happened in BPP Holdings [2017] UKSC 55.Who would have imagined that HMRC would pursue some of the frankly embarrassing tribunal penalty cases we have seen? We have become used to HMRC claiming that it wins 80% of litigation cases. This may be correct, but what about the now eye watering 80,000 cases that are still open? More importantly, in those cases not involving avoidance where the outcomes are not so rosy for HMRC. Too often, in those cases where HMRC must show that it is compliant with the law, it has been found wanting.

Governance structures

Redressing this imbalance is not easy but without independent oversight even greater responsibility falls upon HMRC’s own governance structures. This raises the obvious question: who in the future will guard the guardians? And if HMRC really is not to be trusted, how do we have confidence that the system, whatever it is, works? It is here that to some extent I join some of those more critical of HMRC.

Recently, I have noticed that when it is put to HMRC that its actions are unacceptable, there is a consistent denial of responsibility by senior members of HMRC, who assert that they are ‘unable to get involved’. Why not, and what is the point of senior management if not to ensure that less experienced HMRC staff are acting in accordance with a ‘fair dealings’ standard? This is in many ways a more worrying trend, as there seems to be a lack of internal control within HMRC to protect taxpayers from over-zealous or inexperienced inspectors.

Some in HMRC have described my approach as ‘old fashioned’ but if that’s right where does that come from? The answer is simple. It is how I was trained. Taxpayers and HMRC officers have rights, and those rights should be respected. And there is a very good business reason for this approach: individual HMRC officers are, in my experience, more effective in ‘plucking the feathers with less hissing’ when they pay attention to the basics and get them right.

I have lost count of the number of times I have seen HMRC miss time limits or make other serious administrative failings, almost always resulting in a significant loss of tax and sometimes absurd attempts to justify out of time assessments. Does anyone remember the £100m corporation tax lost due to HMRC missing a time limit? Or the £1bn in NICs lost because of time limits? Or the special commissioners case that collapsed after five years because HMRC had never issued an enquiry notice? Or the invalid discovery assessment because HMRC waited too long and could not then assert ‘deliberate’ behaviour? And that’s just some of what I have seen - how many other advisers have similar experiences? Almost always these errors flow from a kind of ‘target fixation’, being tough on non-compliance (and losing in the process), while no one remembers them because, unlike for taxpayers, there is little or no transparency.

The extension of time limits for offshore matters have alarmed many and may, if anything, make matters worse. It is a worrying trend to allow for poor performance by HMRC by changing the law to catch the taxpayer anyway. For instance, many have criticised the 2019 loan charge as retrospective and introduced for that very purpose: it’s not retrospective, it’s worse, as it side steps the protections Parliament put in place to provide certainty. Compare that charge with the four-year time limit forced on taxpayers which is rigidly and on occasion unsympathetically enforced by HMRC.

Independent oversight

So where should the balance be? Most obviously, in my view, it should not be where it currently is and certainly not where HMRC appears to be relentlessly pushing it. However, achieving balance is not simply requiring that an information notice is approved by a tribunal judge. It requires a much greater degree of independent oversight and openness in how HMRC operates. If HMRC’s governance was more easily accountable, being able to issue an information notice on its own authority would not really matter or would matter much less. What seems clear is that so many aspects of HMRC’s activities are subject to no independent scrutiny unless the taxpayer has the resources to try their luck with a judicial review which, in most cases, is unlikely to succeed – not because the taxpayer’s complaint lacks merit but because the bar is rightly a high one. This has created a worrying imbalance.

Take enquiries, for example. As the law stands, where HMRC opens an enquiry it stays open, forever if need be. I have met a number of clients where an enquiry was opened and closed years later with no substantive correspondence or dialogue in between. It did not stop HMRC from wholly revising the self assessment, and litigation often beckons in circumstances where the taxpayers had little or no opportunity to explain or discuss the original tax position with HMRC. In some ways, those taxpayers are lucky. Thousands of other taxpayers just wait for years, whilst the interest charges levied on any additional tax economically compensate HMRC. Such situations are damaging to the integrity of the whole tax system.

Then there is how HMRC leverages its litigation strategy and the costs of pursuing any significant matter through the tribunal. Very many taxpayers disagree with HMRC’s decisions but they find that challenging them can be more expensive than simply giving in and paying the tax. The litigation strategy has meant that in too many situations the rights of the taxpayer are a poor second. Even if the tribunal directs HMRC to conclude an enquiry, it’s not over and the statutory review process has no actual independence. So far as the latter is concerned, I have no doubt that a great deal of litigation and, more importantly, resentment could be avoided if some proper independence was built into the review process. It is almost certain that many disputes would be resolved in the light of an unfavourable independent view. It would obviously not suit all but almost certainly enough would settle and so significantly ease the pressure on HMRC and the tribunal. HMRC could also experiment with a more transparent governance processes, instead of the opaque ‘star chamber’ approach we currently have in the Anti-Avoidance Board. And HMRC’s continued denial of any management discretion needs to be addressed, this is key to HMRC focusing on the risks that matter.

Finally, think about the general anti-abuse rule, where HMRC can ignore a negative GAAR panel opinion but the taxpayer faces a 60% penalty if he goes ahead and loses any appeal.

We obviously need to wait for the evidence sessions to be completed and the Treasury Committee and House of Lords reports are published but a broader role for the tribunal may be part of the way forward. Support for HMRC remains strong and that is right. But that should not stop the professional bodies and others from highlighting the way taxpayers are too often treated and the fact that on one side the scales of justice appear to be increasingly pinned to the floor.