Tax compliance and enforcement in 2018

Helen Adams

Speed read

In 2018, HMRC focused resources on areas of perceived highest tax risk: multinational businesses, tax avoidance and offshore issues for individuals, trusts and estates. This is backed up by legislation including the requirement to correct and various penalty rules. 2019 heralds a continuation of these efforts with the addition of new legislation such as further extended discovery assessment time limits and new powers enabling HMRC to tackle tax abuse and insolvency, including by demanding security for corporation tax debts. In addition, a new offshore tax compliance strategy is expected.

Just when you thought that HMRC could not make any more changes in the enforcement and compliance area, this year demonstrated that yet more changes are possible. No doubt 2019 will bring more changes to challenge taxpayers and their advisers.

This article looks at some of the key changes for enforcement and compliance for companies and individual taxpayers, as well as considering developments in tackling tax avoidance and the development of HMRC’s powers.

Corporate compliance

In 2018, HMRC continues to be under pressure to tackle the perceived underpayment of corporation tax by multinational companies – pressure which is being exerted by Parliamentary and general public scrutiny, supported by press commentary.

The average length of corporate enquiries was 39 months according to 2017/18 statistics and £59m of careless error penalties were imposed on large businesses in 2017 (an average of £3.1m). Bell & anor v HMRC [2018] UKFTT 272 (TC) and similar cases demonstrate that HMRC uses FA 2007 Sch 24 para 19 to impose deliberate error penalties on a company or LLP’s officeholders too.

It is impossible to tell from these statistics which tax issues attract the most attention. However, separate statistics show that HMRC is scrutinising international corporate issues such as transfer pricing (TP), as the 2017/18 yield from TP enquiries of £1,682m was more than double that of 2014/15 (see ‘Lessons from HMRC’s 2017/18 transfer pricing and DPT statistics’ (Anton Hume), Tax Journal, 31 August 2018). HMRC is also checking whether companies disclosed and paid diverted profits tax (DPT) correctly after its introduction in FA 2015, albeit that DPT investigations may lead to additional corporation tax liabilities as companies alter their TP policies instead.

Recent experience shows that HMRC’s fraud investigation service opens investigations under code of practice 8, working with its transfer pricing specialists, in order to identify groups that contain companies that its risk assessment and profiling checks suggest are at risk of underpaying DPT or corporation tax. HMRC’s standard approach in such cases is to ascertain detailed facts first so that it understands what work and value is added in the UK compared to operations elsewhere in the world. In addition to financial information, other evidence may be sought such as:

contracts between group entities;
details of the staff and directors involved and their roles;
emails and diaries which may show how long each person spent working on UK matters compared to dealing with any non-UK duties such as other directorships; and
details of physical goods/service flows.

Once the facts are known, the next step is to consider the interpretation of those facts using transfer pricing and DPT rules. Other tax risks may be identified and resolved too, such as residence, permanent establishment and double tax relief. HMRC will gather evidence to assess whether:

discovery assessments can be issued within the formal assessment time limits; and/or
penalties for errors in corporation tax returns or failures to notify are also payable.

If HMRC perceives that significant amounts of tax are at risk then it will divert resources (especially staff) to tackle that risk. Given the statistics so far, in 2019 HMRC is likely to continue its efforts to check groups’ UK tax positions in this respect. Any companies which consider that HMRC may disagree with their DPT or TP positions should consider making a disclosure first, before HMRC investigates.

Tackling personal non-compliance

2018 was an eventful year for enforcement and compliance targeted at taxpayers owing income tax, CGT or IHT relating to offshore matters or offshore transfers (collectively, ‘offshore issues’). The government imposed a formal obligation on taxpayers to tell it about past mistakes and omissions via the requirement to correct (RTC) legislation (F(No.2)A 2017 Sch 18). The deadline for taxpayers to disclose additional tax arising in this area was 30 September 2018, albeit that HMRC’s guidance effectively meant that this was a deadline to register to disclose in most cases.

30 September 2018 was also the deadline for other countries that adopted the OECD’s common reporting standard (CRS) to give HMRC details of UK taxpayers with accounts in those countries. HMRC received data from over 100 countries including the name, address and date of birth of the account holder, account number and the account balance. The data is fed into HMRC’s computers so that HMRC can link the names disclosed to names of taxpayers – a process which is no doubt easier with data from countries with the same alphabet as ours as fewer spelling mistakes on translation are likely to arise. After linking the data, HMRC is expected to cross-check it with that which it already holds e.g. people’s tax returns. Discrepancies will generate cases for compliance checks, whether by self-assessment enquiries, civil investigations (under codes of practice 8 or 9) or criminal investigations with a view to prosecution.

HMRC’s compliance checks will be aided by the further extension to the time limits within which HMRC may issue discovery assessments for offshore issues, assuming that clauses 79 and 80 of the current Finance Bill receive royal assent. HMRC currently has time limits of four or six years from the end of a tax year to assess additional tax where the tax arose despite the taxpayer taking reasonable care or due to careless behaviour, respectively, extended by the time limits in F(No. 2) A 2017 Sch 18 para 26. These four or six year time limits will extend to 12 years in many cases, albeit that the 20 year time limit for deliberate behaviour or failures to notify without a reasonable excuse remains unchanged. This change will affect income tax and CGT within scope of these changes for:

2013/14 and subsequent years where careless errors occur; or
2015/16 in all other cases.

Broadly similar time limits apply for IHT.

The 2018 Budget announced that, in 2019, HMRC will publish a new strategy for tackling non-compliance relating to offshore issues. The announcement said that ‘This will build on the substantial progress the UK has made in tackling offshore tax evasion and non-compliance’ since its 2014 No safe havens strategy was published. This may include commentary on working with other countries such as the J5 and getting online platforms to take further action to encourage tax compliance by their users following the consultation earlier this year.

For those taxpayers who missed the RTC deadline, HMRC is likely to open investigations using data it already holds including CRS data. This may result in significant tax-geared penalties as the RTC legislation enables HMRC to impose failure to correct (FTC) penalties of up to 200% of the tax. The minimum penalty will be 100%, in the absence of a reasonable excuse for the failure, but only for voluntary disclosures. If HMRC starts an investigation, then the minimum penalty will be 150% of the tax. In addition, if the taxpayer knew they had offshore non-compliance to correct at any point from 6 April 2017 to 30 September 2018 then they may also face:

offshore asset moves penalties which increase the FTC penalty by 50% (so the maximum becomes 300% of the tax);
asset based penalties; and
publishing of their details.

In order to avoid FTC penalties, taxpayers need to demonstrate that they had a reasonable excuse for the failure. F(No.2) A 2017 Sch 18 para 23 limits the situations in which HMRC may consider that a reasonable excuse exists, one of which is relying on advice which the legislation deems disqualified.

Finally, HMRC’s strict liability offences in TMA 1970 ss 106B–106H (reviewed in ‘Strict liability criminal offences for offshore activities’ (Helen Adams), Tax Journal, 2 November 2017) became effective for those who failed to notify HMRC under TMA 1970 s 7 by 5 October 2018. The strict liability offence means that HMRC no longer has to prove that a person intended to defraud HMRC in order to obtain a criminal conviction. Failing to notify a liability to income tax, CGT or IHT in relation to offshore issues (without a reasonable excuse) is sufficient. On conviction a person is liable to a fine and/or imprisonment. This offence also applies to failures to submit returns within two years of the end of the tax year and errors in tax returns, in the absence of a reasonable excuse or reasonable care (respectively). The effective start dates are 31 January 2020 (TMA 1970 s 106D) and 6 April 2020 (TMA 1970 s 106C): SI 2017/970. Consequently, any taxpayers who have offshore issues to correct and who may suffer FTC penalties or the strict liability offence should obtain specialist advice with a view to making a voluntary disclosure before HMRC launches its own investigation.

Tackling avoidance

Throughout 2018, HMRC continued to tackle avoidance by all types of taxpayers. Its methods include:

litigation challenging the effectiveness of some schemes progressed in the courts;
submitting material to the General Anti-Abuse Rule (GAAR) Panel, which issued five more rulings against tax avoidance arrangements in 2018;
encouraging companies and individuals to agree to settle their income tax, national insurance and associated liabilities arising from the use of disguised remuneration arrangements such as employee benefit trusts, employer-financed retirement benefits schemes (EFRBs) and contractor loan schemes in advance of the April 2019 loan charge; and
issuing follower notices (FNs) and accelerated payment notices (APNs).

While HMRC continued to win cases, the litigation decisions were not all in HMRC’s favour. For example:

R oao Broomfield & Others v HMRC [2018] EWHC 1966 (Admin): the taxpayers challenged HMRC’s view that a tax avoidance scheme did not achieve its intended aims and whether HMRC made a valid discovery. HMRC issued FNs. Prior to the hearing HMRC relented, agreeing that the taxpayer need not withdraw their challenge on the grounds of discovery in order to comply with the FNs by accepting HMRC’s position on the scheme. The APNs will follow the FN conclusion so the taxpayer need not pay the tax relating to the discovery point in order to avoid APN penalties.
Beagles v HMRC [2018] UKUT 380 (TCC): HMRC investigated Mr Beagles’ use of an avoidance arrangement. The Upper Tribunal decided that HMRC’s discovery assessment was invalid as it was issued several years after HMRC identified that Mr Beagles’ tax return was insufficient so the discovery was stale.
Hicks v HMRC [2018] UKFTT 22 (TC): this decision confirmed that a firm giving advice rather than preparing a tax return for submission is not ‘acting on behalf’ of the taxpayer when considering whether HMRC can issue a discovery assessment (TMA 1970 s 29(4)) within the extended time limits. This is because the FTT decided that ‘acting on behalf’ is taking steps that the taxpayer could take or are responsible for. Also, Mr Hicks relied on advice and was not careless.
Tooth v HMRC [2018] UKUT 38 (TCC): Mr Tooth engaged a firm to prepare his tax return containing entries for a tax avoidance scheme, using other information and guidance from the scheme’s promoter. Ultimately, an entry was placed in the wrong box of his return, but the Upper Tribunal decided, among other things, that this was not a deliberate error by him or his agent so his appeal against the discovery assessment succeeded.

Note, however, that HMRC is appealing Hicks and Tooth, so perhaps 2019 will shed more light on these issues.

Currently directors/office holders may be liable for a company’s tax debts if there is willful default of PAYE or if HMRC demands security for tax debts (see cl 81 of the current Finance Bill which extends this power to corporation tax). However, the Budget announced that next year’s Finance Bill will contain legislation making ‘directors and other persons involved in tax avoidance, evasion or phoenixism … jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency’. If ‘avoidance’ is as widely defined as in other legislation then this might have quite broad consequences. This was announced alongside another proposal that will effectively restore HMRC as a preferential creditor for PAYE, employees NICs, VAT and CIS.

HMRC powers

This year saw HMRC offered or seeking yet more powers, in addition to the insolvency related ones mentioned above, the extended assessment time limits and the extension of the security deposit legislation to CIS and corporation tax (cl 81 of the current Finance Bill). One example was HMRC’s information powers consultation which suggested removing the need for HMRC to seek permission before issuing notices to third parties in many cases (about which, see ‘Extending HMRC’s civil information powers’ (Dawn Register & Helen Adams), Tax Journal, 31 August 2018). The main driver for this dilution of taxpayer safeguards appeared to be HMRC’s desire to obtain information and documents more quickly, particularly to enable it to respond to information requests from other tax authorities, which may increase in future as countries follow up on CRS data. Consequently, the alternative proposal in the consultation was the introduction of ‘financial institution notices’ enabling HMRC to seek information from such institutions without taxpayer or tribunal oversight.

There are, however, some signs that the powers tide may be turning. HMRC commissioned research showed that HMRC publishing deliberate defaulters’ details (FA 2009 s 94) makes no measurable positive impact on tax evasion (see bit.ly/2zSEVk1). The process of being investigated and charged penalties has a much greater impact on taxpayers’ behaviour. The research also noted that some people felt that their actions were not ‘deliberate’ and that they were unfairly categorised as such by HMRC.

The House of Commons’ Treasury sub-committee’s inquiry into HMRC’s efforts in tackling tax avoidance and offshore evasion is ongoing. This year’s House of Lords’ Economic Affairs Finance Bill sub-committee inquiry into aspects of the Finance Bill included consideration of the balance of powers and safeguards between HMRC and the taxpayer. After receiving written submissions and witness evidence the sub-committee’s recent report made wide ranging recommendations including:

deletion of the extended offshore time-limits legislation from the current Finance Bill;
withdrawal of the above proposals to curtail safeguards on HMRC’s information powers until further consultation can be undertaken;
improving communication with taxpayers relating to tax avoidance investigations;
the abolition of GAAR and FN penalties;
all HMRC determinations and notices should be appealable to the tax tribunal including APNs and FNs and giving the FTT the ability to hear judicial review cases. These were among several suggestions to improve taxpayers’ access to justice; and
consideration to be given to establishing an independent body to scrutinise HMRC’s operation.

The House of Lords’ report also recommended restricting the application of the controversial April 2019 loan charge and suggested that HMRC should provide more support to affected taxpayers. MPs debated these issues in Westminster Hall on 20 November 2018. Many thousands of taxpayers are potentially affected unless they reach settlements with HMRC for historic liabilities before 31 March 2019. Changes to the legislation are unlikely. Time will tell whether HMRC has sufficient resources to process the cases of all those who seek contract settlements for historic liabilities in order to escape the loan charge.

The tribunals also considered the operation of HMRC’s powers throughout the year. Some notable decisions included:

HMRC v Raftopoulou [2018] EWCA Civ 818 concerned overpayment relief claims (TMA 1970 Sch 1AB). The Court of Appeal decided that a taxpayer cannot appeal against HMRC’s rejection of a claim where HMRC do not enquire into the claim. The taxpayer’s only recourse is judicial review. The court also decided that the four year time limit for making the claim cannot be extended by virtue of a reasonable excuse.
Newton v HMRC [2018] UKFTT 513 (TC) confirmed that, in the absence of a self-assessment enquiry, HMRC must have an objectively reasonable, genuine suspicion that income or gains had not been assessed in order to justify issuing an information notice under FA 2008, Sch 36. The FTT cancelled the notice as HMRC provided no evidence or grounds for such a suspicion.
Martland v HMRC [2018] UKUT 178 set out a three-step process aiding future tribunals’ consideration of whether to permit a late appeal. This includes balancing the merits of the reasons for the delay and the prejudice to the parties if permission is granted or refused.
Addo v HMRC [2018] UKFTT 530 in which the FTT considered the tribunal rules concerning disclosure of documents that are required to enable the tribunal to deal with the case ‘fairly and justly’ even if the party is not seeking to rely on those documents. The FTT directed HMRC to disclose copies of HMRC’s internal notes and other documents. HMRC is appealing.

Following the process specified by the legislation remains essential. In 2018 the FTT cancelled late filing penalties because HMRC asked the taxpayer to file a return despite HMRC already knowing his liability (Goldsmith v HMRC [2018] UKFTT 5 (TC). The return was therefore not issued for the purposes of establishing his tax liability as required by TMA 1970 s 8(1). The FTT also cancelled several penalties as HMRC could not demonstrate that an officer decided to impose them where required by the legislation (e.g. Bells Financial Services Ltd v HMRC [2018] UKFTT 48 (TC)).

Some areas remain unclear, particularly those where decisions depend heavily on facts. Paragraphs 69–74 of the Upper Tribunal’s decision in Perrin v HMRC [2018] UKUT 156 (TC) set out steps to follow when deciding whether a taxpayer has a reasonable excuse. In obiter comments, the tribunal indicated that there can be circumstances in which ignorance of the law may be a reasonable excuse. This issue was considered several times by the FTT in connection with failures to submit non-resident CGT returns but the decisions were split. Perhaps 2019 will bring more decisions shedding light on this matter.

Overall, it is unclear whether there will be any let-up in new powers being given to HMRC to tackle non-compliance. There is no sign of any easing of HMRC efforts in any areas covered in this article. We certainly live in interesting times.

Issue: 1425
Categories: Analysis , Anti-avoidance , Compliance , Corporate taxes , HMRC powers

Strict liability criminal offences for offshore activities

Budget 2018: Enforcement and compliance measures

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

Extending HMRC’s civil information powers

Addo: disclosure in tax appeals