Plans to increase HMRC’s civil information powers have been sharply criticised as ‘flawed’ in a House of Lords report, which also calls for tougher action on a ‘hardcore’ of tax avoidance promotors
The House of Lords economic affairs finance bill sub-committee has published its report on the government’s draft Finance Bill 2021.
This considered measures the government had said it would enact in the Finance Bill but has subsequently said will be delayed until 2022, pending further consultation.
In general, the report found ‘a pattern of new HMRC powers being disproportionate, poorly targeted and without sufficient safeguards’.
It also cautioned that in some cases, ‘expansive new powers are being granted to deal with problems that appear to be marginal and only affecting a small minority, increasing compliance costs for everyone’.
On the issue of tackling promoters of tax avoidance (including the related calls for evidence on raising standards in the tax advice market and disguised remuneration schemes), the committee said that the government should redouble its efforts to tackle known promotors and consider pursuing criminal actions.
The report stated: ‘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.’
The committee also called for more to be done to address the proliferation of new schemes, pointing out that the involvement of some individuals in these schemes is at the instigation of their employer, and solely for their employer’s benefit.
The report said: ‘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.’
Civil information powers
The committee inquiry considered proposals for a new power for HMRC to issue a financial institution notice (FIN) requiring financial institutions to provide information about a specific taxpayer to HMRC when requested, but without the current safeguard of having to first seek the agreement of the taxpayer or the approval of the tax tribunal.
The report stated: ‘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 committee concluded that the civil information powers proposals are ‘poorly targeted, disproportionate in their effect on UK taxpayers and lacking necessary safeguards and rights of appeal’.
It said: ‘We believe the government’s reasoning behind these proposals is flawed and not supported by evidence. We call for the tribunal approval requirement to remain and for HMRC to undertake a full review of the information request process to find alternative ways in which it could be streamlined.’
Two other measures also came in for criticism. The first was a new requirement on large businesses to notify HMRC of an uncertain tax treatment, which has now been delayed until 2022.
The committee said: ‘We welcome this move: it was clear from our evidence that the plans were poorly thought out and difficult to understand and apply in practice.
‘We are concerned that the government only appears to have recognised that there were significant problems with the measure after committing to legislate in 2021.
The report noted that it seemed ‘unnecessary and counter-productive’ to require all businesses to notify uncertain treatment, regardless of their risk status, and also questioned the added costs this would involve.
Finally, the committee had concerns about plans for new tax checks for licence renewal applications, for taxi drivers and scrap metal dealers, pointing out the measure introduces a new concept of ‘conditionality’ into the tax system, essentially making a licence which a trader needs to run their business legally conditional on compliance with their tax obligations.
The report warned of the risk of a potential ‘mission creep’, and said that before 400,000 businesses are required to undergo a tax check 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.
The committee’s conclusions include a number that apply to all of the proposals. It said the government needs to take more care to abide by basic policy principles when proposing new or extended powers for HMRC, and that HMRC is still not making full and effective use of the existing powers it already has, and should look to how these might be better used before considering new legislation.
The committee criticised the government for failing to adhere to good practice for consultation when initiating new policy proposals, some of which it said lacked a strong or transparent evidence base.
Finally, it took issue with an apparent increasing trend for HMRC to outsource its compliance responsibilities—for example, in requiring licensing authorities to undertake tax checks—and said that in future the government must explain why this cannot be done by HMRC.