Lords committee questions ATT on measures to tackle tax avoidance

The hearing was part of the sub-committee's inquiry into measures in Draft Finance Bill 2020-21, focusing on three areas of the Bill, all related to the powers of HMRC:

• New proposals for tackling promoters and enablers of tax avoidance schemes;
• New tax checks on licence renewal applications; and
• Amendments to HMRC’s civil information powers.

Topics covered included:

• The likely effectiveness of tax checks for licence renewals in tackling non-compliance.
• If there is enough clarity about the form tax checks will take and the timetable for them.
• How well these changes have been communicated to licence holders.
• Whether HMRC’s strategy for combating promoters of tax schemes is the right one.
• The justification for removing the requirement for HMRC to obtain tax tribunal approval before seeking third party information from financial institutions

The witnesses were:

• Will Silsby, Technical Officer, Association of Taxation Technicians (ATT)
• Tom Henderson, Technical Officer, Low Incomes Tax Reform Group (LITRG)
• Jason Piper, Head of Tax and Business Law, Association of Chartered Certified Accountants (ACCA)

The session can be viewed on Parliament TV (watch here).

Live blog

Lord Bridges, the chair, opened the meeting and the panel introduced themselves.

Tax checks for licence renewals

Is there a major problem here which requires this measure and do you support the principle of conditionality, asked the chair. Tom Henderson (LITRG) said providing information to first time-applicants has the potential to be useful. Those determined to avoid tax may be encouraged by the measure to operate on an unlicenced basis. Those operating on an unlicenced basis will not be touched by the measure. 

Jason Piper said ACCA had no problem with conditionality as a principle provided the compliance burden on the compliant is outweighed by the benefits to compliant taxpayers. There is a question mark whether that is the case, he said. 

Will Silsby said there was nothing unusual in principle about HMRC requiring information from other authorities (eg local authorities). What is novel is it gives HMRC the ability to veto awarding of a licence. That might be perfectly reasonable if the test was confined to whether the applicant’s business was registered with HMRC but it goes further than that. But issuing of a licence could be blocked where there was a failure in relation to say, the late submitting of a return.

Lord Bridges asked about effectiveness of the measure. Will it just increase the size of the hidden economy? Tom Henderson said it would be very trade specific in terms of how able a business was in a particular sector to proceed on an unlicenced basis. In terms of impact on the hidden economy it is important to be clear on the way round these measures might work - someone not keen to pay tax might remain unlicenced but not sure the measures will increase the size of the hidden economy from a tax perspective.

Will Silsby said the measure might put applicants on notice who might divert into hidden economy whereas use by HMRC of existing powers could be carried out without knowledge of the applicant. HMRC might want consider that.

Jason Piper agreed it would be sector specific in impact. 

Lord Butler took up the questioning. We received evidence at previous session that this would be a straightforward process because applicant would just have to show they have a UTR number. You've said you suspect it would have to go further.

Tom Henderson said under the new provisions we have the 'tax check' process which is going to happen between licencee and HMRC and then there is a further verification by licencing authority to check tax check has been carried out properly. From a licencing authority perspective should be straightforward but in terms of process between licencee and HMRC there is a risk of mission creep. Obligation to submit a tax return must be in accordance with Taxes Act - so complete, correct and timely. If HMRC checking that we suggest that should be subject to proper consultation. Bizarre that on 21 July policy paper says conditionality just relates to registration while draft legislation says something different. The draft legislation looks at whether the individual has complied with their reporting obligations.

Lord Butler probed further. The licencing authority is not allowed to proceed with the licence application unless they've received confirmation from HMRC that a successful tax check has been completed, said Tom

Will Silsby observed para 5.1.b contains an unusual provision that a check can require an applicant to provide info to enable HMRC to 'assess the effectiveness of this schedule in improving the tax compliance of persons carrying on authorised activities'. Seems to suggest a check on eg a taxi driver might require opinions not just facts, or details of other persons in the industry.

Jason Piper said ACCA would share the same concerns about the 5.1.b obligation which goes well beyond confirming you have a UTR.

Lord Forsyth asked if the panel were suggesting HMRC was pursuing a 'snooper's charter'. Will Silsby said it was difficult to know why 5.1.b exists. Lord Forsyth worried it was a 'pretty sinister' idea that people will be required to say whether their friends or enemies are underdeclaring income. Will said he found the wording oblique and it would be helpful to know what was intended.

Lord Butler asked if the panel were confident that HMRC will give adequate information to people seeking these licences. Tom Henderson said he had not seen examples. The equalities impact assessment made clear that in the taxi sector older and ethnic minorities overrepresented. Some might not have English as their first language. Info should be clear and accessible, not just hyperlinked; non-digital options must be available. 

Lord Chandos asked about the timetable for introducing the tax checks. Will Silsby said he didn't think it would be a cliff-edge as licences vary in length and don't all need renewal at the same time. He would have greater concern that check has to be carried out within 120 days of application for the licence. Submitting a tax return and getting confirmation at the same time would be better.

Lord Chandos asked about the Government's stated intention to extend conditionality to other licenced trades, Jason piper said in principle that would be fine. Effect would probably be to improve compliance standards. Low risk of pushing people completely outside. But HMRC need to ensure systems are bedded in and minimise disruption to compliant business. Introduction of digital tools - if there was some way to integrate that with these checks that would make the whole thing seamless. Will Silsby said it's a question of where you draw the line. Is it only trades which require some involvement with local authority, or what about those where you require a bank account or insurance? Will these require a tax check?

Promoters of avoidance schemes

Lord Forsyth noted the LITRG written evidence which gave an example of an agency worker making savings of perhaps a third of the amount being taken by the engager. He said he could not understand why HMRC had not been more active in going after the promoters.

Tom Henderson said LITRG agreed with the thrust of the comments. HMRC should place a greater emphasis on other actors in the supply chain. At the lower end of the labour market individuals get caught up in these schemes not because of any individual's avoidance motive but because of a PAYE avoidance motive on the part of the umbrella company or employment agency. Publishing Spotlights on gov.uk does not help anyone - more could be done to publicise what taxpayers should watch out for (some egs in LITRG submission). Unions could do more. Media ads could be used.

Are they doing enough to tackle promoters? Evidently not because the schemes still proliferate in the lower end of the labour market, said Tom.

Will Silsby said confidence in the integrity of the tax system is essential. The numbers of those involved in promoting these schemes has reduced but not been eliminated. We are always likely to have promoters and enablers with us unless something fairly radical is done. Professional bodies have tended to see tackling promoters and enablers as separate to their work as by and large their members are not involved in this activity. He added that, listening to a File on 4 programme on the repercussions of loan schemes yesterday evening, it struck him that there could be a market-wide approach which might be effective in: tackling promoters, protecting the Exchequer and providing some measure of consumer protection against avoidance schemes. This would involve making anyone who engaged for profit in any way in the provision of any form of tax advice (very broadly defined) jointly and severally liable for any unpaid tax liabilities that resulted from their advice unless they were “duly authorised”. I deliberately use the term ‘duly authorised’ rather than ‘regulated’, said Will, as it provides more flexibility and is less emotionally charged. The intention would be for authorisation to be easy for the many but impossible for the few. It would exclude promoters from having any opportunity unless they wanted to take the risk of picking up the tax liability they have saddled their victims with.

The concept obviously raises lots of practical issues and questions of definition and maybe it is simplistic, said Will, but I wonder whether it is worth exploring through further public consultation as a more holistic and enduring solution to the problems created by promoters and enablers.

Lord Forsyth said that was an interesting idea.

Baroness Kramer also quoted from the LITRG evidence that it is mostly employers and umbrella companies who make money from these schemes. Govt going after promoters but are employers a missing piece? 

Tom Henderson agreed. We do think there should be a more targeted approach - HMRC say they have started work with the Advertising Standards Authority to target misleading advertising. He noted it is very easy to set up an umbrella company with very little capital outlay. We see often these companies run up high PAYE liabilities and then fold. To combat that LITRG would like to see greater use of PAYE security deposits and also joint and several liability powers where the debts of a limited company might in certain circumstances transfer to the directors. We would like HMRC to use and publicise use of these powers.

Baroness Kramer said she found that helpful. She asked Jason Piper whether, looking at stop notices under POTAS, in naming and shaming, has the bar lowered so HMRC have overreaching powers ('HMRC suspects an inappropriate scheme sufficient)? Jason replied that the issue is broader. Looking at criminal behaviour more widely prevention is better than cure. Most criminals assume they won't get caught so a huge fine or other sanction won't necessarily deter them. In some ways not HMRC best placed to deal with this - not the tax treatment specifically that is the issue here but that they can get money off people for giving advice.

Will Silsby said if HMRC officers involved in anti-avoidance work did not at least suspect they wouldn't be doing their job so it's not so much a case of lowering the bar as removing it completely. He wondered if there might be a role for an independent body similar to the GAAR panel.

Lord Monks said the problems drawn to the committee's attention had come mostly from the unregulated sector. Can people be brought more into the regulated / professional body world?

Tom Henderson said LIRG would support CIOT's comments on raising standards in the tax market in which they broadly argued for mandatory professional body membership and as an intermediate step you might make professional indemnity insurance mandatory. In the context of unrepresented taxpayers and DR schemes you must recognise that advice generally comes from the employment intermediary. This is not seen as a situation where tax advice is being given by either party. How do you protect taxpayers? Place emphasis on stamping out DR schemes at each stage of the supply chain.

Will Silsby said the ATT response to the tax market consultation contained a roadmap to bring people within the scope of pro bodies. He said the 30 per cent of the profession not members of a pro body are on HMRC's radar as tax agents ad most promoters are not within this group and are off HMRC's radar. Will said a public register, as suggested by HMRC, could encompass not just pro body members but all known to be advisers in the market.

In response to a question from Lord Rowe-Beddoe, Tom Henderson stressed the importance of good quality guidance and training for HMRC staff. Jason Piper said ideally we would have a simpler tax system.

Civil information powers

Lord Rowe-Beddoe asked the panel to comment on whether it was wrong that a financial institution would no longer have a right of appeal if it considers an information request unduly onerous.

Tom Henderson said HMRC had not really made the case for removing the right of appeal. It has been replaced by an internal assessment within HMRC as to whether the info would be onerous to provide. Everyone can see that HMRC is not best placed to make that assessment. Will Silsby said that in HMRC's policy paper they indicated it currently takes the UK 12 months on average to obtain the info necessary whereas the international standard is six months. It would be unfair to assume that the extra six months is down to the tribunal. It fails to take into account that the tribunal service has now moved over to e-filing so files can be moved quickly and during covid-19 the tribunal has met remotely. It would be easy for HMRC to add applications for info to tribunal hearings on a very regular basis with virtually no delay because it can all be done remotely.

Lord Forsyth said he had heard the argument that it takes HMRC too long to respond to overseas enquiries. The obvious solution is to restrict this to overseas enquiries but it's been suggested that that can't be done. Does he think the real prize is the domestic taxpayer and not having to go through the appeal process? Will Silsby said cost may be coming into it somehow.

Baroness Bowles asked whether there are any other ways in which overseas requests could be speeded up. Jason Piper said he would imagine the issue is the financial institutions but that's increasingly moving to digital transfer. So the argument is becoming dated, asked Baroness Bowles.

Do you have any concerns about how HMRC may use this power asked Baroness Bowles. It is possible to see HMRC using these powers more frequently, said Jason Piper. We would have concerns about that. Just knowing money is there in a bank account is not sufficient. It may be needed for a particular purpose.  

Tom Henderson observed that if you remove the safeguard you also remove the incentive to take the care over the cases which you choose to pursue. The replacement for this safeguard - an authorised officer within HMRC being involved in issuing a notice is a weak replacement for the scrutiny of an independent judge. HMRC would be playing judge and jury in a matter of their own interest here. Three safeguards are being removed - tribunal safeguard, right of appeal and extension of purposes for which notice can be issued. Hugely concerning to think HMRC could combine all three and issue financial institution notices as a matter of course whenever a taxpayer has a tax debt. HMRC haven't made that case other than saying it would be a useful tool. Baroness Bowles said it would be a 'triple whammy'. Tom agreed.

Will Silsby said he was concerned that extension might involve a breach of confidentiality if an institution became aware their customer has a tax debt.

Lord Forsyth wondered how this extension of powers worked with the ongoing powers review. Tom Henderson said the review would not cover this power but it would be interesting to see the report. He noted the previous obligation that the justification for this power is based on out of date data.

Lord Butler observed "one could square this circle of having a faster process but also giving proper protection to the financial institutions and the taxpayer by having a single judicial commissioner who authorises both requests and also hears appeals." He said he was basing this on the intelligence agencies who have a judicial overseer when they wish to trample on people's privacy. Will Silsby said the tribunal - effectively one judge - would be able to fulfil that without the need to create a new body. Jason Piper agreed the tribunals have the ability to fulfil requests.

Lord Bridges asked whether there are any other countries which have perfected this. No-one was able to give any examples.

Lord Chandos asked how easy it would be to determine if there is an uncertain tax treatment. Jason Piper said what is being proposed in UK is different to models pointed to in other countries - not just an uncertain tax treatment being looked at, it's HMRC's likelihood of challenge, and that's potentially problematic because needs to consider not just legal test but state of mind of tax inspector. Not unknown for HMRC to challenge things allowable because of lack of familiarity with a particular sector. By restricting this to largest businesses, vast majority unlikely to have any uncertain tax treatments they haven't already discussed with their HMRC contacts. 

Lord Chandos asked about penalties. Jason Piper said the quantum of the penalties is a relatively minor element of the whole policy piece.

Lord Bridges thanked the witnesses for appearing and closed the session.