HM Revenue and Customs has been under tremendous pressure from the British government to crack down on tax avoidance and evasion, especially since the introduction of austerity measures in 2008.
These weighty expectations have seen the UK taxman adopt tougher measures, such as retrospective investigations and restricting the right to appeal – something which has not gone unnoticed.
In fact, a House of Lords report published at the end of 2018 – The Powers of HMRC: Treating Taxpayers Fairly – is questioning those powers, their applicability and scope.
According to Mark Taylor, head of tax investigation at accountancy and consulting firm Buzzacott, HMRC’s powers have too often put a burden on “unsophisticated” taxpayers – such as those unintentionally involved in tax avoidance.
Not just numbers
The House of Lords report highlights the case of an unnamed social worker who was made redundant by her local council as evidence of the tough tactics used by HMRC.
Days after she lost her job, the council encouraged her to join a recruitment agency so that they could hire her as a contractor. After five years she was re-employed by the council, but is now looking at a loan charge for unknowingly taking part in a ‘disguised remuneration’ scheme under which she paid less tax.
“She was unaware of what was going on,” said Graham Webber, director at WTT Consulting while giving evidence to the House of Lords economic committee.
“She now faces a loan charge equal to probably a year and a half’s salary. She has no means of paying it. She is the only worker in that particular house; she has a young child and her spouse stays at home. If she goes bankrupt and it comes up on her next criminal records check, she cannot work.”
Taylor, too, had a client who was facing a fine that would have put him and his family into financial hardship.
“We had one individual who had been asked to write a cheque for £145,000 ($191,000; €167,000) which was going to have an effect on his savings and his child’s education,” said Taylor (pictured) speaking to International Adviser.
“It would have completely changed a family’s life, so he came to us. He accepted the inaccuracies in the returns and, in three months, we got it settled with HMRC for £28,000 and that is a common situation.”
Revenue vs retribution
To make matters worse, HMRC has been accused of focusing too much on individuals and taking little action against promoters of tax avoidance schemes.
This approach was rebuked by the House of Lords as “prioritising recovery of revenue over justice by targeting individuals rather than promoters”.
“HMRC seems to be going after individuals irrespective of whether they have intentionally engaged in a tax avoidance arrangement,” said Taylor, commenting on the Lords’ report.
“They go after the individual because they know that getting in the yield is far easier from individuals and they are far more likely to be influenced and persuaded. You would expect HMRC to be able to differentiate between [‘sophisticated’ and ‘unsophisticated’ taxpayers].”
Little recourse to appeal
At present, individuals cannot appeal HMRC’s determinations and notices via a tax tribunal. It is up to HMRC to let the taxpayer know whether they are allowed to appeal or not, but only after they have filed an appeal letter.
“You can’t appeal it,” said Taylor, who worked for HMRC until 2007.
“You can issue letters of representation to HMRC and the success of that is clearly going to be limited. HMRC are almost doing everything they can to avoid the taxpayer having the right of appeal.”
Currently, the very few cases against HMRC that do go to the first-tier tribunal do not create a precedent. That means, as Taylor noted, legal representatives often argue the same cases over and over again, even if HMRC lost similar ones previously.
He added that appealing to a tax tribunal would not only safeguard the taxpayer and keep HMRC in check, but it would also help clarify what the UK parliament intended with specific pieces of legislation.
Too many powers
When asked about why the Revenue is acting this way, Taylor said that “HMRC is under pressure”.
“They have been given funding by the government, so they are not going to give HMRC money and not expect a return for that investment.
“It is one of the only revenue authorities with prosecution targets,” he added.
“The beast that is HMRC now is one of the most aggressive and most powerful that I’ve faced.”
With powers spanning from information collection outside of the inquiry window to an “obsession” with offshore tax avoidance, HMRC has a lot of extensive powers that sometimes it doesn’t even use in full, Taylor continued.
Using a “sledgehammer to crack a nut”, was the metaphor he used.
That is why the House of Lords proposed a 360-degree review of HMRC’s powers, and that such a review should be carried out every five years.
Being able to hold the tax collector accountable is “hugely important”, Taylor added. “It monitors HMRC to ensure it adheres to its powers and doesn’t abuse them.”
But that doesn’t mean it will be a straightforward exercise.
The Chartered Institute of Taxation was also involved in the Lords report, with John Cullinane, tax policy director, commenting that “it is interesting that the case for greater scrutiny of HMRC is being made from two very different angles”.
“For the Lords it is primarily as a safeguard to protect taxpayers from an apparently overmighty tax authority; for many MPs it is as a watchdog to ensure HMRC is being sufficiently dogged and aggressive in its pursuit of big business seen as paying suspiciously low rates of corporation tax.
“That does not make the committee’s call wrong, but it does mean that we need very careful consideration of how any independent body would operate and what its remit might be.”