On 4 December 2018, the House of Lords Economic Affairs Committee (the “Committee”) published a report, “The Powers of HMRC: Treating Taxpayers Fairly” (the “Report”) on the balance of powers and safeguards between HMRC and the taxpayer.
A balance must be struck between HMRC using its powers to tackle tax non-compliance, and treating taxpayers fairly. However, the Report concludes that the balance has tipped too far in favour of HMRC, without adequate taxpayer safeguards. The Committee concludes that this imbalance results from a range of factors, including:
- new and strengthened powers granted to HMRC since 2012 (such as the General Anti-Abuse Rule, “naming and shaming” powers, the power to impose tougher penalties for offshore evasion, and new civil and criminal sanctions for intermediaries enabling participation in offshore tax avoidance or evasion);
- a tougher approach to tax avoidance and evasion, and a failure to discriminate effectively between the full range of behaviours which HMRC describes as tax avoidance. The Report highlights that HMRC’s approach does not acknowledge the “clear difference in culpability” between “deliberate and contrived tax avoidance by sophisticated, high-income individuals, and uninformed or naive decisions by unrepresented taxpayers”. An example of this is HMRC’s retrospective powers in relation to loan charges which the Committee expresses grave concern about, noting in the Report that this is having a “devastating” impact on lower income individuals;
- HMRC’s failure to consult on policy objectives before a specific solution has been identified. This can lead to broad, mis-targeted legislation which adversely affects compliant taxpayers, leaves too much to the exercise of HMRC discretion or to guidance, and is more difficult to challenge by judicial review; and
- HMRC’s resourcing challenges which have rendered it unable to effectively perform its dual roles of tackling tax avoidance and evasion, and ensuring taxpayers are treated fairly.
The Report contains a number of more specific concerns which the Committee says evidence HMRC’s failure to ensure taxpayers have adequate protections, including limitations on taxpayers’ access to justice and proposed new additions to HMRC powers.
Limitations on taxpayers’ access to justice
The Committee is troubled by the limitations which have been placed on taxpayers’ access to justice. It makes a number of recommendations, including:
- all HMRC determinations and notices should be appealable to the tax tribunal – this is central to the protection of the taxpayer;
- penalties associated with the General Anti-Abuse Rule and Follower Notices (including penalising taxpayers if they pursue litigation and are unsuccessful) should be abolished as they are draconian and restrict access to justice; and
- the First-tier Tribunal should be granted the power to conduct judicial reviews as judicial review proceedings in the High Court are currently prohibitively expensive for taxpayers.
Proposed additions to HMRC powers
The Committee expresses particular concerns about two new additions to HMRC powers and their impact on taxpayer safeguards:
- Clauses 79 and 80 of the Finance (No. 3) Bill 2017-19 extend the time limit for assessing income tax, capital gains tax and inheritance tax to 12 years where offshore matters are concerned. The Report states that this places an administrative burden on all those with offshore elements to their tax affairs and is unreasonably onerous and disproportionate to the risk. It considers a better option would be to provide sufficient funding to HMRC to enable it to conduct offshore enquiries in a timely manner.
- In July 2018, HMRC published a consultation on new powers to seek information from third parties without first seeking the agreement of the taxpayer or the Tax Tribunal (as is currently required). The Report recommends the withdrawal of the proposal to obtain information from third parties, saying that oversight by the Tax Tribunal of HMRC’s attempts to obtain information from third parties is an important taxpayer safeguard which should not be removed without good reason.
Overall, the Report recommends the limitation or removal of existing (and proposed) powers, the ongoing scrutiny of HMRC, and the implementation of better protections and safeguards for taxpayers. These recommendations are welcome, although questions inevitably arise about the extent to which the Report will lead to any material changes. Many of the Report’s recommendations aim to improve the position of lower to middle income taxpayers, however the current tax and political climate means that it will be challenging to address the imbalance that the Committee has identified.
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