HMRC has recently closed a consultation on increased powers and penalties. Those who have been involved in taxation as long as I have, this seems to be a very familiar route. Since the Keith Committee was set up over 35 years ago, there has been a remorseless increase in both HMRC powers and the penalties that it can levy. The balance in the relationship between the taxpayer and revenue authorities has undoubtedly moved in favour of HMRC. The question is whether the pendulum should swing any further? Counterintuitively I do not think that it is in HMRC’s interests let alone the taxpayer that there should be a further substantial increase in either their powers or penalties.
Consider the origins of the Windrush scandal. A government department which has been subjected to substantial cuts in personnel and budgets is put under considerable pressure by both Parliament and the electorate that it represents to get half with those who are seen to be breaking UK legislation; in this case illegal immigrants. To deal with the shortages of enforcement officers and those processing applications, it relies on third parties such as employers and landlords and others to assist in its operations. It passes new laws in order to make the position of those who are alleged to have broken the law more difficult. It creates a hostile environment for those it suspects of abusing or breaking the law. Those who fall within its area of investigations find that the onus is on them to prove their innocence rather than on the investigator body to prove their guilt.
Sounds familiar? The alarming fact is that one could replicate most of the facts concerning the Home Office and their attempts at immigration enforcement mirror the experience with HMRC. There are only two obvious differences. The first is that no such widespread scandal has yet happened in terms of taxation. Second, many larger taxpayers are normally in a better position in terms of resources and knowledge to resist the more egregious demands of HMRC.
The problem has been that even during the early 2000’s is when government spending went up in most departments, HMRC as part of the Treasury was required to ‘set a good example’ and therefore found that it was subject to expenditure cuts, in part as a result of the Gershon review. When austerity struck, there was less fat on the bone than in other government departments.
HMRC has been affected by public and parliamentary pressure to get tough on tax evaders and avoiders. Often these two groups have been wilfully conflated. In order to keep the pressure up in terms of tax collection, HMRC has had to resort to ever wider powers and higher penalties.
Take the example of Diverted Profits Tax (DPT) where it was only supposed to be directed at a small number of companies practicing egregious tax avoidance– allegedly so small that it was dubbed the “Google tax”. Now this tax is barely 3 years old but has become a regularly used weapon, displacing in many cases the traditional transfer pricing enquiries. When one looks at the detail, one can understand why DPT with its pay now argue later procedure is heavily tipped in favour of HMRC. The reasonableness test applied to HMRC is a relatively low threshold to make the initial assessments. This procedure having been upheld in the courts on judicial review in the Glencore case has become extremely widespread, considering the relatively small number of companies that were supposed to be caught up in this.
One could argue that DPT, which has its exemptions for small and medium-sized companies is acceptable because although it gives substantial powers to HMRC, it is directed at large companies who generally know how to take care of themselves and defend their rights. What about the vast amount of new measures which affect all taxpayers? The problem with the tax system is that it already places a substantial burden on small and emerging companies where they have to comply with a fairly similar amount of legislation large companies undertake. As has been shown with the debacles over the application of personal allowances and the application of the annual allowance for pensions, it is clear that HMRC does not always understand the impact of the legislation that it is enacting.
To consistently introduce complex legislation, which is poorly understood, even by those who are supposed to administer it, and then back this up with substantial and increasing penalties starts to offend the sense of natural justice. Again, a sense of proportion needs to be introduced. The tax gap by HMRC calculations is £34 billion or about 6% of what HMRC collects currently. In international terms this must be one of the smallest tax gaps in the world and it is usually to the credit of HMRC as well as UK tax payers generally abide by a culture of compliance. What would happen to that culture of compliance if taxpayers were increasingly to believe that they were subjected to an unfair and capricious regime. The loss of this goodwill may easily outweigh any temporary advantages that new powers would give HMRC.
