Read my full Taxation article: Penalties and powers: Has HMRC become too powerful?
It is more than 40 years since the Keith Committee carried out a full review of the Inland Revenue’s powers and taxpayer penalties. Since then, almost every Finance Act has added something to HMRC powers. In my latest article for Taxation I argue that it is time for a new independent review. The aim would not be to stop HMRC collecting tax. It would be to look again at the balance between HMRC powers and taxpayers’ rights in a society governed by the rule of law.
From local tax offices to digital complexity
The old system of local tax offices is often remembered fondly, but it ran on mountains of paper. It also served a much simpler taxpaying population: most people were employees taxed through PAYE, exchange controls limited foreign income until 1979, and there was no gig economy or digital platform income.
Self assessment and computerisation removed many of the old burdens. However, HMRC now deals with far more varied taxpayers, often with fewer resources. Its response has been to gather more statutory powers, and attempts to harmonise penalties across taxes have tended to level them up rather than down.
How HMRC powers have grown
- Wider information powers and extensive use of discovery assessments.
- More reporting obligations, including the coming international controlled transactions schedule, real-time reporting, payments on account and Making Tax Digital.
- Taxpayers expected to find, correct and quantify their own errors, under threat of higher penalties.
- Direct recovery of debts from bank accounts, introduced instead of making the courts more efficient.
- Regimes such as diverted profits tax, presented as exceptional, which have come to be used widely.
One curiosity is the £100 penalty for a late self-assessment return, which has not changed for years and has shrunk in real terms. Elsewhere, penalties have generally become tougher. The lesson is that restrictions and safeguards belong in legislation, not in ministerial assurances that are soon forgotten.
Questions about HMRC’s role
The article asks three fundamental questions:
- Should HMRC act as an impartial administrator, collecting no less and no more than the law requires, or should it aim to maximise revenue?
- What status should HMRC’s manuals and guidance have? Taxpayers are expected to follow them, yet HMRC may say it is not bound by them.
- What controls should apply to HMRC’s decisions to litigate, given that taxpayers fund their own costs and may concede good arguments simply because fighting them costs too much?
As HMRC powers are increasingly used by compliance officers rather than specialist inspectors, training, supervision and accountability matter more than ever. Effective safeguards protect HMRC’s reputation as well as taxpayers.
Time for a new review
I suggest a new independent review, probably led by a senior judge, with representatives from HMRC, the tax profession, business and taxpayer groups. Its task would be to set a coherent framework for information powers, penalties, debt recovery, guidance, litigation and taxpayers’ rights. HMRC needs strong powers to deal with a digital, international economy, but those powers should be proportionate, supervised and open to meaningful challenge. I first raised some of these concerns in HMRC powers – a Windrush in the making?, and you can find out how we help with tax investigations.
Read the full article on the Taxation website: Penalties and powers: Has HMRC become too powerful?
