Keep close watch on HMRC powers, institute says

“We will make every effort to tackle tax avoidance, including detailed development of Liberal Democrat proposals.”

This is what the Lib-Cons coalition document vows, and it could be telling for the way the taxman deals with advisers and their clients in the future.

The key plank in the Lib Dem manifesto commits the government to “tackling tax avoidance and evasion with new powers for HM Revenue & Customs”. This comes in the wake of the profession questioning whether the taxman already has too many weapons in its arsenal, leading to ­
heavy-handed dealings with taxpayers.

Fears about HMRC breaking down the doors of innocent taxpayers are at the extreme end of the scale of concerns being circulated after the first year of HMRC’s Powers, Deterrents and Safeguards programme.

But the range of powers currently available to the taxman and the way they dovetail with each other have the profession alarmed.

The new powers have to be seen against the backdrop of staff cuts at the taxman through an efficiency ­prog­ramme, and the new government’s recruitment freeze in the public sector. Critics have said that a leaner HMRC, under more pressure to scotch tax avoidance and also bolster the UK’s coffers, may be excessive in the use of its powers to get the job done.

The feeling in the advisory community is that HMRC needs to get a handle on the powers it already has before being provided with more.

“There are more powers on the way,” said Anne Redston visiting professor at Kings College London. “But we should really be putting a cap on powers for the next five years.”

Companies and people who fail to declare offshore interests, income tax or CGT liabilities will receive stiffer penalties from 1 April 2011. For example, the large number of businesses and individuals who pay excise duties on alcohol, tobacco, gambling and air passenger duty will find HMRC can go back four years instead of three during investigations from 1 April 2012.

HMRC could find itself even better equipped to achieve the Lib Dems’ aim to raise £2.4bn by attacking income tax avoidance.

A wide-ranging survey from the CIoT tested the water in the advisory community. Most had not experienced the feared heavy-handedness, but serious issues still exist.

In the CIoT poll, advisers said HMRC were being unreasonable in the volume of information that is being sought – 55% of the advisers criticised the volume of information being requested and the time provided for responses as unfair. 62% of tax advisers who have used the new internal review mechanism found it fair and reasonable.

But more than a third (37%) of tax advisers did not think new information powers had been used fairly. Around half of tax advisers had seen an increase in informal checks, the CIoT reported. 62% said they were clear about the implications of informal checks, but only 13% think their clients were clear on this issue.

There was a need for HMRC to recognise that, while the informal use of powers has a role, tax advisers will often want to put matters on a formal basis. This is to ensure clients understood their rights, and to protect advisers challenged by clients for revealing information.

The CIoT flagged up the lack of clarity about the process under which HMRC decides which particular form of intervention to use in any case (eg. formal or informal use of powers, information notices or inspection powers).

The penalty framework is always going to be contentious. One particular worry is that described by the CIoT as the “soggy middle”. HMRC appears reluctant to impose either high penalties for deliberate understatement or accept that there have been innocent errors, instead going for the middle option of determining a failure to take reasonable care were also raised. What is classed as “reasonable” is usually the point at which HMRC advisers and their clients collide.

One example where HMRC has taken a tougher stance is in court disputes that have seen the taxman pull permission from contractors to be paid gross by their clients. Cashflow problems leading to late payments to HMRC is not seen a reasonable excuse by the taxman. “This is very hard on businesses because the legislation around it sets the bar very high and gives very limited leeway,” said Alastair Kendrick, tax partner at Mazars.

Advisers also want more training for HMRC staff dealing with complicated cases because they will use better judgement when choosing which powers are suitable.

On the other side, all stakeholders should invest in appropriate training of staff on the operation of the new powers, the CIoT said. Further work is also needed between HMRC and the professional bodies over timescales for information requests to advisers, the profession has said.

This includes looking at an informal sliding scale under which the greater the volume of information requested, the longer the period allowed for advisers to produce it.

The CIoT has been central in representing the profession as the powers framework has been hammered out and says it will be keeping a close eye on the situation as the powers continue to develop.

“We recommend that CIoT revisits powers implementation annually over the next few years and discusses its findings with HMRC, until the new powers have bedded down and we have reached a position of stability,” the institute said.

IN OUR VIEW

With the taxman under greater pressure to fill the Treasury's coffers, the CIoT may be pushing its luck in hoping for greater flexibility with information requests from HMRC.