Should HMRC's right to make random inspections be abolished?

The legitimacy of HMRC's powers were called into question last night during the annual CTA Address, given by the Rt Hon Sir Paul Kennedy, Interception of Communications Commissioner.

Speaking on the subject of 'Powers...Between Citizen and State' he suggested that the professional bodies campaign for the abolition of HMRC's right to make random inspections. He indicated that he thought that this right is neither reasonable nor propotionate.

Sir Paul considers that the risk of random checks by HMRC is unlikely to act as an effective deterrent. He likened the concept to breathalysers and said that the risk of being breathalysed seems to have little effect on those who continue to drink and drive.

I'm not sure I agree on either point. Many people have clearly moderated their drinking or choose not to 'drink and drive' due to the risk of getting caught. (NB: I think the risk of causing accidents should be the primary motivation, but I'm not sure this is always the case).

As the public become aware of the full extent of these powers I think the threat of random checks could be a powerful motivator. BUT I'm not sure that the worst offenders will operate any differently - other than perhaps to make it even more difficult for HMRC to find their ill-gotten gains in the event of a random search!

On the question of the reasonableness of their powers I have long accepted that HMRC need onerous powers to prevent deliberate defaulters from exploiting the system. Senior officials always assert that HMRC will only use extreme powers in extreme situations. The worry, evidenced by some of the questions last night, is that some of these powers are capable of exploitation and that not everyone in HMRC can be trusted to exercise the necessary restraint.

Of course all HMRC powers should be reasonable and propotionate. Before the newest powers were given statutory force there was much debate over their extent. HMRC powers were subject to more discussion documents and meetings between HMRC and the profession than on any other matter I can remember for some time. I suspect that some of the professionals closely involved felt that their concerns were not given an adequate hearing or reflected in the new laws.

The legislation introducing HMRC’s new powers to make 'compliance checks' powers was contained in the Finance Act 2008. Most of the new powers came into force just two years ago on 1 April 2009. There's a useful summary in HMRC's FAQs re 'New compliance checks'.

NB: A quick internet search for 'HMRC powers' reveals that HMRC's website on this broad subject still contains guidance that dates back to the merger of the Inland Revenue and HM Customs & Excise in 2005.

No 'reasonable excuse' for this waste of public funds

A recent Tribunal case will reinforce the view of many people that HMRC are continuing to take an unfairly hard line with compliant taxpayers. The cost and time and effort involved in this case (TC00425: Adrian Waddington) are wholly disproportionate to the 5% surcharge in dispute (£219.52). And, as the Tribunal determined, the taxpayer had evidently made every effort to fully comply with his obligations and to pay his taxes on time.

Mr Waddington is an employee. He's a chartered mechanical engineer and pays PAYE income tax on his earnings in the normal way. He also receives dividends and net interest from his savings. The Tribunal noted that he always filed his tax returns and paid his taxes on time.

The issue in this appeal was whether Mr Waddington had a reasonable excuse for failing to pay the tax due on his self-assessment for 2007/08 by its due date. In the 1990s he had received and filed self-assessment forms each year. Then HMRC stopped sending the forms to him. Instead in April 2008 he was sent a Tax Review form for 2007/08 which he completed and filed on 25 September 2008 (before the deadline). He heard nothing further until January 2009 when HMRC asked him to complete a self assessment return - with the same information already disclosed on the Tax Review form - and to pay any tax due by 31 January 2009.

Mr Waddington filed the return within the 3 month period afforded by the notice but was unable to compute the tax due. Instead he awaited HMRC's computation which arrived in June 2009 at which point he immediately sought assistance from a local HMRC office. And as they were no help he went to a tax accountant. The 5% surcharge however was deemed to have been triggered beforehand as the tax wasn't paid by 29 May. Looked at objectively however there would have been no possibility of a surcharge had HMRC dealt with Mr Waddington's affairs in a more timely manner.

It seems to me that the surcharge rules operate unfairly in a case like this where HMRC issue tax returns late through no fault of the taxpayer. This would not be a problem if HMRC were themselves 'reasonable' when considering whether a taxpayer has a 'reasonable excuse' for the late payment of their tax. The Tribunal was quite clear that such an excuse existed. When HMRC adopt a heavy handed approach as they did in this case, they risk bringing the system into disrepute.

What do you think?

Vantis tax advisers to face charges of “cheating" re tax scheme

Today's report in the Sunday Times, headlined: Stars caught up in £219m tax 'scam' concerns "two leading City accountants who have been charged with a multi-million-pound tax scam involving celebrities, sportsmen and other wealthy clients exploiting charitable donations".

If the reports are true, Roy Faichney and David Perrin (neither of whom are qualified as accountants*) will be facing charges around 3 years after their homes were raided over, what I assume to be, the same £100m tax avoidance scheme used by leading sportsmen, musicians and investment bankers. The Sunday Times reported this story and outlined the scheme in December 2006. At the time many tax commentators thought that HMRC's actions were heavy handed. I know I did. The same 'stars ' were named then as are mentioned in today's paper, ie: Martin Corry, captain of the England rugby team, and Yusuf Islam, the musician formerly known as Cat Stevens.

Not surprisingly Vantis is reported to have announced that "David Perrin and Roy Faichney, employees of Vantis Group, will be strenuously defending any charges brought against them."

In my talks I often stress that there can be a significant time lag between when tax advice is given, acted upon and tax refunds received and when HMRC will challenge the transactions or tax refund claims. All too often promoters of aggressive schemes imply that all is well when HMRC have received a disclosure of the scheme and have permitted tax refunds to be paid out. But this is rarely the whole story. The full picture typically only emerges many years down the line.

There was another example of this time lag earlier this year. The Mercury Tax Group announced that it was preparing a damages claim against HMRC following a court hearing that ruled the taxman had unlawfully obtained warrants to raid the firm’s offices and the home of its chief executive. The raid, related to a 'gilts strip scheme' took place almost two years earlier and was widely considered to be an example of HMRC using a sledgehammer to break a nut.

In both cases (Mercury and Vantis) I would stress that mere accusations by HMRC are not proof that the law was broken by the accused. The old maxim "Innocent until proven guilty" is as true in tax planning as it is in all other cases. I'm sure that in each case the advisers were satisfied that their advice to clients constituted legal (albeit aggressive) tax avoidance rather than tax evasion. In other words they did not intentionally break the law nor encourage clients to do so. And having taken Counsel's opinion, as I'm sure they did, they would have expected to be protected against accusations of illegal activity. As would their clients. And the Mercury case has progressed such that it seems that HMRC eventually backed down.

So why do I draw attention to this case on the TaxBuzz blog?

Quite simply because it supports my contention that pre-packaged aggressive tax avoidance schemes are more risky than some advisers would have you believe. And many of those who promote such schemes do not have the technical understanding of the risks to ensure that their clients fully appreciate them before they decide whether or not to proceed.

As is well known I am no fan of aggressive avoidance schemes and am uncomfortable with the idea of 'planning upto the wire'. Interestingly I am finding more and more experienced tax advisers seem to take a similar view. For example, last week a very well known tax lecturer told me that they would never put their name to any book or article titled: "How to avoid tax on...."

The times they are a-changing.

*For the record I know Roy and David as I used to work with them at what was then WJB Chiltern plc before they left to join Vantis almost 6 years ago. I always liked them but we have not spoken for some time.

Earlier relevant posts:
- Bending vs breaking tax rules
- Tax avoidance is a card game - the metaphors multiply
- Tax avoidance - what are you allowed to do? A simple guide.
- Tax avoidance schemes - a simple guide
- Naive promoters of tax avoidance schemes
- Five facts all accountants need to know about tax avoidance schemes
- Five more facts all accountants need to understand about tax avoidance schemes
- Tax cheats need to think again

Working with tax agents - HMRC webcast

At the ICAEW Tax Faculty AGM yesterday Dave Hartnett explained that he and Simon Norris would be hosting a live webchat tomorrow. Dave is Permanent Secretary for Tax, and Simon Norris is Head of the Review of HMRC Powers.

The webchat has been promoted quite widely already and follows on from the recent consultation document 'Working with Tax Agents'.

What is a 'webchat' and what do we already know about this one?

Firstly let me stress that different people use terms such as 'webchat' and 'webinar' to mean different things. There is not, in my experience, one standard universally accepted format tied to any of these words.

The HMRC webchat is being hosted on webchats.tv so it's fair to assume that it will be in a similar format to the others on the site. So we can expect:

• to watch a live tv interview with Dave and Simon if you visit the webchat page during the show
• to contribute questions online before and during the show - and some of these may be read out and answered during the show;
• to be able to watch a recording of the show by visiting the webchat page at any time in the future;
• to be able to read a transcript of the show after the event - also on the webchat page. And of course you can cut and paste statements made by Dave and Simon after the event.

NB: Contributions and questions have been encouraged beforehand and Dave mentioned yesterday that they have had hundreds already. He said they ranged from the truly abusive to the profound: "If there is a tax on apples and I only eat oranges, am I a tax avoider" - Dave said he's looking forward to answering that one.

To take part or to submit a question in advance, follow this link to the 'Working with Tax Agents' webchat.

Stopping the duff accountants and 'tax agents' spoiling it for the rest

HMRC published a new consultation document last week - the latest in a series under the heading 'Modernising Powers, Deterrents and Safeguards'

The document is titled 'Working with Tax Agents' and it explores how HMRC interacts with 'tax agents' - a phrase said to include "accountants, solicitors, payroll bureaux, specialist advisers and VAT specialists." The main target of any changes that follow are intended to focus on the small number within the tax agent community whose work falls below a professional standard.

The consultation is intended to raise issues and ask questions rather than propose definitive solutions. It contains assurances as regards "the reinvigoration of regular 'working Together' meetings between groups of local tax agents and HMRC staff".

I've no doubt there will be cynics who will doubt the sincerity of some of the aspirations set out in the document. In my view however I think the message has finally got home. Accountants and tax advisers are a critical element in making our tax system operate effectively. This is something that representatives of the main professional bodies have been trying to bang home for some years now. I recall Ian Hayes, my predecessor as Chairman of the ICAEW Tax Faculty, telling us how he had been stressing this point at every opportunity some years back. And many of us have repeated it more recently.

Simply stated, with ever reduced internal resources, HMRC need to be able to rely on the work done by reputable accountants and tax advisers. If you are in practice you have a choice. You can either help your clients to fulfil their legal obligations and do so in a professional manner, or you can (deliberately or otherwise) keep your clients' tax bills to a minimum through dubious means whilst hoping that HMRC's stretched resources will not catch up with you or your clients.

Now is not the time for cynics to dismiss this invitation to contribute to the debate. I think it's a once in a lifetime opportunity to contribute to HMRC's plans to enhance its relationship with accountants and tax advisers. This invitation is a direct result of the efforts made by many in the professional bodies over many years of debate and discussion with HMRC.

The Tax Advice Network will be formulating a response and welcomes contributions from 'tax agents' who have considered views but do not intend to respond to the conultation themselves.

Do please add your comments to this blog post or email us through the feedback facility on our website.

Taking on the taxman

HMRC is such an easy target. And last night's TV programme 'Taking on the taxman' hit the spot. The real life stories were sad reflections of mistakes that have had a devastating impact on the individuals concerned.

This is one of 3 consecutive posts inspired by last night's TV programme 'Taking on the taxman'. In the second post I focus on the issue of bankruptcy orders. And in the third post I gave my take on a key issue only touched on last night.

For now here's my take on key elements of the programme:

Dave Hartnett CB, Permanent Secretary for Tax
Dave Hartnett, who was wheeled out to defend and explain HMRC's position did the best he could do. He refused to discuss specific cases and sought to point out that like any large organisation HMRC will sometimes make mistakes. I know Dave from my days as Chairman of the ICAEW Tax Faculty and I've seen him deal expertly and convincingly with challenging questions on many occasions. As such I am sure that his edited contributions to last night's programme were just that - edited.

Equally I'm sure that despite his denials the recent and prospective staff cuts in HMRC are having a detrimental impact on HMRC service standards.

The bankruptcy orders
I've extracted this element of my notes to create a separate blog post here.

The insider
We were given an insight into poor HMRC practices, pressures of over work and the evident impact of drastic staff cuts. I remain unconvinced that these make sense or that anyone on the inside seriously expects to be able to maintain (at best) or improve 'customer' service at this time - more's the pity. And in this regard I sympathise with HMRC as the staff cuts are being forced upon them and they have to defend them and cope. Not easy.

Tax charged on a redundancy payment
The programme made a big thing about how one taxpayer had expected his £29k (coincidentally just shy of the £30k limit?) termination payment would be tax free - as was indeed eventually agreed by the taxman. But, as were told, he had already invested the gross sum in a new business when he received an initial demand for £8k tax plus interest and an £8k penalty. This suggested to me that either his tax return was incorrect or that his employer had not supplied the 'right' information.

HMRC asserted that the termination payment “was taxable as additional wages.” This is a frequent argument and all too often proves to be correct - for reasons I explained in an earlier posting - 'No £30k exemption from tax when you leave a job'.

So was this taxpayer a victim of an out of control tax gathering department? Or a victim of a tax system that is complex and rules that appear inconsistent to the uninitiated? I prefer the latter explanation but that doesn't make for good d TV in a programme so evidently out to bash the taxman rather than the system. .

Tax avoidance
I didn't follow the juxtaposition of the other stories about HMRC mistakes with Vince Cable explaining that there are too many 'tax avoiders' round. This section of the programme also quoted the figure of £25bn tax lost "through perfectly legal tax avoidance". Hmmm. I think we've been here before.

What do you think? Did you watch the programme? Please add your views and thoughts as comments on this posting - just click the 'comments' link directly below.

Suspects in criminal cases have more rights than in tax cases

A recent article in Taxation magazine reminded me of this concern that I first expressed some years back.

Peter Vaines, is a tax lawyer and a partner with Squire, Sanders & Demspey. In his article he notes that taxation inhabits an 'extraordinary place' in our legal system.

"An individual is better protected by the law if he is suspected of a serious crime than if he is suspected of not paying even a comparatively small amount of tax. HMRC can demand information, enter premises, raise assessments and enforce the payment of tax on grounds which would barely scratch the surface in the criminal process."

Like Peter I appreciate that the burden of proof differs as between civil and criminal cases. However HMRC do not even have to prove their case to the civil standard. It is the taxpayer who has to prove that he or she is innocent to the civil standard. Almost all of the legal protection afforded to a suspected burglar are unavailable to someone suspected of failing to disclose all of their income.

I also share Peter's view that we need to ensure that taxes are paid properly. However I tend to the view that too many obviously guilty people are acquitted under the criminal law due to 'technicalities'. The 'tyrannical powers' that HMRC now have (to use Peter's description) were sought so as to reduce the prospect of tax evaders escaping justice.

Peter refers back to Jonathan Schwarz's Hardman memorial lecture to which I referred on this blog last November. HMRC powers - The rational arguments that these go too far. Peter highlights another key point made by Jonathan. That HMRC simply have too broad a coverage and that it would be much better for them to confine their attentions to taxation and not be burdened by social security benefits at one end and criminal activities such as the importation of endangered species and drugs at the other.

Peter endorses Jonathan's view (as do I) that HMRC are being asked to do too much and that this risks them destroying the very prize the Government seeks.

"The willing co-operation and compliance by the majority."

The key question, I believe, is whether HMRC do restrict the use of their newly liberated powers to the more serious cases or whether we perceive a clunking iron fist across the board. Until recently I was hopeful that the use of their powers would be restricted. More recently I have begun to fear that I was being naive - and wrote about how the Misuse of anti terrorism powers raises concerns about potential for misuse of HMRC powers.
I suppose we shall just have to wait and see!

Misuse of anti terrorism powers raises concerns about potential for misuse of HMRC powers

HMRC now have very wide powers and there is a widespread concern across the profession that taxpayers have insufficient safeguards. **

The police raid on the London home of MP Damian Green, on his Kent home and on his constituency office was conducted using anti-terrorism powers. There has been no suggestion that his involvement in leaks passed to him had anything to do with official secrets. The media, MPs generally and all commentators seem unanimous in their criticism of what appears to be a gross misuse of power by the police.

My reason for referring to this new story on the TaxBuzz blog is that it provides further evidence (if this were needed) that HMRCs powers are also capable of being misused. Indeed I am sure that there are already greater constraints on the Police in this regard than there are on HMRC. And yet still the police were able to rely on anti-terrorism laws to justify their raids on Mr Green.

Senior officials at HMRC have sought to explain why they need to have the new powers afforded to them by Schedule 36 of FA 2008. These follow on from the additional powers contained in FA2007. The entire powers review has been the subject of much discussion and debate. Throughout it seems that HMRC have rejected the profession's near unanimous calls for effective statutory safeguards to prevent misuses of power by HMRC staff and officials.

Such requests invariably seem to fall on deaf ears. On occasion we have heard variations on the usual old cliches:

....would only ever apply to established tax debts once all the normal avenues for appeal had been exhausted, and after repeated requests for payment had been ignored.

Any powers to access bank accounts should we acquire them, would only be used ....after we had exhausted all efforts at contacting the defaulter.

“The cultural message across HMRC is collect the right amount of tax, and not the maximum amount, and to ensure that taxpayers receive their entitlements”

“there are diametric views as to what is actually a safeguard”

it’ll be alright on the night

“Trust us – we shall be reasonable”.

I hope that the events of last week will serve as a lesson. A lesson as to why it is so important for the law to contain effective protection against those who would misuse the wide powers afforded them by the law. It's important as regards anti-terror laws, it's important as regards HMRC powers and it's important for civil liberties. And I've never before been concerned that as an innocent person I had anything to fear from the application of UK law.

**I addressed this point in a recent blog: HMRC powers - the rational arguments that these go too far. This by reference to the 2008 Hardman memorial lecture presented for the ICAEW Tax Faculty by International Tax Barrister Jonathan Schwarz.

HMRC powers - the rational arguments that these go too far

Earlier this week I attended the 2008 Hardman memorial lecture presented for the ICAEW Tax Faculty by International Tax Barrister Jonathan Schwarz. His theme was 'Rights and powers: protecting the legitimate interests of taxpayers.' And his subtitle was "Taxpayer Rights in a Constitutional Democracy"

I have attended numerous seminars, meetings and discussions on related subjects - that is, the new HMRC powers as set out in part 2 of Schedule 36 FA 2008. I have also made a passing reference to these in a previous post on this blog: The end of the old paper bag jobs?

I thought I understood the arguments raised by those in the profession who fear that the powers go too far and could be misused. Equally I had some sympathy with HMRC's position, which was well defended during the ICAEW Wyman Symposium earlier this year. I would summarise this simply as: HMRC argues that it needs these powers to ensure that dedicated tax evaders do not escape on technicalities.

Jonathan's hard hitting views included a well argued observation as to the police state nature of the powers and the prospective consequences of the absence of effective safeguards.

A number of points specifically stuck in my mind:

• the new powers are the tax equivalent of the police's right to 'stop and search';
• as the powers are already on the statute book we need to focus on adding specific statutory safeguards;
• the unfettered power for HMRC officials to enter private homes should however be removed from the statute book;
• the proposed taxpayer's charter will, by definition be inadequate even if given simplistic statutory backing;
• taxpayer rights cannot be effectively addressed by an aspirational document (ie: the proposed charter). They need to be properly endorsed by parliament in the same was as were HMRC powers;

Whilst listening to Jonathan I realised that I had previously allowed myself to be misled by the HMRC arguments. I firmly believed that in reality no one within HMRC would have the time or inclination to abuse the new powers to the detriment of innocent taxpayers.

After the lecture Jonathan took questions from the floor. The last one was more of an observation by Anne Redstone. But, for me, it summed up the fears that I have not previously shared. She recalled a friend from her days at a girl's Convent school. The friend had asked her mother if she could go on the pill. Her mother wasn't happy and likened the idea to acquiring a beautiful ball gown, even though the school didn't have an annual prom. "The thing is, she told her daughter, once you have it you will want to use it."

The fear that so many commentators and practitioners have is that HMRC's powers will be misused. Many of us do not doubt the honest intentions of those at the top of HMRC who have championed the introduction of the new powers. We do not doubt the sincerity of their motives and we may even trust most of them. But it will be less senior officials who get to play with these new toys.

And, lest anyone should doubt how such powers can be used in ways not intentioned, we do not need to look very far for a worrying example. How about the use of the Prevention of Terrorism Act to freeze Icelandic assets?

The new penalties regime - making tax taxing

Have you seen the latest adverts by HMRC for filing tax returns? Moira Stuart is the new celebrity face of HMRC and the print ads focus on a reminder to:

"Keep your tax affairs in order and you'll avoid a penalty"

The TV ads however simply contain a reminder of the new filing deadline of 31 October for paper returns. And at the end of the ads Moira repeats that old line that so annoys those of us who know something about the tax system:

"Tax doesn't have to be taxing"

It's not her fault though. By her own admission she's not a tax expert and knows precious little about the tax system beyond how to avoid penalties - presumably by fling before the deadlines.

I found a short video piece of Moira being interviewed about the ads. This video then continues with an interview with Clare Merrills who has featured in previous HMRC podcast too. I thought she came across exceptionally well. If I was writing for the general public I'd highlight some of the points she made but they aren't really relevant to his blog. You can watch it though by clicking on this link to the HMRC video.

Getting back to the print ads, these contain some important warnings that are worth stressing to all clients and taxpayers - even though they are more relevant to next year's tax returns - as the quality of records being maintained NOW will impact the care with which those returns can be completed:

"Completing your Tax Return is a lot less stressful if you keep all your records in order and check with us [HMRC or your accountant!] if there's anything you are uncertain about.
And this is more important than ever.
From April 2009, if you make a mistake on your Tax Return and can't show that you took reasonable care to get it right, you will have to pay a penalty."

If you're not yet familiar with the new penalties regime, you should be. Briefly, penalties for tax errors (related to tax returns due after 1 April 2009) will be imposed on four different scales according to the category of behaviour the taxpayer is judged to fall into. These categories are:

a) Making a mistake in spite of taking reasonable care: no penalty

b) Failing to take reasonable care: up to 30% penalty

c) Deliberate inaccuracy: 20% to 70% penalty

d) Deliberate and concealed inaccuracy: 30% to 100% penalty.

HMRC have released guidance on how they will interpret the new rules in the Compliance Handbook Manual. You may be surprised to learn what HMRC consider to be a deliberate inaccuracy in para CH 81150:

“deliberately withdrawing money for personal use from an incorporated business and not making any attempt to make sure it is treated correctly for tax purposes.”

How many of your clients are slightly slack with their paperwork and thus would fall into the ‘deliberate inaccuracy’ category, attracting a penalty of up to 70%?

The use of the company to pay personal expenses can be viewed by HMRC as a deliberate and concealed inaccuracy as demonstrated in para CH 81160:

“describing expenditure in the business records in such a way as to make it appear to be business related when it is in fact private (possibly with the supplier agreeing to change the description on the relevant invoices)”

The inference is that an incorrect entry in the prime records of the company could be enough to put your client in the worst category of behaviour potentially attracting a penalty of up to 100%.

Back in August we addressed this issue in one of our weekly tax updates for accountants in general practice. I have also addressed the point in an earlier blog post: 'Take care to avoid a penalty' in which I provided some salutary warnings and advice to accountants who were not yet familiar with the new regime.

Taxpayers' Charter - a comeback? Spin? or a worthwhile exercise?

On 10 January Financial Secretary to the Treasury Jane Kennedy stated that:

'HM Revenue & Customs is today announcing that it will begin the process of working with interested parties on the development of a Taxpayers' Charter, which will set out both taxpayer rights and responsibilities in a single accessible document.'

The move is part of the powers consultation and is a welcome development. But what will it mean in real life even if it comes to pass?