Does HMRC have too` much power or not enough?

The taxes collected by HMRC – £584.5bn in 2020-21 – run the UK and, as such, the right amounts must be managed.

To this end, HMRC has myriad powers to review returns and check taxes have been correctly calculated and paid. For civil cases, these powers include the ability to:

  • open and close enquiries.
  • request information and documentation.
  • inspect business premises; and
  • raise assessments for up to 20 years.

Most people will agree that the powers are not ‘bad’, but how they are used affects how they and HMRC are perceived. Unfortunately, many tax investigations practitioners have experienced HMRC misapplying its powers or abusing them.

Legal interpretation

For the past few years, HMRC has been pushing a narrative that ‘anyone who completes a tax return incorrectly is deliberately depriving the general public of essential services to further its agenda. Increasingly the department uses the phrase ‘tax avoidance and evasion’ in various marketing and other initiatives, with avoidance and evasion being grouped. Speaking to the man on the street, it is common to see that individuals do not understand the difference between avoidance and evasion (let alone ‘aggressive tax avoidance). HMRC is partly to blame for propagating the idea that they are the same.

Further highlighting this is HMRC’s interpretation of the ‘tax gap’. HMRC says: ‘The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is paid.’ The causes of the tax gap, other than taxpayers making errors on their returns, are stated as ‘legal interpretation, evasion, avoidance and criminal attacks on the tax system’ as per the most recent tax gap estimates for 2019-20. Technically, tax avoidance is legal (let’s not go into ‘morality’ just now), and tax legally avoided should not be paid to HMRC. Therefore, it should not form part of the tax gap. However, lumping avoidance and evasion together and saying that they both contribute to a tax loss is misleading at best.

‘Legal interpretation’ is the tax due should taxpayers interpret the legislation differently from HMRC. If there is any disparity until the courts have defined the interpretation, I would argue that the tax gap resulting from legal interpretation should not exist. After all, if HMRC loses at the tribunal, the tax gap disappears.

Erosion of taxpayer safeguards

The reduction of safeguards for taxpayers indirectly contributes to HMRC’s powers and directly increases the perception of the department being omnipotent when it comes to tax affairs. Since the loan charge, we have seen more retro action in HMRC’s arsenal.

When HMRC becomes aware through losses at the tribunal that its interpretation of tax legislation is incorrect, it changes the legislation with retrospective effect. This has the dual effect of preventing people with open inquiries from having their day in court concerning the legislation in force when the potential tax loss arose and without any recourse to claiming back costs sunk in legal fees.

Examples include the legislation on:

  • TMA 1970, s 8 notices and penalties issued by computers – any open appeals against automated penalties or appeals on the basis that notices to file were invalid because they were automated is now subject to debate; and
  • HMRC’s new policy that the high-income child benefit charge is (and has now permanently been) assessable as income (unless the taxpayer appealed HMRC’s assessment on or before 30 June 2021). This will be legislated for in the next Finance Bill.

Does HMRC need more powers?

Unsurprisingly, our answer to this question is ‘no’ – because of how the current powers are being used. We would suggest better training for the enquiry staff in the first instance.

The people at the top of HMRC management and the Treasury also need to be selected independently of the government. For example, the financial secretary to the Treasury should not be an MP as well. HMRC can then request powers, and if independent of government, the lens through which these requests are made may be more objective.

If taxpayers could rely on HMRC, particularly those on a budget, their finances would not limit the quality of the advice. If we look at those caught by the loan charge, many individuals say they spoke to HMRC, which told them the arrangements were not subject to the disclosure of tax avoidance schemes regime. Raising standards of advice given by HMRC would significantly reduce the tax lost due to taxpayers being duped into using schemes. We would respectfully suggest that before accusing tax advisers of poor-quality work, HMRC should perhaps consider the quality of customer service it provides.

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