Treasury Sub-Committee The Conduct of Tax Enquiries and the Resolution of Tax Disputes Inquiry 1 Response by the Chartered Institute of Taxation

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1 Treasury Sub-Committee The Conduct of Tax Enquiries and the Resolution of Tax Disputes Inquiry 1 Response by the Chartered Institute of Taxation 1 Introduction 1.1 HM Revenue and Custom s (HMRC) internal governance processes are intended to ensure that it deals with all tax disputes fairly and in an even-handed manner. The Treasury Sub-Committee is inviting the submission of evidence to examine whether HMRC s approach to conducting tax enquiries, resolving tax disputes and determining the amount of tax to be paid meets the standards in its code of governance for resolving tax disputes. 1.2 As an educational charity, the Chartered Institute of Taxation s (CIOT) primary purpose is to promote education in taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. Our comments and recommendations on tax issues are made solely in order to achieve this aim; we are a non-party-political organisation. 1.3 Our stated objectives for the tax system, which are relevant to the Inquiry, include: A legislative process which translates policy intentions into statute accurately and effectively, without unintended consequences. Greater simplicity and clarity, so people can understand how much tax they should be paying and why. Greater certainty, so businesses and individuals can plan ahead with confidence. A fair balance between the powers of tax collectors and the rights of taxpayers (both represented and unrepresented). Responsive and competent tax administration, with a minimum of bureaucracy. 1

2 2 Executive summary 2.1 HMRC s Code of Governance for Resolving Tax Disputes, and its contents, are unknown to many taxpayers. HMRC could be required to state in their decisions that the code has been complied with, and what level of oversight the decision has had. Also, more interaction between HMRC technical specialists / governance boards, and taxpayers, would help increase all parties understanding and lead to better decisions. 2.2 HMRC s Litigation & Settlement Strategy (LSS) is a sensible framework for handling and resolving disputes. However, problems still arise. For example, while the LSS recommends taking early specialist advice, often HMRC s own technical and legal specialists are engaged too late in the process. Alternative Dispute Resolution (mediation) can work well and needs to be more widely promoted. 2.3 Members report increasing instances of HMRC adopting an interpretation of the law to bring in the greatest tax; rather than the right tax at the right time. This extends to running contradictory arguments in different cases, and / or ignoring their own published guidance, custom and practice, and relevant case-law. 2.4 HMRC s collection and management powers are sufficiently flexible. However in some circumstances HMRC still feel compelled to collect tax in some cases where the level of tax appears unfair. Parliament should act promptly to correct defective legislation and HMRC must communicate legislative changes quickly to relevant staff. 2.5 HMRC s approach to enforcing compliance with tax law sometimes results in disproportionate or unjust outcomes. For example, HMRC will initially suggest an inappropriate category of behaviour (eg categorising genuine errors as carelessness, or carelessness as dishonesty), leading to decisions which are overturned on appeal. HMRC are often unduly reluctant to suspend penalties for one-off errors. Penalty conditions are often poorly thought through. HMRC sometimes threatens penalties where a taxpayer is simply (and openly) disagreeing with HMRC s interpretation of the law and challenging it through litigation. 2.6 HMRC s compliance regime could be improved by simplifying tax legislation; improving the quality of guidance; emphasising the principles in HMRC s Charter; improving training of HMRC staff; improving practices, processes and record keeping by HMRC; and reviewing applicable time limits to more closely align the rights of taxpayers and HMRC to make claims and corrections. 2.7 Governance over HMRC s enquiry process seems only to start near the end of an enquiry or investigation. The nature of enquiries is changing and has become less collaborative and more aggressive, for example HMRC demanding information unrealistically quickly and asking for information which they are not entitled to receive. 2.8 More thought should be given as to how the approach to advance clearance could be made broader and more uniform. 3 Q1: How do HMRC governance and settlement processes affect its ability to resolve tax disputes in a proportionate and fair way? Technical-documents/subsfinal/MOT/2018 2

3 Q2: Does HMRC s litigation and settlement strategy provide a rational and sound framework for resolving tax disputes? 3.1 It is convenient to address these questions together. 3.2 HMRC s Code of Governance for Resolving Tax Disputes 2 and its Litigation & Settlement Strategy 3 (LSS) provide a general framework and process. Governance 3.3 We suspect that the existence of the code of governance ( the code ), and its contents, are unknown to many taxpayers and their advisers. 4 HMRC may wish to refer to the code in decision / review letters that it issues in order to improve awareness. 3.4 It may also prove instructive, both for taxpayers and HMRC, if HMRC were required to state in their decision that the code has been complied with, and what level of oversight the decision has had. This would encourage HMRC staff to ensure that adequate thought had been given to the nature of the case and that it had received the appropriate level of review. It would also reassure taxpayers that HMRC had followed due process, and help them properly evaluate their next steps and save unnecessary time and costs (eg an internal review is unlikely to be beneficial if the matter has already been considered by HMRC s technical specialists). 3.5 Reference is made in the code to tax professionals making decisions in routine cases. There is a perception that the level of the tax technical knowledge possessed by HMRC staff has reduced in recent years. Making the various levels of technical knowledge more visible to taxpayers would also help reassure them that their case has been considered by someone with the necessary expertise. 3.6 There is also the sense that the technical specialists and governance boards sit in their ivory tower and tend not to get involved with the discussions with the taxpayers themselves, leading to scepticism and suspicion. It is also unhelpful when, after possibly years of discussion, a case is referred to the Tax Disputes Resolution Board (TDRB) and the proposal is rejected by them, leaving all parties high and dry. There appears to be no transparency over what happens next eg whether the eventual outcome is better than the rejected proposal. 3.7 One of the accusations also frequently levelled at HMRC staff is that they don t understand the commercial world. Interaction between technical specialists / governance boards, and taxpayers, would help increase all parties understanding and lead to better decisions both by HMRC and taxpayers. Litigation & Settlement Strategy 3.8 LSS is generally well understood by HMRC, advisers, and well-advised taxpayers. Taken at face value, the LSS is a sensible framework for handling and resolving disputes. For example, not settling on all or nothing issues where HMRC consider 2 _Code_of_governance_for_resolving_tax_disputes.pdf 3 _Resolving_tax_disputes.pdf 4 Unless otherwise stated, further references to taxpayers should also be taken to include their advisers. Technical-documents/subsfinal/MOT/2018 3

4 that they will win in litigation is an understandable approach in protecting the interests of the generality of taxpayers. 3.9 However, our members report problems which often arise in the invention or handling of disputes, and these are highlighted below: The LSS suggests that taking early specialist advice will bring important efficiency savings. However, we are concerned that technical specialists, HMRC s solicitors office, and tax counsel, are often engaged too late in the process long after HMRC s decision has been taken and a dispute has arisen. Where HMRC officers undertake the advocacy on cases, there is less evidence that they undertake an objective assessment of the merits of HMRC s case. This reduces the scope for either settling the case, or narrowing down the issues in dispute, which would otherwise occur had the case been dealt with by the solicitor s office or tax counsel. Indeed, contrary to the LSS, our members report that HMRC seem to be taking increasing numbers of cases where the prospects of success appear much lower than 50%. Alternative Dispute Resolution (ADR) (mediation) can work well and needs to be more widely promoted as a mechanism for resolving disputes. 5 ADR is effective when it is used genuinely to seek to resolve disputes. Unfortunately, our members have also experienced cases where the HMRC officers at the ADR meeting did not have the authority to reach a settlement, when the taxpayers had senior personnel attending who were able to take decisions that could have led to settlement. This leads to increased costs, makes subsequent litigation more difficult, and makes ADR less attractive to pursue. HMRC should be prepared to engage with authority in this process. Contrary to the LSS, which requires HMRC to apply the law fairly and consistently, members report increasing instances of HMRC adopting an interpretation of the law which brings in the greatest tax; rather than the right tax at the right time. Indeed, this extends to running contradictory arguments in different cases, and / or ignoring their own published guidance, custom and practice, and relevant case-law. We were recently concerned at the reference in HMRC s single departmental plan 6 which says that it will maximise revenues due rather than wording such as maximise collection of revenues properly due One of the key areas where the LSS might be reviewed concerns value for money. The LSS states that where HMRC believes that it is likely to succeed in litigation and that litigation would be both effective and efficient, it will not reach an out of court settlement for less than 100% of the tax, interest and penalties (where appropriate) at stake In practice it appears that the words effective and efficient are being ignored by HMRC, as many cases are litigated by HMRC where the costs versus benefits simply 5 See our submission to the Civil Justice Council (CJC) on The Future Role of Alternative Dispute Resolution in Civil Justice 0Resolution%20in%20Civil%20Justice%20Interim%20Report%20by%20the%20CJC%20- %20CIOT%20comments.pdf 6 See Technical-documents/subsfinal/MOT/2018 4

5 don t stack up. This applies to many penalty appeals which are heavily fact-based 7 and cases where the amounts in dispute are relatively modest This uncommercial approach by HMRC puts taxpayers at a disadvantage, as litigating can be time consuming and costly. Taxpayers often end up simply agreeing to pay liabilities which they do not think are due (and so would otherwise litigate), because the financial and time costs of litigation do not justify the likely reward. There is an increasing belief that HMRC exploit this to the taxpayer s detriment. HMRC should take into account likely costs that will fall disproportionately on the taxpayers concerned - we accept that translating this principle into a practical approach will require thought Further, even though the first tier tribunal is meant to be relatively informal, there are strict deadlines which apply which can trip up both parties. Missing these deadlines can leading to wasted costs and further complexity in resolving the dispute. 8 4 Q3: Do HMRC s collection and management powers set out in the Commissioners for Revenue and Customs Act 2005 provide HMRC with sufficient flexibility to achieve cost-effective and fair results? 4.1 Our view is that the powers do give HMRC sufficient flexibility. Whilst HMRC do not have a general discretion to choose to collect less than the tax due under the law, they are empowered to make collection decisions based on cost and the net return to the Exchequer, and in further limited circumstances can choose not to collect tax which is due. However, as highlighted above, it is the use / application of those powers and the processes that HMRC uses to conduct its work which cause issues. 4.2 HMRC are more cautious about the extent of their care and management powers post-wilkinson 9 (in which the House of Lords made clear that the scope of HMRC s administrative discretion to make concessions that depart from the strict statutory position was not as wide as previously thought). Indeed, it would be undesirable if HMRC take it upon themselves to correct what might be perceived as defects in the law in order to produce a fair result. If there is defective legislation this should be corrected by Parliament, rather than HMRC needing to make judgements on what the law should be. 4.3 However, this can lead HMRC to seek to collect tax in some cases where the level of tax may be perceived to be unfair ; for example, life bond taxation in situations such as Lobler 10 where an effective tax rate of 779% had arisen in relation to the part surrender of life insurance policies, despite there being no commercial gain. It can also give rise to apparent unfairness, such as where taxes have been overpaid but strict application of time limits means that it is no longer possible to obtain a repayment. 11 Further, the need to resort to the expensive option of judicial review in these cases in practice often simply denies a taxpayer s access to justice. 7 Though we recognise that some penalty appeals have precedent value and therefore need to be taken. 8 The BPP Holdings Supreme Court decision illustrates what can go wrong when HMRC s Solicitors Office does not meet deadlines HMRC is barred from taking any further part in proceedings, but the case will carry on without them. 9 R (on the application of Wilkinson) v IRC [2005] UKHL Joost Lobler v HMRC [2015] UKUT 0152 (TCC) 11 See, for example, HMRC v Dr V Raftopoulou [2018] EWCA Civ 818 and TC06467: Kevin George Munn [2018] UKFTT 234 (TC) Technical-documents/subsfinal/MOT/2018 5

6 4.4 It is important that where Parliament has made provision to correct defective legislation, as in the case of life insurance bonds, this is communicated appropriately to the staff within HMRC who are actually making decisions, and acted upon by those staff Sometimes better use of powers (eg special relief) or more care is needed to meet the public sector equality duty/equalities Act, particularly for taxpayers with mental health issues. Cases such as The appellant v HMRC [2017] UKFTT 839 (TC) 13 should simply not need to be fought in Tribunal. HMRC should resolve them considerately at a much earlier stage. HMRC s Needs Enhanced Support Unit is a step in the right direction but more needs to be done. 5 Q4: Does HMRC s approach to enforcing compliance with tax law, including its approach to penalties and other sanctions, result in disproportionate or unjust outcomes? If so, how can the situation be remedied? 5.1 Yes. In our view HMRC s approach to enforcing compliance with tax law does sometimes result in disproportionate or unjust outcomes. We have set out some examples / comments below, based on the experiences of our members: Whilst it is important that HMRC properly consider the application of the penalty rules in all cases, there often appears a tendency for HMRC to initially suggest an inappropriate category of behaviour (in the sense of categorising the behaviour as worse than it is). This not only affects both the level of any penalty, and whether it can be suspended, 14 but importantly also affects the time limits for assessing the underlying tax amounts (20 years in cases of dishonesty, four or six years in cases of innocent / careless errors). In any event, inadequate objective consideration of the taxpayer s behaviour often leads to decisions which are overturned on appeal; such litigation is normally a costly exercise for both the taxpayer and HMRC. HMRC often seems to forget that genuine errors can arise simply by virtue of genuine mistake or misunderstanding, with no carelessness, recklessness or deliberate conduct. Similar issues with careless errors, particularly where the taxpayer relied on advice from a professional adviser which was not obviously wrong and so did all they could to get their tax right. They should not be deemed to be careless in this situation. Many penalties for careless behaviour are simply issued with no apparent consideration of suspension, contrary to the instructions in the HMRC manuals to consider suspension in all cases. HMRC are often reluctant to suspend penalties for either one-off errors, or where they view a mistake as due to a simple human error. This reluctance appears to be because HMRC consider that they are unable to set an appropriate condition of suspension, and this approach has been criticised in 12 See the criticism of HMRC in Thakoral Taylor v HMRC [2017] UKFTT 0845 (TC)) Para 14 Schedule 24 FA HMRC officers are instructed to consider the suspension of every penalty for a careless error - see HMRC s Compliance Handbook at CH Technical-documents/subsfinal/MOT/2018 6

7 numerous First Tier Tribunal decisions. 15 In fact, HMRC s manuals do now indicate at CH83133 and CH83143 that it is in principle possible to suspend a penalty where you can set at least one specific suspension condition that, if met, would help the person avoid a further penalty for a careless inaccuracy. The Office of Tax Simplification s Tax penalties: final report of November recommended that examples should be included in the HMRC manuals to make this easier for staff, but this recommendation does not appear to have been taken up as the HMRC manuals do not give any examples of this. HMRC still insists on imposing the generic condition 17 that the person must file all their returns on time during the suspension period. The law says that suspension conditions must help a person avoid future careless errors. The generic condition does not do this and was criticised by the Tribunal in Alexander Duncan v Revenue and Customs Comrs [2016] UKFTT 709 (TC) 18. The generic condition is that the person must file all their returns on time during the suspension period. The generic condition is not for the purpose of helping the person avoid a further penalty for a careless inaccuracy, but you must set this condition in all cases. Penalty conditions are often poorly thought through. For example, one large and complex organisation failed to subject a small, discrete category of officeholders to PAYE. One of the conditions of suspension was that they regularly monitor such payments and meet regularly with all staff to ensure PAYE compliance generally. It is important that penalty conditions really are designed to help ensure future compliance. HMRC has also threatened the imposition of deliberate penalties where the taxpayer has adopted a position contrary to HMRC s policy or guidance, but which the taxpayer is actively pursuing by way of litigation (or is standing behind appropriate pending litigation). This is surprising at is suggests that challenging HMRC s interpretation, even through making a claim, could give rise to substantial penalties if the litigation finds for HMRC. This is exacerbated when faced with time limits expiring. One member reports an example where, on tax counsel s advice, the taxpayer submitted an estimated claim, clearly and openly described as such with the basis of the estimation, in order to prevent time-limits expiring. On later refining the estimate for accuracy, which reduced the claim, the taxpayer was threatened by HMRC with a penalty for deliberately over-claiming in the first place. 5.2 The situation could be improved in a number of ways: Simplifying tax legislation. Improving the quality of guidance. Tax law can be extremely complex and hence difficult, if not impossible, for the ordinary person to understand. We understand the basic guidance on GOV.UK is written for persons with a 15 Examples include Philip Boughey v HMRC [2012] UKFTT 398 (TC), David Testa v HMRC [2013] UKFTT 151 (TC), Alexander Duncan v HMRC [2016] UKFTT 0709 (TC), Paul Ronald Steady v HMRC [2016] UKFTT 0473 (TC), Eastman v HMRC [2016] UKFTT 0527 (TC), Patrick Miller v HMRC [2016] UKFTT 0801 (TC) 16 See paragraph ax_penalties_final_report_ pdf 17 See Technical-documents/subsfinal/MOT/2018 7

8 reading age of 9; in practice this means that the information available to ordinary taxpayers can omit important points of detail to such an extent that it is actually inaccurate. Accurate guidance, on which taxpayers can rely, would reduce disputes and hence costs incurred by taxpayers and HMRC. A renewed emphasis within HMRC on the principles in HMRC s Your Charter 19 particularly the commitment to treat taxpayers as honest unless HMRC have good reason to think otherwise. Improved training of HMRC staff. Improving practices, processes and record keeping by HMRC, to support the decisions they have taken. A review of applicable time limits, so as to more closely align the rights of taxpayers to make claims and corrections, with the time limits applicable to HMRC correcting errors. 6 Q5: Is there sufficient governance over the whole of HMRC s enquiry process to ensure that HMRC s interventions are well-targeted and that taxpayers are treated fairly and professionally throughout? 6.1 No. The governance appears only to start near the end of an enquiry or investigation. This could be after an enquiry has been ongoing for over 12 months. 6.2 HMRC s CONNECT data analysis computer system compares data from a multitude of sources and helps HMRC identify cases for enquiry or investigation. This means that HMRC s efforts are generally well targeted. HMRC focuses its finite resources fairly well on high risk areas. HMRC is also generally good at identifying areas on which to focus, forming taskforces to look at specific taxpayers and working together to investigate and assess additional tax. An example of this which is ongoing is the Offshore Property Developers Taskforce. Previous taskforces included a focus on let property. 6.3 The nature of enquiries is changing and has become less collaborative and more aggressive. This has become particularly apparent in domicile enquiries, where this results in protracted correspondence often requesting irrelevant information. 6.4 There is a reasonable expectation issue regarding the information gathering process. Sometimes it can take taxpayers a while to collate information requested by HMRC, through no fault of their own, eg because a third party 20 is being slow providing copy statements, or the information has been archived etc. However, many caseworkers now take a zero-tolerance approach, so even if they are kept informed of the steps being taken to gather the information, they issue a formal Schedule 36 FA 2008 information notice with a tight deadline and penalties for non-compliance. Often such notices are vaguely addressed so take time to find their way to the right person, by which time the deadline for response is often impossibly close or passed HMRC could ask the taxpayer to sign a form authorising HMRC to write to the third party direct, but few inspectors use this power. Technical-documents/subsfinal/MOT/2018 8

9 6.5 Similarly, in complex investigations and voluntary disclosures there is a tendency for some officers in HMRC s Fraud Investigation Service to expect disclosure reports (covering multiple issues and 20 years tax etc) to be submitted in an unrealistically short timescale and/or for work to be progressing before they even communicate what issues they want covered in the report. 6.6 It is not unusual for enquiries / investigations to be prolonged and get bogged down. This happens for a multitude of reasons: either side s position becoming entrenched, HMRC not fully understanding the taxpayer s business or a particular transaction. Sometimes HMRC forms a view early on that there is only one answer (a red line ) which it then repeats, not realising that it misunderstood the facts and is therefore potentially reaching the wrong conclusion. Mediation (ADR) is a powerful and useful tool for resolving such situations and HMRC s use of it is appreciated by taxpayers and agents alike. It should be used more. A periodic internal review of ongoing disputes by a manager or independent officer might speed up the process, or help provide an alternative perspective. 6.7 Further, there are increasing reports of HMRC asking for information which they know (or should know) that they are not entitled to receive. When information is requested (either informally or in a formal Schedule 36 notice) HMRC should explain the safeguards and rights available to the taxpayer. 6.8 Similarly, when issuing a discovery assessment, HMRC fail to give any hint that there are statutory restrictions on their use. A layperson would get the impression that HMRC can simply assess the tax and not realise that HMRC have to overcome some additional hurdles. Again, this does not strike us as fair as taxpayers might not realise that they have good grounds for an appeal (eg where HMRC have to prove careless/deliberate conduct). 6.9 Generally, our members report that taxpayers are treated fairly most of the time by HMRC, including for Code of Practice 9 (suspected serious fraud investigations). Perceptions may be damaged if a taxpayer receives repeated enquiries and little extra tax is identified. However, this is rare, and most taxpayers are treated professionally by HMRC most of the time. 7 Q6: Do HMRC s governance processes provide sufficient scrutiny and assurance for clearances and approvals given to taxpayers outside the formal enquiry process. 7.1 It is unclear exactly what governance exists regarding clearances and approvals outside the formal enquiry process. More thought should be given as to how the approach to advance clearance could be made broader and more uniform. 7.2 In most instances, taxpayers simply need clarity, in order to run their business and tax investment decisions etc. It would be better for HMRC to provide clearances in a wider variety of areas. Technical-documents/subsfinal/MOT/2018 9

10 8 Acknowledgement of submission 8.1 We would be grateful if you could acknowledge safe receipt of this submission and ensure that the CIOT is included in the List of Respondents when any outcome of the consultation is published. 9 The Chartered Institute of Taxation 9.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 18,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 31 May 2018 Technical-documents/subsfinal/MOT/