Power to the people?

KEY POINTS

• HMRC powers are the most important issue for advisers.
• Will HMRC use their new powers properly?
• Try the new internal review process for appeals.
• Right to refuse entry.
• Do the new powers work? Please tell us.

Here is your starter for ten. Are HMRC’s new powers:

(a) A massive and completely unwarranted attack on the personal privacy of taxpayers?

(b) A severe restriction on the ability of HMRC’s staff to do their job properly, which will result in taxpayers getting away with it time and time again?

(c) A reasonable, balanced package which attempts to balance the rights of the state with the rights of the individual?

(d) A mixture of all of the above?

(e) None of the above?

(f) What new powers?

If you have answered (f), I suggest that you might have picked up the wrong magazine in the dentist’s waiting room and that perhaps you should find something else to read.

But answers (a) to (e) are all ones which I have heard recently, and in this article I want to explore a little just why we don’t yet have any sort of consensus on what the impact of the new powers will be.

Drawing the map

The rights and responsibilities of the state and the taxpayer in relation to tax matters is the most important issue that advisers and HMRC staff have to deal with.

Advisers in particular have a crucial role to play in helping clients understand the new compliance landscape, but have advisers really grasped just how much has changed? I do have some serious concerns here.

One of my key objectives in my year as CIOT president is to do what I can to help draw the map of that new landscape.

That is a tall order (and those who know me will know that telling left from right, let alone map reading, is not among my skills) but it is one which cannot be shirked.

I have been talking to a lot of people – agents, clients and HMRC staff – recently about powers and I have found that the general level of understanding about what is actually happening is not high.

I’ve not yet met anybody who answered (f) yet, but I have met many people within the profession who have only the sketchiest idea of what is happening.

Tomorrow is another day

Why is this? Well, partly it is a consequence of the very open way in which the new powers have been introduced. The project has proceeded very methodically and each step has been the subject of extensive consultation.

While I applaud this as a good example of what can be achieved through proper dialogue, it has meant that, for those who have not been directly involved, the process has being going on for so long that it has faded into the middle distance.

The general attitude has been ‘we know this is important but it is a long way off and we struggle to keep up with what happened last week’. This is only natural but it does mean that most people are going to have to get up to speed very quickly with the new regime.

There is also a question of balance. If people have learned anything about the powers it has been in the area of penalties. The tax investigations specialists have, quite rightly, been pushing awareness of the new penalty regime very heavily.

I have no problem with that, but penalties are only a small part of the new geography and few general advisers will see more than one or two penalties a year. They are, by contrast, likely to be dealing with the new interventions, the information notices and the other compliance powers on a routine basis.

The changes in these areas are very significant but perhaps less worthy of headlines, and therefore for most people they have, until very recently, hardly entered the consciousness.

Letting go of the train set

We are now at a very interesting stage in the process. The powers team within HMRC together with the private sector colleagues who have been working closely with them throughout the project are now having to hand over the project to the people who are going to have to operate it.

That is bound to create some interesting tensions. In my mind, it is rather similar to what happens when parents lovingly spend time building a new train set layout for their children, complete with sidings, detours and characterful background scenery, to find that their children are only interested in seeing who can create the most spectacular train crash.

Will the same thing happen here? Will HMRC staff and tax agents only be interested in creating mayhem? I hope not, but I would make the point that crashes have many causes.

While it is important that the profession is vigilant in ensuring that HMRC do not create crashes we have to recognise that agents and advisers (to say nothing of taxpayers) also have the capacity to make things go off the rails.

Let’s all hope that the new powers do not degenerate into a contest to see who can create the most carnage in the shortest amount of time.

Safeguards to be grasped

One of the key design features of the new regime is that safeguards for taxpayers should be provided against each HMRC action and that those safeguards should be clear and unambiguous. I think that, by and large, that principle has been properly carried through into the legislation.

But that is only part of the answer. Safeguards are of no use unless people both understand and use them. It is going to take us all, HMRC included, some time to appreciate how these safeguards work and when it will be appropriate to use them.

It is important that the safeguards are actually used: after all the profession put a lot of effort into ensuring that safeguards were part of the package. Is there a danger that that effort could be wasted?

I have in mind here what happened with closure notices under self assessment.

The ability to seek a closure notice was regarded from the start as an important right for taxpayers and it is my understanding that when self assessment was being planned, HMRC put significant resources into being able to deal with what they expected to a large number of closure notice requests, only to find that in reality very few such requests were made.

The process then became something quite different. Instead of being routine, closure notices became largely a weapon of last resort and taxpayers shied away from using them.

There have also been persistent rumours that, in some cases, an application for a closure notice has led to an HMRC raid under TMA 1970, s 20C.

I am not in a position to comment on whether or not these rumours are true (or whether there were special circumstances involved), but the mere fact that such rumours circulate show how the very sensible concept of the closure notice has been transformed into something which occupies a very different place in the conduct of tax administration.

The same thing could easily happen with the new internal review procedure. Several people have already suggested to me that an application for internal review will be a waste of time because HMRC will always close ranks behind their original decision.

This could turn out to be exactly what happens – though I hope not and I am encouraged by the efforts that HMRC seem to be making to ensure that the process is robust and independent – but it would be wrong to condemn the system without giving it a chance to demonstrate its usefulness. That would completely negate the whole point of creating safeguards.

I hope that in a year’s time I will be able to go back to HMRC and say ‘lots of people have used the internal review and although not everybody has had their decision changed they do accept that they have had a fair hearing’.

But if I cannot do that I would far rather be able to say ‘lots of people have used the internal review and they have all found it a waste of time’ than ‘nobody has used it and therefore we are unable to judge its effectiveness’.

At least if it were tested and found wanting, there is a chance that changes could be made. If nobody uses it, there is no chance of making improvements.

I make the point about this particular safeguard, but it applies equally to all of them. Let’s test the safeguards in appropriate circumstances and ensure that they work as they should and give the balance of rights and responsibilities that they were designed to.

Is anyone at home?

The prospect of visits to business premises is probably the most contentious part of the new regime, especially when those business premises also double up as the family home.

I completely understand this: the prospect of welcoming a group of HMRC’s finest into my home first thing in the morning is not something which would thrill me. So it is absolutely right that this area is given the closest scrutiny.

However, the more I look at the rules and guidance here the more I wonder if in fact these new provisions actually amount to very much.

Working through the legislation on its own certainly appears to suggest that HMRC have very considerable powers to make inspection visits, including in appropriate circumstances visits without any prior notice.

But HMRC’s Compliance Handbook Manual at CH25650 states:

‘The person whose tax position you are checking … has the right to refuse you entry. It cannot be overridden so a person retains the right to refuse entry to their property even when an officer has a right to enter and inspect with tribunal approval.’

This confused me when I first read it (and I am not alone in this) because nothing in the legislation refers to this right to refuse entry.

The position, as I now understand it, is that the right to inspect does not extend to the right of entry; that is a much more serious matter which can only be dealt with under the criminal code.

So even when an officer has been given access to the premises he can be asked to leave at any time and HMRC’s instructions make it clear that the officer must leave straight away.

Have we all been panicking unduly? Is there in fact nothing to be concerned about here at all? I wouldn’t go that far. Clearly it is going to be vital that officers who are conducting inspection visits do properly explain the position to taxpayers and inform them of their rights.

We are assured by HMRC that this will be the position and I have no reason to doubt this.

But there is a world of difference between a hurried explanation on the doorstep while officers are already halfway through the door and a proper reasoned and calm explanation of rights which makes it clear to taxpayers that they have an absolute right to refuse entry.

The more I think about it the more I wonder if, if ironically, this power of inspection is really designed as a taxpayer protection measure: to put some framework round the existing practice of inspection by HMRC staff and to stop them making arbitrary and unreasonable requests?

This new power might actually merit an answer (b) rather than (a). Perhaps I would not actually go that far, but things are not always as they first seem. We need to see how it all works out.

Feedback

Which brings me conveniently to my last point. Things are bound to go wrong in the initial stages of the new regime. HMRC officers will make procedural errors or seek to use powers that are not open to them.

Similarly, some taxpayers and agents will continue to respond as if the old powers were still in place or fail to understand the new obligations which are imposed on them. That is an inevitable consequence of major change.

The important thing is that we learn from those mistakes and this can only be done if we know about them.

So it will be vital that, in the initial years of the new powers, there is good sharing of information as to how they are working in practice. If something goes badly wrong it is bound to hit the headlines, but we need to know whether it is one case in a thousand or one in three.

A lot of effort is, quite rightly, being put into capturing information. HMRC has set up an oversight forum, of which I am a member, to track the way that the implementation is happening and the CIOT, as with other professional bodies, is setting up mechanisms which will allow advisers to feedback information about practical experiences of the powers in action.

As I said at the beginning of this article, there is no more important issue that tax professionals will face over the next years than the way that the new powers will operate.

Whatever answer you gave to my question at the start of the article, you and your clients will still want the new powers to work effectively.

Do take the opportunity to give feedback. Without it, the chance of making any effective improvements will be lost.

Andrew Hubbard is the president of the Chartered Institute of Taxation and national tax policy director at Tenon.

Issue: 4206 / Categories: Comment & Analysis , HMRC powers , Admin