A Plea to Help Darren – HMRC Powers to Raid Bank Accounts

Darren is a mythical former Inland Revenue man.  He worked in the local Tax District and was someone’s nephew or cousin or husband.  He was the man you thought of when the Inland Revenue (as all organisations do) made a mistake.  Your view was “Yes, it’s wrong, but Darren is not nasty.  Misguided sometimes, but he’s ok.  It will be sorted out fairly”.

This blog is a campaign to keep Darren safe from being bought a long Government mac and turned (against his nature) into a quasi Gestapo imposer of penalties and seizure of personal funds with no appeal for the taxpayer.

I am grateful to my loyal clients and the support given over 20 years of practice as Eaves and Co, but sometimes, I peruse my debtors list and wish that some would pay quicker.  I am sure many other business men think the same!  Perhaps, even HM Revenue and Customs?  Having said that and even knowing the hassle it takes to make a County Court claim it has never crossed my mind that I should have the right to raid a client’s bank account!  Surely that would be wrong in principle, because, by definition, any dispute would not have been fully resolved.

Quite apart from it being wrong in principle, I am absolutely certain that HMRC (like any other organisation) will make mistakes (see recent press regarding private debt collectors).  I am not saying they will do it on a vast scale, but publicity recently on tax credit debts and prior PAYE errors, suggests that mistakes can and will happen.

MPs, suppose you vote for the measure and then one of your constituents loses his business/marriage/health/commits suicide because of a raid on his wife’s account, which then leads to job losses…

Are these HMRC powers necessary or proportionate?  I think not, and commend the Taxation Articles  (May 29) “Just Say No” and “Departmental raid on the downtrodden”.

Wise HMRC personnel ought to campaign against taking too much power as well.  Adverse publicity caused by a bad case or cases (which statistically must be likely to happen) must surely have a much worse impact on overall compliance than any marginal benefit through acting to curtail current appeal rights.  The publicity contrast on the apparent abuse of power in that situation would be easy and profound.

I liked HM Inland Revenue.  They were civilised, sophisticated and well trained.  (I did used to work for them!)  I was nervous of HM Customs and Excise who seemed to be (I generalise) trained to hide behind rocks, shoot people and indulge in intimate body cavity searches – probably essential, but not a subject for normal, civilised commerce.  Then they merged and were given lots of new powers, responsibilities and centralised computer projects.

From having a foothold in every town through local Tax Districts (systematically closed some time ago) we now learn that even the centralised Help centres are to be closed down.  Inevitably, this will make HMRC appear more remote.  I think this is bad for the taxpayer, the country and indeed HMRC.

It is brought about by ‘wrong thinking’ in misnaming taxpayers as ‘customers’.  Sensible business strategies may focus on the 80-90% of core customers to make a business successful.  (Tesco are unlikely to offer tailor made Purdey shotguns at the end of a frozen food aisle).  However, HMRC has to work for all taxpayers, even those in unusual circumstances.  This is not easy, but having worked with people in various European jurisdictions my view is the general level of compliance in the UK is significantly higher than many other European states.  This is a huge benefit to society as a whole, but it is a tender beast, surviving through the public view of perceived fairness of action and local involvement.

Please do not turn Darren into a nasty man with a long dark mac raiding personal bank accounts.  HMRC do not need more powers.  They need more trained personnel to enforce existing powers consistently and fairly.

Give Darren more friends not powers!

HMRC “closing in on undeclared income”

HMRC is continuing with its anti-evasion publicity campaign, “closing in on undeclared income”, through targeted advertisements on over 3,000 billboards in public spaces.

The basic poster is perhaps tacky and to some eyes a little sinister in terms of implicit State Surveillance, but clamping down on evasion has got to show the idea is in the right place.

I was delighted to see that the website had a link saying, “Remember you can get independent advice”.

When you click on this however, you get a list consisting of:-

–          Tax Aid

–          Citizens Advice Bureau

–          GOV.UK setting up

–          Business Finance and Support

The latter entry cross refers to getting public finance for business and GOV.UK.  Bearing in mind the problem highlighted in the (inherently unauthorised) use of public finance through not paying tax, it would seem the latter two sources are inherently unsuitable for independent advice on such tax problems!

Further, assuming the tax problem is large enough to make it worthwhile having an expensive, publically funded publicity campaign, the first two organisations are also inappropriate as they focus on small matters and those who cannot afford professional advice.

As an advisor, I am forced to ask, why is there no mention of real independent tax advice, through qualified professionals?  It seems insulting to qualified professional advisors, who seek to act ethically, that they are not mentioned at all as “independent advisors” but obviously rank behind “family and friends” in terms of expertise, according to the GOV.UK article.

Bearing in mind the recent consultation on so-called ‘High Risk Tax Providers‘, it appears that there is a running theme of mistrust of the profession from HMRC which does not bode well for the future of tax advisory work.

‘Raising the Stakes on Tax Avoidance’ – A Response

For those of you who failed to find the exciting Government Consultation Document, ‘Raising the Stakes on Tax Avoidance’.  It is a fluffy, woolly document which proposes that the HMRC should have discretion to label someone as a “High Risk Tax Provider” [of Tax Avoidance] and then fine them up to £1m (plus £10,000 per day) for … well read and find out.

I am sure HMRC may mean well, but surely this is not the answer?  It is extra resources they need not new powers?

Anyway, for those now champing at the bit, here is my submission to HMRC on the Consultation.

“Please accept this as a formal response to the Consultation Document “Raising the stakes on tax avoidance.

SUMMARY

In my opinion the approach suggested is:-

a)     Wrongheaded.

b)    Risks bullying, corruption and, in the longer term, a reduction, rather than increase in tax compliance.

c)     Is an abuse of Parliamentary process, because (according to HMRC figures in Section 8 of the Document) the estimate is that there are only 20 businesses who may be affected.  Such as issue could and should be dealt with under existing powers.

d)    It risks undermining the Rule of Law, because it proposes severe sanctions (including £1m initial fine plus £10,000 per day subsequent fines) with the penalties being imposed on woolly, ill-defined criteria which are ultimately at the whim of State dictat.  This is particularly a concern because none of the alleged criteria require there to be any criminal behaviour on behalf of the so called ‘high risk promoter’.  Fines of such a size would ruin most individuals – taking their families down with them.  How can such penalties be compatible in human rights or any version of equity with recent lenient policies on penalties for theft and burglary?  Those activities are illegal.  On the other hand tax avoidance is generally thought to be legal. [Collins Dictionary 1995: tax avoidance n. reduction of tax liability by lawful methods].  How can it be appropriate to punish someone for obeying the law to a greater extent that the sanction chosen by the state for illegal attacks on an individual citizen’s property?

QUESTIONS

I           Identifying a ‘high risk promoter’.

  1. Question I incorporates a value judgement and states (in 3.16) that ‘the lack of flexibility leads to the conclusion that this would not be workable, consequently the Government does not intend to adopt this approach’.

I agree the lack of flexibility represents a problem, especially as common professional advice is (in relevant situations) to request HMRC use formal powers, so as to avoid the risk of the client suing the advisor for breach of confidentiality.  However, to then make it down to the whim of a Revenue Official whether a law abiding citizen and his/her family could be financially ruined is totally unreasonable.

  1. The ‘key individual’ concept is especially iniquitous as it could effectively lead to a person being unemployable in their field of training without having committed any crime whatsoever.
  2. Whilst the consultative document uses the currently fashionable term ‘transparent’, this does not take account of:-

a)     The risk that the client may not be truthful to the advisor, so what looks like a reasonable assumption/conclusion to him may not tie in with all the facts – especially events occurring after his input.

b)    The fact that any commentary on planning must, by definition incorporate assumption on future events.

  1. A key risk of a taxpayer using an avoidance scheme is that it does not work.  It is the role of HMRC to identify such schemes and challenge them.  If they are quickly shown to fail taxpayers will not waste money on purchasing them!  I agree they should be diligent and do this.  They need extra resources, not extra theoretical powers
  2. If (Para 3.6) the schemes have negligible chance of working and rely on ‘concealment and mis-description of elements’ then surely they are fraudulent, representing illegal tax evasion.  This is not avoidance and should be subject to separate penalties/criminal sanctions.  However, HMRC does itself no favours, nor any to the debate on tax compliance to mix up, as it seems to deliberately, lawful and unlawful behaviour.
  3. I agree that taxpayers should have the right to see the pros and cons of technical advice and if necessary, the right to show that to different advisors.  Advisors (and HMRC) should then be obliged to debate the merits of any technical issue in a reasonable timescale in full light of the facts properly disclosed.  Similarly though the client should be entitled to claim professional privilege in terms of the advice elements.

 I am conscious in this context that when asking for data under the Freedom of Information Act I was told that keeping the advice of legal counsel secret was vital to the administration of justice and good governance.  If a taxpayer is not allowed to see the advice given to public servants he has effectively paid for via taxation in the context of a ‘consultative document’, why should the State have the right to see advice given to him  specifically with regard to his own affairs, to his possible prejudice?

  1. Although penalties are proposed for doing ‘it’, tax avoidance is not even defined here.  However, readers considering the current provisions should recognise that the recent comments by Jamie Oliver promoting home made healthy food, would (under the last published HMRC definition of tax avoidance) amount to ‘tax avoidance’.  This is because he was promoting zero rated food purchases rather than take away food liable to VAT at 20%.

II          High risk promoter regime

  1. Without identifying a proper definition of High Risk Promoter and Tax Avoidance it is totally inappropriate to have a ‘regime’ at all.
  2. A better route may be to consider HMRC ‘endorsing’ professional advice by advertising those regulated by ICAEW, CIOT, ACCA etc., are subject to proper professional standards and then naming those who failed to live up to it – within the normal and limited restrictions imposed by libel and defamation.  It would only seem fair that a business so challenged should have access to those standard defences.
  3. There should be no need for extra time limits.  If the time limits are not long enough then that should be addressed generally.  HMRC needs sufficient resources generally to carry on, but that compliance effort should be targeted widely and fairly.  By all means focus sensibly on perceived targets and risk areas.  It is sensible.  However, all should be equal before the law and it is not just this week’s ‘Group Hate’ Victim.  Others may turn out to be equally naughty.

III         Penalties for Users of Failed Schemes

  1. My experience both as an advisor and Inspector of Taxes is that people do not like the risk of litigation, let alone the consequences of losing.  If a judicial decision goes against them, or their technical stance most well advised litigants will be only too willing to drop the case and ‘amend’ their returns.  I would therefore be surprised if there was evidence that taxpayers were simply ‘stringing things out’, because of the resulting high professional cost to them.
  2. It follows that the risks of failure with costs being awarded against them are already a dis-incentive to taxpayers, in which case there should be no requirement for a ‘penalty’.  This would just seem to be an arbitrary risk to be imposed by HMRC for going second, enabling them to bully taxpayers into settling where in law they may have valid distinguishing features.

CONCLUSION

I used the words ‘wrongheaded’ to describe the proposals.  In my view this is because it is seeking statutory measures to try to solve a problem of resources.  HMRC does not need more powers, it needs the personnel, resources and training to impose the powers it already has.

In the 17th Century Governments chased lawless behaviour by imposing greater and greater sentences on people without really addressing the probability of being caught.  It resulted in the saying that someone ‘might as well be hung for a sheep as a lamb’, because the sentences got so arbitrary that sheep stealing was a capital offence.  Tax compliance is a delicate flower.  It has been nurtured over time by HMRC fairness and the associated co-operation resulting from qualified professionals.  It is never going to be perfect, but generally I believe the profession wishes to continue to help by encouraging good compliance.  However, this will not happen if they are bullied out of explaining reliefs and the ‘upside’ of compliance.  That is another way of interpreting the tendency for professionals to avoid giving tax advice.

I think it unlikely there would be a change of behaviour by diligent professionals.  It will follow the financial services advice model of 20 years ago, where independent professionals will be excluded with the result that clients will go to the unscrupulous.  Reality in the commercial world being as it is, I fear clients would be likely to refuse to pay fees to learn what they are not allowed to do, without associated sensible advice on what they may do lawfully.

Whilst I still have admiration for many HMRC staff, the fact remains it has suffered and is suffering from a lack of trained staff, and people who are authorised to take decisions.  My colleague was on the phone for 1 hour this morning (without getting through) to ask why we were being threatened with penalties for ‘failing’ to file a form which has already been filed.  Currently, I have more than 1 case where we have written to HMRC to try to pay extra tax due but have been ignored or fobbed off for over a year.  Give HMRC the resources to do their job properly.  Do not impose extra arbitrary penalties and lose the sympathy of the majority.  When HMRC think it ‘reasonable’ to seek penalties for a ‘late return’ when it was actually lodged 10 days early as they did recently [Estate of Teresa Rosenbaum (deceased) 2013].  I fear they risk moving the rather fickle mood of public opinion against them.  It is an example of a bullying bureaucratic mind set which promotes a natural fear that, if not now, at some stage in the future, the arbitrary powers envisaged by the Consultative Document may be misused – to the detriment of us all as free citizens supposedly equal under the law.

I recommend the provisions are abandoned.  Use the money to train some Inspectors.

Paul Eaves”

Tax Advisors Beware! : Supreme Court Decision abolishes ‘Get out of Jail Free’ card

Many Accountants and Tax Advisors will have a number of Trusts as their clients.  They may or may not have known that the ‘Rule in Hastings-Bass’ referred to a legal defence Trustees could use to prevent HMRC collecting tax on steps which resulted in extra tax liabilities [NB:  Those who thought the Hastings-Bass rule was to do with the offerings of a South Coast pub should read on to protect their PI insurance].  Effectively, the Hastings-Bass rule was used as a way to unwind actions which had unexpected, adverse tax effects.  Essentially, it was a ‘Get out of Jail Free’ card.

Trusts are often misunderstood.  They have suffered recent adverse publicity, but they can still serve valuable roles in protecting minors, the vulnerable and inter-generational family wealth.  This is the reason many Trustees may only be involved in one Trust, and many Advisors will only have a few on their client list.  Such diversity is helpful, in my opinion, because it keeps those most affected by the outcome closely involved in the decision making process.  The underlying personal and commercial issues are generally more important, and those who are close can give a more balanced view, than just technical input.  It does not stop the latter being important though.

This month the Supreme Court issued its judgement in Futter and Another v The Commissioners for HM Revenue and Customs and Pitt and Another v The Commissioners for HM Revenue and Customs.  They were disparaging about the Hastings-Bass rule and Trustees claiming that they had acted in an ‘un-Trustee like fashion’ such that they should be able to void as a ‘mistake’ actions which gave rise to an unexpected tax bill.  The Supreme Court compared such a defence with the lack of relief which would be due to an individual beneficial owner of property who may have made a similar mistake.

The Court Opinion is elegantly written but raises a number of potentially complex issues for advisors.  Those who may be affected should read the judgement carefully.  Perhaps the first thing which springs to mind though is that Trustees and Advisors need to protect their own interests (as well as the Trusts) by ensuring they have evidence of obtaining appropriate professional advice.

HMRC: Reasonable Excuses and Suspended Penalties

Many years ago, as a young Inspector of Taxes, my District Inspector taught me not to take a harsh line on “late” submissions on behalf of the Inland Revenue.  His policy was that it was not the job of the Government to fine or penalise citizens if they were broadly trying to comply with their tax obligations but were slightly late in doing so.  The thinking behind this idea was that people were far more likely to be co-operative and compliant – factors key in having a capable and cost effective tax system – if citizens felt they were dealing with people who were reasonable and flexible, rather than hide bound by bureaucratic rules.

Perhaps as a result of such benevolent views, Accountants rarely thought about questions of Revenue powers and procedures, trusting the administrative reasonableness of the ‘Powers that be’.  It appears to me that such flexibility and judgement has been eroded from the Revenue lexicon.  This may be because of a desire to be more consistent, but in any event Accountants should help clients by considering carefully whether penalties have been correctly and legally levied or whether they can be eliminated or mitigated via concepts such as reasonable excuse or the use of suspended penalties.

Examples of cases where the Revenue line taken to the courts could appear harsh include;-

Cotter, where the Revenue sought to deny a taxpayer the right to claim a stand over of collection of tax which was in dispute pending resolution of the appeal.  The taxpayer won in the Court of Appeal, but HMRC are now taking it to the Supreme Court, demonstrating their effective limitless resources compared to individual taxpayers.

Business Women’s Coaching, where the taxpayer was fined for filing a return due by 31 December on 11 February.  The return in question was updated as originally it had been submitted on 9 December, but was then rejected as being incomplete.  The taxpayers did not advance a ‘reasonable excuse’ so their appeal was rejected, but would taxpayers consider HMRC’s behaviour as reasonable and proportionate in imposing a fine on being just 6 weeks late in adding extra material to a return originally submitted in time?

F Weerasinghe, where an accountant had lost the client’s papers and HMRC then rejected updated figures from a new accountant on the basis that they were too late.  The taxpayer won on a technicality because the tribunal held the time limits did not apply, because HMRC had not issued a formal demand for the Return in question.  They also found that the taxpayers figures appeared more reliable than those calculated by HMRC.

Hard cases make bad law and HMRC have a very difficult job to do.  It is a question of balance but perhaps it may be worth reflecting on the original responsibility of the Inland Revenue for the “care and management” of the tax system in Section 1 of the Taxes Management act 1970.  This was changed in 2005 to “collection and management”.  Maybe a little more “care” to mitigate pure “collection” may pay dividends in keeping taxpayers happy and compliant?

The other lesson is that accountants should be helping their clients by seeking to identify circumstances winthin the scope of “reasonable excuse” or the regime for suspending penalties.