Government responds to Lords committee reports on MTD and HMRC powers

The government has responded to two reports published by the Lords economic affairs Finance Bill sub-committee in November: The powers of HMRC: treating taxpayers fairly; and Making tax digital for VAT: treating small businesses fairly.

In his letter dated 22 January, financial secretary to the Treasury, Mel Stride, told the sub-committee chair, Lord Forsyth of Drumlean, that HMRC will look to strengthen the effectiveness of taxpayer safeguards, including the adjudicator’s office, the new ‘customer experience committee’ and the ‘compliance reform forum’. Somewhat surprisingly, the letter also stated that the government had accepted ‘the majority’ of the Finance Bill sub-committee’s recommendations ‘in whole or in part’.

Responses to the report, The powers of HMRC: treating taxpayers fairly (bit.ly/2MRDI1p) may be summarised as follows.

On the approach to tax avoidance generally, the government did not accept the sub-committee’s suggestion that it should draw a clearer distinction between ‘deliberate and contrived’ tax avoidance and that which is merely the result of ‘uninformed or naive decisions’ by unrepresented taxpayers. The response states that taxpayers’ arrangements ‘are either effective or not under legislation passed by Parliament. The motives of those engaging in them does not affect that.’ However, HMRC does take taxpayer behaviour into account in relation to penalties.

Concerning new powers, the government rejected calls to:

• reconsider the extended time limits for assessing offshore tax matters in fresh engagement with the tax profession; and
• withdraw proposals to allow HMRC to issue third-party information notices without seeking permission from the tax tribunal, as set out in the consultation on HMRC’s civil information powers (the consultation closed on 2 October and the government has yet to publish its summary of responses).

Concerning the loan charge, the government accepted the recommendation that HMRC give more publicity to action it is taking against promoters of disguised remuneration schemes, by increasing awareness of its ‘spotlight’ publications and use of social media.

Other recommendations on the loan charge were rejected, including:

• requiring HMRC to make a clear public statement each time it begins investigating a potential tax avoidance scheme;
• excluding from the charge loans made in years where taxpayers have disclosed their participation, or which would otherwise have been ‘closed’; and
• reviewing all loan charge cases solely on grounds of the individual’s ability to pay.

The government also refuted the sub-committee’s accusations of unreasonable delay by HMRC in communicating effectively with some users of such schemes, of delaying legislation and of failing to progress enquiries into individuals’ tax affairs. The response pointed out that, since November 2017, HMRC has written to over 40,000 individuals who may be affected by the loan charge.

Concerning taxpayer safeguards, the government accepted the sub-committee’s recommendation to publicise the statutory review process more widely.

It rejected other recommendations, including:

• introducing a right of appeal against accelerated payment notices and follower notices, as well as against the exercise of a new or extended power;
• giving the First-tier Tribunal the power to conduct judicial reviews; and
• restricting ‘naming and shaming’ to those who have broken the law.

Concerning the tax policy process, the government ‘noted’ the recommendation to evaluate all powers granted to HMRC since the 2012 powers review and publish the findings. On HMRC specifically, the government accepted recommendations:

• to consider publicising the role of the adjudicator earlier in the complaints process; and
• making use of the ‘customer experience committee’ and amendments to the Charter.

The government rejected the need for an independent review of HMRC resources and for a further powers review, since ‘there has been no fundamental change to the operation of the Department which would justify a further review at this time’.

Responses to the report, Making tax digital for VAT: treating small businesses fairly (bit.ly/2Gosdxn) may be summarised as follows.

• The government rejected the sub-committee’s call to delay the introduction of mandatory MTD for VAT by at least one year, saying it had ‘no plans’ for any further deferral beyond April 2019.
• The government is sticking to its plan not to extend the scope of mandatory MTD to other taxes before 2020, but is not minded to follow the sub-committee’s recommendation to wait until at least April 2022.
• In response to the sub-committee’s recommendation that HMRC develop guidance for claiming digital exemption in conjunction with the representative bodies and notify taxpayers in writing, the government said: ‘HMRC will take a decision on what it considers to be the most appropriate method and format for sharing guidance with stakeholders’; and that guidance would contain an ‘appropriate level of detail’.
• The government accepted the recommendation for more support for businesses to choose software and said HMRC will shortly launch an enhanced version of its ‘software choices’ web page, allowing taxpayers to browse a number of specific features to help them generate a ‘shortlist’ of software products tailored to their needs.
• The government rejected calls to extend the period of grace for the two-stage late payment penalty system from 15 to 30 days, reiterating its view that the new approach, whereby penalties start at half the full rate 15 days from the due date with full penalties applying after 30 days, ‘provides a proportionate balance’.
• The government also rejected calls to reduce the two-year time limit for HMRC to assess penalties to no more than one year, and to remove restrictions on VAT repayment interest.
• The sub-committee’s recommendation for a revised impact assessment was rejected, as the government believes its impact assessment published in December 2017 remains ‘a credible estimate of costs and savings for the VAT businesses that will be mandated from April 2019’.

The financial secretary’s letter of 22 January also contained a reply to a letter of 16 January from Lord Forsyth, asking for further information about the review of the loan charge prompted by the Finance Bill amendment agreed on 8 January. Lord Forsyth’s letter asked the minister to clarify the following details about the review:

• the terms of reference;
• who will undertake the review;
• when it will start; and
• when the conclusions will be published.

The financial secretary confirmed that the chancellor would present his report ‘no later than’ 30 March, as required by the amendment.

Lord Forsyth also asked the minister to provide details of how individuals affected by the extension of offshore time limits and the loan charge will be able to give evidence to the review. Stride replied that: ‘HMRC engages with those affected by the loan charge as part of its normal business, and will continue to do so.’

The letter repeated the sub-committee’s view that Treasury ministers should be required to attend sub-committee evidence sessions ‘when there are issues that cannot satisfactorily be answered by officials’. Stride has declined several invitations from the sub-committee since October.

See Lords economic affairs committee publications at bit.ly/2SeRIIH.