On 8 June 2021, the House of Lords is due to debate the following motion:
Lord Bridges of Headley to move that this House takes note of the Report from the Economic Affairs Committee, ‘New powers for HMRC: fair and proportionate?’ (4th Report, Session 2019–21, HL Paper 198).
What are these new powers?
As part of the draft Finance Bill 2021, published 22 July 2020, the Government included proposed new powers in a range of areas designed to tackle tax avoidance and improve tax compliance. Ministers also subsequently announced a further measure on uncertain tax treatment that the Government later said would be delayed until 2022. These proposals included:
- tackling promoters of tax avoidance (including the related calls for evidence on raising standards in the tax advice market and disguised remuneration schemes);
- amendments to HMRC’s civil information powers;
- a new requirement on large businesses to notify HMRC of an uncertain tax treatment (the reform is now delayed until 2022); and
- New tax checks on licence renewal applications.
Specifically, the measures aimed to tackle the challenges posed by those involved in the marketing and promotion of tax avoidance schemes. They also concerned the related issue of the efficacy of the Loan Charge, a measure designed to tackle a form of tax avoidance known as disguised remuneration.
[These measures include] a new power for HMRC to issue a Financial Institution Notice (FIN) requiring financial institutions to provide information about a specific taxpayer to HMRC when requested. The information will be used for checking the tax position of the taxpayer and for debt collection purposes. HMRC already has powers to obtain such information for checking a person’s tax position (though not for debt collection purposes), but at present it first has to seek the agreement of the taxpayer or the approval of the tax tribunal. The proposed measure would remove that safeguard, except in cases where HMRC wishes to obtain the information from a financial institution without the taxpayer being aware of it.
An ‘uncertain tax treatment’ is one where there is more than one way to interpret or apply tax legislation in relation to a transaction. A business may, for example, choose to interpret a transaction in a way which is contrary to HMRC’s known position, or when dealing with a new or novel product or service, that results in tax losses caused by them adopting tax treatments that do not stand up to legal scrutiny.
Finally, a new measure proposed in the draft Finance Bill would require a person applying to renew a licence to drive a private hire vehicle (taxi or minicab), operate a private hire business, or carry on a scrap metal business to undergo a tax check. Unless this check is successfully completed, the licensing authority would not consider the application for renewal.
The House of Lords Economic Affairs Finance Bill subcommittee noted that, although these measures are generally standalone in their objectives, they each involved creating new powers for HMRC or expanding the scope of existing HMRC powers. In addition, they link to further steps being taken by HMRC to address what is commonly referred to as the ‘tax gap’. (The amount of tax paid to HMRC versus what, in theory, should be paid.)
In its report, published 19 December 2020, the House of Lords Economic Affairs Finance Bill Subcommittee concluded that:
- Whilst the committee welcomed ministers’ intention to take action against the hard core of tax avoidance promoters, it urged to the Government to “redouble its efforts in this respect, and to take further measures to combat the continued proliferation of new schemes”. The committee also highlighted the vulnerability of lower income taxpayers to these schemes, and their continued use by some employment intermediaries.
- On proposals for amendments to HMRC’s civil information powers, the committee said it was “very concerned about the removal of important taxpayer safeguards for information requests”, particularly the need to request permission from the tax tribunal. The committee added that it believed the Government’s reasoning behind these proposals was “flawed and not supported by evidence”. The committee called for the tribunal approval requirement to remain and for HMRC to undertake a full review of the information request process to find alternative ways in which it could be streamlined.
- On plans for notification of uncertain tax treatments, the committee welcomed the delay of his move until 2022, saying it was clear that “the plans were poorly thought out and difficult to understand and apply in practice”. The committee added that it was concerned that the Government only appears to have recognised that there were significant problems with the measure after committing to legislate in 2021. It further urged the Government to look again at the cost of compliance and to consider whether the measure should apply as widely as envisaged.
- Finally, on proposals for new tax checks for licence renewal applications, the committee said it was worried about potential ‘mission creep’ in the proposals which risks them going beyond a simple check for tax registration. It added that should these checks result in more traders becoming unlicensed in order to avoid them, this could pose risks to the public.
The committee also developed a number of cross-cutting conclusions, including that the Government should “take more care to abide by basic policy principles when proposing new or extended powers for HMRC”. It suggested in addition that HMRC was not making full use of its existing powers. The committee also noted what it called “a pattern of new HMRC powers being disproportionate, poorly targeted and without sufficient safeguards”. In some cases, the committee argued that expansive new powers were being granted to deal with problems that appear to be marginal and only affecting a small minority, increasing compliance costs for everyone.
The Government published its response to the committee’s findings on 19 February 2021, in which it said it had accepted a number of the committee’s recommendations.
On the issue of tax avoidance, ministers said the Government remained committed to tackling those who promote tax avoidance schemes and noted HMRC uses a range of powers to achieve this, including the promoters of tax avoidance schemes (POTAS) legislation. The response noted that POTAS is designed to encourage promoters—generally someone who designs or markets the tax avoidance scheme or is responsible for its organisation—to change their behaviour voluntarily or face an escalating series of sanctions. Ministers added that the effectiveness of the POTAS legislation is kept under constant review, including through a recent consultation exercise.
On the issue of information-sharing, the Government rejected the committee’s assertion that the requirement for tribunal approval for a third-party information request to a financial institution should be retained. Ministers said that the UK played a “leading role” in promoting international tax cooperation and transparency, and said that it would be unable to meet the international standard for exchange of information if the need for tribunal (or taxpayer) approval for a third party notice remained in place. In contrast, the Government said the proposed financial institution notice (FIN) will allow the UK to meet these standards, while providing appropriate safeguards for taxpayers, and is in line with practice in all other G20 countries. The Government further noted that tribunal approval will still be required in any case where the taxpayer is not given a copy of the FIN.
About uncertain tax treatment, the Government also rejected the committee’s assertion that it should issue a new stage 1 consultation, so it can work with business and representative bodies to develop a more targeted, proportionate measure than that proposed. Ministers said that HMRC had been already discussing a range of potential changes to the measure with stakeholders, aimed at making it clearer, more targeted, and more proportionate.
Finally, on the subject of license renewals, the Government said it had taken extensive views from stakeholders before reaching a decision on these measures, the majority of whom it said have supported the principle of applying tax checks to licensing, provided that any administrative burden was minimised. Ministers added that representative groups such as the Local Government Association and trade representatives had been actively involved in this process. The response added that taxpayer representatives had suggested this could be a valuable tool in tackling non-compliance. It added that licensing body representatives had said the checks could be incorporated into licensing relatively simply. Some representative groups had said they welcomed the check as a way of supporting compliance in the relevant sectors.
On the committee’s cross-cutting recommendations, the Government said it was committed to early and continuing engagement on tax changes and to exploring new ways of broadening public engagement with development of the tax system. Ministers said the Government already had a standard practice of providing detailed analysis to explain the purpose of any new proposals, via the publication of tax information and impact notes (TIINs) for tax policy changes.
The response added that the Government continued to seek opportunities to find how the consultation approach can be more effective and how engagement can provide greater insight to the effects of a policy change. In addition, HMRC’s guidance would be updated to further emphasise the importance of targeting tax legislation on the taxpayers it was intended to affect.
Budget 2021 and government consultations
As part of the Budget 2021, delivered by the chancellor on 3 March 2021, the Government confirmed it would go ahead with measures designed to address tax avoidance. As stated in the accompanying document, ‘Budget 2021: Overview of Tax Legislation and Rates (OOTLAR)’, the Government said:
As announced at Budget 2020 and following consultation, the Government will legislate in Finance Bill 2021 to take further action against those who promote and market tax avoidance schemes. The legislation, which will take effect following Royal Assent, will:
- Strengthen information powers for HMRC’s existing regime to tackle enablers of tax avoidance schemes and ensure enabler penalties are issued sooner for multi-user schemes.
- Enable HMRC to act promptly where promoters fail to disclose their avoidance schemes under the Disclosure of Tax Avoidance Scheme and Disclosure of VAT and other Indirect Taxes (DOTAS and DASVOIT) regimes.
- Allow HMRC to stop promoters from marketing and selling avoidance schemes earlier and ensure promoters fulfil their obligations under the Promoters of Tax Avoidance Schemes (POTAS) regime.
- Make further technical amendments to the POTAS regime, so the regime can continue to operate effectively.
- Make additional changes to the General Anti-Abuse Rule (GAAR) so it can be used as intended to tackle avoidance using partnerships.
That document also said on relicensing that:
As announced at Budget 2020, the government will legislate in Finance Bill 2021 to make the renewal of certain licences conditional on applicants completing checks that confirm they are appropriately registered for tax.
Those licences are to:
- Drive taxis and private hire vehicles (for example minicabs).
- Operate private hire vehicle firms.
- Deal in scrap metal.
Licensing bodies will have to obtain confirmation that an applicant has completed the check before making a decision on their renewal application.
The measure will make it more difficult for non-compliant traders to operate in the hidden economy and help level the playing field for the compliant majority.
These changes will take effect in England and Wales from 4 April 2022.
Since the publication of the budget and the Finance Bill, the Government has also continued or concluded consultation exercises on various measures related to these proposals. For example:
- The summary of responses to its call for evidence on tackling disguised remuneration tax avoidance was published on 23 March 2021.
- A second consultation on notification of uncertain tax treatment by large businesses has also been launched, to conclude shortly on 1 June 2021.
- House of Lords Economic Affairs Finance Bill Subcommittee, New Powers for HMRC: Fair and Proportionate?, 19 December 2020, HL Paper 198 of session 2019–21
- HM Treasury, Government Response to the Sub-Committee’s Report, New Powers for HMRC: Fair and Proportionate?, 19 February 2021
- House of Lords Library, ‘Finance Bill’ 3 June 2021.
Cover image from Gov.uk.
This article was updated on 4 June 2021 to include the link to the briefing for the Finance Bill.