The Tax Administration Framework Review: enquiry and assessment powers, penalties, safeguards

This article was first published on the Bloomsbury Professional Blog on 14 March 2024.

HMRC recently issued a new consultation on revamping its enquiry and assessment powers, penalty regimes and taxpayer safeguards. Throughout the consultation a few key themes crop up; simplification and digitalisation.

Simplification

Simplification comes up in relation to penalties, where HMRC suggest aligning the penalty regimes across taxes and also in relation to the enquiry and assessment powers. In relation to the latter two, simplification it is suggested could relate to the alignment of enquiry and assessment powers across taxes as well as aligning the two regimes to make the rules simpler for tax agents and taxpayers to understand and for HMRC to administer.

Currently, HMRC has (broadly speaking) one year to open an enquiry or four, six or 20 years to raise assessments. The time limits for assessments are dependent on taxpayer behaviour – reasonable, careless or deliberate – and also the source (country) of undeclared income/gains. In terms of simplification, the consultation suggests

• redesigning the assessment powers to remove behaviour based approach and instead apply strict time limits;
• aligning the assessment powers across different taxes.

HMRC’s concern is that determining behaviour takes a lot of time. This along with the whether a discovery assessment is ‘valid’ may both be subjective conditions and cases ‘often end in litigation’. Where assessments need to be issued within one year of of becoming aware of the facts, HMRC is concerned that the degree of subjectivity leaves assessments open to challenge even where a tax liability has been identified and the figures themselves are not challenged.

Whilst simplification of the tax system generally is a good aim, we must be careful that taxpayer safeguards are not eroded in the process. The legislation as drafted builds in subjectivity in certain areas to protect taxpayers and to make the system as fair as possible based on certain parameters. For example, at the time the legislation was drafted it must have been considered important to penalise those who deliberately under-declare taxes much more than those who took reasonable care. Subjectivity in conditions like behaviour allows both parties to put their cases forward, which is a requirement for justice to be served. The fact that cases take time to come to tribunal is more a reflection of the system than the legislation.

Currently, HMRC has [broadly speaking] one year to open an enquiry. However, if no enquiry is opened, HMRC can only raise an assessment is information is ‘discovered’ and various timelines are followed. The devil of course is in the detail. While the premise for simplifying the enquiry and investigations process is good, it is less so if HMRC consider simplification to be (e.g.) removing the assessment legislation and extending the enquiry time limits.

The consultation states that the legislation as it stands creates ‘costs for taxpayers, agents and HMRC’ and HMRC raises concerns about the ‘exploitation’ of safeguards. Where HMRC considers that ‘Some taxpayers and agents seek to exploit aspects of HMRC’s application of its discovery powers’, others may consider the same actions to be protecting the taxpayer from HMRC’s misuse of its powers. For example, where the validity of a discovery assessment is in doubt, as the department raising the assessment, it should be within HMRC’s capability to ensure the assessment is valid beyond doubt.

The time limits and other requirements for raising assessments are there to protect taxpayers. Whilst there will always be a minority seeking to misapply legislation or deliberately obfuscate or prolong matters by taking clearly unwinnable cases to Tribunal, the majority of taxpayers rely on the legislation to protect them.

The consultation suggests alignment of penalties across different regimes. Again, this seems a reasonable suggestion as long as the alignment does not then result in harsher penalties across the board.

Simplification in and of itself is a good objective provided that taxpayer safeguards are not eroded in the process. In terms of penalties, HMRC points out that an inherent danger in simplifying penalty regimes is that the ‘fairness’ of the system is reduced as the penalties cannot then be easily adapted to different behaviours, repeat offenders. For the latter, the ‘penalty points’ system appears to work well. Most would agree that deliberately evading tax is more severe compared to making errors. Our justice system agrees and defines fraud as an action taken “with dishonest intent” to make a gain or cause a loss. Thus it seems reasonable that penalties should increase for deliberate behaviour.

In terms of penalties, our view is that simplification should be limited to harmonising regimes but that behaviour should still be taken into account, however time consuming it may be.

Digitalisation

The theory behind digitalisation is that things that can be automated effectively and easy questions can be answered via online channels leavnig technical staff free to respond to more complex issues. The problems HMRC has are twofold:
1) the digital channels are not user friendly/developed well enough to be able to deal with queries;
2) often the people ringing up are unable to use the digital channels or would simply ‘prefer’ to speak to an adviser.

HMRC receives millions of calls about resetting passwords, which just goes to show how many of HMRC’s ‘customers’ find IT (or HMRC’s systems) hard to use. HMRC either needs to improve their digital provisions significantly or add resources specifically to deal with these.

The consultation suggests that going forward, statutory notices could be issued digitally. This has the benefit of a clear audit trail; if HMRC sends a notice, there will be a digital footprint showing when it was issued and to whom. The disadvantage however is that digital notifications are easily dismissed, for example, they may go to Junk/Spam folders.

There is no statutory requirement for individuals to check their emails. However, if a brown envelope with ‘HM Revenue and Customs’ stamped on it comes through the letterbox, most people would open it, however unwillingly. The consultation states that the issue of notices by post can cause delays and suggest this gives taxpayer less time to respond. A possible solution: Increase the time to respond by making the deadline 30 days from the date of delivery or 45 days from the date of the letter. Or better still, the Government could legislate that each party must respond within a maximum of either 30 days or the time taken by the other party to respond to previous correspondence…

Taxpayer safeguards

HMRC’s definition of safeguards are legislative (e.g. ability to appeal decisions), non-tax legislative (e.g. Human rights), HMRC’s public law obligations (e.g. the requirement for HMRC to act rationally and within its powers) and ‘other’ safeguards such as alternative dispute resolution. We consider that time limits on HMRC raising assessments (for example) or having to ‘make a discovery’ are also safeguards.

HMRC considers that having a variety of safeguards adds complexity, however different safeguards are there to address the different regimes. If regimes were aligned, then automatically, safeguards would be aligned as well. HMRC suggests that Taxpayers may not be familiar with the options available when disputing a decision and we suggest that (as is generally done anyway) HMRC can make the taxpayers aware of their options when making a relevant decision.

Again, with regard to simplification, it would be useful to have an appeals procedure aligned across all taxes, providing existing safeguards are not removed. To reduce confusion around timescales, HMRC could lay out clearly and in simple language exactly what the options are to appeal and the confusion would be reduced.

Throughout the consultation, HMRC refers to costs for taxpayers and ‘resource implications’ for taxpayers and HMRC. For the vast majority of taxpayers, the cost is much higher to them than to the government (as a proportion of income). Taxpayers pay third parties (accountants, tax advisers and lawyers) for advice and representation, where HMRC has this expertise in-house. When taking cases to tribunal, taxpayers will generally therefore take this into account and the majority of cases taken will be by those who genuinely believe HMRC’s decision is incorrect.

Finally, HMRC has laid out a number of international comparisons in respect of enquiry and assessment powers, penalties and safeguards. When responding to the consultation ,keep in mind that just because ‘everyone else does it’ doesn’t make it right.

The consultation (https://tinyurl.com/47hay2sb) is open until 9 May 2024 and responses should be sent to tafrcompliance@hmrc.gov.uk

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