Proposed new powers for HMRC

In a consultation document released recently, HMRC explained the “direct recovery” powers as previously announced in the 2014 Budget.

These powers would allow HMRC to recover tax debts directly from a taxpayer’s bank account including access to any ISAs or accounts held jointly even though only one partner is deemed to “owe” HMRC.

Colin Tice of Cassons Chartered Accountants reviews these and other tax proposals regarding HMRC powers made in the 2014 Budget.

Tax avoidance

Certain proposals were presented as being targeted principally at taxpayers who have undertaken tax avoidance schemes. In reality they may well have an impact far beyond that. There are broadly three proposals giving HMRC further extensive powers.

HMRC will be able to access your bank accounts to take payment without your approval;

HMRC will be able to decide that a point in dispute is the same as that already decided by a tribunal or a court and demand that the disputed tax is paid up front before the actual dispute is resolved;

If taxpayers undertake tax avoidance strategies they will be required to pay the disputed tax up front (and get it back later if the scheme is upheld by the courts).

Smash and grab

A taxpayer may not actually owe any taxes but HMRC may think otherwise. Take an example where a taxpayer owes say £30,000 for one tax year but is due a repayment of say £50,000 for another year, so HMRC owes the taxpayer a net £20,000. In this particular instance HMRC has two separate tax years to deal with but processes only one – and under these proposals HMRC will be able to access the taxpayer’s bank accounts, including any joint accounts or ISAs and take the £30,000.

But never mind, because HMRC will have “rigorous safeguards” in place and will leave at least £5,000 in the bank account. That’s all right then! And, Even if a taxpayer does owe some tax, is it right that HMRC can just grab the money, possibly to the detriment of other legitimate creditors? And what about the rights of the other joint account holder.

The amount to be collected has to be at least £1,000. This threshold is well below the level of tax avoidance schemes. It is targeted at everyday taxpayers. Perhaps taxpayers should just set up bank accounts overseas, outside HMRC’s reach – there is nothing illegal in doing so provided all income is disclosed to HMRC. But beware, it has subsequently been announced that the presumption of innocence if you set up an offshore bank account will be lost from next year. If you do innocently fail to disclose income in respect of an offshore bank account it will be presumed that you are guilty of tax evasion (not avoidance) and the onus of proof will be on you to show otherwise. Be careful, tax evasion is a criminal offence.

Tax up front

As mooted last year, HMRC will have the power to decide that a taxpayer’s dispute with HMRC is ‘the same or similar’ to an already decided case. HMRC will then have the power to demand an accelerated payment of tax in respect of the dispute.

This is all well and good in those cases where taxpayers are simply trying to delay payment for as long as possible and where indeed there is an already decided case on the same point. But we see very little evidence that taxpayers try that. And HMRC’s interpretation of tax law is not always upheld by the courts. Can we really trust HMRC’s analysis of ‘the same or similar’ in view of its not particularly good track record? HMRC inevitably has a partisan view, yet it will be acting as both the judge and jury, with the taxpayer having no right to appeal. This cannot be right.

Taxpayers in general should be very concerned. These measures do not apply exclusively to aggressive tax avoidance schemes; they can be applied to a broad range of tax disputes. If this proposal becomes law, it will probably be used with a “light touch” at the outset, concentrating on certain aggressive tax avoidance schemes. But once HMRC feels comfortable with its new powers it is highly likely it will seek to use them more extensively and far beyond the boundaries of “tax schemes”.

More tax up front

Another major area for concern applies to any taxpayer who has undertaken what is known as a ‘disclosable tax avoidance scheme’ (a “DOTAS” scheme).

Any taxpayer who has undertaken a ‘disclosable tax avoidance scheme’ (DOTAS) will be forced to make an accelerated payment of tax in advance of the courts deciding whether the tax planning works. This will apply to schemes undertaken many years ago. This is a retrospective change in law contrary to established jurisprudence requiring certainty and no retrospection in tax law. It may turn out to be breach of human rights.

George Osborne’s justification is that many taxpayers delay resolving tax disputes so that they can retain the cash saved by the planning. To the contrary, our experience is that those schemes that are undertaken by reputable providers commonly suffer delays because HMRC does not progress enquiries quickly. (Some commentators believe that HMRC deliberately drags out such enquiries in order to maximise taxpayer uncertainty and discomfort.)

Other anti-avoidance

The Budget confirmed that previously announced proposals affecting limited liability partnerships (LLPs) will be implemented with effect from 6 April 2014. This news comes despite the House of Lords urging caution and delay. These new rules will impact members of LLPs who cannot satisfy certain criteria to be treated as self-employed and will instead suffer employment taxes with associated national insurance costs. This is intended to prevent the use of LLPs as effective tax shelters – but it will catch a host of innocent commercial business structures. Members of LLPs are urged to review their tax status now.

Stamp duty land tax (SDLT) anti-avoidance rules are being extended to catch residential properties worth more than £500,000 (previously £2 million) held by “non-natural persons” – for example, residential property held in a company. This move will obviously catch far more properties than before and the 15% SDLT charge on purchasing a property in this way is probably prohibitive.

Tax avoidance and the economy

The Chancellor appears to think that all the ills of society can be cured by targeting “tax avoiders” and by giving HM Revenue & Customs (HMRC) unprecedented extended powers. The Budget documents indicate that these measures are expected to raise £5.1 billion from 33,000 individual taxpayers and a further £2.1 billion from 10,000 companies. Put in context, the Government is prepared to give HMRC unprecedented powers to raise (initially) £7.2 billion, but is having to borrow a further £339 billion between now and 2018. To suggest that tax avoidance is a significant contributor to the UK’s financial difficulties is stretching the truth. The immediate impact on 10,000 or so businesses will however be significant and job losses must be one inevitable consequence.

ConclusionThese are extensive and unprecedented powers for HMRC. Beyond all the rhetoric, the rights of taxpayers are being significantly diminished and we should be entering this Brave New World with great nervousness.