A comprehensive review of HMRC’s new powers reveals few horror stories, however, over a third of advisers thought that new powers had been used unreasonably.

The Chartered Institute of Taxation (CIOT) has just published a review and member survey covering the first year of operation of HM Revenue & Customs’ (HMRC) new Powers regime. In it the CIOT sets out a series of recommendations to get the new regime operating more effectively. These include more specialist training for HMRC staff and more work between HMRC and professional bodies in a number of areas to improve clarity and understanding of the system and ensure that powers are proportionate, fair and transparent.

The CIOT also conducted a member survey, key results were:

  • 12% of advisers had negotiated penalties under the new system. Half of those did not think that the rules had been explained clearly and applied appropriately, and less than half of penalties were suspended.
  • Only 13% of advisers report that clients had been subject to pre-return checks.
  • 37% of advisers thought that the new powers were not used fairly.
  • In general advisers had not noticed major changes in the number of enquiries or requests for visit.

The CIOT’s recommendations

  • All stakeholders continue to invest in appropriate training of staff on the operation of the new powers.
  • Both HMRC and the agent community develop suitable feedback mechanisms to gather practical experience of the new powers.
  • The CIOT investigates why 37% if its members thought that the powers had been used unreasonably, to establish whether there are particular areas where change is required by HMRC, tax advisers or their clients.
  • Further work is done jointly between HMRC and the professional bodies over timescales for information requests.
  • HMRC gives priority to the creation of specific training and development activity for staff who are to deal with cross-tax enquiries into small businesses.
  • As a matter of urgency HMRC set up a system to facilitate agent authorisation for particular heads of duty merely for the purposes of cross-tax reviews. This could be by way of a paper 64-8 which is held by the HMRC officer leading the review, rather than processing it fully through HMRC’s compliance system.
  • The CIOT needs to continue to poll members on the new penalty regime and confirm that clear explanations about the new penalty rules are being provided by HMRC officers.
  • HMRC staff are given specific guidance on when to offer suspended penalties when dealing with unrepresented taxpayers.
  • Current operational and technical guidance is reviewed in the light of experience to ensure that it is clear where suspended penalties can be offered.
  • HMRC staff are given the confidence and support of their line managers to:
  • charge high penalties in cases where there has been very clear evidence of deliberate understatement; and accept that mistakes happen and that people get into muddles and that such behaviour should not attract penalties.
  • The area of flat rate penalties is kept under review to ensure that it is delivering proportionate penalties.
  • Further serious engagement between HMRC and the profession to develop a robust framework within which tax advisers can be sure that they are working with reasonable care. This is a key priority.
  • Greater clarity over the scope that HMRC’s internal reviewing teams have to look at the decision in the round.
  • The whole area of ‘discovery’ is the subject of a proper review to ensure that adequate guidance is provided in respect of discovery and ensure that  unfounded ‘protective discovery assessments’ are not issued; or
  • Explain the legal backing for protective assessments where there is only a suspicion of lost revenue.
  • Create a broad framework in which it is clear which type of compliance check will be used in different circumstances.
  • Information notice letters are clear as to whether they are a routine request for information or an indication of serious concern on the part of HMRC.
  • More work be done both by tax advisers and HMRC in educating taxpayers about the changes.
  • More work is done on considering the interaction of informal and formal powers and obtaining certainty; a piece of work needs to pull all of these threads together to ensure proper safeguards for taxpayers in the use of informal v formal powers.
  • VAT officers within HMRC are given proper training in understanding clients’ businesses and behaviour, and also the proper people skills.
  • HMRC work with VAT practitioners to issue clear guidance on how correction of errors and voluntary disclosure should work under the new regime.

The CIOT intends to revisit the powers implementation annually over the new few years.

CIOT President, Andrew Hubbard says:

“We are still in the early stages of the new HMRC Powers regime. The system is still bedding down, and both taxpayers and HMRC are still getting to grips with the various powers and how they interact.

“The good news is there has been no big rash of horror stories so far.” However, he adds “We have identified concern around how the new penalty regime is being operated. HMRC seem reluctant either to impose high penalties for deliberate understatement or to accept that there have been innocent errors in some cases, instead going in almost every case for the middle option of determining a failure to take reasonable care.”

“It is incumbent on all involved to respond to the points we have raised. The new Powers regime may be in its infancy but if we don’t get the rules of engagement right at the beginning we will store up problems for later.”