THE LOW INCOMES TAX REFORM GROUP (LITRG) –

WRITTEN EVIDENCE (DFE0003)

Draft Finance Bill 2020-2021 inquiry

 

 

1                   Executive Summary

1.1           We welcome the opportunity to provide input into this call for evidence on various clauses of the draft Finance Bill 2020-21.

1.2           We make comments on two of the draft clauses under inquiry: new tax checks on licence renewal applications and amendments to HMRC’s civil information powers.

1.3           On the first of these clauses, we feel that the proposed processes need improvement. Firstly, the guidance which is to be issued to first-time applicants needs clarification. In particular, this should take account of the fact that taxi and private hire vehicle drivers are, on average, older and more likely to be from ethnic minority groups than the general working age population.

1.4           We also have significant concerns about the proposed ‘tax check’

process, including that:

 

1.5           On the amendments to HMRC’s civil information powers (specifically, the removal of tribunal approval for statutory third- party information requests issued to financial institutions), we do not agree that the abolition of this safeguard is justified, especially in a domestic context.

 

 

 


 

CHARTERED INSTITUTE OF TAXATION

30 Monck Street, London, SW1P 2AP REGISTERED AS A CHARITY NO 1037771


Tel: +44 (0)20 7340 0550

E-mail: litrg@ciot.org.uk www.litrg.org.uk


UK REPRESENTATIVE BODY ON THE CONFEDERATION FISCALE EUROPEENNE


1.6           We provide more detail on these concerns in responses to selected questions below.

2                   New tax checks on licence renewal applications

2.1          Q6. Are the proposals for tax checks on licence renewal applications fair and proportionate? How effective is the legislation likely to be, and is any amendment needed?

2.1.1         Addressing both of these questions together, we believe that the draft legislation in its current form needs amendment in a number of areas if it is to be as fair and effective as possible. We discuss these in detail in our submission relating to this clause which we have made to the policy team responsible for the draft legislation.1 We highlight our main concerns below.

 

Guidance provided to first-time licence applicants

2.1.2         Specifically, we note that the new measures are expected to disproportionately affect older and ethnic minority taxpayers.2 It is therefore important that the guidance which is required to be provided to first-time licence applicants takes account of this.

2.1.3         Information about how to access tax checks and guidance about them should be clear, accessible and not too long. The guidance should not, for example, simply be a list of hyperlinks. It should also surely include the fact that the individual will need to undergo a ‘tax check’ upon renewal of that licence, as well as guidance explaining what the taxpayer needs to do (and when) in order to complete the tax check successfully.

2.1.4         We think that the draft legislation needs some amendment in this area. For example, we think it is important that the regulation- making powers of the Commissioners under paragraph 9 are

extended from just the “form or manner” of the information

 

 


 

1 https://www.litrg.org.uk/sites/default/files/files/150920-LITRG-response-New-tax-checks-on- licence-renewal-applications-draft-legislation.pdf

 

2 See the assessment of Equalities impacts:

https://www.gov.uk/government/publications/new-tax-checks-on-licence-renewal-applications/new- tax-checks-on-licence-renewal-applications#detailed-proposal


provided to first-time licence applicants to include specifically what information is to be provided.

2.1.5         We also think that the applicant should be asked to explicitly confirm that they have understood, and will comply with, any necessary tax obligations, and be signposted to sources of further help if required. Currently, the confirmation required to be obtained by the licensing authority under paragraph 2(2)(b) only states that the applicant is “aware” of the guidance. There also need to be rules about the form of the confirmation, how long it should be retained and whether it should be dated.

 

Tax checks

2.1.6         Our main concern is regarding the scope of the tax check. Throughout the consultation process, it has been made clear that tax conditionality would be concerned with whether or not a person had properly registered for tax – and not whether or not the person had submitted a tax return which was complete and correct.3 For individuals, the relevant statutory obligation is contained in section 7 of Taxes Management Act 1970. However, paragraph 10 seems to extend this to include a taxpayer’s obligations under section 8, which concerns a taxpayer’s obligation to file a return. This appears to be outside the scope of the policy intent.

2.1.7         We also think that the tax year for which a taxpayer’s obligations under ss 7 (and 8) TMA 1970 are being checked should be made clear. A taxpayer is not generally required to notify their chargeability to income tax under s7 until six months after the end of the relevant tax year. It is not clear, for example, what would happen in the case that an individual has trading income under the level of the trading allowance, meaning that they do not in fact have any obligation under ss7 (or 8) – or otherwise if the renewal is required before the six-month deadline for the relevant tax year.

2.1.8         As for first-time licence applicants, the proposed process for completing a tax check should take account of the equalities impact assessment. This means, for example, ensuring that non-digital


 

3 See, for example, paragraphs 1.11 to 1.12 of the Summary of responses document: https://www.gov.uk/government/consultations/tackling-the-hidden-economy-public-sector-licensing


means of carrying out the tax check are available for the digitally excluded. Paragraph 4, for example, currently only requires HMRC to make arrangements for the tax checks to be completed “by means of a website or otherwise” – but not both.

2.1.9         We also consider that the definition of the 120-day period in which the taxpayer is required to undergo a tax check needs amendment. Under the current draft law, the period ends on the day that the licensing authority makes the request to HMRC to confirm that the applicant has completed a tax check. We think this makes it difficult for the taxpayer to understand when this period commences. It would be better for the 120-day period to end on the date of expiry of the licence, to give certainty to the taxpayer. It would also be useful if the licensing authority were required by statute to issue a reminder to the individual that they must undertake a tax check when they notify the individual of the need to renew their licence.

2.1.10     It seems odd to us that under paragraph 5(3) the tax check is defined to end “on the day on which HMRC are first satisfied that they hold all of the information they have requested”. Nor does there appear to be a mechanism for the tax check to end but with HMRC concluding that the taxpayer has not complied sufficiently. If this is to be the mechanism (such that the tax ‘check’ is more like a tax ‘green tick’), surely this needs updating to say that the tax check ends at the point that HMRC is satisfied that the taxpayer has complied with the relevant obligations?

2.1.11     Finally, we do not consider it balanced that the taxpayer and licensing authority have strict time limits yet HMRC has no statutory time-constraint to actually complete the tax check. This needs correcting – what if HMRC’s delay means that the taxpayer is unable to renew their licence?

2.2          Q7. What is your view of the principle of conditionality and its use in the tax system?

2.2.1              We support the use of conditionality in tackling the hidden economy. However, in order for it to be a success we think it should be paired with a greater focus on educating the general public about the importance of using licensed businesses in the first instance. This ‘two-pronged’ approach would help to ensure that the introduction of tax conditionality will not drive businesses further


into the hidden economy by operating without even the relevant licence.

2.3          Q8. How do you view the Government’s stated intention to extend conditionality to Scotland and Northern Ireland, as well as to other trades?

2.4           The government originally considered applying the principle of conditionality across a wider number of sectors, including for licences issued under the Housing Act 2004 for houses in multiple occupation. As we highlighted in our submission to the 2018 consultation, we did not support the use of conditionality in this sector.4 This is because the licences are only renewed once every five years, giving plenty of time for hidden economy activity before the licence is first renewed. In addition, we were concerned about the potential impact on tenants if a landlord’s licence renewal was denied. Furthermore, we believe that the issue of undeclared rental receipts is a much broader problem which, we feel, requires wider consideration and a different approach. This example demonstrates the importance of consultation if the government is to introduce conditionality in other sectors.

2.5           We make no comment on the government’s intention to extend conditionality to Scotland and Northern Ireland, other than to state that we do not see why tax conditionality should only apply in certain parts of the UK. Having a disjointed approach could mean that hidden economy activity simply shifts to parts of the UK where conditionality does not apply.

3                   Amendments to HMRC’s civil information powers

3.1          Q10. What is your view of the removal of the requirement to obtain tax tribunal approval before issuing a Financial Institution Notice? Are the safeguards promised instead adequate and, if not, what more should be done?

3.2           From a taxpayer perspective, we are not convinced that the removal of this important taxpayer safeguard is justified. Put simply, the reasons for the existing statutory safeguard relating to third-party


 

4 https://www.litrg.org.uk/sites/default/files/180302-LITRG-response-Public-Sector-Licensing- FINAL.pdf


notices – even when limited to cases where they are issued to financial institutions – are no less valid than they were when they were originally introduced. As such, we do not consider that the

‘drivers for change’ discussed by HMRC, or international comparators, warrant their abolition.

3.3           If HMRC are able to issue a third-party notice to a financial institution without taxpayer agreement or independent tribunal approval, doing so under their own jurisdiction and determining themselves whether the notice is ‘reasonably required’, they become both judge and jury in a matter of their own interest. This remains so even in cases where the issue of such a notice needs to be approved by an ‘authorised officer’ – a weak replacement for the scrutiny of an independent judge.

3.4           We also note that the financial institution has no right of appeal against a Financial Institution Notice. Currently, a third party is able to appeal an information notice on the grounds that the request is unduly onerous to comply with. The draft law requires that an HMRC officer be of the ‘reasonable opinion’ that the information would not be onerous (unduly or otherwise) to provide. However, HMRC are not best placed to make this assessment. We suggest the financial institution is given a clear right of appeal if the records are unduly onerous to obtain.

3.5           The new provisions therefore remove not one, but two key safeguards in one fell swoop: tribunal approval and right of appeal.

3.6           We are concerned that as a result of the changes, more third-party notices will be issued (because it will be quicker and easier to do so) and more of these notices may be issued in circumstances which a tribunal might have rejected. The fact that HMRC have only had one case of rejection by a tribunal where a third-party notice which has arisen through the exchange of information process does not mean that the safeguard can be abolished. The existence of this safeguard of itself is likely to have an impact on the care that HMRC take in choosing which cases to pursue; if you remove the safeguard, the incentive to take this care is also removed.

3.7           In particular, we see no reason why the age of the existing safeguards and the increased digitalisation of the economy have any bearing on whether or not the existing powers are appropriate.


If anything, the fact that financial records can be shared with greater ease than ever before should mean that information can be supplied more quickly and easily, especially by financial institutions, meaning that the safeguards are less of a burden now than when they were originally introduced.

3.8           In our submissions on this matter, we argued that the scope of the changes should be restricted to deal solely with the cases where HMRC would otherwise fall short of international standards in meeting their treaty obligations.5 However, HMRC state that it is not possible to introduce a different process for domestic cases because of restrictions in UK law and international treaties.6 As a result, it feels to us that HMRC are introducing powers which may be used in a domestic context but without any domestic justification.

3.9           We believe that a better approach would have been to streamline or simplify the existing process of obtaining tribunal approval. For example, the ability for third parties to make representations before tribunal approval is granted might have been restricted, rather than abolishing the requirement for tribunal approval altogether.

4                   About Us

4.1           The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998, LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes. Everything we do is aimed at improving the tax and benefits experience of low-income workers, pensioners, migrants, students, disabled people and carers.

4.2           LITRG works extensively with HM Revenue & Customs (HMRC) and other government departments, commenting on proposals and putting forward our own ideas for improving the system. Too often

 


 

5 https://www.litrg.org.uk/latest-news/submissions/180926-increasing-hmrc’s-civil-information- powers

 

6 Paragraph 3.21, Amending HMRC’s Civil Information Powers – summary of responses: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/ 902294/Amending_HMRC_s_Civil_Information_Powers_-_summary_of_responses.pdf


the tax and related welfare laws and administrative systems are not designed with the low-income user in mind and this often makes life difficult for those we try to help.

4.3           The CIOT is a charity and the leading professional body in the

United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities.

 

Friday 2nd October 2020