Evidence submitted by The Taxation Committee of The London Society of Chartered Accountants (tre0181)

Written evidence submitted by the Taxation Committee of the London Society of Chartered Accountants to the Treasury Sub-Committee inquiry into The Conduct of Tax Enquiries and the Resolution of Tax Disputes

Dear Sirs,

I am writing as Chairman of the Taxation Committee of the London Society of Chartered Accountants (LSCA); further details about the LSCA and the Committee are given at the end of this letter. The committee welcomes the opportunity to provide a submission to the Treasury Sub-Committee inquiry into the Conduct of Tax Enquiries and the Resolution of Tax Disputes as our members have a number of serious concerns about HMRC’s conduct in certain situations.

Executive Summary

      We recognise that HMRC has a Code of Governance for resolving tax disputes and that generally most differences of view between taxpayers and the tax administration are resolved collaboratively and by agreement. In addition, HMRC now has alternative dispute resolution procedures to provide additional mechanisms to try and resolve differences before they reach a more formal stage, and a Litigation and Settlement Strategy (LSS), intended to ensure that all disputes are settled in accordance with the law and not as a result of compromise. The Code of Governance is designed to ensure that the principles of the LSS are applied consistently when resolving a tax dispute.

      Nevertheless, despite these mechanisms and safeguards, we do not believe that HMRC necessarily resolves tax disputes in a consistent, proportionate or fair way.

      We also feel that HMRC’s approach to enforcing compliance with tax law, including its approach to penalties and other sanctions, sometimes results in disproportionate or unjust outcomes.

      We are concerned about the frequent long delays by HMRC in dealing with correspondence in cases where many taxpayers are desperate for closure.

      We have evidence of equally long delays in settling partnership enquiries.

      We are also concerned about the long delay – still ongoing – for HMRC to announce its proposed policy on the treatment of dry income.

      Our members are concerned about the use of follower notice procedures.

      We are concerned by HMRC’s refusal to apply the Icebreaker judgement at FTT (approved by UTT), whereby there are trading profits in later years against which the agreed year 1 trading loss may be carried forward.

      We are also concerned by HMRC’s refusal to accept the limitations of the De Silva SC judgement, namely that (a) it does not apply to sideways claims and (b) where a notice of amendment has already been issued which does not reflect paragraph 31 of the judgement, HMRC cannot amend again to create a charge to recover tax which has been over-repaid.

      We believe that at least some of the problems are caused by HMRC’s lack of resources and the fact that it does not have the staff to work enquiries correctly.

      Our final concern is about HMRC’s unilateral reallocation of payments and credits to earlier liabilities, which can create underpayments for later years and consequential surcharges/late payment penalties that may give rise to a greater overall payment. HMRC should allocate money in the most favourable way for the taxpayer in all circumstances. We have been informed that the reallocation process is automatic, as is the issue of surcharge, etc. notices, without human intervention. However, HMRC needs to be reminded of the rule in Clayton's case whereby later credits can only be reallocated with the debtor's consent.

Comments on the Specific Questions Raised by the Treasury Select Committee:

Q1 How do HMRC governance and settlement processes affect its ability to resolve tax disputes in a proportionate and fair way?

Generally speaking, we believe that the HMRC Code of Governance for resolving tax disputes and the Litigation and Settlement Strategy do provide a reasonable framework which should enable a fair and proportionate agreement to be reached in most cases before differences of opinion become entrenched.

Q2 Does HMRC’s litigation and settlement strategy provide a rational and sound framework for resolving tax disputes?

We believe that generally it does do so.

Q3 Do HMRC’s collection and management powers set out in the Commissioners for Revenue and Customs Act 2005 provide HMRC with sufficient flexibility to achieve cost-effective and fair results?

We believe that the statutory powers provide HMRC with sufficient flexibility to achieve cost-effective and fair results.

However, we do have some concerns about overpayment relief whereby, if HMRC rejects the taxpayer’s claim, there is no appeal against that decision except in cases where HMRC has formally enquired into the claim.

Q4 Does HMRC’s approach to enforcing compliance with tax law, including its approach to penalties and other sanctions, result in disproportionate or unjust outcomes? If so, how can the situation be remedied?

It is not clear how compliance with tax law is defined by the H M Treasury sub-committee. We would like to think that it includes the use and enforcement of Advanced Payment Notices (APNs) and Partner Payment Notices (PPNs) where HMRC believes that tax should be paid “up front” in circumstances around an alleged tax scheme. These notices come under the “enforcing compliance” circumstance and involve penalties and other sanctions, and so we think that this is an area that should be of concern to the sub committee because of the way in which HMRC has chosen to use these powers.

Our committee has received reports of concerns and examples of the devastating effects of APNs and PPNs on people’s lives. We do not seek to defend in any way that those concerned may have been sold a tax scheme and agreed to enter the scheme, but we believe the examples arise because the government chose to introduce incredibly harsh penalties on people with retrospective effect. The APN and PPN laws came into effect in 2013 but did not target those entering into a scheme on or after the date of introducing these laws. They applied to schemes entered into by taxpayers in the early 2000s, around 2000 to 2010. Had these people known about APN or PPN legislation, we suspect many would not have entered the schemes that they did. The APN and PPN laws have worked insofar as they have gone a long way towards stopping people using schemes after 2013. But those already in schemes have been left, in many instances, exposed to incredible financial stress and, as a result, potential health and family problems. We think that the Sub-Committee really should look at some of these cases and the hardship that has resulted in certain cases where taxpayers’ circumstances changed between entering schemes and the 2013 legislation, for example, divorce, bereavement, ill health and so on. This legislation, we think, should have been introduced to attack the entering into schemes on or after the date of introducing the law and not used against those who entered schemes long before the APN or PPN regime was introduced. Representations were made and ignored about this at the time, but we are now seeing some cases of real hardship and the destruction of lives as a result of the retrospective element in the application of the law.

Detailed Concerns and Specific Examples

1.    We have had a report from one of our member’s firm that a client sold what assets they were able to sell in order to settle an APN but were still left with a debt arising from an APN. The client’s spouse was ill, but HMRC threatened bankruptcy, which would have cost the client their livelihood, potentially resulting in HMRC never being able to collect the debt. Incessant pressure from HMRC meant that the taxpayer’s only resort was to encash their pension. This, in itself, resulted in additional income tax due to HMRC. HMRC refused to take account of the additional tax from encashment of a pension as part of the settlement and willingly accepted it as a “bonus” to HMRC. The taxpayer still owes a sum of APN tax. The scheme for which the APN was issued is still subject to court proceedings and it remains unclear that all the tax demanded will ultimately be due.
2.    We have also heard reports, but without specific details, of cases where taxpayers have been bankrupted by having to make advance payments before their cases have been heard. If this is correct, surely it is disproportionate and against common justice and human rights in an advanced democracy. Clearly taxpayers must comply with the law, be it a follower notice or corrective action. However, taxpayers who are found to be acting effectively within the law must be compensated for any loss they suffer as a result of laws that have been incorrectly interpreted or applied.
3.    We also have a number of concerns about HMRC’s enquiry behaviour in the current crop of cases involving tax schemes such as Eclipse, Icebreaker and film partnerships.
4.    The likely outcome of the Eclipse enquiries has been well trailed and HMRC is currently proposing to tax investors on dry income that they have not received, with the result that they will pay tax of many times the amount they subscribed. Our main concern is HMRC’s intractable position on this dry tax charge, which is based on unexplained principles. Even worse, in the case of Eclipse for example, there are members who have left the partnerships but HMRC says that they have not and is still proposing to charge them.
5.    We are also very concerned about the use of follower notices in some cases, such as Icebreaker, where in reality there is no chance that a taxpayer will make a challenge. One of our member’s recent experience of follower notices and the penalty provisions suggests that taxpayers who are not properly advised will risk incurring severe penalties, when all that is needed is for them to amend their tax returns to cancel the sideways loss claim and carry forward the agreed trading loss.
6.    In the case of the Icebreaker schemes, the Tribunal ruled that the LLPs were trading (albeit not commercially and with a view to profit), but that the major element of the members’ contribution to the LLPs – funded by a loan of course – was not a trading expense but a capital payment to secure a guaranteed income stream (non-trading). Investors are now getting letters from HMRC telling them what their allowable trading loss is, but not pointing out that the loss can at least be carried forward against trading profits. One of our member’s reports that an officer at Counter-Avoidance told him that HMRC’s “interpretation” of the Tribunal decision is that all the income is from the guarantee arrangements. The member pointed out that the Tribunal found as a fact that the LLPs were entitled to a share of trading profit, and that the entitlement to the guaranteed element (top-up) was additional. One cannot “interpret” a finding of fact.
7.    Even worse, HMRC is now saying that the allocation of the residual trading loss is not the end of the matter. They believe that unless the scheme member was joined in the “seven individuals” case (which denied sideways loss relief) there remains a risk that he/she would make his/her own appeal and that since the question has been finally decided by the Courts, a follower notice is appropriate. This is heavy-handed in the extreme. How can a follower notice work if no sideways loss relief has been received from the residual loss? The end result of a follower notice is a notice requiring the taxpayer to counteract the benefit – but how? The simple answer is that the taxpayer just needs to amend the self-assessment to cancel the original loss and the sideways claim and replace it with the amended loss and a carry forward. This can be done simply and without recourse to follower notices.
8.    The continued action against those caught up in such schemes means that they will have to pay tax of many times the cost of their investment, often for many more years. HMRC has already disallowed the loss relief and the related loan interest, but investors cannot get out of a lot of the schemes and will have to pay tax on lease income which they do not receive because it is used to service and pay off the loan. Indeed, as mentioned above, in some cases even those who left the partnership four years ago but where the lending bank refused to novate the loan as part of the exit arrangements are being told that they must pay tax on the income regardless. HMRC’s position on this has still not been explained, but legally the member is no longer a partner so we assume that HMRC is trying to tax the income under some other head than share of partnership profit. Most participants did not consider that they were engaging in tax avoidance (most schemes were never sold as such) but the penal outcome for investors is wholly disproportionate to the “offence”.

Moving away from APNs and PPNs:

9.    Another of our members has reported on the case of a client who entered into two SDLT avoidance schemes over five years apart and which have recently been the subject of a tax enquiry. The member’s firm requested the paperwork submitted to ascertain the precise SDLT scheme used (they had not been involved when the client entered the schemes) and whether or not there were grounds for appeal. Unfortunately, all they received were the basic details regarding the amount of SDLT paid, the value of the properties and their addresses. The client was left with no option but to agree that the taxes were due, since trying to defend an enquiry without any paperwork would have been impossible and the client obviously did not understand the arrangements. He is now being threatened with insolvency if he does not come up with £150,000. He feels that his entire life is up for sale and he has had to sell assets at considerably undervalue in order to provide HMRC with any funds. He wants the whole thing to go away and HMRC are being extremely aggressive on the recovery of a debt which the firm is still unsure is actually due.

Q5 Is there sufficient governance over the whole of HMRC’s enquiry process to ensure that HMRC’s interventions are well-targeted and that taxpayers are treated fairly and professionally throughout?

The governance arrangements discussed under our Executive Summary only generally apply towards the end of the enquiry or investigation. We are equally concerned about the treatment of taxpayers throughout the whole of the enquiry process, which the experience of our members strongly suggests is not always as fair and proportionate, and therefore not as professional, as it should be.

With regard to whether the interventions are well-targeted, HMRC has a risk-based approach to investigations and uses its Connect data analysis to identify the risks to the system.

Q6 Do HMRC’s governance processes provide sufficient scrutiny and assurance for clearances and approvals given to taxpayers outside the formal enquiry process.

More clarity is required about the governance that exists regarding clearances and approvals outside the formal enquiry process.

If you would like to meet representatives from our committee or wish us to expand on our points above or clarify our views, please do not hesitate to contact me.

Yours faithfully,

Adrian Mansbridge BA FCA FCCA CTA

Chairman, LSCA Taxation Committee

Half Oak House, 28 Watford Road, Northwood, HA6 3NT

Direct phone: 01923 821416; Email: adrian@acmco.co.uk

About the LSCA and its Taxation Committee

The LSCA is by far the largest of the 22 district societies affiliated to the Institute of Chartered Accountants in England and Wales (ICAEW). It has a membership of over 35,000, representing nearly one quarter of all ICAEW members, and also provides services for other ICAEW members who live or work in London. London members, like those of the Institute as a whole, comprise a mixture of those working in all sizes of practice and those working in a range of businesses both large and small, the public sector and third sector interests, or otherwise not in practice. They include many members operating at the heart of industry and commerce in the City of London, as well as those working in the largest accountancy firms, with a wide range of specialisms and expertise. The Taxation Committee reflects this diversity and knowledge. Members give their services to the Committee on a voluntary basis and in addition to their normal full-time employment.

The Committee responds to consultation and other papers on taxation matters issued by HM Revenue & Customs, HM Treasury and other bodies. It also makes detailed representations on issues such as the Finance Bill proposals. It provides the opportunity for lively debate and selects certain topics for broader discussion and publication to LSCA members. In addition, the LSCA organises an annual Breakfast event on the morning after the Budget to review the Chancellor’s main proposals, as well as holding other events on topics of current interest and importance.

May 2018