Tax administration

Investment in HMRC

The government has announced that it will invest a further £180 million in 2021/22 in additional resources and new technology for HMRC. This is forecast to bring in over £1.6 billion of additional tax revenues between 2021/22 and 2025/26 by enabling HMRC to:

• invest in IT systems to enable taxpayers to more easily access tax services and update accounts digitally and make the collection of tax and payments to taxpayers easier (including digitalising business rates)

• recruit additional compliance staff to increase HMRC's ability to target non-compliance

• continue to fund compliance work on the loan charge, historic disguised remuneration cases and early intervention to encourage individuals to exit tax avoidance schemes.

Review of tax administration for large businesses

Alongside more concrete changes to the business tax environment, Budget 2021 announced a forthcoming review of tax administration for large business, playing to the dual themes of competitiveness and investment and with one eye no doubt on the UK's position post-transition period.

After the furore triggered by last year's consultation on the introduction of a notification regime for uncertain tax positions, subsequently deferred to April 2022, the acknowledgement in the Red Book that a review is desirable should be considered a positive. In particular, the decision to investigate whether sufficient "early certainty" is provided to business will be an opportunity for stakeholders to make representations on areas for improvement, for example to advocate for a more robust and efficient clearance regime giving business the certainty that is needed in these uncertain times.  Other aspects of the review, including the "efficient resolution of disputes" and to promote "a collaborative and constructive approach to compliance", will also require careful attention - previous efforts in these areas have been seen to favour HMRC rather more than business.

The timelines for implementation of any reforms following the conclusion of the review are unclear.  Notwithstanding the government's framing of the review as forming part of its 10-year Tax Administration Strategy, launched last year, it is to be hoped that matters can be progressed rather more quickly than that...

OECD mandatory disclosure rules

Following the surprise New Year's Eve announcement that the UK was, in large part, repealing its implementation of the EU DAC6 rules on the disclosure of reportable cross-border arrangements, Budget 2021 confirmed the plan for the government to consult later in 2021 on the implementation of the OECD Mandatory Disclosure Rules (MDR) under UK domestic law.

The MDR flow from BEPS Action 12, which provided recommendations for the design of rules to require taxpayers and their advisers to disclose aggressive tax planning arrangements. The MDR are narrower in scope that DAC6, focussing on Common Reporting Standard avoidance arrangements and on the disclosure of structures that seek to disguise the beneficial owners of assets held offshore. Under the MDR, intermediaries (both promoters and service providers) have the primary obligation to report to relevant tax authorities in the jurisdiction where they have a relevant nexus, with a fallback obligation on relevant taxpayers.  The information reported will then be exchanged with relevant other tax authorities. Jurisdictions such as Gibraltar and Mexico have already implemented the MDR under their domestic laws, in addition to the EU27 member states, which have implemented their version of MDR through the category D hallmarks under DAC6.

Although significantly less onerous than DAC6, some criticism has been levied at MDR, in particular concerning the extent of the hallmark aimed at the obscuring of beneficial ownership. Whilst the MDR commentary takes a pragmatic approach to limiting the operation of this hallmark in practice, it is to be hoped that HMRC will similarly take steps through the consultation to identify and address concerns over the scope of the disclosure obligations for relevant UK intermediaries and taxpayers in the legislation that is ultimately adopted, with this being supplemented by the helpful approach to guidance that had been followed in respect of DAC6.

Tax conditionality

Tax conditionality was first announced as a principle for tackling tax losses in the hidden economy by requiring those who need licences to operate to demonstrate that they are properly registered for tax in Autumn Budget 2017. Budget 2020 then announced that the government would legislate in Finance Bill 2021 to make the renewal of certain licences conditional on applicants completing checks that confirm they are appropriately registered for tax.

These government has announced that these new rules will take effect in England and Wales from 4 April 2022 and will apply to licences to: drive taxis and private hire vehicles (for example minicabs); operate private hire vehicle firms; and deal in scrap metal. Licensing bodies will have to obtain confirmation that an applicant has completed the check before making a decision on their renewal application.

These are interesting steps, though as the Low Incomes Tax Reform Group (LITRG) pointed out in its responses to the 2018 consultation, the measures will not affect those that operate illegally without the appropriate licences or indeed ensure that those who are registered are actually compliant.

Reporting rules for digital platforms

New reporting obligations are to be imposed on "digital platforms in the UK that facilitate the provision of services by UK and/or other taxpayers". HMRC's policy paper clarifies that "digital platforms" will include "apps and websites which facilitate services such as the provision of taxi and private hire services, food delivery services, freelance work and the letting of short-term accommodation" - in practice, the great majority of the 'gig economy'.

The information to be reported by the platform focuses on the sellers and providers of goods and services, and in particular, their incomes derived from the platform. This information will be shared with other tax authorities under the auspices of the existing OECD-derived information sharing arrangements.

The provision of this information has an obvious domestic function in helping to ensure tax compliance within the gig economy. While HMRC has a right to request this data from digital platforms, this change will greatly increase the information that HMRC is in practice able to review. Looking internationally, this measure looks very much like the EU's DAC7 programme and appears consistent with the intention of the OECD's 'Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy'.

It remains to be seen whether this information is put to any use beyond checking compliance. For example, with this data to hand, will the government look again at a much broader digital sales tax?

Tackling promoters of tax avoidance

HMRC has published its summary of the responses to its consultation on 'Tackling Promoters of Tax Avoidance', which was opened at Budget 2020.

Finance Bill 2021 is set to contain a series of amendments that will "strengthen the existing anti-avoidance powers and tighten the rules designed to tackle promoters and enablers of tax avoidance schemes." This will include:

• Powers to seek information about avoidance schemes not notified under the Disclosure of Tax Avoidance Schemes (DOTAS) regime;
• The power to issue a 'Stop Notice' to promoters of tax avoidance schemes at an earlier stage, with new penalties for non-compliance;
• The extension of the Promoters of Tax Avoidance Schemes (POTAS) regime to allow HMRC to issue notices to new vehicles used by serial promoters of avoidance schemes;
• An increased availability of HMRC's powers under Schedule 36 Finance Act 2008 to require the provision of information;
• The application of the General Anti-Abuse Rule (GAAR) to partnerships, with safeguards allowing taxpayers who are partners in an abusive partnership to take corrective action in relation to their own tax liability.

The amendments were broadly treated as uncontroversial by the respondents to the consultation and we do not expect them to be seriously challenged during the passage of the Finance Bill. They are also - were it needed - confirmation that the government is determined to deploy a formidable legislative arsenal in combatting tax avoidance.

Follower notices and penalties

Follower notices are issued when multiple taxpayers have used what HMRC considers to be a similar tax avoidance scheme to one that HMRC has defeated in litigation. They require the other taxpayers to take "corrective action": to take steps to bring the tax saving back within the charge to tax. A failure to do so exposes the taxpayer to the risk of a penalty, currently 50% of the avoided tax. This provided, quite deliberately, a significant disincentive to litigate.

HMRC has consulted on a reduction of that 50% penalty to 30%, with a further 20% penalty liable to be imposed where the taxpayer's litigation is found by a tribunal to be vexatious, without merit or time-wasting. Respondents to the consultation were supportive of the concept of reducing the 50% penalty to 30%. There was a greater split in opinion about the proposed 20% penalty for vexatious litigation: it had some support, but was subject to serious criticism, both practical (a finding that litigation has been brought vexatiously is a very rare thing in practice, so how likely is this new power to be used?) and principled (HMRC should not be given the power to impose a tax-geared penalty when what is criticised is not the filing of the return, but rather, the conduct of the taxpayer in litigation). One respondent powerfully made the point that it would not be right to accept the principle that HMRC has any business imposing a penalty on taxpayers for their conduct in litigation, which would have a chilling effect on tax disputes even regardless of the merits of the taxpayer's case if applied outside this context by some subsequent Finance Act. In our view the point can be taken further: to give HMRC the power to sanction taxpayers it has defeated in litigation is to usurp the power of the tribunal to regulate the conduct of litigation - something the tribunal already does through its power to impose a costs order against an unsuccessful party .As to the latter objection, HMRC has confirmed that the proposed "legislation sets out precise and narrow conditions which have to be met before the further penalty can be charged and they could have no application outside these circumstances. The government has no plans to extend this approach to other regimes" will be watched closely by practitioners and their representative bodies.

Financial institution notices

Financial Institution Notices (FINs) simplify the process for HMRC to request information about taxpayers from financial institutions. The road to their creation has been relatively long - the proposal was first subject to consultation in 2018 - but with Finance Bill 2021, FINs have finally arrived.

Where HMRC wishes to obtain information during the course of an enquiry, or in response to a request from a foreign tax authority, it issues a 'Schedule 36 notice' - a notice under Schedule 36 Finance Act 2008 that requires the provision of information to HMRC, on pain of penalties. Where HMRC wishes to obtain that information from a taxpayer, it can issue the notice and it is binding on the taxpayer without anything more. Should HMRC request the information from a third party, however, it needs either the consent of the taxpayer in question or of the tax tribunal in order for its request to bind the third party.

FINs will change that position. They will allow HMRC to make requests of financial institutions without the consent of either taxpayer or tribunal. Financial institutions that do not provide the requested information are subject to penalties, which can be appealed to the tax tribunal. While the default position will be that the taxpayer will be notified of the request, HMRC may seek an order from the tax tribunal dispensing with that requirement; that order would also prevent the financial institution from telling its customer that it has provided its records to tax authorities.

Financial institutions will be used to receiving requests for information from HMRC. It remains to be seen whether an increased number of requests will follow, given the simplified procedure open to HMRC. Financial institutions also need to be careful, in circumstances where HMRC has sought an order from the tribunal preventing disclosure, to ensure that they do not make their customers aware of the existence of a request in a FIN.

Penalties for late filing and payment

The government is reforming the rules on penalties for late filing and late payment. There are also changes to the rules on late payment interest and repayment interest. The changes announced today apply to VAT and income tax self-assessment (ITSA).

Under the current rules, for VAT:

• The default surcharge regime in s59 VATA 1994 serves as a combined late filing and late payment sanction.
• If a return is not filed or if an amount of tax shown on the return as due is not paid (defined as a 'default') HMRC can issue a surcharge liability notice. The surcharge liability notice specifies a 'surcharge period', typically running for 1 year from the end of the VAT accounting period to which the default relates. Any subsequent default in the surcharge period gives rise to a surcharge of between 2% and 15% of the tax that is outstanding in respect of the period to which the subsequent default relates. The rate at which the surcharge is calculated depends on the number of VAT accounting periods during the surcharge period for which there has been a default.

Under the current rules for ITSA:

• FA 2009 schedules 55 and 56 provide different penalty regimes for late filing and late payment.
• A late filing penalty of £300 is charged as soon as the return is late. If the return remains outstanding after 3 months, daily penalties of £10 are charged up to 6 months from the filing date. A penalty of £300 or 5% of the tax liability (whichever is greater) is charged 6 months after the filing date and again at 12 months.
• A separate late payment penalty of 5% of the tax liability is charged on tax that is outstanding, generally speaking, 30 days after the due date (referred to as the 'penalty date'). A further 5% penalty is charged on tax outstanding 5 months from the penalty date, and another 5% at 11 months from the penalty date.

The new rules

The default surcharge regime and the ITSA rules on late filing and payment penalties are being replaced with a points-based system.

Where a return is submitted late:

• In general, a taxpayer will incur 1 point for every missed submission deadline. Points will accrue separately for VAT and ITSA.
• A taxpayer incurs a fixed penalty of £200 once they reach the relevant points threshold. The threshold depends on the submission frequency: annual submission = 2 points / quarterly submission = 4 points / monthly submission = 5 points.
• Points expire after 24 months provided the taxpayer remains below the relevant threshold.
• Points do not continue to accrue once the taxpayer reaches the threshold. Instead a fixed penalty of £200 applies for each further missed submission.
• Once the points threshold is reached, points will only expire if the taxpayer meets all filing obligations for a set period of time, again based on submission frequency: annual = 24 months / quarterly = 12 months / monthly = 6 months.

In relation to late payments:

• The new late payment penalties consist of two separate charges. The first charge is payable 30 days after the payment date and is levied at between 0% and 4% of the late paid tax. The second charge applies from day 31 to either the date of payment or the date on which TTP is agreed, at a rate of 4% per annum.
• The first charge operates so that no penalty is payable if the tax is paid or if TTP is proposed within 15 days of the due date. If the tax is paid or TTP is proposed between day 16 and day 30, the penalty is charged at 2%. If there is still tax unpaid and no TTP proposed by day 30, the penalty is charged at 4%.

As with all penalties, HMRC has discretion to reduce or not charge a penalty. Similarly, HMRC should agree not to assess a penalty if the taxpayer has a reasonable excuse for the late filing or late payment. The existing appeals and review processes will apply to both points and penalties. HMRC will be subject to time limits after which it cannot give a point for late filing and there are special rules that apply where a taxpayer changes its filing frequency.

The rules on late payment interest and repayment interest for VAT and ITSA are also being aligned so that:

• Late payment interest will accrue from the due date regardless of whether a penalty is also due, at the Bank of England base rate plus 2.5%.
• Where a taxpayer has overpaid tax, repayment interest will accrue from the later of the date on which the payment was due to HMRC or the date of the actual overpayment, at the Bank of England base rate less 1%, subject to a minimum rate of 0.5%. This is subject to certain exceptions where a VAT repayment return is filed.

The new rules will take effect:

• In relation to VAT, for VAT accounting periods beginning on or after 1 April 2022
• For ITSA taxpayers with business or property income over £10,000 per annum (who are required to submit digital quarterly updates through Making Tax Digital for ITSA), for tax years beginning on or after 6 April 2023
• For all other ITSA taxpayers, for tax years beginning on or after 6 April 2024

The points-based system for late filing is said to be more proportionate, and designed to penalise only the small minority that miss filing dates persistently, rather than those who make occasional mistakes. In this respect it aligns the ITSA late filing penalty system, which currently applies an automatic penalty as soon as a return is late, with the VAT default surcharge regime, which required a second default before a surcharge was levied.

The new late payment penalties are said to be designed to link the penalty directly with both the tax outstanding and the length of delay, to encourage faster compliance following a missed payment.

It is said to be expected that over time the overall number of penalties will reduce. However the measure is expected to raise an additional £155 million per annum from 2024/25 when it comes into full effect.