Tax administration

Large business notification

From April 2021, large businesses will be required to notify HMRC when they take a tax filing position that HMRC is likely to challenge. It is said that the policy will draw on international accounting standards which many large businesses already follow.

This is presumably a reference to the situation where an entity, when facing uncertainty as to a particular tax treatment under IAS12, must consider whether it is probable or not that the relevant tax authority will accept its filing position. If the entity concludes that it is probable that the tax authority will accept the filing position, it should determine its taxable profits in accordance with the filing position. If the entity concludes that it is not probable that the tax authority will accept the filing position, it should use the most likely amount or expected value of the tax treatment to determine its taxable profits.

In the latter situation, the entity will presumably also be required from April 2021 to notify HMRC that it considers that HMRC is likely to challenge the filing position.

Tackling promoters of tax avoidance

The Government’s response to Sir Amyas Morse’s review into the Loan Charge noted that it is “not acceptable for promoters to market... tax avoidance schemes which do not work and deprive the Exchequer of tax that is owed” and promised further measures designed to prevent the marketing of avoidance schemes. Further detail was promised in Budget 2020.

No draft legislation appears to have been published (it may be that it will be included with the broader implementation of Sir Amyas’s proposals), but the Government has now indicated what the substance will be. Highlights include strengthening HMRC’s information-gathering powers; enhancing the penalty regime to ensure that promoters of avoidance schemes that fail are liable to a penalty equivalent to 100% of their fees; strengthening the Promotors of Tax Avoidance Scheme (POTAS) regime, which contains a broad suite of powers designed specifically to target scheme promotors; and making changes to the General Anti-Abuse Rule (GAAR) that are aimed at preventing the use of partnership structures in tax avoidance.

There is an obvious delicate balance between, on the one hand, giving HMRC the tools it needs to tackle marketed tax avoidance schemes, and on the other, intruding into perfectly legitimate tax structuring. We will be paying particularly close attention to any proposed expansion of the GAAR.

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.

A consultation followed “Tackling the hidden economy: public sector licensing” which considered ways in which new tax-registration checks could be administered for those applying for licences to operate in the following sectors: private security, taxi and private hire vehicles, waste management, houses in multiple occupation and selective licencing in the private rental sector, scrap metal and retail and trade.

The consultation closed in March 2018 and a summary of responses was published in November 2018, around the time of the last autumn Budget.

Today’s Budget announcement included confirmation that the Government will legislate to make the renewal of licences to drive taxis or private hire vehicles; operate private hire vehicle firms, and deal in scrap metal conditional on applicants completing checks that they are appropriately registered for tax. The changes will take effect from April 2022. It is not clear at this stage how HMRC will determine which tax registrations are relevant for the purpose of the new rules. It was also announced that a further discussion document seeking views on the wider application of tax conditionality will be published in spring 2020.

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.

Other compliance measures

The Government has announced that it is investing in additional compliance officers and new technology for HMRC. An HM Treasury internal estimate based on HMRC data suggests that the investment will bring in £4.4bn of additional tax revenue up to 2024/25 by enabling HMRC to further reduce the tax gap through additional compliance activity and expanding debt collection capabilities.

The Government will also publish a call for evidence in spring 2020 on raising standards for tax advice. It is said that the process will seek evidence about providers of tax advice, current standards upheld by tax advisers, and the effectiveness of the Government’s efforts to support those standards, in order to give taxpayers more assurance that the advice they are receiving is reliable.

Although in practice most tax advisers will be members of one of the accountancy bodies, the CIOT or be practising as solicitors or barristers, the measure appears to acknowledge that one can practice as a tax adviser without necessarily belonging to any professional body, and the Government is clearly concerned that there are some advisers out there whose standards fall short of what the Government expects. The Government will be consulting ‘shortly’ on the proposed process.

Protecting taxes in insolvency

The Government will introduce legislation in Finance Bill 2020 amending current insolvency legislation in order to change the order of distribution for assets from insolvent companies to move HMRC up the creditor hierarchy.

This will ensure that HMRC has greater priority to recover taxes paid by employees and customers which businesses collect and hold temporarily before passing them on to the Government. These taxes include VAT, PAYE, employee NICs, student loan deductions and CIS deductions.

HMRC will become a secondary preferential creditor in respect of these taxes, ranking behind certain secured creditors (holders of fixed charges) and insolvency practitioners, but ahead of other secured creditors (holders of floating charges), unsecured creditors and shareholders. The rules will remain unchanged for taxes owed by the businesses themselves, such as corporation tax and employer NICs (in respect of which HMRC will continue to be ranked with other unsecured creditors).

This change will ensure that when businesses go insolvent more of the taxes paid in good faith by their employees and customers will go to fund public services as intended (rather than being distributed to creditors other than HMRC).

The implementation date of the measure will be 1 December 2020.