Since 2010 the British government has introduced over 100 measures to tackle tax avoidance, evasion and other forms of non-compliance, helping to secure £175bn in tax that might otherwise have gone unpaid. Yet there are concerns that HM Revenue & Customs’ approach to enforcing tax law is becoming more aggressive towards small and medium-sized enterprises.
The Treasury Committee recently launched an inquiry on VAT and the Treasury Sub-Committee launched inquiries into “tax avoidance and evasion” and “the conduct of tax enquiries and resolution of tax disputes”. John Mann MP, chair of the Treasury Sub-Committee, says: “The Committee often receives representations from people who feel that HMRC’s enquiry process treats them unfairly.
Some have accused HMRC of offering more advantageous terms of settlement to big business than small businesses or individual taxpayers receive. There are concerns about the extent to which HMRC balances its responsibility to collect the right amount of tax due against its obligations to administer the tax system fairly and even-handedly.”
Judging how balanced and fair HMRC is in its approach to checks, enquiries and penalties is complex. When a business is unable or unwilling to settle outstanding tax, HMRC has various options (see enforcement actions, right) and their deployment depends on factors ranging from HMRC’s internal code of governance (and processes) for resolving tax disputes, to individual circumstances in each case.
On the ground
Support for SMEs that can’t pay their tax bills does go beyond forbearance for Carillion suppliers and those hit by the Salisbury nerve agent attack. “If clients call the helpline, we’ve found HMRC helpful, within certain parameters, if clients stick to what they promise on the phone,” says chartered accountant Peter Upton. “But if they ignore their tax bill, HMRC is much quicker to pass it to debt collection agencies.”
HMRC spending on private sector debt collection agencies was £24m between 2016 and 2017, compared to £12.5m in 2015 and just £6m in 2014, according to research from UHY Hacker Young. This may be cost-effective for HMRC, but it can create delays when trying to resolve mistakes and potential problems that may be caused by miscommunication between those involved.
Even HMRC can send letters about debt in error. “I have recently seen cases where liabilities have been chased which had already been settled either through allocations from a group payment arrangement or through surrender of repayments due to other group companies, but which had not yet been processed by HMRC,” says Steven Dowers, chair of ICAEW’s SME business tax committee.
Drivers for change
HMRC figures show an increase in more severe enforcement actions (see SME wind-ups, below). “I think we are seeing a growing lack of tolerance from HMRC around tax debt,” says Conrad Ford, chief executive at Funding Options. He sees the big driver as the economic upcycle, with record employment and low interest rates. There may be other drivers too.
“Better technology and additional powers legislated by government have put HMRC in a stronger position to identify and actively target instances of avoidance and evasion compared to the past,” says Dowers. The Disclosure of Tax Avoidance Scheme (DOTAS) regime, coupled with Accelerated Payment notices (making participants in tax arrangements pay first and argue in court), may colour perceptions.
“There’s been mild hysteria about tax avoiders facing huge bills and being bankrupted by HMRC. It’s all nonsense,” says an HMRC spokesperson. He reports that 95% of the “tax avoiders” who have received Accelerated Payment notices have Time to Pay (TTP) arrangements in place and across all taxpayers 1.5m currently have TTP arrangements.
Deliberate by default
Perceptions of a crackdown on SMEs that make errors in tax returns may also be coloured by HMRC’s use of technology; a greater proportion of compliance checks may be leading to enforcement action because HMRC is taking a more informed, risk-based approach. “Their algorithms are getting better and they pick out with greater accuracy the anomalies in tax returns,” says Upton.
Might this account for the 64% increase over the past three years in penalties for “deliberate errors”? Kevin Igoe, managing director at tax investigation insurance specialist PfP thinks not. “The jump in penalties for deliberate errors coincides with a fall in those imposed for ‘failure to take reasonable care’, which tend to result in a less severe fine,” he says.
Dowers thinks that when additional tax is identified in an enquiry by HMRC it may take a default position of a failure to take reasonable care by taxpayers. Upton agrees: “The burden of proof is always on the taxpayer. The balance of probability does not seem to work in this area.”
Unhelpfully, the word ‘deliberate’ is not defined in statute; but the burden of proof in penalty cases may be less opaque (see deliberate errors, below). So how can ICAEW members help SMEs to avoid the worst strictures?
There is no silver bullet solution. There is too much variety across businesses and their tax situation, accountants’ relationships with clients, types of tax, HMRC forbearance for one-off events and economic trends, and arrangements such as TTP – which are at HMRC’s discretion.
Role to play
In some scenarios, there may be relatively uncomplicated ways for SMEs to keep on the right side of HMRC. For a sound business with temporary cash flow problems, tax financing products may have a role to play. “Some lenders are very open to the message that cash flow is bumpy from a tax perspective,” says Ford, though if a business is “in a hole and digging further”, it is unlikely to get a loan.
Membership of ICAEW’s Tax Faculty is a good route to guidance and support; tax expertise and tips are also freely available on the website. For example, Gary Rowson, Lancaster Knox tax director, suggests practical ways to protect and defend clients in Defending deliberate HMRC penalties here
As tax rules become more complex and there is less tolerance for carelessness and error, businesses and tax accountants need all the help they can get. “It is unrealistic to expect the average business owner to be a tax expert on the side,” says Dowers. “Even those of us whose job it is to keep on top of all this find it challenging.”
HMRC can take various enforcement actions to get the money if a tax bill is not paid, including:
- deducting what is owed through earnings or pension;
- taking court action;
- using debt collection agencies;
- recovering goods from business or residential premises and selling them;
- taking money directly from a bank account or building society;
- taking bankruptcy action; and
- applying to the court for a winding up petition.
Actions on late and non-payment are generally accompanied by penalties and surcharges, such as a notice fee, visit fee (to take control of goods), and surcharges, which are a percentage of the amount of tax outstanding, as well as the amount due and interest on this.
If HMRC thinks there is a risk of late or non-payment of tax or duty it can ask the taxpayer for a deposit or bond (security), then if the bill isn’t paid, HMRC can use the security to settle it. Refusal to give HMRC the security can lead to a court appearance and fines.
HMRC imposed 34,100 penalties on taxpayers for deliberate errors on tax returns in 2016/17, a 34% increase from the 28,700 penalties imposed during 2015/2016, according to figures from PfP.
HMRC imposes penalties for “deliberate behaviour” when it believes an inaccuracy on a tax return was made intentionally, or that a taxpayer knew of an inaccuracy and did nothing to correct it.
In 2016/17 penalties for “deliberate behaviour without concealment” increased to 29,900, up 19% from 2015/16; penalties for “deliberate behaviour with concealment” rose 21% to 4,200.
HMRC’s internal manual Appeals reviews and tribunals guidance ARTG8395 (gov.uk/hmrc-internal-manuals/appeals-reviews-and-tribunals-guidance/artg8395) notes that “in the case of penalties the burden is on HMRC to prove that a penalty is due, while in assessments or return amendments the burden is on the customer to prove that the amount of assessed tax or profits is wrong”.
SME WIND UPS
According to information provided by HMRC to Funding Options (an online business finance supermarket), HMRC filed 4,710 winding up petitions for the year ending 31 December 2017. This is a 21% increase on the 2016 figure of 3,906, which was a 12% increase on the 3,485 in 2015.
HMRC also revealed an increase in asset seizures (distraint), where businesses are unable (or unwilling) to pay their tax bills. During 2016/17 HMRC issued 1,953 businesses with A Notice of Enforcement (previously known as a Distraint Order Notice), an increase of 23% on 2015/16.