Search Keywords
Financial Times Wall Street Journal Economist
News Period From   To
News: 60885    Funds: $437    Pays: $524

Go Back to
News List
This News on
Daily Paywall
  Rated 34 | Views 509
Rate it | Share it 

Clawback - the taxman’s growing reach
From the Financial Times of Fri, 17 Oct 2014 17:02:22 GMT

Let me tell you how it will be; there’s one for you, 19 for me. It was George Harrison’s astonishment at the amount of tax he was paying that prompted him to pen The Beatles’ song “Taxman” almost 50 years ago.

But what’s raising eyebrows today is not so much the quantum of tax rates – the era of 95 per cent income tax in the UK is long gone – but the increasingly draconian powers vested in the authorities to claim tax that is owed, or believed to be owed. “You Really Got Me”, the Kinks’ song from the same era, might better describe the reach of the tax authorities: “you got me so I can’t sleep at night”.

Tax avoidance and evasion are thought to account for more than £7bn of lost tax revenues each year. The clampdown on “those who do not pay their fair share”, as chancellor George Osborne put it this year, has become a political priority at a time when spending on benefits is being cut.

HM Revenue & Customs has been challenged with reclaiming unpaid billions, and been granted new legislative weapons, including the power to demand upfront payment of disputed tax. Further powers – such as direct access to taxpayers’ bank accounts and criminalising tax avoiders – have been proposed.

Tax avoiders don’t get much sympathy in the court of public opinion. Nevertheless, concern is growing that these powers are excessive, out of proportion and not subject to sufficient oversight.

“Our clients are concerned about an invasion of the state in their affairs, with HMRC acting as judge and jury,” says Tessa Lorimer, special counsel at law firm Withers.

“Historically, people were only afraid of the ‘VAT man’ because of his inspection powers. The taxman could only write you letters,” says Dawn Register, tax director at BDO, of the days when HM Customs & Excise and the Inland Revenue were separate organisations.

“For HMRC, these powers make sure that people take tax seriously. For people at the receiving end, it will be a nasty shock that HMRC has these sticks it can wield.”

Removing the right to appeal

Under new legislation, HMRC can demand upfront payment of disputed tax from individuals who participated in arrangements deemed to be tax avoidance vehicles.

AudioUK inflation, HMRC powers and pension freedoms

FT economics editor Chris Giles joins Jonathan Eley to discuss the impact of the latest inflation figures. Also in the show, is the arm of the taxman reaching too far? And why the latest pension freedoms may not prove revolutionary

Download mp3 Download

Although most such investments were made five or more years ago, and many investors have since exited the schemes, the tax authority is looking for back payment of associated tax reliefs, plus interest.

Over the next 18 months, HMRC expects to issue accelerated payment notices (APNs) to 33,000 individuals and 10,000 businesses in an attempt to reclaim £7.1bn of tax. The first notices were sent last month.

Upon receipt, taxpayers have 90 days to settle the disputed tax or face a late penalty payment of 5 per cent. Although recipients can request that HMRC reconsider the amount in question, extending the deadline for payment by up to 30 days, they cannot appeal against the notice.

If they consider it unfair, taxpayers can take their case to a tribunal and if successful, their money will ultimately be returned with interest.

Bill Dodwell, head of tax policy at Deloitte, says that he is more concerned by so-called “follower notices”, which precede APNs.

Follower notices are requests to settle disputed tax, and are issued to participants in avoidance schemes deemed similar to ones that HMRC has successfully litigated against. “These notices rest entirely on HMRC’s judgment . . . it is the element of discretion that is concerning,” says Mr Dodwell.

“You get the feeling that tax avoiders, who are otherwise tax compliant, are being targeted more than tax evaders because they are easier to identify,” says Tim Walford-Fitzgerald, senior private client manager at HW Fisher & Company.

The Dotas trail

As a senior manager at HMRC, Ray McCann was instrumental in formulating the “Dotas” (disclosure of tax avoidance scheme) rules in 2004. Now a partner at Pinsent Masons, a law firm, he says the regime was intended to make schemes less attractive by removing the cash flow advantage of participants, many of whom simply wanted to defer payment of tax.

Many promoters registered their schemes as a precaution, and not because they were aggressive avoidance schemes.

But Dotas is also a who’s who of tax scheme promotions; in July, HMRC published a list of 1,200 avoidance schemes whose investors will receive APNs. All were identified from their Dotas numbers.

Martin Taylor, head of client relations at Rebus Group, a claims management company, says that many investors – whose circumstances may have changed – now face potential hardship as a result of the Revenue’s demands. Depending on the scale of the taxpayer’s investment and their scheme’s leverage, as well as interest due, their tax bills could significantly exceed their initial investment.

HMRC encourages those who are unable to pay to contact them to discuss settlement opportunities. “To be fair, HMRC is saying that it doesn’t want to bankrupt people . . . but if you haven’t got the capital in the first place, time to pay doesn’t matter,” says Mr Taylor.

Accessing bank accounts

Another weapon in HMRC’s armoury is its ability to recover debt directly.

In the March Budget, Mr Osborne announced proposals to grant the authority powers to access the bank accounts of taxpayers who are more than £1,000 in arrears without the need to apply to a court, providing that it left at least £5,000 in the account.

HMRC estimates that the proposals would affect 17,000 self-assessment taxpayers each year. Individual savings accounts – a major store of personal savings – would also be accessible under the plans, as would joint accounts, from which half of any credit balance above £5,000 would qualify.

“Direct access to accounts has probably seen the most public outcry because, if administered improperly, it could leave vulnerable people in great difficulties.” says Ms Register.

It seems an extremely broad power for such a small target, when it can have much wider-reaching implications

- Tim Walford-Fitzgerald, senior private client manager, HW Fisher & Company.

“Albeit in good faith, HMRC does make mistakes on how much tax people owe,” says Patrick Stevens, president of the Chartered Institute of Taxation.

Last week, the authority acknowledged that it had sent incorrect income tax calculations to an estimated 20,000 taxpayers, prompting industry calls for a review of its systems.

HMRC has said that direct debt recovery would affect taxpayers with an average tax debt of £5,800. Around half of debtors affected have more than £20,000 in their bank accounts and Isas.

Although HMRC has committed to checks and procedures to prevent misuse, many accountants and lawyers continue to express concerns.

“The fact that HMRC might gain this executive power without judicial oversight is quite worrying,” says Mr Walford-Fitzgerald, who adds that it would not only affect tax evaders, but taxpayers experiencing general financial difficulties. “It seems an extremely broad power for such a small target, when it can have much wider-reaching implications.”

“The problem with direct access [proposals] is that clever fraudsters wouldn’t leave large amounts of cash in UK bank accounts,” says Ms Register.

HMRC has said that taxpayers would have ample opportunity to respond to its communication and request a repayment schedule. Under proposed safeguards, it says debtors would be contacted at least four times beforehand.

There is nothing currently to stop HMRC going through the courts to take money from bank accounts where debts are owed

- Patrick Stevens, president of the Chartered Institute of Taxation

Mr Stevens says that the proposals would allow the Revenue to access accounts without actually speaking to individuals. HMRC’s brown “On Her Majesty’s Service” envelopes may not only go unnoticed, he says, but unreceived if individuals are away from home.

The proposal appears largely intended to make the tax authority’s job easier, Mr Stevens adds. “There is nothing currently to stop HMRC going through the courts to take money from bank accounts where debts are owed.”

The authority can already collect debts directly from the salaries of taxpayers paid through the pay-as-you-earn system, usually through an amended tax code that incorporates their tax debt and spreads its repayment over the year.

The annual amount that HMRC can recover from taxpayers through so-called “coding out” increased from £3,000 to £17,000 a year in September. The increase to the limit, expected to raise £115m in the 2015-16 tax year, affects those earning more than £30,000 a year on a sliding scale. The maximum can be recovered from those earning £90,000 or more.

Mr Stevens says that while there are parallels with HMRC’s proposals for direct recovery of debt, “it is by far the lesser of evils if you do have some tax to pay back at some point . . . With direct recovery, it’s gone and you can do nothing about it.”

Criminalising taxpayers

Stashing the loot offshore is no longer a solution. Not only has there been a wide crackdown on the use of tax havens (see below), HMRC is now consulting on a “strict liability offence” of failing to declare taxable offshore income and gains, intentionally or not. Unlimited financial penalties or up to six months’ imprisonment are proposed, with sentencing dependent on the seriousness of non-disclosure.

Strict liability offences remove the onus to prove intent. “Many people are very concerned about this,” says Mr Dodwell. “Dishonesty needs to be proven, and criminal law has worked like this for centuries.”

Tax experts have argued that the policy could affect a large number of unintended victims who may have made innocent mistakes.

Mr Walford-Fitzgerald cites the example of the sale of a home overseas, without a capital gain in local currency, which could trigger a small profit in sterling terms due to exchange rate movements over time. If such a profit went undeclared – and exceeded £5,000, the proposed threshold of potential lost revenue – a taxpayer could be liable for prosecution.

“The nature of automatic penalties is that is that they are unforgiving – there is no room for honest mistakes,” says Dermot Callinan, head of private client advisory at KPMG.

Frank Haskew, head of tax faculty at the Institute of Chartered Accountants of England and Wales, says that a large number of taxpayers could easily end up making mistakes given the tax code’s complexity.

“The danger here is that we’re sliding into granting powers that could be quite draconian and could affect people who may not necessarily be subject to a criminal offence.”

The number of criminal prosecutions for tax evasion rose by almost one-third in the 2013-14 tax year, to 795. The authority has set a target of 1,165 prosecutions for 2014-15.

The shifting balance of power

Taken together, the tools acquired – and proposed – by HMRC seek to alter the balance of power radically between the authority and taxpayers who have got on the wrong side of it.

“Each of these changes shows increased powers to the tax authority and a corresponding decrease of powers to the taxpayer,” says Mr Stevens.

“Civilised society must have a balance . . .[and] if this is removed, there will be too much power in the hands of the state. Even without the intention to abuse this power, in the natural course of events, mistakes will happen and there is nothing to stop them.”

While the accountancy profession supports the government’s efforts to tackle tax evasion, there are concerns of an over-reach that may undermine trust in the system, says Mr Haskew.

“So often, these powers are taken [by HMRC], but then are they used? . . . There is a line and the Revenue needs to be careful not to cross it.”

Sharing information

It has long been a frustration for HMRC that it could not access the affairs of taxpayers beyond the UK. But following a flurry of international agreements, sun-kissed Caribbean islands and alpine retreats offer less sanctuary from the UK taxman.

In 2013, HMRC signed deals with all Crown Dependencies (the Channel Islands and the Isle of Man) and Overseas Territories (including the Cayman Islands and Gibraltar) to exchange information automatically about UK residents’ accounts in those jurisdictions.

HMRC has estimated that information exchange with the Crown Dependencies would return more than £1.1bn of extra revenue between 2013-14 and 2018-19.

The agreements follow the model of the US Foreign Account Tax Compliance Act, which is intended to detect and deter tax evasion by US citizens. Importantly, Fatca places the reporting burden primarily on financial institutions and national tax authorities, rather than individuals.

“I suspect the information collected will reveal a lot about tax avoidance schemes and individuals who have moved accounts around,” says Ms Lorimer.

Ahead of this vast data mining exercise, UK residents can use “disclosure facilities” to come clean about their offshore assets and reach a settlement with HMRC. Those relating to Guernsey, Jersey or the Isle of Man run until September 2016. Those who do not make a disclosure by this deadline face penalties of up to 200 per cent of the amount disputed.

Put simply, HMRC’s IT resources now mean it has a huge amount of financial detail on everyone

- Tina Riches, national tax partner, Smith & Williamson

But a similar deal with the Swiss tax authorities, which came into force in January 2013, has so far yielded far less than expected. Under the UK-Swiss agreement, UK taxpayers with assets in Switzerland were subject to a one-off charge in May 2013 to clear their past unpaid tax liabilities, unless they made a full disclosure. An annual “withholding” tax on future income and gains is also deducted automatically and transferred to HMRC.

According to HMRC figures, the agreement had raised £800m by March 2014 – far less than the £3.2bn that the tax authority had expected to raise in 2013.

Holders of Swiss accounts can move them to neighbouring Liechtenstein via an existing scheme. Under the Liechtenstein Disclosure Facility, which closes in April 2016, a 10 per cent fixed penalty is liable on all underpaid tax liabilities accrued since April 1 1999, with a 20 per cent rate applied on undeclared income since April 5 2009.

Mr Callinan says that the disclosure facilities offer a limited period for people to get their affairs in order. “If they do not, information will be shared about them and they will face the full force of penalties.”

Joining the dots

HM Revenue & Customs has long collected an array of information on individuals’ financial affairs, but information technology has revolutionised the way that the tax authority can piece together information about our liabilities and identify evasion and avoidance.

The authority’s “Connect” system, developed by defence contractor BAE Systems at an initial cost of £45m, matches more than one billion items of data from taxpayer records, third parties and the internet.

Analysis can reveal underpayment of tax by comparing that paid with personal income, credit card statements, bank account interest, and data from foreign tax authorities, as well as information from Companies House, the Land Registry and DVLA.

“The Connect system allows interrogation of lots of data very, very quickly . . . revealing the connection people may have with identified black spots in compliance,” says Tessa Lorimer at Withers.

HMRC says Connect has delivered £1.4bn in unpaid tax to the exchequer, since its launch in 2010.

“The system has already absorbed more data than the British Library and it is beginning to join the dots and paint many new pictures to highlight groups to target,” says Tina Riches, national tax partner at Smith & Williamson.

“Put simply, HMRC’s IT resources now mean it has a huge amount of financial detail on everyone.”

This article is provided by, which is published and distributed by Paolo Cirio Ltd., registered in England, number 8188080. Registered Office: Suite 36, 88-90 Hatton Garden, City of London, EC1 N8PG, United Kingdom. Paolo Cirio Ltd. alone is responsible and liable for information and services provided through Daily Paywall’s newspaper and website.

Enjoy The Real Value of Information

Earn Money
Offer Money
Buy Advertising
Buy Artwork Article

Similar Articles
Financial News that Matter for free!