Many of the 30 consultations and discussion papers published on the U.K.’s recent first “Tax Day” set out a vision for a more streamlined and efficient tax administration system which makes greater use of the increasing amount of data received by the U.K. tax authority, HM Revenue & Customs (HMRC), and real-time digital processes. Don’t hold your breath though. These papers set out the government’s and HMRC’s aspirations: the reality of a complete overhaul of the tax administration, if it happens, is likely to take ten years or more.
Some common themes emerge from the papers and, in particular, there is recognition that most non-compliance is not deliberate. Most taxpayers are not trying to avoid tax through the use of aggressive schemes or illegally evading their liabilities, but fail to pay the right amount through ignorance or carelessness.
There is more emphasis on helping “innocent” taxpayers to get it right. Even so, HMRC have made it clear that they will continue their relentless pursuit of those who create, promote or use aggressive avoidance schemes or deliberately fail to pay tax they know is due.
In order to “help taxpayers pay the right amount of tax” HMRC propose to:
- improve taxpayer education and understanding of their obligations;
- use the ever-increasing amounts of data collected under the Common Reporting Standard (CRS) and exchange of information initiatives;
- reduce error through the development of a completely digital tax system; and
- use agents and intermediaries acting for taxpayers to improve the accuracy of returns.
The objective is to collect more tax, more efficiently, and narrow the “tax gap.”
According to the most recent (2018–19) figures, nearly one third of the “tax gap”—the difference between the tax HMRC believe is due and the tax actually collected—is attributable to error or a failure to take reasonable care. By contrast, 15% was due to evasion and 5% to avoidance. One third of the tax gap equates to approximately 10 billion pounds ($13.8 billion) of tax lost through non-deliberate behavior.
To date, HMRC’s approach has been reactive: they identify non-compliance in the course of reviewing tax returns and then open inquiries into them in order to identify and recover unpaid tax. As anyone who has had the misfortune to be the subject of an investigation can testify, this can be a long, drawn-out, expensive and stressful business.
New Approach by HMRC
The new approach is to try and stop non-compliance before it happens.
Two of the Tax Day papers concern offshore non-compliance. HMRC’s own research indicates that taxpayer awareness of offshore tax obligations is low. Simple ignorance of the tax rules applying to offshore assets is identified as one of the factors causing non-compliance as well as guidance and communications from HMRC being unclear or irrelevant. The papers address how to improve this state of affairs.
Better Use of Data
HMRC’s first proposal is to make better use of the vast amounts of data which they receive under the CRS and Foreign Account Tax Compliance Act (FATCA) initiatives. In 2019, HMRC received information on 7.6 million offshore financial accounts held by U.K. resident individuals and their entities; an extensive resource to promote compliance and head non-compliance off at the pass. HMRC recognize that possession and use of all this information will throw up new challenges in maintaining taxpayer confidentially and data security.
Ideas on how they might leverage the data include:
- reminding taxpayers of the requirement to notify chargeability. A taxpayer who does not fill in tax returns may not realize they have to tell HMRC if they have taxable income or gains;
- reminding taxpayers, when sending a notice to file a tax return, that they have assets or income overseas;
- asking taxpayers they know to have foreign assets to complete the “foreign pages” of the tax return;
- prompting taxpayers who are completing their tax returns online by informing them that HMRC collect data which may detail their offshore assets, or even reminding taxpayers to declare income and gains from assets, in particular countries which HMRC know about;
- informing agents such as accountants, with whom HMRC are dealing on behalf of taxpayers, about the information which HMRC hold on their client’s offshore assets.
Taxpayers, innocent and not so innocent, will be left in no doubt that Big Brother is watching them, and as in Orwell’s dystopian vision it will undoubtedly influence their behavior. It will certainly focus the minds of those who are trying to complete their tax returns correctly and will focus the minds of those who are not even more!
The second proposal involves, as former Prime Minister Tony Blair put it, “Education. Education. Education.”
HMRC already provide large amounts of guidance and information on their website, thousands of pages of it. The problem is the “unknown unknowns.” If an individual does not know that they have obligations around their offshore assets they are unlikely to trawl through the guidance or stumble over the information they need. Even those individuals who do know that they have potential liabilities but are not sure what to do about it can have problems finding the information and understanding it, if they do manage to find it.
HMRC are beginning to recognize this and to consider how to engage more proactively with taxpayers to raise awareness of obligations and provide education and guidance as to how to meet them.
HMRC had recent success with the “Requirement to Correct” communications campaign. The Requirement to Correct required taxpayers with offshore non-compliance to come forward by a deadline or face penalties of up to 200% of the tax due. HMRC carried out a communications campaign using webinars, radio, newspapers and industry presentations. As a result, almost 14,500 taxpayers came forward to regularize their tax affairs, raising over 100 million pounds.
The third theme is to provide “prompts” to taxpayers to “suggest they consider whether tax may be due because of certain income or assets they hold or receive.” Although HMRC contemplate that prompts could be delivered by letters in the post, they envisage that many of the prompts will be delivered digitally while taxpayers are completing their returns.
HMRC have already trialed this “nudge” approach. They asked businesses to confirm at the start of their value-added tax (VAT) return that they would complete the form honestly rather than making a declaration at the end of the process, and they reminded taxpayers claiming foreign tax credit relief to check that they had entered the correct amount and inserted the correct percentage rate. These seemingly simple reminders reduced errors and increased the tax yields.
The fourth strand is to build on existing relationships with agents and intermediaries. HMRC are seeking views about the direct sharing of information on taxpayers with their agents. Accountants and other tax agents are reliant on their clients to give them the right information. If the clients do not realize they need to declare certain receipts they may not tell their agents about them. If HMRC give the agents the information, the agents will be better placed to make sure the taxpayer tells all.
International Tax Collection
A further paper addresses the specific problems of collecting “international tax debt,” that is, a liability to tax which has arisen where the taxpayer, their assets, or both, are outside the U.K.
There are obvious difficulties with trying to collect debts from nonresidents. Nonresidents who own U.K. real estate are likely to owe U.K. tax but they have assets in the U.K. against which liabilities can be enforced. The majority of offshore tax debt arises from unpaid VAT and income tax from self-assessment.
Collection rates for domestic tax debt are around 90%, whereas international tax debt collection rates are nearer 35%. The total tax debt was 20 billion pounds as at January 2020 and 5% of this—1 billion pounds—was represented by international debt.
HMRC’s strategy for preventing international debt occurring in the first place, or recovering it when it has arisen, is again based around data, education and digital processes. They plan to use the data to identify specific professions, activities or jurisdictions which have a higher risk.
There is then a major role for guidance and education. One idea is to distribute information through agents and intermediaries who will be advising the offshore taxpayers. As well as using traditional means of providing information through manuals, leaflets and internet pages, HMRC are looking to engage taxpayers through newer formats including webinars, YouTube videos and forums where taxpayers can ask questions.
The expanding use of digital processes and payment methods should also make it easier to communicate and pay tax. One of the difficulties with international tax debt is that HMRC will only correspond by post unless the taxpayer has given permission to use email. This can create problems in the international context where letters may go missing and will certainly take much longer to be delivered. HMRC want to obtain permission to use email at the earliest possible time. To help those nonresidents who do not speak English, HMRC are currently engaged in a trial of sending bilingual letters/emails to nonresident taxpayers.
All this is intended to help taxpayers who want to be compliant, to comply.
A different issue is the minority of taxpayers who are simply non-cooperative and do not intend to settle their debts. Although there are existing processes by which HMRC can ask the tax authorities in another jurisdiction to help, this is a cumbersome and lengthy procedure and may incur greater costs than the tax at stake.
HMRC have identified the problem, but have not identified any solution as yet.
HMRC are hoping that agents and intermediaries will be part of the solution to non-compliance and they want to make sure that they are not part of the problem. A further strand of the consultations explores how to raise standards in the tax advice market and suggests requiring all tax advisers to carry professional indemnity insurance.
Clamping Down on “Promoters”
HMRC are also ramping up efforts to suppress the promoters of aggressive tax avoidance schemes. They believe that they need stronger powers against the promoters, despite the wide-ranging legislation which already exists and even though it is estimated that there are fewer than 20 companies engaged in devising and promoting these schemes.
The aims of “Clamping down on promoters of tax avoidance” are to:
- enable HMRC to seize promoters’ assets to prevent them avoiding the payment of penalties;
- tackle offshore promoters who operate through U.K. entities through the introduction of new penalties;
- give HMRC the power to apply to the courts to close down a company involved in promoting tax avoidance and disqualify the directors of the company.
Once again, taxpayer education will play its part. HMRC want to inform taxpayers so that they can avoid getting embroiled in avoidance schemes and can exit them if they are already involved.
HMRC also recognize that the advertising and marketing materials used by promoters are sophisticated and convincing and many users of the schemes do not realize what they are getting themselves involved in. HMRC hope that by equipping taxpayers to recognize avoidance schemes through guidance and education, delivered by digital prompts and other means, they will reduce the market for such schemes and help to put the promoters out of business.
A Positive Step
HMRC’s recognition that most taxpayers want to comply with their obligations, but that some need help to do so, is a positive step. Their proposals are ambitious and far-reaching and it is to be hoped that they will translate into a workable and fair regime shaped in consultation with interested stakeholders. At all events, the intention to prevent non-compliance before it happens through better education and information, delivered in a proactive way which actually reaches taxpayers and is of genuine help, is to be welcomed.
And as for those who still think they can “get away with it,” they will find that they are sadly mistaken.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Marilyn McKeever is a Tax Partner at BDB Pitmans.
The author may be contacted at: firstname.lastname@example.org