A call for evidence: simplification of the Tax Administration Framework

As part of its ongoing review of the Tax Administration Framework, the government has issued a further call for evidence in relation to HMRC's enquiry and assessment powers, penalties and safeguards (the Call for Evidence).

This follows two previous consultation publications and works towards the government's wider objective "to simplify and modernise the tax system, tackle non-compliance, make the tax system fairer for taxpayers and to make the customs system better for traders."

Call for Evidence: enquiry and assessment powers, penalties and safeguards

The Call for Evidence sets out 22 potential reforms, covering the following areas:

(1) Enquiry and assessment powers, where HMRC faces the challenge that many of its current powers are specific to individual regimes. In circumstances where, for example, HMRC is checking a taxpayer's compliance across multiple taxes at the same time, this inconsistency can give rise to complications, resulting in additional costs.  Claims for tax relief and credits are also stated to present challenges, with a 'process now, check later' approach.

Achieving consistency and aligning and addressing gaps across different tax regimes is therefore a common feature throughout the Call for Evidence, along with other proposals, such as simplifying time limits and modernisation of administration and communications.

(2) Penalties, where the Call for Evidence explores opportunities to reform the design of the regime for financial penalties, which has been subjected to criticism on the basis that it is too complex.  Ensuring proportionality of penalties presents a challenge under the current rules, whilst the process of considering taxpayers' behaviour when determining appropriate penalties is time-consuming and costly.  Furthermore, where professional advisors are non-compliant, there are limited means to address this.

The Call for Evidence therefore explores the possible implementation of proportional fixed penalties, calculated by reference to a taxpayer's taxable income.  Another suggestion is penalty escalation for continued and / or repeated non-compliance, with the intention of discouraging non-compliance.  The Call for Evidence considers various other potential reforms, such as of penalty suspensions, aligning and simplifying penalties across tax regimes, and designing new penalties to discourage undesirable behaviour.

(3) Safeguards, which are put in place to ensure that taxpayers and intermediaries are treated fairly and in accordance with the law. The safeguards focussed on within the Call for Evidence include the use of alternative dispute resolution (ADR), statutory review and appeal to the First-tier Tribunal.  The Call for Evidence notes the wide range of processes and legislative considerations that taxpayers and their agents may need to navigate, and that exploitation of safeguards is seen to be a challenge.

The Call for Evidence therefore focusses on a system built on consistency, with the possibility of aligning procedures across appeals to HMRC, statutory reviews and appeals to the tribunal. It talks about mandating statutory reviews in certain circumstances, whilst also withdrawing the option of statutory reviews in others.  Other options considered include the alignment of payment requirements, improvement of access to ADR and statutory review, and the implementation of digital administration.

The impact of the proposed reforms on claims against professional advisors

There is a focus on creating a simplified tax administration framework within the Call for Evidence, and ensuring consistency (where possible) across each of the different tax regimes. One would hope that, from this, there would be further clarity around what is required of taxpayers.

A simplification of the rules should, in theory, make compliance with the rules easier. On that basis, a reduction in claims against professional advisors may follow. Equally, however, changes to the system may result in a period of unfamiliarity and adjustment for professional advisors, which could result in more claims in the short term.

Further, one of the key challenges identified within the Call for Evidence is HMRC's current limited means to address failings by professional advisers. The Call for Evidence notes that, under the Canadian tax rules for example, the tax authority can impose a 'preparer penalty', which "applies to persons who make or participate in making a false statement and knew or would reasonably be expected to know that the statement was false." The Call for Evidence says that there is no equivalent penalty within the UK, at least for the moment...

A change to the system, paving the way for HMRC to take direct action against professional advisors would increase their exposure, as well as potentially increasing their Insurers' exposure. It is clear to see here that there is also the potential for disputes to arise, and so the potential costs of disputing a penalty would also need to be considered.

The Call for Evidence also asks for views in respect of the reform of the use of penalty suspensions. The introduction of more lenient measures to allow for compliance where, for example, a tax return was not filed by a tax professional in accordance with the requisite time limits, could see a reduction in claims. There is, of course, the question who would benefit from penalty suspensions (i.e. whether or not the suspension would be afforded to professional advisors), but, in keeping with the wider objective of simplifying the tax administration framework, it would seemingly make sense for the same rules to apply across the board.

Summary

The potential reforms considered within the Call for Evidence suggest that, for taxpayers and professional advisors alike, substantial changes to the tax administration framework are likely to be introduced in the not too distant future.

Whilst there are proposed reforms that could theoretically result in a reduction in claims made against professional advisors, we have noted that there are also reforms that could increase exposure in some areas, both for professionals and for their Insurers.

For those who wish to respond to the Call for Evidence, the deadline for doing so is 9 May 2024. The government has said that responses to the Call for Evidence will inform any future policy proposals, and we will provide a further update following the publication of any such proposals.

To read the Call for Evidence, please click here.