Finance Bill Sub-Committee
Thursday 15th October 2026
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09:44
Lord Newby
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Lord Newby
It says. The government says that this new requirement is about making explicit the obligation on taxpayers to correct errors. And what we'd like to hear from you initially is whether you think this is necessary. And to what extent the current legislative framework is deficient in giving the powers to HMRC to pursue taxpayers who fail to correct errors on their returns. Sandy.
09:45
Speaker 1
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Speaker 1
Thank you. I think I would probably start by saying that I think both the Law Society and myself take the view that further statutory compliance powers should only be introduced where a clear policy requirement has been identified. And so my starting point is, is that I do not believe that to be the case here. So whilst it is right to say that under the current UK tax rules, there's no general kind of standalone statutory duty obliging a taxpayer to voluntary notify HMRC upon discovering an error in a previously filed return, you know, failing to correct an error can expose the taxpayer to penalties and potentially larger penalties if that behaviour is treated as careless or deliberate.
I think that that should be enough. So if you were to sort of expand that beyond where it sort of currently lies from a statutory framework perspective, you would think that that would have to be conclusively demonstrated. The other thing I would say is, is that, you know, we have a system of self-assessment, and a taxpayer has to take reasonable steps to ensure they file accurate returns. And this is a, I think, sufficient burden placed on the taxpayer at that point in the cycle without having them to sort of further police what has happened post the filing of those returns.
Whilst HMRC considers both, you know, the return that has been submitted in any ancillary or extra sort of evidence or documents required to sort of substantiate that, I can potentially see a value in HMRC being able to issue something akin to a correction notice. But I'd also query how different that is in practical terms to the existing powers HMRC have, where if they look at return filed by a taxpayer and they're not sure about something, they can open an inquiry into that tax return and ask, you know, a taxpayer for further details.
I also think there's a danger, potentially in having a taxpayer having to self-police post filing and, and, and the consequences of that being potentially deemed deliberate behaviour. I would also question whether or not, given what these not just this power, but other powers that HMRC are looking to introduce, you know, is this proportionate to what they're trying to target in terms of behaviour? Is this proportionate in terms of what they're trying to target in terms of closing the tax gap? I'm still struggling to see how this power potentially helps with those objectives.
So I think in summary that would kind of be my take on where I see, you know, the need or indeed the justification for this this measure.
I think that that should be enough. So if you were to sort of expand that beyond where it sort of currently lies from a statutory framework perspective, you would think that that would have to be conclusively demonstrated. The other thing I would say is, is that, you know, we have a system of self-assessment, and a taxpayer has to take reasonable steps to ensure they file accurate returns. And this is a, I think, sufficient burden placed on the taxpayer at that point in the cycle without having them to sort of further police what has happened post the filing of those returns.
Whilst HMRC considers both, you know, the return that has been submitted in any ancillary or extra sort of evidence or documents required to sort of substantiate that, I can potentially see a value in HMRC being able to issue something akin to a correction notice. But I'd also query how different that is in practical terms to the existing powers HMRC have, where if they look at return filed by a taxpayer and they're not sure about something, they can open an inquiry into that tax return and ask, you know, a taxpayer for further details.
I also think there's a danger, potentially in having a taxpayer having to self-police post filing and, and, and the consequences of that being potentially deemed deliberate behaviour. I would also question whether or not, given what these not just this power, but other powers that HMRC are looking to introduce, you know, is this proportionate to what they're trying to target in terms of behaviour? Is this proportionate in terms of what they're trying to target in terms of closing the tax gap? I'm still struggling to see how this power potentially helps with those objectives.
So I think in summary that would kind of be my take on where I see, you know, the need or indeed the justification for this this measure.
09:48
Speaker 2
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Speaker 2
I am going to disagree because I've had the CIOT do consider that that it is this is necessary. And actually we have advocated for it in consultation responses that we've made to HMRC in the last few years when various other methods, various other compliance interventions were suggested. So I think there is a strong policy rationale for encouraging taxpayers to correct errors once they become aware of them. And I think it's reasonable to expect taxpayers to do that.
I mean, this is all with the caveat that it's clear what they need to do and so on, which I think we'll come on to later. So the number of reasons why we, we, we take in that position because we do think it will help improve compliance, encourage for more voluntary disclosures, and it should reduce the need for HMRC to make active interventions, which is all for the good given their, you know, the resources they have to hand. But very importantly, the tax gap.
I mean, it has the potential to reduce the tax gap. And latest figures for the tax gap show that every taxpayer mistake accounted for more than half of the latest tax gap figures. Exact figures, failure to take reasonable care. That was 20.8 billion and error was 9.3 billion. So we're talking about significant amounts of tax that are due to taxpayer mistake. So if this has if this drives behavioural change and encourages more taxpayers to correct errors once they become aware of them, that should hopefully impact those figures.
Additionally, it would reinforce the requirement on tax advisers that currently exists in professional conduct in relation to taxation, which is known as PCR, and the CIOT is one of the seven signatories to that. And it's basically our professional rules. And in those professional rules, there's a requirement on tax advisers to encourage and assist their clients to correct errors once they become aware of them. And I identified so I think having an overarching statutory duty to correct will support those professional rules and help tax advisers in those sometimes difficult discussions they may have with clients.
When an error is identified and discussing what to do about it and how much additional tax might be payable. Sandy mentioned there are already some consequences in legislation if you don't correct once you become aware of an error, I think there's an implicit or implicit duty under criminal law to rectify errors. For example, the offence of cheating the public revenue. But as far as we're aware, that HMRC prosecution policy seems to indicate that they wouldn't prosecute most cases under that under that there's also the requirement in penalty legislation that if you do discover an error and you fail to correct it, and the error wasn't originally careless or deliberate, then it will be deemed to be careless.
So that is already there. So what we're seeing in the draft legislation is a step up from that. It will be treated as deliberate. And also if you if you report an error later, it's more likely to be prompted. So there'll be a higher penalties for that as well. So there are some already some consequences. But this is just putting it under a statutory sort of umbrella.
And I think so long as we'll come on to I expect later, so long as there's sufficient awareness raising and education so taxpayers actually know what they've got to do, then I think our view is that we we support it.
I mean, this is all with the caveat that it's clear what they need to do and so on, which I think we'll come on to later. So the number of reasons why we, we, we take in that position because we do think it will help improve compliance, encourage for more voluntary disclosures, and it should reduce the need for HMRC to make active interventions, which is all for the good given their, you know, the resources they have to hand. But very importantly, the tax gap.
I mean, it has the potential to reduce the tax gap. And latest figures for the tax gap show that every taxpayer mistake accounted for more than half of the latest tax gap figures. Exact figures, failure to take reasonable care. That was 20.8 billion and error was 9.3 billion. So we're talking about significant amounts of tax that are due to taxpayer mistake. So if this has if this drives behavioural change and encourages more taxpayers to correct errors once they become aware of them, that should hopefully impact those figures.
Additionally, it would reinforce the requirement on tax advisers that currently exists in professional conduct in relation to taxation, which is known as PCR, and the CIOT is one of the seven signatories to that. And it's basically our professional rules. And in those professional rules, there's a requirement on tax advisers to encourage and assist their clients to correct errors once they become aware of them. And I identified so I think having an overarching statutory duty to correct will support those professional rules and help tax advisers in those sometimes difficult discussions they may have with clients.
When an error is identified and discussing what to do about it and how much additional tax might be payable. Sandy mentioned there are already some consequences in legislation if you don't correct once you become aware of an error, I think there's an implicit or implicit duty under criminal law to rectify errors. For example, the offence of cheating the public revenue. But as far as we're aware, that HMRC prosecution policy seems to indicate that they wouldn't prosecute most cases under that under that there's also the requirement in penalty legislation that if you do discover an error and you fail to correct it, and the error wasn't originally careless or deliberate, then it will be deemed to be careless.
So that is already there. So what we're seeing in the draft legislation is a step up from that. It will be treated as deliberate. And also if you if you report an error later, it's more likely to be prompted. So there'll be a higher penalties for that as well. So there are some already some consequences. But this is just putting it under a statutory sort of umbrella.
And I think so long as we'll come on to I expect later, so long as there's sufficient awareness raising and education so taxpayers actually know what they've got to do, then I think our view is that we we support it.
09:52
09:52
Speaker 3
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Speaker 3
Yes, thank you, my Lord. We are going. The Law Society of Scotland is perhaps going to take a middling tack as compared to the loss of life, England, Wales and Co. It. We certainly understand the policy aim behind this legislation and in principle we are supportive of it. But we have a couple of reservations regarding the specificity of some terms. And I think in general, there are some terms that need further guidance in order to properly work through this legislation.
I would specifically point out to unclear terms reasonable steps in terms of steps taken. And when the taxpayer becomes aware of the inaccuracy. These are two terms that we highlighted in our written evidence as well, that we believe could do with some further guidance from HMRC to specify what exactly they mean, and building off what I have just said there, making this legislation work will depend greatly on taxpayer understanding of their obligations under the legislation, and that will require clear guidance.
We are supportive in general of HMRC cracking down on the tax cap, but we do note also that this has been quite a fairly busy period for legislation on tax conduct, so to speak, in the last couple of years, and we would just kind of wish for consideration to be given about how this properly fits within that overall framework. We'd highlight, particularly the recent introduction of mandatory registration for tax advisers. We note that this is an obligation, obviously, on the taxpayer, but taxpayers will be taking advice from tax advisers and will go on to that in a little bit.
But there is further consideration, we think, for how exactly this impacts tax advisers and their professional obligations under the legislation.
I would specifically point out to unclear terms reasonable steps in terms of steps taken. And when the taxpayer becomes aware of the inaccuracy. These are two terms that we highlighted in our written evidence as well, that we believe could do with some further guidance from HMRC to specify what exactly they mean, and building off what I have just said there, making this legislation work will depend greatly on taxpayer understanding of their obligations under the legislation, and that will require clear guidance.
We are supportive in general of HMRC cracking down on the tax cap, but we do note also that this has been quite a fairly busy period for legislation on tax conduct, so to speak, in the last couple of years, and we would just kind of wish for consideration to be given about how this properly fits within that overall framework. We'd highlight, particularly the recent introduction of mandatory registration for tax advisers. We note that this is an obligation, obviously, on the taxpayer, but taxpayers will be taking advice from tax advisers and will go on to that in a little bit.
But there is further consideration, we think, for how exactly this impacts tax advisers and their professional obligations under the legislation.
09:53
Lord Newby
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Lord Newby
I'll just press you on the point you make. I have sympathy with about defining reasonable steps, because it seems to me that's quite difficult. And I mean, what form of guidance would you look for? Would it be examples of what is reasonable and not reasonable? Or I mean, how do you get beyond a very, very vague? As you say, reasonable is a subjective term, as we find what people consider to be reasonable or common sense varies very, very much between people.
09:54
Speaker 3
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Speaker 3
I think something that we picked up in particular, and to do with reasonable steps, is the lack of a deadline for the correction. I think a clear timeline outlined in guidance would help taxpayers and tax advisers understand their obligations and at what speed they should move to correct those errors. As to a specific example, I could not speak to that, but I can offer to get back to you in writing, after speaking to our tax law subcommittee, who can perhaps provide more detail on that.
09:54
Lord Newby
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Lord Newby
Thank you very much. I've got a supplementary question, which is is principally addressed to Sandy. Given that, Sandy, you're not keen on what the government is doing, do you have any other suggestions as to what HMRC might do to improve taxpayer behaviour around correction of errors? If this isn't the way that you would do it, or, as you slightly implied, do you think that the HMRC already has the powers that it needs to deal with errors anyway?
09:55
Speaker 1
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Speaker 1
If I may, I'll start with the the second point first I. I think that sufficient powers do exist, and I think that with further resourcing, HMRC could probably take better advantage of those existing powers. I appreciate that it's a hard job and therefore sometimes the easy solution seems to be to try and increase the scope of powers and hope that that also creates kind of more of a deterrent in terms of sort of dealing with errant taxpayer behaviour. I think in terms of alternatives, I would come back to something that that Margaret correctly identified earlier when she was pointing to the sort of biggest component of the tax gap.
And I'm using HMRC's own statistics here when I sort of talk about the tax gap. So what they call failure to take reasonable care is sort of 35% of the tax gap. And then errors, errors. And this is mistakes that a taxpayer makes despite taking reasonable care. That's a further 12%. Sorry sorry 16%. I'm sorry. And so. 3516 that takes you to over half of the tax gap.
And the question is, is that arising because simply taxpayers are not behaving appropriately, or is there something else going on? And if you also look at the sector from which a lot of the tax gap comes from, it is typically the small business sector, and the sort of trend in the statistics has been repeated. I'm quoting the latest tax cap figures that I have for the tax year 2425. But that trend has been sort of replicated in the tax gap statistic for a number of years.
And my personal view is, is that what that is saying is that the tax code is too complicated, and therefore compliance with the tax code is problematic as a result of that. And so if you really want to make a significant dent in the tax gap, we need to look at the existing tax laws and find a way to make compliance easier for the taxpayer. Because I'm not convinced that actually, for example, when you're looking at sort of, you know, careless or negligent behaviour by taxpayers, I'm not convinced.
And certainly my professional experience is that I'm not convinced that that comes from bad behaviour by taxpayers. I think it's more of an issue where there's just struggling to understand obligations, struggling to understand the scope of the laws that they need to comply with, and the fact that tax is inherently complicated and uncertain sometimes, and therefore enhancing powers which have the premise that the taxpayer is somehow at fault and their behaviour is what is driving the difficulty. I think that's where I have the key concern.
And so my alternative would be a sort of fresh look at how we legislate in the UK, and also considering whether or not there are areas of the tax code where, for example, the tax gap is wide and things that can be done to address that.
And I'm using HMRC's own statistics here when I sort of talk about the tax gap. So what they call failure to take reasonable care is sort of 35% of the tax gap. And then errors, errors. And this is mistakes that a taxpayer makes despite taking reasonable care. That's a further 12%. Sorry sorry 16%. I'm sorry. And so. 3516 that takes you to over half of the tax gap.
And the question is, is that arising because simply taxpayers are not behaving appropriately, or is there something else going on? And if you also look at the sector from which a lot of the tax gap comes from, it is typically the small business sector, and the sort of trend in the statistics has been repeated. I'm quoting the latest tax cap figures that I have for the tax year 2425. But that trend has been sort of replicated in the tax gap statistic for a number of years.
And my personal view is, is that what that is saying is that the tax code is too complicated, and therefore compliance with the tax code is problematic as a result of that. And so if you really want to make a significant dent in the tax gap, we need to look at the existing tax laws and find a way to make compliance easier for the taxpayer. Because I'm not convinced that actually, for example, when you're looking at sort of, you know, careless or negligent behaviour by taxpayers, I'm not convinced.
And certainly my professional experience is that I'm not convinced that that comes from bad behaviour by taxpayers. I think it's more of an issue where there's just struggling to understand obligations, struggling to understand the scope of the laws that they need to comply with, and the fact that tax is inherently complicated and uncertain sometimes, and therefore enhancing powers which have the premise that the taxpayer is somehow at fault and their behaviour is what is driving the difficulty. I think that's where I have the key concern.
And so my alternative would be a sort of fresh look at how we legislate in the UK, and also considering whether or not there are areas of the tax code where, for example, the tax gap is wide and things that can be done to address that.
09:58
09:59
Speaker 3
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Speaker 3
Yes, I'm afraid I would agree with it, though we're not entirely sure either where it would come, but I would kind of echo the Law Society of England and Wales points earlier that resourcing is key. Wherever HMRC targets it, they need to make sure that they have the adequate resources to do so, rather than give themselves more powers without the resource to back it up, so to speak. Yeah.
09:59
09:59
Lord Carrington of Fulham
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Lord Carrington of Fulham
Yes. Thank you. I think we've probably already touched on what I'm trying to get at, but it's this there are going to be some tax payers, particularly very small businesses or indeed individual taxpayers who don't have professional advisors. There are also going to be taxpayers and particularly small businesses who have professional advisors who. How can I put it, do a cheap and cheerful procedure for their businesses because that's all the business can afford.
So how difficult is it going to be for a non-specialist, an individual, or a small business owner to be able to get their taxes correct? And more importantly, when they get a customer correction notice coming through, how easy will it be for them to be able to respond to that without incurring unreasonable costs?
So how difficult is it going to be for a non-specialist, an individual, or a small business owner to be able to get their taxes correct? And more importantly, when they get a customer correction notice coming through, how easy will it be for them to be able to respond to that without incurring unreasonable costs?
10:00
Speaker 2
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Speaker 2
Can I take that, my Lord? Yeah. So I think you mentioned the notice. So I think it feels to me that it's a bit this is this correction measures more understandable when you think of it in terms of HMRC sending a prompt to someone, because actually they will become aware that they may have made an error, but obviously they'll need to check. So the the explanation in the notice needs to be very clear about what the error is.
HMRC suspect has occurred, how the taxpayer what the taxpayer should do about it. There should be an easy process to either let HMRC know. Actually no, I haven't made an error or I have. And this is how I need to tell HMRC. So there needs to be very clear guidance to somebody, especially somebody who doesn't have access to professional advice, because I think, you know, they're they're going to be a cohort of people who may struggle with this.
If you've got a professional adviser, they'll be able, they'll be there to, to give advice. Of course, one concern is that correction notices, we don't know at the moment because they're obviously going to be new. So we don't know how HMRC intending to use them. But we we'd hope and we we'd expect and we'd advocate for them to be used only in cases where HMRC are pretty certain that there has been an error. So they're pretty certain that some source of income has been omitted, for example.
So . So that so that the. Otherwise I mean if they're going to be used for broader things, I mean , tax payers could be put to a lot of unnecessary work and cost trying to deal with them. And then maybe actually there is no error.
HMRC suspect has occurred, how the taxpayer what the taxpayer should do about it. There should be an easy process to either let HMRC know. Actually no, I haven't made an error or I have. And this is how I need to tell HMRC. So there needs to be very clear guidance to somebody, especially somebody who doesn't have access to professional advice, because I think, you know, they're they're going to be a cohort of people who may struggle with this.
If you've got a professional adviser, they'll be able, they'll be there to, to give advice. Of course, one concern is that correction notices, we don't know at the moment because they're obviously going to be new. So we don't know how HMRC intending to use them. But we we'd hope and we we'd expect and we'd advocate for them to be used only in cases where HMRC are pretty certain that there has been an error. So they're pretty certain that some source of income has been omitted, for example.
So . So that so that the. Otherwise I mean if they're going to be used for broader things, I mean , tax payers could be put to a lot of unnecessary work and cost trying to deal with them. And then maybe actually there is no error.
10:02
Lord Carrington of Fulham
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Lord Carrington of Fulham
Could I just come back on that quickly? Because I have to say my experience of HMRC is they go fishing, they send out a general notice saying, we don't think this is correct, largely driven, particularly in the corporate sector, between presumably some sort of possibly AI, but some some sort of system generated comparison between previous years figures. And they say, we don't understand why this is different, effectively explain it and justify it. Aren't they going to do exactly the same with these? Aren't they just going to go and say, we've looked at your tax return from last year and your tax return this year.
There's a difference. Go into detail as to why that's different.
There's a difference. Go into detail as to why that's different.
10:03
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10:03
Speaker 2
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Speaker 2
I mean, that is also a prompt. So I guess, you know, at that stage, if this measure comes in at that stage, the taxpayer may potentially be aware that they might have made an error. They then have to do some work to investigate it. You know, take professional advice if they don't already have an adviser. So I mean, it could and it ultimately, if it's unfounded, that's going to create. But as now that will create a lot of unnecessary costs and work.
But I suppose with this measure, the the stakes are higher because if you don't. Correct. And actually it is an error, HMRC come later and is an error. They decide it is an error, they issue a deliberate penalty, and then you're kind of into a new. Sort of, you know, a new, a new new risk, some elements of risk.
But I suppose with this measure, the the stakes are higher because if you don't. Correct. And actually it is an error, HMRC come later and is an error. They decide it is an error, they issue a deliberate penalty, and then you're kind of into a new. Sort of, you know, a new, a new new risk, some elements of risk.
10:04
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10:04
Speaker 2
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Speaker 2
Well they're new. So I mean I think the correction notice is is definitely a sort of the consultation around that is less mature than on the error correction sort of overarching duty. So I think we think there should be further consultation around how these notices are going to work and what they're going to look like and how they're going to be issued and what for and what information they'll contain. That's really important. And HMRC have said to us that they will continue to engage with us during that process, which we welcome.
10:05
Lord Leigh of Hurley
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Lord Leigh of Hurley
Can I interrupt on that? Because my understanding was the CCN was going to be specific. You forgotten that bank account. You've forgotten that source of income, whereas the nudge letters are open ended and you sit there worrying, what on earth have I forgotten about? So can we be clear on this? Is this going to specifically say that what the error that needs reporting should be and limit it to that? Well.
10:05
10:05
Speaker 2
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Speaker 2
At the moment I think we well, we don't actually know because obviously they're new, but these are the sort of things we'd be advocating for. Yes. Because another risk of a CCN is it picks up HMRC spot that the taxpayer's omitted one source of income from their tax return. But actually the taxpayer did it the last year as well, or the year before. Or perhaps there's other errors. So there's another risk of one of these notices is that that taxpayer could make an incomplete disclosure.
You know actually they should be disclosing all their errors at the same time. And there's routes to do that. So just responding to a notice that identifies one error may leave them exposed. If there's other errors that they're not correcting at the same time. So that is a risk of these notices. So I think they need to be clear as well that you need to they also nudge to consider whether the taxpayer's made other errors.
You know actually they should be disclosing all their errors at the same time. And there's routes to do that. So just responding to a notice that identifies one error may leave them exposed. If there's other errors that they're not correcting at the same time. So that is a risk of these notices. So I think they need to be clear as well that you need to they also nudge to consider whether the taxpayer's made other errors.
10:06
Speaker 3
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Speaker 3
I think just to go back to Lord Carrington's question about taxpayers that do not have professional advice, something that we picked up in HMRC earlier consultation on the reform of behaviour behavioural penalties earlier in the year, as we consider that generally when it comes to penalties, HMRC should not just take a black and white approach, they should consider the factors. For example, what is the size and scale of the of the instance? How big is the tax loss here? The frequency of errors? I think in this case, building off what Margaret just said there.
That's a key point. Is this a first offence? Is this a one off or is this a pattern? The intent and as Lord Carrington said, was professional advice received? If it's not, I think that also builds the case for clear and coherent guidance with examples so taxpayers can be made made to understand their duties under the legislation. Tax is complex, we all know this and there are people who are going to go, well, I won't need professional advice.
I'm going to do it on my own and that will sadly result in errors, I believe. So I think guidance is key, but also HMRC discretion will be key in making this work and also building confidence in the system that HMRC are not simply punishing taxpayers. I think for modest errors.
That's a key point. Is this a first offence? Is this a one off or is this a pattern? The intent and as Lord Carrington said, was professional advice received? If it's not, I think that also builds the case for clear and coherent guidance with examples so taxpayers can be made made to understand their duties under the legislation. Tax is complex, we all know this and there are people who are going to go, well, I won't need professional advice.
I'm going to do it on my own and that will sadly result in errors, I believe. So I think guidance is key, but also HMRC discretion will be key in making this work and also building confidence in the system that HMRC are not simply punishing taxpayers. I think for modest errors.
10:08
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10:09
10:09
10:09
Speaker 2
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Speaker 2
I hope so? I mean, it's something that we will continue to to press because I think they've already piloted that with some of their nudge letters, which sometimes can be really vague. And they have piloted used some actually putting the source of an income. They think that that someone may have omitted from their tax return in a nudge letter. And the feedback they've had from taxpayers is, that's really helpful because taxpayers need some guidance. You know, you get a correction notice from HMRC, you need to know what is HMRC are concerned about.
Otherwise, you know, you're going to be put to a lot of time trying to work out what they may or may not think the error is.
Otherwise, you know, you're going to be put to a lot of time trying to work out what they may or may not think the error is.
10:10
10:10
Speaker 1
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Speaker 1
My Lord, I'm not sure that I can answer that question because I think HMRC is obviously an enormous organisation, that it's very difficult to sort of say that, you know, as an organisation they all behave in a particular way. I think what I would say, and this is a both a Law society position and my own personal view, in order to ensure that we have rule of law in the UK, you know, state bodies need to have very clear scope of the powers that they have.
They they should be limited discretion, and that discretion should be appropriate and proportionate. I think that in the context of this particular proposal, I agree with a number of the concerns that have been raised. I also think that it's my understanding from the original consultation document that the sort of threshold for HMRC and Ken's will be a reason to suspect, which I think is an inappropriate threshold for something like this. I think the bar should be higher, particularly to your point about ensuring that it is appropriately used.
Now, it may well be the case that when further draft legislation is published and the rules are tighter and these things are clarified, I would also advocate that HMRC are put on a very clear statutory footing as to what they can and can't do, and we don't sort of try put too much in the discretionary guidance about what HMRC can and can't do with this power, for the very reasons that you've identified. I guess the last point I would make is that it still goes back to what they're looking to achieve.
I think, you know, Reuben rightly pointed to the idea that we kind of legislation should probably hope for the best behaviour by parties, but it also should cater for the potential worst behaviour. And that's both on the side of the state as well as on the side of the taxpayer. But in order for a measure like this to be proportionate, it should be very, very clear the type of behaviour it's looking to target. And if it's looking to target bad taxpayer behaviour, then it should be clear and the rules should be tightened accordingly.
If this is looking to create a broader deterrent for all taxpayers, then the question that should reasonably be asked is that will it provide the appropriate deterrent or will it simply add yet more cost and administrative burden on taxpayers who are already trying very hard to comply?
They they should be limited discretion, and that discretion should be appropriate and proportionate. I think that in the context of this particular proposal, I agree with a number of the concerns that have been raised. I also think that it's my understanding from the original consultation document that the sort of threshold for HMRC and Ken's will be a reason to suspect, which I think is an inappropriate threshold for something like this. I think the bar should be higher, particularly to your point about ensuring that it is appropriately used.
Now, it may well be the case that when further draft legislation is published and the rules are tighter and these things are clarified, I would also advocate that HMRC are put on a very clear statutory footing as to what they can and can't do, and we don't sort of try put too much in the discretionary guidance about what HMRC can and can't do with this power, for the very reasons that you've identified. I guess the last point I would make is that it still goes back to what they're looking to achieve.
I think, you know, Reuben rightly pointed to the idea that we kind of legislation should probably hope for the best behaviour by parties, but it also should cater for the potential worst behaviour. And that's both on the side of the state as well as on the side of the taxpayer. But in order for a measure like this to be proportionate, it should be very, very clear the type of behaviour it's looking to target. And if it's looking to target bad taxpayer behaviour, then it should be clear and the rules should be tightened accordingly.
If this is looking to create a broader deterrent for all taxpayers, then the question that should reasonably be asked is that will it provide the appropriate deterrent or will it simply add yet more cost and administrative burden on taxpayers who are already trying very hard to comply?
10:12
10:12
Baroness Wheatcroft
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Baroness Wheatcroft
Thank you. I think going back to Lord Carrington's point, there seems to be an assumption on HMRC's behalf and underlying some of the the answers we've had here that most people have access to professional advisers at one stage or another. And the. The self-assessment now is so wide that that simply cannot be the case. And so I think my concern would be that receiving a CCN would instil sheer panic in quite a lot of taxpayers who have been perfectly innocent in what they've done.
Do you share that fear, and do you think that HMRC probably has powers enough already? It can send out one to many letters. I think these are what you refer to as nudge letters, and probably needs to draft them more tightly rather than go on fishing expeditions. But is there a risk that this is just going to add to the fear factor amongst a lot of taxpayers who already choose not to open letters from the taxman? Is it necessary? That's really Margaret you thought it was when we started out on on this session, but.
Do you share that fear, and do you think that HMRC probably has powers enough already? It can send out one to many letters. I think these are what you refer to as nudge letters, and probably needs to draft them more tightly rather than go on fishing expeditions. But is there a risk that this is just going to add to the fear factor amongst a lot of taxpayers who already choose not to open letters from the taxman? Is it necessary? That's really Margaret you thought it was when we started out on on this session, but.
10:14
Speaker 2
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Speaker 2
The overall statutory duty. Yeah. In particular, I mean the correction notice. I mean they're just the way HMRC have thought up of, you know, perhaps a more effective nudge than a one to many letter getting people to correct errors HMRC think they've made. So that's I mean there's going to be a lot of need to be a lot of thought about how they're going to be used. As you say, there's a lot of people won't have an agent, maybe the majority, if they're going to use them at high volume.
And those people, some of them may not respond. And of course, not responding to one of these customer correction notices will mean you could end up with a penalty even if you haven't made a mistake. So what are we going to do about HMRC going to do about people who don't respond? Are some people going to think, oh, actually, I do need to go and get advice, which they wouldn't otherwise have done, you know, to just protect themselves so you can see it, you know, it is going to be more paperwork and more obligation on people.
But at the same time, the notice will act, I think, as a more of a prompt. It's more it's more understandable in the kind of when we talked about becoming aware of an error, it feels more understandable when you've received a prompt from HMRC that. That's a point that when you become aware, it's. If you become. It's. It's when you don't receive a prompt from HMRC, how will anyone know or be able to prove when.
You might have become aware of an error.
And those people, some of them may not respond. And of course, not responding to one of these customer correction notices will mean you could end up with a penalty even if you haven't made a mistake. So what are we going to do about HMRC going to do about people who don't respond? Are some people going to think, oh, actually, I do need to go and get advice, which they wouldn't otherwise have done, you know, to just protect themselves so you can see it, you know, it is going to be more paperwork and more obligation on people.
But at the same time, the notice will act, I think, as a more of a prompt. It's more it's more understandable in the kind of when we talked about becoming aware of an error, it feels more understandable when you've received a prompt from HMRC that. That's a point that when you become aware, it's. If you become. It's. It's when you don't receive a prompt from HMRC, how will anyone know or be able to prove when.
You might have become aware of an error.
10:16
Baroness Wheatcroft
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Baroness Wheatcroft
And that surely is any effective? As you suggested before, if the prompt is fairly specific, yes, because if it's general, the panic factor I think will be quite large. Do you think in the end that perhaps HMRC needs to tier the way it deals with taxpayers far more than it does at the moment, and that people who are. Going to be liable for very little tax at one particular form. And so it graduated that way.
And they don't waste too much effort on the small.
And they don't waste too much effort on the small.
10:16
Speaker 2
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Speaker 2
Yeah. I mean, I certainly think there ought to be some kind of de minimis threshold because, I mean, you know, are they going to send a notice to someone because they think they've omitted £50 worth of income? You know, it's just so I really feel there should be some kind of de minimis over this. And if you've got an adviser, you certainly don't want to be spending a lot of fees. You know, that would end up being totally disproportionate to the, the actual tax that you've underpaid.
At the same time, these notices shouldn't be used for like technical, you know, areas of technical uncertainty. They should be for like obvious errors and spelt out errors. Nothing that's kind of complicated. You know that for example, if someone's UK resident or domiciled or, or whatever, you know, they should be kept to the simple, straightforward, obvious mistakes.
At the same time, these notices shouldn't be used for like technical, you know, areas of technical uncertainty. They should be for like obvious errors and spelt out errors. Nothing that's kind of complicated. You know that for example, if someone's UK resident or domiciled or, or whatever, you know, they should be kept to the simple, straightforward, obvious mistakes.
10:17
10:17
Speaker 1
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Speaker 1
I think simplification, I understand, is a difficult overall objective. There's always going to be an element of complexity in tax laws. I think with something like this particular measure, I if it had to be introduced, and again, for the reasons I've mentioned previously, I'm not sure it does, but if it had to be introduced, I would probably drop the first element of it and say that once the taxpayer does what it's supposed to do, which is to take all reasonable care to ensure that it files an accurate return, it's done its duty, and that it then kind of moves to HMRC to sort of, you know, you know, take that forward as part of the normal compliance lifecycle.
If HMRC feel that customer correction notices would be a useful additional tool in terms of assisting a taxpayer, assisting them in ensuring compliance, but also assisting sort of taxpayers in terms of getting things right, even though it's post filing, as long as it was appropriately, tightly defined, I could sort of see how that could work because it would be another arsenal in HMRC compliance powers, which is pretty close to what they have already. But I would sort of question whether in isolation, it's much different to contacting a taxpayer and opening an inquiry into an existing return.
And as Margaret rightly says, if you're talking about something where it's very, very clear that there has been an error, then quite rightly, the threshold we were talking about earlier, about reason to suspect, can by definition be much higher. And therefore, as a result of tightening the scope of this legislation, you can hopefully simplify it by ensuring that it only applies in very limited circumstances. Off the top of my head, that's probably the best I can think of in terms of simplifying the measure.
If HMRC feel that customer correction notices would be a useful additional tool in terms of assisting a taxpayer, assisting them in ensuring compliance, but also assisting sort of taxpayers in terms of getting things right, even though it's post filing, as long as it was appropriately, tightly defined, I could sort of see how that could work because it would be another arsenal in HMRC compliance powers, which is pretty close to what they have already. But I would sort of question whether in isolation, it's much different to contacting a taxpayer and opening an inquiry into an existing return.
And as Margaret rightly says, if you're talking about something where it's very, very clear that there has been an error, then quite rightly, the threshold we were talking about earlier, about reason to suspect, can by definition be much higher. And therefore, as a result of tightening the scope of this legislation, you can hopefully simplify it by ensuring that it only applies in very limited circumstances. Off the top of my head, that's probably the best I can think of in terms of simplifying the measure.
10:19
Speaker 3
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Speaker 3
I would just refer back to my lady to the answer I gave to Lord Carrington regarding the degrees of behaviour we see. I think the Law Society of Scotland thinks that's key, which is why we responded to HMRC s consultation on the broader reform of behavioural penalties. We do need to understand that it is not black and white when it comes to tax, even though the legislation often has in terms of behaviours. And I think Sandy touched on a key point there with complexity.
Tax law is complex and some of our tax law is more complex perhaps than other aspects. And if people, as you allude to, are not using professional advice, then there are, as I said earlier, going to be mistakes. And I think HMRC need to take that into account when utilizing this, which is why we are supportive in principle of this legislation. But we think there are some practical difficulties that need to be worked out before implementing it utterly.
Tax law is complex and some of our tax law is more complex perhaps than other aspects. And if people, as you allude to, are not using professional advice, then there are, as I said earlier, going to be mistakes. And I think HMRC need to take that into account when utilizing this, which is why we are supportive in principle of this legislation. But we think there are some practical difficulties that need to be worked out before implementing it utterly.
10:20
Lord Leigh of Hurley
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Lord Leigh of Hurley
Thank you, Lord chairman. And to disclose for the record, I am a member by qualification of the CIOT. Admittedly in 1985 when it was a bit simpler, but nonetheless. Can we just talk first about what common safeguards. But just to to scope it, I think the CIOT said it's submissions that this will be affected through the TMA and as such, can you explain which taxes it affects and which taxes it doesn't affect? And can you also explain the difference between the proposed system and the current system? By which I mean they must now have a system whereby they discover undeclared income and they do something about it.
So what is the difference in the two routes? Sorry, there's a lot of questions.
So what is the difference in the two routes? Sorry, there's a lot of questions.
10:21
Speaker 2
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Speaker 2
Well, I'll take the first question, my lord. So that was about which taxes it will impact. So it's making the draft legislation is making amendments to schedule 24 of Finance Act 2007, which is the error penalty legislation. And that applies to basically all taxes more or less. So all the main taxes and a lot of the kind of more minor sort of taxes. So income tax, capital gains tax, corporation tax, VAT, stamp duty, land tax, etc..
So it definitely tax. Yes. Yeah. So it definitely applies to my understanding is that applies to all the taxes. I suppose one thing we're not entirely clear about because there's an amendment to section 118 of the TMA, which generally only applies to income tax and capital gains tax. And I think corporation tax as well. Then it's a bit unclear whether there's any other amendments are required in any other statutes, just to tie any loose ends together.
And so we put that question to HMRC. But until we see the finance Bill, we're not going to know whether there are some further amendments. But my understanding is that it is to be applied to all taxes. And your other question was about.
So it definitely tax. Yes. Yeah. So it definitely applies to my understanding is that applies to all the taxes. I suppose one thing we're not entirely clear about because there's an amendment to section 118 of the TMA, which generally only applies to income tax and capital gains tax. And I think corporation tax as well. Then it's a bit unclear whether there's any other amendments are required in any other statutes, just to tie any loose ends together.
And so we put that question to HMRC. But until we see the finance Bill, we're not going to know whether there are some further amendments. But my understanding is that it is to be applied to all taxes. And your other question was about.
10:22
10:22
10:23
Lord Leigh of Hurley
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Lord Leigh of Hurley
Well, I think you've covered it for everyone. But just to move on to the issue of safeguarding, we were discussing earlier, particularly as it happens for inheritance tax, where the people making the submission are not the people who would have been responsible for the asset collation, if you like. So in those circumstances, what protections and safeguards do you think should be built into the legislation.
10:23
10:23
10:24
Speaker 2
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Speaker 2
Yeah, I see, I see it's a good question. Yeah. So I think this touches on something that we've also considered, because I think the focus of the legislation is very much on you make a mistake, you do something about it, and if you don't do something about it, you're going to get a higher penalty. So that's the main focus. Whereas the there's a gap there, which I think we, we, we, we think should be.
Included in the legislation itself around people who are unsure whether they've made an error or whether they've got something to disclose, and perhaps somebody in a position where they, you know, they maybe don't have all the information or can't access all the information they need to establish whether an error has been been made. I mean, there's lots of examples we could think of about where someone thinks HMRC thinks there's an error has been made, but the person disagrees. What do they do? It could be they take you know, it could be a very complex area of law.
HMRC may not have all the facts, you know, and I think it's really the escalation in risk around what what the consequences of not correcting an error really could place a lot more sort of responsibility on taxpayers and their advisers and other people to make absolutely sure that they've done their research, they've got all the evidence together and taken advice if necessary, or even second opinions. So I think it does sort of up the ante, if you like, on the, you know, because the consequences of getting things wrong are higher.
Included in the legislation itself around people who are unsure whether they've made an error or whether they've got something to disclose, and perhaps somebody in a position where they, you know, they maybe don't have all the information or can't access all the information they need to establish whether an error has been been made. I mean, there's lots of examples we could think of about where someone thinks HMRC thinks there's an error has been made, but the person disagrees. What do they do? It could be they take you know, it could be a very complex area of law.
HMRC may not have all the facts, you know, and I think it's really the escalation in risk around what what the consequences of not correcting an error really could place a lot more sort of responsibility on taxpayers and their advisers and other people to make absolutely sure that they've done their research, they've got all the evidence together and taken advice if necessary, or even second opinions. So I think it does sort of up the ante, if you like, on the, you know, because the consequences of getting things wrong are higher.
10:25
Speaker 3
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Speaker 3
On the specific question about executors, I'll echo Margaret's comments and say, that is a good question, and I can offer to ask our trusts and succession subcommittee at the Law Society of Scotland to come back to you with a more detailed answer on that, as I think they will have more knowledge of that in regards to IHT. I would pack up on one of Margaret's points where this applies to all taxes. I would just highlight that Scotland has numerous devolved taxes now outwith HMRC's remit that is managed by Revenue Scotland, and consideration going forward perhaps needs to come into play about how these two potentially divergent systems will operate alongside one another.
Our most notable one is, of course, the land, buildings and transactions tax. I think the Law Society of Scotland's main concerns about safeguards is around advisors. It's not clear to us what obligations there are when they advise us, identify or suspect an error on a taxpayer's behalf. There is an example that one member gave to me of what if you advise a client that there is an error in your return and the client goes, I disagree.
Is there an obligation on the solicitor to secure a correction on that? At what point does it become Sanctionable conduct? I think this is a very pertinent and timely question, given the recent introduction of the framework around mandatory registration that I mentioned earlier, and we would query, would HMRC deem that as misconduct under that, if a tax advisor was unable to secure a correction to our client's return, how far are we going with this? What is their obligations under the legislation? I think that's quite a important question from the tax advice perspective, particularly for solicitors.
Our most notable one is, of course, the land, buildings and transactions tax. I think the Law Society of Scotland's main concerns about safeguards is around advisors. It's not clear to us what obligations there are when they advise us, identify or suspect an error on a taxpayer's behalf. There is an example that one member gave to me of what if you advise a client that there is an error in your return and the client goes, I disagree.
Is there an obligation on the solicitor to secure a correction on that? At what point does it become Sanctionable conduct? I think this is a very pertinent and timely question, given the recent introduction of the framework around mandatory registration that I mentioned earlier, and we would query, would HMRC deem that as misconduct under that, if a tax advisor was unable to secure a correction to our client's return, how far are we going with this? What is their obligations under the legislation? I think that's quite a important question from the tax advice perspective, particularly for solicitors.
10:27
Lord Newby
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Lord Newby
I'd like to come on to reckless behaviour in just one second, but I'd first like to pick up a point that Margaret made at the start. I think, Margaret, you said it was it was absolutely crucial that HMRC took steps to ensure that taxpayers understood that this was happening, and I just. How if you were them, how would you do that? And this is a question to everybody.
10:28
Speaker 2
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Speaker 2
Well, I mean, there needs to be comprehensive guidance with examples. And the examples need to be not just obvious errors. There needs to be some kind of difficult examples as well in there around things like what if there's a change in HMRC guidance? What if there's a court of precedent decision that changes the understanding, everyone's understanding of what the tax position is and things like that. Extensive communication. I mean, it would be easier to it would be easier to communicate with agents.
So the real problem is that those people without agents are unrepresented. How how the message is going to get to them. I think with the correct HMRC issue a correction notice that should be a comprehensively explain what the position is. But absent a prompt or a notice, you know, how how is HMRC going to reach those people? It's a good question. I mean, they try to do things using social media, YouTube videos, those sort of things.
I think they generally get quite good viewing numbers. So there are various options available to them. But I still think it's going to be quite challenging.
So the real problem is that those people without agents are unrepresented. How how the message is going to get to them. I think with the correct HMRC issue a correction notice that should be a comprehensively explain what the position is. But absent a prompt or a notice, you know, how how is HMRC going to reach those people? It's a good question. I mean, they try to do things using social media, YouTube videos, those sort of things.
I think they generally get quite good viewing numbers. So there are various options available to them. But I still think it's going to be quite challenging.
10:29
10:29
10:29
Lord Newby
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Lord Newby
Okay. Can we come on to the proposed criminal offence of making reckless, untrue statements or declaration? I think the the, the the overarching question here is, given that we do have the an existing framework of both criminal and civil civil sanctions, do you think that it's necessary to introduce this new category of behaviour that could lead to this sort of sanction? I would like to start. Sandy, you're the skeptic.
10:30
Speaker 1
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Speaker 1
Okay. Thank you. I think both the Law Society of England and Wales and myself, I think we would have concerns if this was introduced. I think I can sort of there's a there's a lot to this, but I'll sort of be as concise as I can. There's probably sort of five reasons why I think we should be careful with something like this. The first one is, is that recklessness is not particularly well defined from a legal perspective.
And there is potential to confuse both taxpayers tax advisers and indeed HMRC officers. And so we would sort of, you know, advocate caution there there hasn't been much in the way of real consideration by the courts in tax cases on the concept of recklessness. And certainly in the in the case of indirect taxes, this is a not often used power. Elaborating on the difference between indirect and direct taxes, direct taxes can frequently be qualitatively different in scope, complexity, and application from indirect taxes.
And that can be everything from sort of timing and regularity of collection and filing to just the nature of the way that the taxpayer has a relationship with that tax. So, for example, something like VAT. Oftentimes, the taxpayer is also in the position of the tax collector because of the way it works as a cascade tax. So there are various differences. That doesn't necessarily mean that the powers should should align for consistency sake. That distinction should be borne in mind.
It will inevitably raise rule of law and access to justice concerns, because taxpayers may lack sufficient certainty as to how to comply with the law. And it's obviously hugely important for that to be clear in the context of criminal liability. You also have to potentially think about the way that it might impact taxpayer behaviour and what, for example, could be the impact on, you know, voluntary disclosures by compliant taxpayers in a situation where they're concerned about the possibility of a criminal offence.
And I think even HMRC acknowledge that voluntary disclosure processes have worked well and are better and better all the time. And then I would sort of reiterate my earlier point about, you know, with the powers that they currently have, what is it exactly about this sort of escalation of existing powers that the government feels will have a significant impact on the tax gap, either by encouraging compliance or deterring non-compliance? Because, again, I don't think the case is clear there.
And there is potential to confuse both taxpayers tax advisers and indeed HMRC officers. And so we would sort of, you know, advocate caution there there hasn't been much in the way of real consideration by the courts in tax cases on the concept of recklessness. And certainly in the in the case of indirect taxes, this is a not often used power. Elaborating on the difference between indirect and direct taxes, direct taxes can frequently be qualitatively different in scope, complexity, and application from indirect taxes.
And that can be everything from sort of timing and regularity of collection and filing to just the nature of the way that the taxpayer has a relationship with that tax. So, for example, something like VAT. Oftentimes, the taxpayer is also in the position of the tax collector because of the way it works as a cascade tax. So there are various differences. That doesn't necessarily mean that the powers should should align for consistency sake. That distinction should be borne in mind.
It will inevitably raise rule of law and access to justice concerns, because taxpayers may lack sufficient certainty as to how to comply with the law. And it's obviously hugely important for that to be clear in the context of criminal liability. You also have to potentially think about the way that it might impact taxpayer behaviour and what, for example, could be the impact on, you know, voluntary disclosures by compliant taxpayers in a situation where they're concerned about the possibility of a criminal offence.
And I think even HMRC acknowledge that voluntary disclosure processes have worked well and are better and better all the time. And then I would sort of reiterate my earlier point about, you know, with the powers that they currently have, what is it exactly about this sort of escalation of existing powers that the government feels will have a significant impact on the tax gap, either by encouraging compliance or deterring non-compliance? Because, again, I don't think the case is clear there.
10:33
10:33
Speaker 3
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Speaker 3
Just to build off of that, we would point out that the Law Society of Scotland would point out the HMRC s investigative policy states that for cases where HMRC needs to send it to turn and it deems criminal sanctions necessary, the examples that it gives are money laundering, fraud, theft and organised crime. And we query then, does this policy need to be revisited in light of this, to the actual offence itself, we take no firm position on it for or against.
I wouldn't want to pre-empt our Criminal Law Committee's consideration of it, but I think Sandy's raised numerous points there that bear careful consideration. I'd also point out that in Scotland there is only one public prosecutor, the Crown Office, and the way that this is drafted, it's not necessarily clear that it understands that particular role. I believe there's a reference to independent prosecutorial authority, authority or some such other thing. So those are the two points that the Law Society of Scotland would wish to raise in reference to that.
I wouldn't want to pre-empt our Criminal Law Committee's consideration of it, but I think Sandy's raised numerous points there that bear careful consideration. I'd also point out that in Scotland there is only one public prosecutor, the Crown Office, and the way that this is drafted, it's not necessarily clear that it understands that particular role. I believe there's a reference to independent prosecutorial authority, authority or some such other thing. So those are the two points that the Law Society of Scotland would wish to raise in reference to that.
10:34
Speaker 2
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Speaker 2
Thank you. Yeah. On this occasion, I think I'm going to actually come over a bit stronger than Sandy and disagree with this policy. So yeah, I'm the CIOT is taking the position that we don't support it, particularly as it's currently proposed. It's just far too uncertain where what recklessness actually means. I mean, it's supposed to be sitting between carelessness and deliberate behaviour, but the boundaries seem really blurred. And the examples that HMRC used in their consultation document didn't really help at all.
In fact, they just made muddied the waters. Really it was it was very difficult to see and very worrying actually, in some of those examples as to the sort of behaviour that they would consider to be reckless, which I think a lot of people would think, well, actually that's probably careless, not reckless. So the boundaries are going to be really difficult to establish. It's going to be giving advice, you know, potentially quite difficult, especially in complex areas.
As Sandy said, you know, direct tax is different from indirect tax and it's less transactional. There's more, you know, nuance and difficult technical positions that might need to be worked through. And I think one of the the other reasons why we don't support it is that there seem to be little evidence or little evidential basis on which HMRC were suggesting that they needed this offence. I mean, they say it's already in. I mean, it is already in place for some indirect taxes, but as far as we could we we could find out it's been rarely used.
In fact, they just made muddied the waters. Really it was it was very difficult to see and very worrying actually, in some of those examples as to the sort of behaviour that they would consider to be reckless, which I think a lot of people would think, well, actually that's probably careless, not reckless. So the boundaries are going to be really difficult to establish. It's going to be giving advice, you know, potentially quite difficult, especially in complex areas.
As Sandy said, you know, direct tax is different from indirect tax and it's less transactional. There's more, you know, nuance and difficult technical positions that might need to be worked through. And I think one of the the other reasons why we don't support it is that there seem to be little evidence or little evidential basis on which HMRC were suggesting that they needed this offence. I mean, they say it's already in. I mean, it is already in place for some indirect taxes, but as far as we could we we could find out it's been rarely used.
10:36
10:36
10:36
10:36
10:36
Lord Leigh of Hurley
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Lord Leigh of Hurley
Can I can I just ask, is this we looked at R&D tax credits a little while ago. And from the from the examples that have been given, I think that making an an R&D tax credit, which you think might be right, might not, but stick it in anyway. I think that would wish it happens. I think this would be a reckless now wouldn't it.
10:37
10:37
10:37
10:37
10:37
Speaker 2
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Speaker 2
I don't know how it feels like. I mean, one of the reasons for introducing it is because it's a lower threshold than trying to prove dishonesty. So perhaps there are cases I don't know because we've not been shown any evidence, but maybe there are certain cases that are at the back of HMRC mind that they're thinking, actually we could use that use this offence for those.
10:37
Speaker 1
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Speaker 1
Yeah. No, I was just going to say that it's it's not been clear to me from the consultation document and the consultation process that followed exactly what HMRC are trying to target. I agree with Margaret that they're looking at sort of trying to catch behaviour that they think sits somewhere between carelessness and and deliberate or dishonest behaviour. But the scope of recklessness is is unclear in this context, as indeed as it is in various other parts of the the law of the land.
And so that's partly one of our concerns. It's the idea that you can't necessarily appropriately define the type of behaviour that you're looking to criminalise. And, you know, it's a, a, it should be something that we take very seriously as a country in terms of if someone is going to be potentially criminally liable, it should be very clear what the scope of those , you know, the scope of that legislation is.
And so that's partly one of our concerns. It's the idea that you can't necessarily appropriately define the type of behaviour that you're looking to criminalise. And, you know, it's a, a, it should be something that we take very seriously as a country in terms of if someone is going to be potentially criminally liable, it should be very clear what the scope of those , you know, the scope of that legislation is.
10:38
Lord Newby
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Lord Newby
As far as you're aware, is there any sort of hard case that's led to HMRC wanting to do this? Because it's I mean, it is quite a significant proposal. And if they're not using the this provision for indirect taxes, one wonders why, other than sort of bureaucratic desire for tidiness, that they. They have decided to introduce it, but I. Are you aware of anything specific?
10:39
10:39
Lord Leigh of Hurley
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Lord Leigh of Hurley
This is a pattern of behaviour. Treasury and Whitehall consistently bring in mountains of legislation and HMRC never implemented. They never go after anyone. Well, hardly. So it's some civil servant justifying the existence of all this stuff. Which is fine and it may be good, but there's no good if HMRC don't actually implement it. Is that your experience? Slightly less. neutral as prejudice pejorative than my words, but is that your experience that there is a lot of legislation that HMRC has.
They don't.
They don't.
10:40
10:40
10:40
Speaker 1
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Speaker 1
I think that. It can be difficult sometimes as tax rules develop, you know, to have the appropriate opportunity to kind of holistically consider whether or not the scope of compliance powers HMRC have, you know, remains fit for purpose. And, you know, particularly as the way business evolves, the nature of cross-border business and how that's transacted, there could be any number of reasons why the tax code, particularly the client compliance aspects of the tax code, are always playing catch up.
And there are various difficulties in a democracy in sort of, you know, there being the appropriate opportunity to kind of have a complete rethink about sort of how these powers, you know, should be, should be both legislated and, and, and enforced. So I have a bit of sympathy with the way that the sort of the jigsaw is, is, is at the moment, and I'm not necessarily sure that's HMRC fault. And if they are being sort of pushed to close the tax gap, it may well be the case that they're being asked to sort of consider things that would potentially up the ante in a way that would, you know, deter or otherwise impact taxpayer behaviour in such a way that it sort of helps with the closing of the tax gap.
I think the difficulty, certainly that I face when I look at some of these proposals is that if it's not clear exactly what they're trying to do, it's difficult to be helpful in terms of better targeting the proposal, or you can do is raise concerns.
And there are various difficulties in a democracy in sort of, you know, there being the appropriate opportunity to kind of have a complete rethink about sort of how these powers, you know, should be, should be both legislated and, and, and enforced. So I have a bit of sympathy with the way that the sort of the jigsaw is, is, is at the moment, and I'm not necessarily sure that's HMRC fault. And if they are being sort of pushed to close the tax gap, it may well be the case that they're being asked to sort of consider things that would potentially up the ante in a way that would, you know, deter or otherwise impact taxpayer behaviour in such a way that it sort of helps with the closing of the tax gap.
I think the difficulty, certainly that I face when I look at some of these proposals is that if it's not clear exactly what they're trying to do, it's difficult to be helpful in terms of better targeting the proposal, or you can do is raise concerns.
10:42
10:46
Lord Newby
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Lord Newby
Good morning. I'm I'm I'm chairing this session of the subcommittee looking at aspects of tax administration in the budget. And we're particularly looking at the requirement to correct which HMRC is seeking to introduce in this year's finance Bill. We have in this session two witnesses, Antonio Stokes, who's with us in person, who's the senior management manager at the Low Incomes Tax Reform Group, and Adam Craggs, who is joining us, we hope, shortly virtually whose partner and head of tax investigations and financial crime at Reynolds Porter Chamberlain LLP.
And we hope that Adam will be with us any second. But we're going to start in his absence. And I'm going to ask Antonio the question, which, when Adam appears, I'll also ask him, which is how important, basically, do you think this new requirement to correct will be in terms of how errors are dealt with under self assessment?
And we hope that Adam will be with us any second. But we're going to start in his absence. And I'm going to ask Antonio the question, which, when Adam appears, I'll also ask him, which is how important, basically, do you think this new requirement to correct will be in terms of how errors are dealt with under self assessment?
10:48
Speaker 4
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Speaker 4
Great. Thank you for having me. So yes, this is a significant proposal, a significant measure that's being brought in. And obviously, as I know you all know, there are sort of two key measures to this, which is the requirement for taxpayers to correct. And then also this introduction of new customer correction notices. While we as the Low Incomes Tax Reform Group being part of the CIOT, would echo their support for this general need to fill a gap in the civil law in terms of correcting errors and tax returns and other such documents.
We do have concerns that this is particularly heavy handed, and the reason we feel that way is that we're representing the interests of taxpayers who can't afford professional advice, which is obviously a very important part of this, particularly since we are aware that this measure is designed to sort of tackle these high, high volume but low value errors across the tax system. So it's got to be a process that works for people who can't afford to pay for tax advice.
And there are concerns that this is quite heavy handed and difficult for people to navigate if they don't have advice. So moving the the penalties potentially at stake from being careless to deliberate is particularly concerning, especially if the original error was made despite taking reasonable care. But this person just simply doesn't understand these new obligations in terms of having to
We do have concerns that this is particularly heavy handed, and the reason we feel that way is that we're representing the interests of taxpayers who can't afford professional advice, which is obviously a very important part of this, particularly since we are aware that this measure is designed to sort of tackle these high, high volume but low value errors across the tax system. So it's got to be a process that works for people who can't afford to pay for tax advice.
And there are concerns that this is quite heavy handed and difficult for people to navigate if they don't have advice. So moving the the penalties potentially at stake from being careless to deliberate is particularly concerning, especially if the original error was made despite taking reasonable care. But this person just simply doesn't understand these new obligations in terms of having to
10:49
Speaker 1
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Speaker 1
Was made despite taking reasonable care. But this person just simply doesn't. understand these new obligations in terms of having to correct. That seems very harsh that they would then potentially face a deliberate penalty. On that original error, and from what we can see, there's no there's no method of particularly kind of appealing and getting, you know, a, you know, claiming that there was a reason that they weren't able to meet that obligation to correct.
So that's particularly concerning. And then also in terms of the way this has been constructed, in the sense that the. taxpayer has to do that.
So that's particularly concerning. And then also in terms of the way this has been constructed, in the sense that the. taxpayer has to do that.
10:50
Speaker 1
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Speaker 1
Assessment time limits. So that taxpayer has to understand exactly would HMRC in theory, be in time to do an assessment on this error? And am I still within that time frame? And what does that mean and what are my next steps? And we just are very concerned that for many taxpayers, this is just going to be way beyond their.
10:50
Lord Newby
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Lord Newby
Capabilities without some sort of professional advice. Well, that's that's very clear. Can I ask you one question which I've been asking other people, which is, given that you're talking about people who are not going to have tax advice, and a lot of them will be, you know, the amounts of tax we're involved are relatively small. Do you think there should be a de minimis. limit .
10:51
Speaker 1
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Speaker 1
Below which this process should not operate? I mean, yes, in principle I would like to see a de minimis, and I think we would like to see a de minimis built in. The only reservation I have on that is that this seems to be driven by the the low value, high, high volume errors. And so would HMRC say, well, that defeats the point of why we're doing this. So personally. Yes.
And you know, as part of the CIOTI think we would like to see that. But whether .
And you know, as part of the CIOTI think we would like to see that. But whether .
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10:51
Lord Carrington of Fulham
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Lord Carrington of Fulham
It is another question. Yes. We're talking presumably about people who are self-employed very largely and genuinely self-employed, not caught under Ir35. And they would have an income which would be certainly wouldn't justify employing a tax accountant to do their affairs. So how much and say you've got you're a plumber and you're earning, I don't know, £70,000 a year as a plumber, a successful plumber, and you make an error in your tax return, the error is likely to be £1,000, £2,000 for the most something of that sort of number.
So if you if the if there isn't a de minimis. But you wouldn't know what the de minimis should be in any case, until you'd actually looked at what the error was. But so the HMRC are going to go after this, presumably not because they know there's been an error, but because they suspect there might be one. It sounds to me like an extremely heavy handed way of operating. Chasing small amounts of money, which are probably going to be pretty hard to recover in any case.
It is there something just completely wrong about .
So if you if the if there isn't a de minimis. But you wouldn't know what the de minimis should be in any case, until you'd actually looked at what the error was. But so the HMRC are going to go after this, presumably not because they know there's been an error, but because they suspect there might be one. It sounds to me like an extremely heavy handed way of operating. Chasing small amounts of money, which are probably going to be pretty hard to recover in any case.
It is there something just completely wrong about .
10:53
Speaker 1
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Speaker 1
The way HMRC is. approaching people who are self-employed? I mean, I would absolutely agree. It seems very heavy handed and also it's hard to know what HMRC is, how HMRC would then know that this person has had the error which they failed to disclose. I'm talking about issues here outside of correct customer correction notices and where it's just the taxpayer has learned they've made an error. It feels like it's just. almost throwing them with the threat of this deliberate penalty to force people into action.
And you know, that's even do they even know about this? You know, these rules know that they have action to take. But yeah, it feels like they're trying to force people into action with the threat of these higher penalties and things like that, and hoping they just go ahead and comply and HMRC then don't have to get involved. But it remains to be seen how it would actually all play out in practice and whether this would increase voluntary compliance.
And I think a lot of the success of this. measure will come from their being easy disclosure facilities. I think at the moment the current digital disclosure facilities are really hard for people to navigate without an advisor nigh on impossible, really. So they need to have such an improvement in their disclosure facilities, in their guidance related to all of the forms where these corrections can be possible. Because at the moment, I think trying to, you know, deal with any .
And you know, that's even do they even know about this? You know, these rules know that they have action to take. But yeah, it feels like they're trying to force people into action with the threat of these higher penalties and things like that, and hoping they just go ahead and comply and HMRC then don't have to get involved. But it remains to be seen how it would actually all play out in practice and whether this would increase voluntary compliance.
And I think a lot of the success of this. measure will come from their being easy disclosure facilities. I think at the moment the current digital disclosure facilities are really hard for people to navigate without an advisor nigh on impossible, really. So they need to have such an improvement in their disclosure facilities, in their guidance related to all of the forms where these corrections can be possible. Because at the moment, I think trying to, you know, deal with any .
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10:54
Speaker 1
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Speaker 1
In terms of their internal costs? No. And actually in the policy paper that accompanied the draft legislation, it was entirely silent on the in the summary of impacts in terms of costings, which was really disappointing actually. You know, there's no indication of, you know, the potential yield from this, how much it will cost them to implement and what .
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10:55
Speaker 1
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Speaker 1
Is there are going to be losing money on most of these. Well potentially. I mean, I obviously can't say in terms of whether or not they would automate. You know, we're in a whole new world now where automation is ever more possible than it ever was before. So it might be that they do have plans that they can largely keep this a hands off method. But obviously, we would hope that there is still human intervention here as part of the process to ensure that taxpayer safeguards are in place.
We don't want them just firing out customer correction. notices without having tried to verify that there is a. reasonable .
We don't want them just firing out customer correction. notices without having tried to verify that there is a. reasonable .
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Speaker 1
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Speaker 1
Which is antagonistic towards the taxpayers? I would say this. I mean, I think resourcing and have moved away from that personal sort of approach that may have been HMRC involved. Obviously, we know we've lost the tax offices and everything is now being moved to. self-service and digital first and things like that. And, you know, this noise about the tax gap is kind of becoming ever louder in recent years. And I think HMRC, you know, realised that they have to be seen to be taking action on that.
And they have to actually be.
And they have to actually be.
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Speaker 1
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Speaker 1
And aren't at the moment? And if so, what would they be? Yeah. I mean, at the moment it does seem that it's it's very weak in terms of safeguards. I mean on a more basic level, just in terms of what time frames are we talking about here? Like in the legislation itself, they've not. included any explanation as to what it means to become aware of an error, at what point, how long a person has to act on that error.
How long you know it? If a person is entitled to go in to get tax advice and things like that before coming forward, is there a reasonable time frame that they're allowed to do that? All of this information is very much missing at the moment, which is very problematic. We definitely think there should also be certain safeguards put in place in terms of people who are.
How long you know it? If a person is entitled to go in to get tax advice and things like that before coming forward, is there a reasonable time frame that they're allowed to do that? All of this information is very much missing at the moment, which is very problematic. We definitely think there should also be certain safeguards put in place in terms of people who are.
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Speaker 1
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Speaker 1
Ratio straight away. Exactly. And obviously they won't be there, and it wouldn't be appropriate for the extra support team to be helping every unrepresented taxpayer. But certainly for those who are at the most risk of not being able to. Correctly kind of represent themselves in these situations. I think that's particularly important. And equally on the reckless, untrue .
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11:00
11:00
Lord Newby
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Lord Newby
There must be some sort of de minimis. Thank you. Say a bit more about this. The extra support teams, which is. potentially quite a. significant thing. provide support. But how does it work? Are they are the is the team part of HMRC? In which case are they. advising the taxpayer almost against the rest of HMRC, or are they external people who are.
independently brought in? And secondly, are there enough of them to .
independently brought in? And secondly, are there enough of them to .
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Speaker 1
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Speaker 1
Do what might be quite. You know, there might be quite a lot of takers for that. Yeah. I mean, I think it is unreasonable to expect that the extra support team is going to be able to assess every single unrepresented taxpayer there in a kind of assess if they would qualify for their assistance. I think it's more a case that the taxpayer has to be aware that if they're.
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Speaker 1
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Speaker 1
If this is. striking fear into them and they are frozen and they can't see a way forward, they can consider if they would qualify from help from the extra support team to navigate this issue. But just to answer your question, the extra support team is is very much a part of HMRC. It's part of their customer service team, but they're specially trained to deal with people in vulnerable circumstances. And they they do a wonderful job.
You know, we're we're very supportive of HMRC extra support team and what they do for taxpayers. They're brilliant. They're not separate. There are other. organisations such as tax aid, who work, who are an external charity, who do work to support unrepresented taxpayers with problems. So, you know. undoubtedly as part of these new measures, they will also see a strain on their own resources from people coming forward saying, you know, I've received this notice.
I don't know what to do, or I've heard about this new rule to .
You know, we're we're very supportive of HMRC extra support team and what they do for taxpayers. They're brilliant. They're not separate. There are other. organisations such as tax aid, who work, who are an external charity, who do work to support unrepresented taxpayers with problems. So, you know. undoubtedly as part of these new measures, they will also see a strain on their own resources from people coming forward saying, you know, I've received this notice.
I don't know what to do, or I've heard about this new rule to .
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Lord Carrington of Fulham
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Lord Carrington of Fulham
Find that data for you, though, and let you know. That would be really helpful. Yes. Thank you. From what you've said, they wouldn't help my plumber, who is clearly quite capable of doing plumbing work. Just is not able to actually cope with the tax return. Exactly what you're saying is they're going to deal with people who are challenged because of disabilities .
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11:03
Speaker 1
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Speaker 1
You know what? It's going to cost him £5,000. I mean, we're always of the position that, you know, most everyday people should be able to navigate the tax system without having to pay for an advisor. And that's a really important thing. And if we're getting to a stage where people feel like they have no choice but to take advice, you know, at a cost, then that seems problematic. I mean, obviously alongside this, HMRC could also help by.
ensuring like, I think I've already said that they need to have really, really clear guidance, really straightforward processes for people. And they also need to be prepared to have call handlers. available to answer questions on this, because undoubtedly it will it will result in that. And I know there they're trying to kind of put push away from people calling them on the phone and the digital self-service. But I think with a measure like this, they have to expect that people want reassurance.
Often it might even be the worried well, and, and that's fine, but they shouldn't assume that somebody, if they are the worried, well, that's not a legitimate phone call. That person should still be able to get that. reassurance if that's .
ensuring like, I think I've already said that they need to have really, really clear guidance, really straightforward processes for people. And they also need to be prepared to have call handlers. available to answer questions on this, because undoubtedly it will it will result in that. And I know there they're trying to kind of put push away from people calling them on the phone and the digital self-service. But I think with a measure like this, they have to expect that people want reassurance.
Often it might even be the worried well, and, and that's fine, but they shouldn't assume that somebody, if they are the worried, well, that's not a legitimate phone call. That person should still be able to get that. reassurance if that's .
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Lord Carrington of Fulham
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Lord Carrington of Fulham
Thank you chairman. Just just looking at the other side of things, never forgetting that Al Capone was only brought to justice because of his tax affairs being of being incorrectly submitted. So so the question is there is a tax cap. We can argue about the size. It's a huge tax cap and we do need to do something about it. And one would have thought that in the current state of technology that one could create AI and algorithms that show that a person is living well above his or her declared lifestyle and other indicators of expensive holidays or whatever it is that don't match income.
So should we not be encouraging HMRC to be much more sophisticated and go around this route to say to people what to do? A sort of wealth assessment, balance sheet assessment, I think , needs to be called of individuals from from one period to another. So or do you have a .
So should we not be encouraging HMRC to be much more sophisticated and go around this route to say to people what to do? A sort of wealth assessment, balance sheet assessment, I think , needs to be called of individuals from from one period to another. So or do you have a .
11:04
Speaker 1
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Speaker 1
Better idea of how we attack the tax gap? Well, I mean, I think in terms of things like customer correction notices, it wouldn't be. appropriate to use that on somebody where, you know, they've run the AI and it appears that perhaps they are living above their means. And there's a few maybe red flags that are coming up on the system. I think in a situation like that, it's just got to go back to, you know, good old fashioned inquiry.
They've got something they want to dig into. They will have to do it that way. A customer correction notice, I think we've got to be clear has got to be based on a, you know, a really reasonable, quite. defined suspicion that there's something wrong there. It can't be sort of a broad, vague unease. I think that's important. Another thing that I think HMRC So could be doing about the tax gap, and it could well feed into possible customer correction notices, which might come out in due course, is to do with.
identifying patterns in errors. So for.
They've got something they want to dig into. They will have to do it that way. A customer correction notice, I think we've got to be clear has got to be based on a, you know, a really reasonable, quite. defined suspicion that there's something wrong there. It can't be sort of a broad, vague unease. I think that's important. Another thing that I think HMRC So could be doing about the tax gap, and it could well feed into possible customer correction notices, which might come out in due course, is to do with.
identifying patterns in errors. So for.
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Speaker 1
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Speaker 1
Your uniform and things like that. And a lot of the claims are hugely. inflated without evidence. The taxpayer just kind of signs up by clicking a button and goes along with it. And I think we've heard from HMRC recently that it's it's instances like high value repayment agents, which have really spiked the the instances of high volume, low value errors in the tax system. So HMRC is able to spot patterns like this, people over claiming expenses, you know, incorrectly, things like that.
If they can then use that as a way to tackle it from the other side and actually look at these agents and look at their end to end processes and try and shut down that instance rather than going directly after the taxpayer. I think that would be .
If they can then use that as a way to tackle it from the other side and actually look at these agents and look at their end to end processes and try and shut down that instance rather than going directly after the taxpayer. I think that would be .
11:07
Lord Carrington of Fulham
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Lord Carrington of Fulham
A very sort of effective way to potentially tackle the tax gap. Just just to push you a bit on that, I mean, there are communities who are very cash focused and who do all sorts of trades with each other. And, and there are trades that are very cash focused, and it's all very well going after the dodgy advisers, which is which is commendable. But at the end of the day, it's a taxpayers responsibility.
And I don't see why you you think that it's down to HMRC to make investigation where a person's living above their income. Surely it's down to HMRC to push the taxpayer.
And I don't see why you you think that it's down to HMRC to make investigation where a person's living above their income. Surely it's down to HMRC to push the taxpayer.
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Speaker 1
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Speaker 1
Which particularly that requirement for the taxpayer to correct outside of having a customer correction notice, having these additional. measures will. hopefully prompt more people to come forward and decide to rectify previous errors. You know, undoubtedly, I think in some ways that will be the case. But for the people who are honest about their tax affairs, and I think, you know, I think that's very much certainly the majority.
Most people want to get things right. They they might make a mistake. And that might be because they can't afford advice or because it's just they're not quite sure about it or they feel nervous about it. You know, those people I feel should be the priority here .
Most people want to get things right. They they might make a mistake. And that might be because they can't afford advice or because it's just they're not quite sure about it or they feel nervous about it. You know, those people I feel should be the priority here .
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Speaker 1
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Speaker 1
Lead to an increase in revenue by adjusting behaviour. Yeah, I think I think there is definitely a strong argument that it will. But on the flip side, there is there is a worry in terms of taxpayer. behaviour when you also look at it in the context of the reckless, untrue statements, which I know we're going to come on to next . Because when you when you hang the both of these measures.
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Speaker 1
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Speaker 1
Which is, you know, pushing people to correct errors and do so. promptly and, you know, otherwise at risk of getting much higher penalties. But then on the other side, we have these proposed measures where they're saying, and if we find out that you've made an error, and perhaps this is under these correction of errors, if we think that that was actually reckless, you could be on the hook for criminal prosecution. So a person has got these two very competing sneezes and it's like, well, you know, what do I do? Basically, we're worried that that could really cause huge anxiety for taxpayers.
You know, it could really diminish trust in the tax system, actually, because it's no longer giving out the impression that HMRC is here supporting you to get it right. And if you get it wrong, not to worry, we'll help you. That that sort of that whole .
You know, it could really diminish trust in the tax system, actually, because it's no longer giving out the impression that HMRC is here supporting you to get it right. And if you get it wrong, not to worry, we'll help you. That that sort of that whole .
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Speaker 1
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Speaker 1
Well, we would say we haven't. We haven't really been convinced by the case that there is. And I think the the. consultations on reckless, untrue statements is yet to. really set out why they feel this is necessary. You know, what is the reason? What are these cases where they would have liked to have.
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Speaker 1
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Speaker 1
But they couldn't quite prove dishonesty? And for what reason do they want to now bring some people who are perhaps just careless and maybe it's the upper end of careless, you know, and it's a bit borderline, but why do they want to bring these into a criminal prosecution? You know, this could ruin people's lives. This could ruin people's livelihoods. Their careers, make them white collar criminals. And is that really is that really fair when they cannot prove dishonesty? I think we feel quite strongly that that should.
remain within the realms of dishonesty, beyond .
remain within the realms of dishonesty, beyond .
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Speaker 1
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Speaker 1
I think it's fair to say. But, you know, it is under pressure to close the tax gap. That's without a doubt. You know they also they also are trying to do their best I think, to support taxpayers where they can. But when it comes to errors and and unpaid tax, and we're also seeing things coming through in terms of low value debts and things like that. It feels like they no longer can just sit on these things and they want to take action.
But it would be a shame for them to push forward with these. measures and not still bear in mind that customer trust is such a huge, important thing that needs to be. It needs to .
But it would be a shame for them to push forward with these. measures and not still bear in mind that customer trust is such a huge, important thing that needs to be. It needs to .
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11:12
Lord Newby
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Lord Newby
Hopefully, Adam, you can hear us. I , I, I can Your lordship. Right. Well we might we might come back to where we were. But I'd like to start again, as it were, with you. So a slight. reprise here of the questions that we've been asking, Antonia. And the first was, if you could give us your. assessment of how.
significant a change you think this new requirement to correct will be in terms of. Identifying .
significant a change you think this new requirement to correct will be in terms of. Identifying .
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Speaker 6
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Speaker 6
I think. amongst the the tax adviser profession as to whether there is an existing. obligation to correct an error once one has submitted a tax return or a claim for relief to to HMRC and there are some grey areas and some some professional view is along the lines of if it was accurate when it was submitted, then it's very much for. HMRC to be proactive and to contact the taxpayer or the adviser if they feel there is an error or a mistake and it's not for the.
taxpayer to to to correct that. So I think it would certainly, if it ends up on the statute books, would would clarify the position. I do think in. practice it might have a lot of.
taxpayer to to to correct that. So I think it would certainly, if it ends up on the statute books, would would clarify the position. I do think in. practice it might have a lot of.
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Speaker 6
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Speaker 6
In that you may. find HMRC are inundated by. overcautious taxpayers and their. advisers and are contacting HMRC out of an abundance of caution, especially as there may well be this, this new offence of of making a reckless, inaccurate statement. So that that that also is, I think, links to the the second issue, and I would imagine that there'll also be a huge increase in.
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Speaker 6
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Speaker 6
Have to do to make a correction? I think at the. moment Lord Carrington it it's not clear. I often talk to friends, family who who are not involved in in either the legal or accounting profession. And they find tax and the whole system within the UK hugely. complex and and rely very much on HMRC telling them what to do to fill in a tax return, etcetera. So I can't imagine many taxpayers would would be aware of, of errors if they filled in their tax return.
In good faith. It's difficult to see a scenario where they would, at a later date, realise that there was a mistake. You know, one example that that .
In good faith. It's difficult to see a scenario where they would, at a later date, realise that there was a mistake. You know, one example that that .
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Speaker 6
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Speaker 6
To actually say what the correction should be? I think that there ought to be and and I think they they should. justify and. explain the basis of of that. Although whether in practice that would help the taxpayer. I suspect most. taxpayers who who aren't fortunate enough to, to be able to, to, to pay for professional.
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Lord Carrington of Fulham
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Lord Carrington of Fulham
Simply, I think, accept HMRC s view. You know, can I ask you the question that I asked Antonio about effectively the cost to HMRC of chasing small errors in individual tax returns, particularly, I assume we're really talking about people self-employed, because most other people's tax returns are relatively straightforward, presumably, particularly if they're paid through Paye and so on. And and a certain amount of dividend interest or dividend income or whatever. So it's mostly going to be self-employed, but the amount that they're going to the errors of somebody.
And I gave an example of a plumber, for instance, who maybe earns £70,000 a year, makes some sort of error. It's likely to be several thousand at the most. The cost to HMRC of challenging that and identifying the error and responding to the individual taxpayer who would not understand how to correct it. Would you have an idea as to how much you would cost HMRC in administration costs to recover?
And I gave an example of a plumber, for instance, who maybe earns £70,000 a year, makes some sort of error. It's likely to be several thousand at the most. The cost to HMRC of challenging that and identifying the error and responding to the individual taxpayer who would not understand how to correct it. Would you have an idea as to how much you would cost HMRC in administration costs to recover?
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Speaker 6
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Speaker 6
But but I think it, it, it, it would be disproportionate. And, and one would hope that they would concentrate on, on the larger errors and mistakes. And it may well be that, that they should be a, you know, a de minimis. Stipulation of its value for money in terms of using. taxpayers money to actually. enforce and take compliance action against taxpayers. Because, as you say in that.
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Speaker 6
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Speaker 6
I think HMRC have a number of of tools available at the moment. And I think that they want to many letters which used to be called nudge letters and are now one to many letters, but that in my experience is is very effective because they point out to the recipient that there may be an issue and you need to look at your affairs. And therefore most honest, law abiding. taxpayers would would either.
themselves look at their affairs and see whether .
themselves look at their affairs and see whether .
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Lord Carrington of Fulham
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Lord Carrington of Fulham
That's my view. Correct. Thank you. Can I just pick up a point you made that you gave the example of someone who had submitted a tax return in good faith and in the case law change, or there was a case law judgement that meant that there's extra tax due that hadn't been declared at that time. And you said in those circumstances, an adviser may or may not choose to disclose that to HMRC.
Does that reach to someone who, for example, discovers a source of income that he or she had forgotten about or or makes a loan to someone and that person decides to repay it with interest or these sort of or other cash events. Are you saying that some advisers would not suggest that that an extra .
Does that reach to someone who, for example, discovers a source of income that he or she had forgotten about or or makes a loan to someone and that person decides to repay it with interest or these sort of or other cash events. Are you saying that some advisers would not suggest that that an extra .
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Speaker 6
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Speaker 6
There are. certainly I'm aware of and this is obviously a very important issue and a big issue. And as the committee will be aware, that there is now an obligatory. registration system which is being implemented as we speak, to try and wheeled out the less reputable advisers, because certainly prior to that, anyone could call themselves a tax adviser. They didn't need to be regulated, they didn't need any.
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Lord Newby
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Lord Newby
Existence to, to deal with that sort of thing. Thank you. Thanks so much. When you joined the session, we were already on to the second issue, which was the proposed criminal offence of making reckless, untrue statements or declarations. So I wonder if I could ask you what we've already asked Antonio, which was to what extent do you think there's a gap here that needs to be filled? Do you think that given the existing powers that.
HMRC has, that there is still an area which needs to be covered? Or do you .
HMRC has, that there is still an area which needs to be covered? Or do you .
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Speaker 6
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Speaker 6
Think that the powers are already pretty extensive? Yeah, I don't think there is is a need. I know. HMRC have said, well, we have this for indirect tax and it's been on the statute books for, for for many years. My my. understanding is, is that there, there have been very few if any. prosecutions for, for for.
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Lord Carrington of Fulham
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Lord Carrington of Fulham
Questioning Antonio when Adam came on. I don't know whether he wants to ask him the same. Can I can I ask you pretty much the same question that I was asking Antonio. A lot of this is driven, as we understand it, or we're being told by the pressure on HMRC to close the tax gap and to get in large amounts of money, which previously they believe has not been paid to them, which are very much in small parcels, if I can put it like that.
In other words, large numbers of small amounts of money not being paid to HMRC. If it's all been driven by what is very largely a political desire to close the tax gap, how confident are we that the tax gap is the size that it's claimed to be, and how confident are we that where they think the .
In other words, large numbers of small amounts of money not being paid to HMRC. If it's all been driven by what is very largely a political desire to close the tax gap, how confident are we that the tax gap is the size that it's claimed to be, and how confident are we that where they think the .
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Speaker 6
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Speaker 6
Lies is where it actually lies? And it's a very good question. I did catch just as I was joining. Antonio's answer, and I think I'm in the same position. I don't know what data or. criteria HMRC use when when. calculating the tax gap and I, I would imagine it has to be very much a sort of finger in the air by by definition, because they're not aware of the size of the black economy and people being paid in cash and just not declaring that to HMRC by by definition.
So I would have thought the estimate is very rough and ready, but, but .
So I would have thought the estimate is very rough and ready, but, but .
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Lord Carrington of Fulham
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Lord Carrington of Fulham
Really qualified to, to, to comment. To be honest, my worry about all this and these changes is that it's being driven from a political agenda of I'm an old cynical politician who believes that politicians are always looking for easy headline answers to difficult problems. And the tax gap sounds to me like one of those, hey, we've got a problem here. Let's define that. Let's say we've got a problem. So let's then produce legislation to fix the problem that we've dreamt up, rather than something which you can actually define accurately and therefore design legislation.
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Speaker 6
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Speaker 6
Address accurately as well. I, I think a good. example when I, when I've looked at the tax gap figures and how it's split, and I think from memory, I'm right in saying that that about 6% of the tax gap is made up of, of tax avoidance. So it's a relatively small amount. I think criminal activity is about. 15% from memory. One could be. forgiven for thinking that the tax gap is almost.
exclusively as a consequence of tax.
exclusively as a consequence of tax.
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Speaker 6
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Speaker 6
So irrespective of one's view about the morality of, of, of, of entering into arrangements to minimise your tax, I think that might be a sort of dragon that that has been. created so that it can be slain. And I think in reality the amount of, of, of. revenue that that is lost to the Exchequer as a consequence of tax avoidance arrangements is, is relatively small. And yet there's a huge amount of .
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Baroness Wheatcroft
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Baroness Wheatcroft
Whether you had any questions for either or both of our witnesses. I suppose I just like to ask you both, because there's a feeling of. inevitability that the government wants to bring in this reckless. proposal and legislate for it. And if that's the case, are there any. safeguards that you think should be built in to protect. taxpayers from what is. potentially a really heavy penalty? As Antonio said,
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Speaker 6
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Speaker 6
And those who either are ultimately not prosecuted because the decision is taken by the CPS, thankfully not HMRC. So there's an independent body that that reviews the evidence or if ultimately it goes to court. and they're found not guilty, the effect on those innocent people can not be overemphasized. It it more often than not, my clients marriages end up in ruins. They're often on medication because of the stress caused.
It affects their businesses. If their. employees then it affects their their, their, their working life, their family life. So the consequences are huge for innocent people. And I think the the safeguards that would be needed if, if, if we are going to criminalise. reckless behaviour rather than.
It affects their businesses. If their. employees then it affects their their, their, their working life, their family life. So the consequences are huge for innocent people. And I think the the safeguards that would be needed if, if, if we are going to criminalise. reckless behaviour rather than.
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Speaker 6
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Speaker 6
You would need, I believe, a statutory definition of what. recklessness means for this purpose. I think that would be crucial. So that innocent mistakes, no matter how foolish or stupid or negligent, are not criminalised and people are put through the criminal. process for for, as I say, innocent mistakes, no matter how stupid they might have been. We shouldn't really criminalise stupid mistakes.
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Speaker 1
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Speaker 1
Might I ask, Antonio, if you think it's possible to define reckless? Well, yes. I mean, that's that is a very difficult thing. And in HMRC s. consultation on this, some of the examples they included, I think, across the board, a lot of the responses we've seen from ourselves and other professional bodies is we don't feel like that's reckless behaviour. That seems careless, you know, in the example they put in, for example.
So it does need to be a really tightly drawn definition if they are going to plough forward with this. In terms of other safeguards, we think it's also important that there should be.
So it does need to be a really tightly drawn definition if they are going to plough forward with this. In terms of other safeguards, we think it's also important that there should be.
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Speaker 1
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Speaker 1
For reasonable reliance on another person. If you've taken advice and you know you honestly believe that was correct, even if, you know they knew they were leading you up the garden path, then there should be there should be an exclusion for that. Also, in cases of legitimate. uncertainty or whether it's a judgment case, you know, tax is rarely black and white, you know, and I think that needs to that needs to remain very much part of this.
And it just shouldn't be used to criminalise behaviour, which is already being. perfectly adequately dealt with under the civil penalty regime. And then a final suggestion we've got for safeguards is that there should be senior. approval for any of these things being pushed forward into a criminal prosecution, an appropriate.
And it just shouldn't be used to criminalise behaviour, which is already being. perfectly adequately dealt with under the civil penalty regime. And then a final suggestion we've got for safeguards is that there should be senior. approval for any of these things being pushed forward into a criminal prosecution, an appropriate.
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Speaker 1
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Speaker 1
Not just one rogue HMRC inspector deciding that's the route they're going down it. There needs to be there needs to be processed processes in place to ensure people are protected. And generally I think the scope definitely initially needs to be quite limited to higher value and higher risk cases. And you know, they need to then assess and see how it's going. Test and learn things like that. But we would hope this is going to be used pretty rarely.
We would hope, but there's always a risk that there will be creep in terms of, oh, well, this is a tool we've got and we've not been using it very much. We're still worried about our tax gap.
We would hope, but there's always a risk that there will be creep in terms of, oh, well, this is a tool we've got and we've not been using it very much. We're still worried about our tax gap.
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Lord Newby
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Lord Newby
Well look, can I thank you both. I'm sorry Adam, we had difficulties in hearing you at the start. It meant that you you've not been able to hear what Antonio had to say. Although she has had the advantage of hearing you, that is. That is all very clear and not out of your view is not totally out of line. What we've heard from other people. So .
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