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Mark McLaughlin CTA (Fellow) ATT TEP considers reason behind HM Revenue & Customs’ seemingly tougher approach in recent years in dealing with taxpayers and their advisers.

Mark McLaughlin

Introduction

The well-known saying that ‘there are lies, damn lies and statistics’ is one reason why I do not normally take very much notice of statistical information. However, when it comes to HM Revenue & Customs’ accounts for 2006-07 (http://www.hmrc.gov.uk/about/hmrc-06-07-acc.pdf), which includes a report on the accounts produced by the Comptroller and Auditor General and presented by the National Audit Office (NAO) (http://www.nao.org.uk/publications/nao_reports/06-07/0607626.pdf), the information is difficult to ignore.

Tougher line

There has been a sense among some tax professionals that HM Revenue & Customs (HMRC) have adopted a much tougher line in recent years, in terms of collecting tax, negotiating liabilities and administering the tax system. HMRC might point out that they are merely applying the law. However, they probably applied the law with a much lighter touch in previous years than today. One example is in the negotiation of penalties in tax enquiry cases (although there will soon be less scope for negotiation in any event, following changes to the penalty regime being introduced shortly). Another example is the collection of tax arrears. Once again, it seems likely that new legislation will shortly be introduced to enhance HMRC’s collection powers in some respects.

If HMRC are indeed taking a tougher line, a review of financial reports by the NAO on tax revenues reveals the likely reason why. 

Tax revenues

• Tax revenues in 2006-07 amounted to £344.9 billion. Other revenue amounted to £92 billion, principally in National Insurance contributions (£91.5 billion), giving total revenues of £436.9 billion.
• In 2006/07, HMRC collected £125 billion in income tax and £85 billion in National Insurance contributions (NIC) through the Pay As You Earn (PAYE) system. This represents the Government’s largest source of tax revenue.
• In 2006/07, HMRC collected £26.6 billion (after repayments) in income tax, Class 4 National Insurance contributions and Capital Gains Tax under the self-assessment system.
• In 2006/07, net VAT revenue amounted to £85.5 billion, compared with £71.1 billion in 2003/04.

Tax debts and write-offs

• HMRC were owed revenue of £24.6 billion at 31 March 2007. Included in this figure is £6.5 billion relating to ‘doubtful debts’. By comparison, the amount of tax owed at the end of 2004-05 was around £9.6 billion.
• Average monthly tax debt from self-assessment in 2006/07 was £3.13 billion (i.e. 11.77% of self-assessment receipts).
• HMRC estimates that it may not be pursuing around £880 million each year in PAYE deductions. The NAO indicated that £575 million was not being pursued in its 2004-05 report.
• HMRC’s ‘revenue losses’ (i.e. remissions and write-offs) in 2006-07 amounted to £4,755 million compared with £3,317 million in the previous year. In 2004-05, HMRC wrote off or remitted tax debts of £818 million and NIC of £280 million.
• HMRC estimate that in 2004-05, tax credit error and fraud resulted in credits of between £1.04 billion and £1.30 billion being paid to claimants to which they were not entitled. In addition, claimant error resulted in between £196 million and £348 million of tax credits not being paid to claimants.
• £3.9 billion of tax credits overpayments remained to be collected by HMRC at March 2007. Of this debt, £1.6 billion was considered to be ‘doubtful’ and potentially irrecoverable. 
• The level of VAT debt due to ‘missing trader fraud’ increased to £2.3 billion in 2006-07, compared to £687 million in 2005-06.

Potential gains

The scope to save billions of pounds each year has not apparently gone unnoticed by the Government and HMRC. For example, HMRC yielded over £1 billion from self-assessment enquiries in 2006-07, compared with £468 million in 2003/04. Forthcoming changes to the penalty regime for taxpayers who file incorrect tax returns will arguably enhance the penalty yield from tax enquiries.

In addition, the Government have taken various steps in recent years to ensure that taxpayers pay ‘the right amount of tax’. For example, new legislation has been introduced in a number of areas (e.g. to tax certain ‘employment-related securities’ provided to staff, and an income tax charge on ‘pre-owned assets’ to penalise some inheritance tax saving arrangements, to name but two). In addition, the Government introduced a legal requirement to disclose tax avoidance schemes to HMRC, with a view to legislating to close them down as quickly as possible.

Tax debts

Earlier this year, HMRC released proposals to radically reform the law and practice relating to the collection of tax debts. The proposal that attracted most attention was the direct attachment of arrears to taxpayers’ assets. HMRC proposed that they should be able to secure a taxpayer’s bank or building society accounts by “freezing” the amount of the tax debt. HMRC would also be able to place a legal charge over land and buildings, whilst continuing to pursue collection of the unpaid tax.

Benjamin Franklin once said: “A penny saved is a penny earned”. Based on the level of taxes outstanding, and subject to remission or write-off each year, it is perhaps understandable that the Government would be keen to increase its tax yields and recovery rates. Most taxpayers would probably welcome this approach, particularly if the savings were transmitted back to them in terms of reduced costs of public services, or lower taxes. It is therefore surprising, if HMRC have indeed been ‘tightening the screw’ in recent times, that taxpayers and professional advisers were not notified of this policy more clearly. Some professional advisers feel that they found out about this change of approach the hard way, such as through more confrontational day-to-day communications with HMRC.

Being prepared

Taxpayers who find that they are unable to pay their tax bill should contact the local office that normally deals with their tax affairs in the first instance, or seek professional help. It is important that unpaid tax bills are not ignored, particularly in the current climate as described in this article. Taxpayers and advisers will need to ‘move with the times’ and be prepared to respond to whatever approach the Government and HMRC decide to throw at them.

Mark McLaughlin CTA (Fellow) ATT TEP is a Consultant to TaxDebts (http://www.taxdebts.co.uk/), who assist taxpayers with outstanding tax problems. He is a Tax Consultant to professional firms, writer and General Editor of TaxationWeb (http://www.taxationweb.co.uk/).