Where HMRC is on the ropes, and why that’s deserved

An increasing pressure on the government’s disproportionate policy towards contractors has been exerted in recent weeks and with just cause, writes Graham Webber, director of HMRC dispute specialists WTT Consulting.

We have had the House of Lords inquiry (scathing of HMRC); we have three ongoing parliamentary inquiries (none flatter HMRC), and we have the government-commissioned review of Loan Charge 2019 (probing whether 110 MPs are right that the charge is nothing short of unlawful).

We have also witnessed how this intense pressure is resulting in HMRC either struggling to provide answers to MPs or resorting to their favourite trick of supplying answers to a different question than the ones asked. Being punched so many times evidently impacts your basic ability to respond in a straight fashion to what’s in front of you.

Treasury leadership? The lack of it is stunning

The truly worrying aspect of the repeated failures of HMRC to answer straight questions and the deliberate mis-directions in their answers, is that HM Treasury is supine. The lack of leadership and oversight from elected officials, notably Mel Stride MP and John Glen MP, is stunning in its absence.

Our politicians here in the UK (and those elsewhere too) need to pay closer attention. Remember, many media outlets continue to report that trust in politics is at an all-time-low. That may be true. But what there’s no doubt about is that HMRC’s blinkered approach to the loan charge’s impact is not going to reduce the disdain there is for politics, should that approach continue to be Nelson-esque. As we all are taught, when asked in 1801 about the danger posed by a French fleet, the-then Lord Admiral put a telescope to his eye patch and said, “I see no ships”.

Let’s now turn to our modern-day Lordships. Following the appearance of HMRC at the inquiry of the House of Lords Economic Affairs Committee, Ruth Stanier, the Revenue’s director-general of “customer strategy,” was asked whether any contractors used by HMRC had used a tax avoidance scheme of the type that the agency was actively investigating. The response was that “HMRC has never participated in a tax avoidance scheme”. Their Lordships repeated their question given the Revenue’s failure to answer. It produced this response: “It is possible for contractors to use disguised remuneration without the participation or knowledge of their engager.”

HMRC’s failings

In other words, HMRC, the party responsible for identifying and investigating contractor schemes that they consider to be avoidance, could not, did not, or chose not to run even the most basic of checks on contractors they engaged. Worse, there is no evidence that they asked the agencies to run such checks.

How difficult would it have been for HMRC, surely the touchstone of integrity in contractor arrangements, to have insisted that their own HR department and/or the agency to have made these checks? If they cannot do this, why do they profess disbelief when contractors say they didn’t know either?

Let’s now look at scrutiny of the Revenue by the Treasury Select Committee, which held an oral evidence session on January 30th.  Some of the following points we have raised via a Freedom of Information Act request, but as of the time of writing have not had a response.

Tory MP Charlie Elphicke told HMRC (at Q12) that other witnesses had said that HMRC does not operate the Litigation and Settlement Strategy in a “sensible way” conducive to handling and resolving disputes. HMRC is accused of being too rigid and not willing to resolve matters in a “proportionate or sensible manner”, the MP said.  In reply, HMRC’s Jim Harra uttered the simple; unsurprising,  “I would not agree with that evidence”.

Why MPs (and the Treasury) need to step in

Be in no doubt, HMRC disagrees with evidence -- not opinion, hearsay or rumour, but evidence.  This is why I say our MPs need to pay closer attention to what they’re told by a taxman who likes to duck and weave out of corner.

In the defence he gave, Mr Harra went on to punt the usual advertorial about HMRC’s litigation success. More interestingly, he did claim that there was “access” for individuals to seek justice. Given that the Lords inquiry (outlined above) specifically isolated that issue and found HMRC guilty of ‘putting up barriers to justice,’ how can Mr Harra believe the statement he made. Perhaps both witnesses and their Lordships are wrong?

Later on in the inquiry (at Q27 and beyond), HMRC was questioned about cases going to tribunal where the taxpayer was clearly at a disadvantage. For example, a woman was diagnosed with a serious mental illness and held to be incapable of handling her tax affairs. And thanks to the First Tier Tax tribunal, we know of a similar case where a homeless man had a penalty for not making a tax return!

HMRC claims that they would not know the circumstances of such taxpayers, until the tribunal sits. What!? Please note officialdom, it is necessary to make a case before going to tribunal. So yes actually, HMRC did know about the circumstances but its failure to consider them led to a taxpayer going to tribunal. What a waste of public money.

As ContractorUK’s coverage of the session implied at the time, the star of the Treasury Select Committee’s bout with HMRC was the department’s Mary Aiston, a director of counter-avoidance. Once she entered the ring (at Q32), the fun really began.

Far from boxing clever

She was asked what the loan charge was. An easy starter from MPs potentially trying to feel out their opponent. But they actually landed an early blow, because her answer was a clanger of the highest order. “The purpose ... is to draw a line under disguised remuneration”, she stumbled.

Really? I thought Part 7A of ITEPA was that. I thought the loan charge was a “new tax on a new source” and not a retrospective assault on earlier years? That’s the usual HMRC line anyway.

A little later (Q46), HMRC was asked whether, because they spotted a problem 10 years ago, they had flagged up to people that the problem existed. Ms Aiston obliged, “Yes”.

Sorry but I think not. Their Lordships isolated this issue too, and told HMRC that their notices were ‘inadequate.’ To ignore such a direct and relevant criticism, as Ms Aiston did, speaks volumes we think. But again, those asking the questions must be more forensic in their study of the answers that officialdom provides.

Streeting stung like a bee

From the MPs’ side, the star fighter was probably Labour’s Wes Streeting MP. In his flurry of punchy questions (Q57 -Q63), his frustration almost boiled over. It’s worth a watch (15:31 onwards). He thumped HMRC for taking its eye off the ball and for using the loan charge as a sticking plaster to the sad, but increasingly-backed assessment that “HMRC did not do its job properly”. He also smashed any suggestion that he was attacking civil servants, in response to a jabbing HMRC that, he clearly thought, was twisting his words.

True to form, Mr Harra responded with a flat, unevidenced and not pursued rejection. Again, we suggest MPs ought to be as meticulous in their listening as they are in their questioning. But the graver point is this --  HMRC is clearly not willing to accept that they may have stumbled and, in our view, stumbled badly.

The elusive challenger

Yet the pressure on them though appears just as apparent -- at a time of Brexit, internal morale issues and strained resources at HMRC, the tax authority now seems to be on the ropes -- more so than ever before, receiving punches about the loan charge from the public, affected taxpayers, MPs, Lords, industry and common sense itself. There’s one party missing in that long list of challengers however, and that’s the Treasury.

And unfortunately until those charged with oversight of the taxman do their job and intervene to stop the flailing which the Revenue is doing under the weight of attacks, and force it to respect its position, we will see more denials from the taxman even in the face of evidence and inequity.