A consultation proposing a number of reforms to HMRC’s existing enquiry powers, and the introduction of a new power, closes later this month.

The “Tax Administration Framework Review – New ways to tackle compliance” is the latest in a series exploring novel ways to simplify the UK’s tax administration system, making it more straightforward for taxpayers and enabling HMRC to allocate resources more effectively. 

Background

Closing the “tax gap”, the difference between the amount of tax owed and what is actually collected by HMRC, remains a key focus for the Government. Despite all the attention given to tax avoidance and evasion, the data shows that the bulk of the tax gap comes from individuals and small businesses making careless mistakes on their tax returns. These small mistakes add up collectively to large figures, and the changes proposed seek to tackle this issue.

Rationale

HMRC cite the growing pool of self-assessment taxpayers, and increasingly complexity of their tax affairs, as reasons why the system needs reforming now. The ease and speed of making repayment claims has also led to a rise in claims in recent years. These factors have led to a higher incidence of low-value inaccuracies in tax returns.

Current approaches to addressing these errors are labour-intensive – they require one-to-one engagement from HMRC through enquiries and assessments – which may be disproportionate to the individual amounts involved. HMRC are seeking to make the system more fit for the purpose of responding to a large number of small errors.

The proposals

The following reforms to existing HMRC powers have been put forward.

• Imposing increased information requirements on taxpayers when making a claim. 

Under the current regime most claims can be made in a tax return without the need to provide substantial details. This has already changed for research and development tax relief claims, an area that has been subject to error and abuse. Requiring additional details upfront is expected to allow HMRC to quickly identify errors and process legitimate claims.

• Alignment of the Revenue Correction Notice conditions and processes across the different tax regimes. 

This proposal aims to standardise the conditions and processes for issuing Revenue Correction Notices across different tax regimes. Currently, the requirements vary depending on the type of tax. The alignment would require both HMRC and taxpayers to provide reasons when a Revenue Correction Notice is issued or rejected.

• Introduction of a partial enquiry. 

This would allow HMRC to open an enquiry into a specific issue or section of a return, limiting the investigation to that particular issue.  The goal is to resolve the issue quickly, with time limits imposed on HMRC to conclude their investigation. This would not affect the normal enquiry window, meaning HMRC could still open a full enquiry into the same return within the usual time limits subsequent to, or concurrent with, the partial enquiry.

The consultation also proposes the introduction of a new power: the requirement for a taxpayer to self-correct. This measure is expected to be used where large numbers of taxpayers have made the same error in their tax return. It would give HMRC the power to issue a notice to a taxpayer, with reasons, to correct the error. The notice would impose a legal obligation on the taxpayer to respond, either by amending their return or providing an explanation as to why they consider the return to be accurate. Sanctions would apply for non-compliance, but the consultation recognises the need for taxpayers to be afforded an avenue to dispute the notice should they disagree with HMRC’s view.

What does this mean for taxpayers?

HMRC already have wide-ranging enquiry powers and, once an enquiry is open, any issue relevant to the years under enquiry is open to scrutiny. There is also no deadline by which an enquiry must be concluded (subject to the taxpayer’s right to apply to the Tribunal for the enquiry to be closed). If the partial enquiry and the requirement to self-correct tools are targeted appropriately and used as alternatives to “full” enquiries in order to more quickly resolve minor issues, then this is likely to be a welcome change from the current drawn-out and often burdensome process. Equally, the requirement to provide additional claim information upfront is reasonable if it leads to quicker results overall, but HMRC will need to ensure they are adequately resourced to deliver this increased efficiency.

The trouble with these measures comes if they are used bluntly, without being targeted to returns with identified errors, or where they are used in conjunction with a full enquiry. Where that is the case, the use of these powers is likely to complicate matters for taxpayers, requiring them to jump through additional hoops in order to confirm their tax position. Such an outcome would defeat the purpose of the reform.

The consultation can be found here: The Tax Administration Framework Review - new ways to tackle non-compliance - GOV.UK