UK government proposes measures to tackle tax non-compliance

The government has launched a new consultation on proposals designed to tackle a specific category of non-compliance. It is part of an ongoing review that aims at modernising and reforming the tax administration framework. At the same time, it has published a summary of responses to a previous consultation on how certain aspects of tax administration could be reformed, such as tax assessments, penalties and safeguards.

In the latest consultation paper on non-compliance, the government has set out several proposed changes to HM Revenue & Customs’ (HMRC) existing powers and processes and the potential for a new power to require taxpayers to correct mistakes themselves.

Ian Robotham, a tax expert at Pinsent Masons, said that while the new consultation on non-compliance is clearly targeted at small businesses and individual taxpayers, there is no suggestion that it would be limited to those categories of taxpayers and large businesses should make themselves aware of the proposals.

The suggested changes include imposing additional information requirements for taxpayers to be able to make a claim and reforming revenue correction notices (RCN), which are issued when HMRC identifies an error in a taxpayer’s return or claim and makes corrections to it. Under the RCN reform proposals, the use of RCNs would be aligned across a number of taxes, and HMRC would be required to explain what the RCN is correcting and why, while taxpayers would be required to explain why they are not accepting the RCN.

The government also proposes to allow HMRC to open a partial enquiry on a narrow point and work to resolve the issues within specified time limits, while preserving HMRC’s right to open a wider enquiry in the normal window. It could be particularly useful for cases where taxpayers have claimed a relief or are awaiting payment for relatively small amounts, the paper noted.

Pinsent Masons tax expert Steven Porter said: “Large businesses will be particularly interested in the possibility of a partial enquiry. Most large businesses will have more than one issue open with HMRC at a given time across the numerous taxes they deal with. Currently a whole return enquiry is often opened when dealing with a discrete issue. The possibility for this to be dealt with using a partial enquiry will be attractive in order to bring certainty to their remaining tax affairs.”

Under the latest proposals, HMRC could be given a new power to issue a notice requiring taxpayers to self-correct their returns, and taxpayers will have a legal obligation to respond with consequences for failing to do so. According to the consultation paper, this new power could allow taxpayers to review their position and correct any inaccuracies, without needing HMRC to pursue the risk further using more expansive enquiry powers, in a bid to save time and cost for both HMRC and the taxpayer. “Requiring the taxpayer to review and correct this error themselves could promote positive future behaviours, meaning a lower risk of repeated mistakes,” it said.

Robotham commented: “If HMRC proceeds with the proposal to allow them to issue self-correction notices, taxpayers will need to know whether there are any time limits by which HMRC must do so. It will be important that issuing of self-correction notices does not result in an extension of the enquiry window, or extension of other statutory time limits that currently protect the taxpayer.”

The consultation on non-compliance is open until 22 January.

In the government’s responses to the original consultation, it has decided to not take any immediate action on many of the reform opportunities posed in the original consultation, including moving to a single set of enquiry and assessment powers and greater alignment of powers across different tax regimes. It will, however, continue to consult and engage with stakeholders, particularly on certain proposals regarding penalties and taxpayer safeguards.

The original consultation proposed alignment of penalties across regimes, possible adjustments to the approach to behavioural penalties and potential new options for penalty escalation and suspension. The government has committed to taking forward changes to inaccuracy and failure to notify penalties through a new consultation, which has not yet been published.

On taxpayer safeguards, the original consultation had considered aligning appeals processes between direct and indirect appeals, and reforms to the statutory review process, including the possibility of giving HMRC the power to exclude certain taxpayers from being able to obtain a review. The government has now committed to releasing a consultation to improve access to both alternative dispute resolution and statutory review. But following strong objections to the consultation, it has decided not to exclude certain taxpayers from access to the statutory review.