Inside the mind of a tax inspector - PowerPoint Presentation

1. Inside the mind of a tax inspectorPresentation to the CPNDate: 25 March 2021

2. What is it like dealing with HMRC?Client feedbackUncertainUncommercialChallengingTime consumingExasperatingWorryingWhat does HMRC say?Make things easyResponsiveTreated fairlyImpartialEffectiveAccessible

3. HMRC as an organisation

4. What type of organisation is HMRC?Collected £636bn in year to 31 March 2020 (pre pandemic!)Established by Commissioners for Revenue & Customs Act 2005Non ministerial departmentReport to Parliament through Treasury MinisterTreasury lead on tax policy/HMRC lead on maintenance & adminS5 CRCA 2005 – HMRC responsible for “collection and management” of taxDuty of care & managementTreat taxpayers equally and fairlyGovernance & accountabilityDealing with HMRC is not a always a commercial negotiation

5. What is HMRC responsible for?Income Tax, CT, CGT, IHT, IPT, SDLT and PRTEnvironmental taxesClimate change and aggregates levy and landfill taxValue Added Tax (VAT), including import VATCustoms dutyExcise dutiesTrade StatisticsNIC’sTax CreditsChild BenefitNational Minimum WageStudent Loan repayments

6. What are HMRC’s strategic objectives?Per HMRC Annual Report:Collect Revenues due and bear down on avoidance and evasionTransform tax and payments for customersDesign & deliver a professional and engaged organisation Wider objectivesLeading digital change across public services Budget 2021 £95m to deliver digital technologyCreation of a tailored single tax account Behavioural based approach

7. Tax GapDifference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paidCurrently stands at 4.7%Lowest ever tax gapIn monetary terms - £30.8bn

8. Tax Gap - segmentationSegmentAmount(£bn)PercentageFailure to take reasonable care£5.5bn18%Legal interpretation£4.9bn16%Tax Evasion£4.6bn15%Criminal Attacks£4.5bn15%Non payment of tax£4.1bn13%Errors£.3.1bn10%Hidden Economy£2.6bn8%Tax avoidance£1.5bn5%

9. The good old days?? …..Versus TodayThenNetwork of local Tax OfficesAll functions integratedDirect/indirect tax autonomousManual processesLocal selection of enquiry casesInvestigation based approachNow13 Regional CentresBusiness DirectoratesJoined up/Cross tax enquiresAutomised processesRIS teamCampaigns/Audit/Interventions based approach

10. What is it like to work in HMRC?Per HMRC Employee Survey 2019 – (Agree or Strongly agree):“I am interested in my work” – 81%”I have a clear understanding of HMRC’s objectives” – 78%“I believe actions of senior managers are consistent with HMRC values” – 45%“Overall I have confidence in decisions taken by senior managers” - 34%”When changes are made in HMRC they are usually for the better” – 23%

11. The tax landscape

12. Tax and regulatory environmentWhat does this mean in practice?Dramatic increase in legal and regulatory complianceIncreased reporting obligationsChange in HMRC approachFocus on people responsible for the loss of taxPublic perception/reputationResponseIncreased focus on dataLower risk appetiteGovernance more importantCertainty on tax positionsMitigating risk

13. Tax & regulatory environmentLarge business -“Tax in the Boardroom”, tax policy, SAO, Risk reviewsMultinationals - BEPSOffshore - Common Reporting StandardUK – Regulatory Money Laundering regulationsBribery ActCorporate Criminal OffenceUK - Litigation & Settlement StrategyUK – New information powers (including right of inspection)UK - New Code of Governance for resolving tax disputes

14. Focus on tax avoidance & evasionTax AvoidanceGeneral Anti Abuse RuleAPN’s & Follower NoticesStrengthening DOTASDOTAS for indirect taxesSerial avoiders legislationEnablers of tax avoidance schemesLoan chargeTax EvasionRequirement to CorrectNew penalty regime for offshore offencesCorporate Criminal OffenceOnline marketplaces

15. The headline grabbers……

16. Survey of larger businesses – key issuesLower risk appetite Scrutiny from HMRC an important factor – 57%Reputational Risk – 38%Interventionist approachIncreased regulation affects their business – 67%Reputational riskSeek resolution by agreement – 57%Litigate only in exceptional circumstances – 33%Achieving settlements difficultStuck in HMRC policy – 39%

17. Tax Governance

18. Building blocks of tax governanceTax StrategyAttitude to taxCovers 4 areas:Approach to risk management & governanceAttitude towards tax planningLevel of risk the group is prepared to takeApproach with HMRCTax Strategy – Questions from HMRCDoes it capture the actual approach?Is the tax strategy known?Board/senior managementAcross the businessIs it used in decision making?How do you demonstrate this?

19. Building blocks of tax governanceOperational Quality of underlying dataClearly defined/documented tax processesAdequate controls in placeTesting of controls and processesAllows for accurate tax reportingOperational – Questions from HMRCWhat is the quality of documentation?Is it consistent across the business?Are the controls the right controls?Show us evidence of testingWho reviews this and when?

20. Building blocks of tax governanceTax control frameworkKey tax risks understoodAppetite to risk understoodBoard/senior management engagementUnderstood/applied throughout the businessSufficient resources:PeopleProcessesPolicies/trainingTax control framework – Questions from HMRCIs tax aligned with corporate strategy?How are tax controls defined and embedded?Is tax an integral part of the business?Is there a commonly understood risk appetite across the Group?

21. Local compliance

22. HMRC organisationLarge BusinessTurnover £500m+Top 2,000 businesses in UKAppoint a Customer Compliance ManagerWealthy & MidsizedTurnover £10m+ to £500m or at least 20 employees“Customer segmention” (focus on the business and not individual taxes)Individuals & Small Business ComplianceTurnover up to £10m35m individuals and small businesses

23. HMRC enquiries – key considerationsWhat type of enquiry is it?Who issued the enquiry/who is the Inspector (Is it an inspector?)What information do HMRC have?Is the information HMRC requesting reasonably required?Do HMRC have the right to raise enquiries/issue assessments?What safeguards are in place?Who is the decision maker?What is the settlement/governance process?

24. HMRC – Risk & Intellegence Service (RIS)Based in BristolCollates data for HMRC enquiries/campaigns/projects3 main elementsAnalysis & information – identifies compliance risk and threatsCampaigns & National Projects – Develops project workOperations – Deliver risk intelligence packagesAll returns risk assessedWide range of information sources from HMRC’s systemsIf your clients do receive an enquiry it is likely HMRC have some information or reason to enquire

25. HMRC Connect databaseIntroduced in 2010 - developed by BAE SystemsCost £100mUses sophisticated data analytics“A data matching & risking tool that allows us to uncover hidden relationships between people, organisations & data that we could not previously identify”All information sources not known but it will interrogate over 30 databases containing billions of pieces of dataConnect can search all those databases and collate information

26. HMRC Connect database - Information sourcesTax returnsBank accountsOffshore data Credit reference agenciesCredit card accountsOnline activity (e.g.Paypal/Ebay)Companies HouseDVLALand registryOnline social networkingProperty websites (e.g. Rightmove)Flight sales Passenger informationLocal authority returnsDWP

27. Connect – Example of an Intelligence Package HMRC risk profile a shareholder of a company……Married or divorcedChildren & private schoolMaintenance or Child BenefitProperties owned & mortgagesRental income receivedBank depositsBank borrowingsInvestments held InsurancesFinance arrangementsCars owned/leasedCouncil tax & other utilitiesOther business interests

28. HMRC Litigation & Settlement Strategy (LSS)What is it and why is it important?Introduced in 2007 Sets out the principles within which HMRC handles all tax disputesHMRC approach has 2 key elements:Support customers to get it right, thereby avoiding disputesResolving disputes collaboratively to establish the right amount of tax at the least cost to HMRC and its customers

29. HMRC Litigation & Settlement Strategy (LSS)How do you reach agreement?Negotiated settlements are the normHMRC will work with the taxpayer to:Fully understand the relevant facts & lawShare & test the strengths and weaknesses of each others argumentsReach a considered view on the strength of its caseThis is an opportunity to influence HMRC and reach an agreement

30. HMRC Litigation & Settlement Strategy (LSS)LitigationWhere a dispute is genuinely all or nothing in nature and HMRC believes it would be likely to succeed in litigation, HMRC will not reach an out of court settlement for less than 100% of the tax dueWhere there are a range of possible figure for tax due, HMRC will not settle for an amount which is less than it would reasonably expect to obtain from litigation.If HMRC believes it would be unlikely to succeed in litigation, it will, in the majority of cases, concede the issue

31. How do you avoid a HMRC enquiry?Keep good recordsTake professional advice where appropriateMake use of “white space disclosures” on tax returnsMake voluntary disclosuresUse clearance procedure where appropriateEnsure tax returns and payments are up dateUnderstand the consequences if you enter into tax avoidance arrangementsUnderstand HMRC’s powers (and safeguards in place)Effective dialogue/negotiation with HMRC

32. Future tax landscape?

33. Future tax landscape?Tax Policy & Consultations document – Spring 2021Presented by Treasury to ParliamentMaking Tax Digital extended - to apply to IT Self Assessment (April 2023)Investment in digital infrastructure Tax administration review – changes to enquiry process & information powersMore frequent payment of Self Assessment taxRaising standards in the tax advice marketOff payroll workingClamping down on the promoters of tax avoidanceDisguised remuneration and the loan chargePaying for Covid/Compliance

34. Coronavirus Support Payments£47.9bn paid out in furlough grants to Nov 2020Estimated that 5%-10% error/fraudBudget 2021 - HMRC earmarked £100m & 1,000 extra staff for compliance Aggressive (behavioral) penalty regimeFraud Hotline & other HMRC intelligenceLegislative support - Sch 16 FA 20Uses existing HMRC powers

35. CSP’s – Assessments Sch 16 Finance Act 2020If person not entitled to a CSP or ceases to be entitled:Due to a change in circumstancesPerson has not, within a reasonable period, used the amount for the purpose intendedTax due when payment received (or or the date they ceased to be entitled to the payment after it was received)Recipient liable to income tax on an amount equal to the CSP to which they are not entitled (i.e. 100% claw back)HMRC may make an assessment “in the amount which ought in the officer’s opinion” be chargedAssessment subject to HMRC time limits (4, 6 & 20 years)For partnerships assessment on any partner and there is joint and several liability (and penalties)Automatically treated as “deliberate and concealed” if the person knew they were not entitled to the CSPProsecution in appropriate cases

36. Coronavirus Support PaymentsCash costs (assessments & penalties)Joint & several liability for partnershipsNaming & shamingNo “walk away” through insolvencySignificant penalty cost Effectively manage any HMRC auditHMRC information & inspection powersClarity on technical aspects (e.g. employment law issues)“Best judgement” for assessmentsEffective negotiation /onus of proof etcBe proactive, establish the facts, behaviours & collate evidence to supportWhat impact for the wider business?

37. Conclusions & thoughts

38. Conclusions & thoughtsHMRC going through transformational changeChanges in law & working practices affect us allRegulation increasingAppetite for risk is reducingHMRC have more information than ever beforeKeeping good records & taking professional advice will reduce the risk of enquiry or a tax dispute if HMRC do query a return

39. Questions?

40. Contact detailsRichard Aldersonrichard@pannutax.co.ukO7739 874043Pannu Tax Ltd