Vernon Dennis of Howard Kennedy LLP explores HMRC’s approach to the tax gap, and the tax authority’s relationship with financial directors
Last Autumn, HMRC issued “Measuring Tax Gaps”, an annual report on the estimated UK tax gap. The tax gap being the shortfall in tax estimated by HMRC as being due in any one tax year from that which is eventually collected.
In the accompanying press releases and in comments made in parliament, much was made of the fact that despite £36bn of estimated tax revenue remaining uncollected for tax year 2014-15, at 6.5% of all potential revenue, this represented a major success. It was pointed out that the tax gap is now at its smallest level since comparative analysis began, following a downward trend from a high point of 8.5% in 2005-06. Attention was drawn to the fact that since 2010, £1.8bn has been invested in boosting HMRC’s compliance capabilities and a similar sum is being spent on updating IT collection and data systems. This obviously results from the government’s commitment to crack down on tax avoidance.
It will have escaped no one’s attention that during this same time much public opprobrium has been generated by government and the press on the use of tax schemes, created by advisers, and the use of such schemes by celebrities and prominent individuals being termed as morally reprehensible. We have even seen recent reports of the Honours system being linked to having “good” tax affairs. Accompanying legislation and the General Anti-Abuse Rule have been introduced as part of an anti-avoidance strategy designed to tackle “abusive” avoidance. Criticism, however, remains of HMRC’s failure to attack multinational tax avoidance through profit shifting, the use of tax havens and continuing use of complex avoidance schemes; and debate as to what is regarded as appropriate tax planning and what is unacceptable tax avoidance is continuing.
These arguments, while generating significant headlines, fail to recognise that the key battle in tax collection is in regard to the affairs of SME businesses, indeed half of all uncollected tax emanates from SMEs.
In addition, as a so-called “involuntary creditor” and the loss of Crown preferential status (following the Enterprise Act reforms of 2002), HMRC has been extremely conscious of the possibility that directors of limited companies have used money that would otherwise be due as tax as a means of retaining working capital, leaving HMRC unpaid while trade creditors, employees and potentially the directors themselves are paid. As a result, increasingly HMRC has introduced a number of direct measures to limit potential liability and has promoted indirect measures that will promote better corporate governance and better tax compliance.
HMRC increasingly are using their power to demand security from a company against potential liabilities. A notice may be issued where the directors of the company have failed to comply with tax obligations in respect of the current business, or previous business, and HMRC has spotted that the directors were connected or associated with multi business failures. Security must be given within 30 days by the company, its directors being jointly and severally liable with the company to meet the demand. A criminal offence, with a fine of up to £5,000, is committed if security is not provided.
Whilst generally this power was restricted to seeking a VAT bond from a “phoenix business”, these powers can, and increasingly are, being used to cover potential liability in a much wider variety of cases, covering PAYE, NI and indeed other taxes, such as insurance premium tax, climate change levy and the landfill tax.
The use of this power may derive from an increasing ability to establish that an individual has been involved in a business failure causing loss to HMRC. Since November 2014, the HMRC has combined the teams dealing with direct and indirect taxes on insolvency. As a result of shared data, and therefore an ability to spot potential offenders, the use of security as a means of policing director conduct has increased.
Accelerate Payment Notices
Tax avoidance schemes have also been tackled by the increasing use of the accelerated payment notices (APNs). APNs must be paid within 90 days and are targeted at those taxpayers who have entered into a tax scheme that may subsequently be liable to challenge. APNs alone have raised more than £3bn since being introduced in 2014.
The use of the insolvency regime – personal liability
It should not be forgotten however that a significant way of policing director conduct is through the use of the insolvency regime, whereby a director may well lose the privilege of limited liability if guilty of one of many statutory provided areas of misfeasance.
HMRC has for some time sought post liquidation to use insolvency practitioners who are specialists in investigation and recovery proceedings. Such practitioners are well versed at looking for preferential payments, misuse of directors’ loan accounts and any breaches of duty towards the company and by extension its creditors. Proceedings will result in personal liability, which is important in not simply ensuring return to the Crown through a dividend, but also as a means of deterring others and removing the financial ability of a malfeasant director from setting up in business again.
In support of this public policy it is of no great surprise to find that in respect of Company Director Disqualification Act proceedings, unfair treatment of the Crown has been by some significant way the most common ground for disqualification; in 2015-16 being the reason for more than half of all disqualifications.
Personal Liability Notices
An increasingly used power, exercised where a director has been involved in company failure resulting in HMRC loss, is the issue of a Personal Liability Notices (PLN). Little seen until only a few years ago, a PLN may be issued not only to a director but anyone who had responsibility of non-payment of a relevant tax debt. This can therefore apply to employees, administrators or executive officers of a company.
A PLN can be served where non-payment of the tax is attributable to fraud or neglect, regard having to be had to the gravity of the fraud or neglect and the consequences of it. Whilst the liability under the PLN was originally mostly confined to PAYE, increasingly it is being seen in regard to both PAYE and VAT non-payment.
The willingness of a financial controller to deliberately withhold tax payments to fund the remainder of the business may well fall foul of this section, rendering the individual personally liable to contribute to the non-payment of tax. This is a measure that can be taken in concert with a liquidator’s allegation of misfeasance and the Insolvency Services actions for disqualification.
The message – beware!
Together, these measures can be seen in the context of the demands by the public and, by extension, parliament to ensure effective tax collection; to narrow the tax gap.
While high profile celebrities and multinationals have attracted significant attention in reality, the real battle ground for tax collection is in the SME market. Here HMRC is acting in a number of ways, which should cause directors and financial controllers of any company to have very close regard to the liabilities owed to HMRC. Thinking of skipping a payment to HMRC, think again!