Tax compliance and Covid-19: HMRC takes new approach to investigations and disputes
Published on 17th Apr 2020
Amid a range of actions to help businesses through the coronavirus emergency, HMRC's new policy on tax compliance raises practical issues that companies will need to address.
HMRC has adopted a new go-slow approach to tax compliance to help businesses in urgent need of management time and cash flow through the coronavirus emergency. The change in policy, which follows a number of recent measures by HMRC (see our Insight here) in response to the pandemic, has implications for managing tax investigations and appeals and the practical steps that companies will need to take.
HMRC has adopted an approach – which has not been formally announced – of stopping compliance checks and allowing investigations to drift, save where they need to take action (for example, in raising protective assessments when faced with issues around imminent time limits.
Understandably, HMRC is suffering from employees contracting coronavirus as well as the difficulties – particularly for a public-sector body – related to employees working remotely. It has also been tasked with responding to the coronavirus crisis through designing and implementing tax deferral measures (including a new hotline to request Time to Pay arrangements), the Coronavirus Job Retention Scheme and the Self-employment Income Support Scheme. HMRC can hardly be blamed for being distracted.
More positively, this could be seen as an attempt to take pressure off businesses and taxpayers because, if HMRC's task is now to preserve businesses, there is no point allowing a business to defer, say, £1m of VAT, but at the same time enforce £1m of underpayments – and, while it does so, occupying management time.
Whether this is good for taxpayers depends on the investigation and if the dispute is at an investigation stage or has progressed to a formal appeal, when the Tax Tribunal's difficulties will also have an impact.
HMRC has set up a dedicated helpline for businesses concerned about not being able to pay their tax because of the coronavirus crisis. Some businesses may be tempted to short cut this process and pay late without prior discussion with HMRC, in the hope or expectation that HMRC will not take enforcement action during the current emergency.
In effect, this is a cash-flow strategy that treats the outstanding tax as a cheap unsecured loan from HMRC – but it is a dangerous course of action. Any extended time to pay has to be agreed on a case-by-case basis. There is no general suspension of payment obligations. HMRC will at some point revert to type and enforce penalties – and it was very keen on applying penalties prior to the pandemic crisis – if it considers that taxes are unpaid by choice rather than necessity, particularly where there is a generous time to pay facility available. The addition of penalties could make the current 2.6% late payment interest rate for underpaid tax much more expensive. Deliberate non-payment could also have wider ramifications for the business's ongoing working relationship with HMRC.
Where the investigation involves HMRC checking a taxpayer reclaim (that is, where the business is owed overpaid taxes), the obvious response for a taxpayer to HMRC's new policy must be to chase up and make sure HMRC engage. The position is rarely simple so this will demand management time. However, HMRC's obligations to engage with a taxpayer in accordance with the litigation and settlement strategy – and to provide a helpful, efficient and effective service – have not changed. Taxpayers should also in this situation watch for time limits expiring, for example, the making of a claim, such as a double tax-relief claim, that is only required should HMRC's view be correct.
Where, as is normally the case, HMRC is demanding taxes from the business, there is a temptation to let the matter drift. Putting off the argument enables management to concentrate on other more pressing issues and it also defers the date any payment found to be due needs to be made to HMRC. However, there are a number of issues to bear in mind before deciding to allow time to pass.
Clearly, unpaid tax attracts interest, but HMRC's default interest rate for late payment has just been reduced to 2.6%. For many businesses, particularly in the current environment, that is an attractive rate – even though it is non-deductible for tax purposes. However, as with simply not paying tax as a cash flow strategy, there are risks of penalties – as previously outlined – and this could be expensive.
Clearly, a business could apply for time to pay under HMRC's policy, which would prevent penalties arising but would only apply if tax were due. Where the business accepts the tax is probably due – but not when there is a strong case – then conceding the debt in order to enter a Time to Pay arrangement with HMRC might in the right circumstances be prudent.
Businesses should also be aware that allowing an investigation to drift could have other consequences:
- Where there is a right of recovery against a third party, for example under a contract, enforcement can normally only occur when the tax liability has been established. A delay on the tax investigation therefore risks the value of the indemnity deteriorating, for example because the other party becomes insolvent.
- A related point arises where the tax investigation relates to an ongoing issue, for example VAT output tax. The interaction of the tax time limits for assessment and contractual rights means that, in certain circumstances, the tax liability remains for periods where there is no contractual right of recovery – or commercially it is too late to seek to recover – for example from a large number of small customers.
- There is considerable concern at present among auditors as to how to prepare accounts; not only as to how to provision for liabilities but also as to how to value a business on a going-concern basis. Allowing a tax investigation to continue may extend the uncertainty through to the year-end and make discussions about the accounts more difficult.
- It may be that, with a tax dispute that is unlikely to be won, tax uncertainty is better than paying out, but for "winnable" disputes, the quicker the matter is resolved the better.
- The evidence on which the business relies will start to deteriorate in a protracted dispute. If the policy decision is to allow the dispute to drift, the business should review the evidence it may need to rely on and seek to capture it, for example from a key witness who leaves the business.
Finally, one point to watch is that, notwithstanding HMRC allowing the investigation to drift, there are still time limits with which to comply, for example where HMRC has issued a formal information notice under Schedule 36. Failure to comply with such time limits will trigger penalties. While a "reasonable excuse" defence is available, rather than risk the penalty, a better option is to seek to agree an amended deadline for compliance or, if necessary, make a protective appeal to the First-tier Tribunal in relation to the deadline.
Where disputes have reached the appeal stage, the Tax Tribunal, in common with other courts, is finding it difficult to progress appeals. Judge Sinfield, the president of the Tax Tribunal, has issued a general direction ordering that all proceedings and time limits be stayed for a 28-day period. While some hearings are to be held remotely, where possible, there will be an inevitable backlog and it remains to be seen how long it will be before the tribunal system is up and running again.
Amendments to the tribunal procedure rules to deal with the coronavirus crisis have been made and signal an increased use of paper decisions and video hearings – but there will still be delays.
One point to note is that, for VAT appeals, appellants must pay the tax upfront before you can appeal (in contrast to most direct tax appeals). The only exception is where HMRC (or the First-tier Tribunal) agree that the taxpayer has demonstrated that upfront payment would cause financial hardship. If the current crisis means that upfront payment would cause real financial problems for the business, the COVID-19 reason should be made clear in a hardship application. If a hardship application is pending, and the financial situation has since deteriorated, it is worth making further submissions to the First-tier Tribunal and HMRC without delay. Once the First-tier Tribunal makes a decision on hardship, there is no right of appeal.
Care should also be taken with internal reviews. Even if HMRC are happy for an appeal to proceed slowly. If HMRC offer an internal review, a taxpayer must accept such an offer or appeal to the First-tier Tribunal – otherwise the appeal is deemed to be resolved in accordance with HMRC's view.
Osborne Clarke comment
HMRC's new go-slow policy can be very useful to a business that has urgent need of management time and cash flow. However, there are downsides in this new approach and each business needs to consider all the factors in the context of its circumstances and make a conscious decision to allow the investigation to stall or not. Likewise, while it may suit both parties not to actively progress an appeal at his stage, important statutory deadlines will remain and should be addressed.