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The oncoming storm

April 6, 2017

HMRC has a long record of enforcing compliance with direct taxes by hitting taxpayers with a bigger and bigger financial stick until they engage. Readers with long memories may recall the old method of estimated assessment, where a tax return was obtained by estimating income and profits and, if no return was received, estimating next years’ higher and higher and higher until finally we had little old ladies with tens of thousands of pounds of alleged income in tears on the doorsteps of accountants.

More recently there were cases of absurd penalties racking up under the C.I.S. system. And there is of course the notorious hundred pound penalty for failure to submit a tax return on time. This began as the lesser of £100 or the tax due: now it is simply £100 even if your tax bill as a result of the return is zero.

It is my contention that HMRC has very little understanding of the ecology of taxpayers with earnings at or around the nil rate band limit. This was evidenced in the last few years in the VATMOSS debacle (this blog, ad nauseam) where the tax authorities failed to engage with the very smallest digital entrepreneurs, principally because they had no idea that such businesses existed in the first place. The HMRC stakeholder model makes it hard for such people to engage because on an individual basis it takes up too much time and energy to deal with HMRC one-on-one, and none of the existing stakeholder organisations represent such businesses: the entry level for the Federation of Small Businesses, for example, at £99 for a start up or £172 thereafter, is prohibitively expensive if one is earning 10,000 a year.

So if we accept that HMRC’s pattern is to use disproportionate financial penalties on small businesses and it has little understanding of the very lowest earner, it is easy to see how the disastrous affair of the tax credits outsourcing program came to be. The PAC report published today goes into full detail but there are a couple of additional points worth noting.

Firstly the outsourcing of work which ought rightfully to be done by the civil service. It has always been thought morally dubious (and in my opinion rightly) to outsource the collection of tax to a profit making entity. How is it not incorrect, therefore, similarly to outsource the payment of small amounts to the poorest members of society?

Secondly there is the question of control of contracts and external work. As you will know, I am not sanguine about the possibility of Making Tax Digital for Business working as intended and this is largely because HMRC have over the years lost their in-house expertise in dealing with computerisation. Combine this with the rumoured walking away of their own consultants because of the changes to IR35 rules, it looks as though the problems with tax credit payments are merely a foreshadowing of a shit storm heading HMRC’s way.

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