Comments from ACCA to HM Revenue and Customs (HMRC), February 2011.
ACCA welcomes the opportunity to comment on the proposed policy, its design and the related draft legislation. It is unfortunate that all three stages of the process have been telescoped into one. While there may be merit in the proposals as a means of dealing with a certain small population of determined non-compliers in the employer withholding taxes area, ACCA would have welcomed a wider consultation on other behaviours which pose a risk to effective collection of employer withholding taxes.
The proposals seem to indicate that the new measures would be deployed only in the most serious of cases. If this can be guaranteed, then ACCA would support the availability to HMRC of a suitable power to protect the Exchequer in such extreme cases.
However, the potential impact of the requirement to provide security is so great that safeguards must be clear, effective and inviolable. If HMRC intend solely to pursue "phoenix traders" then this should be clear both in the guidance and the legislation. Individuals involved in accrual of employer withholding tax liabilities to the stage where security might be required would need to be fully informed of the potential effects of their behaviour as early as possible, and in any event while they have the opportunity to demonstrate in a concrete way that they are able to comply with their statutory obligations. Once the first business has ceased the best opportunity is lost, and individuals would need to be aware of that.
With proper safeguards in place, the deterrent effect would be strengthened by introduction of a register of all individuals subject to security and the businesses with which they are involved. This would serve the twofold purpose of providing clarity to other creditors, and also informing potential customers and employees of the character of the management of the businesses.
Q1: Is there a civil sanction that could be designed which would have the necessary impact on determined rule breakers?
In the case of HMRC's defined target group (determined phoenix traders) a criminal sanction does appear to be the suitable approach. However, the focus on "determined rule breakers" predetermines the answer. If a criminal sanction is to be made available for use in appropriate cases, there must be adequate safeguards top ensure that it cannot be used in inappropriate cases, such as those whose liabilities to HMRC have accumulated through incompetence or misfortune. While there may be a case that some measures should be in place for protection of the public and the exchequer from the former, the latter group should not be subjected to further penalty by HMRC. In neither case would a criminal sanction would be appropriate, and the system must be created in such a fashion that the criminal sanction for non-compliance with NICs and PAYE obligations can be applied only to those who have clearly demonstrated their desire to evade their statutory duties.
The more stringent these safeguards are, and the more effective they are at ensuring only those who "deserve" criminal treatment receive it, the more effective a deterrent the system will become. Taken in conjunction with the suggestion expanded upon below that any HMRC security should be registered and publicly ascertainable, the combined economic effect of the measures would be to significantly restrict the ability of individuals or companies subject to security to accrue further trading liabilities to either suppliers, consumers or the exchequer.
Q2: In view of the changes that are taking place or being consulted on which concern PAYE, HMRC would welcome views on the timing of when the ability to obtain security should be introduced.
Around 2012 when the RTI procedures are implemented. The publicity around RTI will provide the perfect springboard for implanting an awareness of the new power, its application and its implications in the consciousness of all employers which will be a key element in achieving the desired deterrent effect.
ACCA also believes that consideration should be given to the creation of a public register of HMRC securities, for all taxes to which they apply. This would operate in two ways. Firstly it will protect commercial suppliers who might otherwise enter into a contract with the new company not appreciating that their claim will effectively be ranked behind HMRC. Secondly, it would function as a more general warning to all potential customers and suppliers of the employer of their past history. In this context, the effect would be similar to the Publishing Details of Deliberate Defaulters strategy, but with several important differences.
The register would simply record a financial attribute of the employer, and as such the integrity of the register would be compromised if employers were able to call for exemption from the register (and in any event, many of the grounds such as personal safety of informants in criminal cases would not apply). The register would be a reflection of historic behaviours, but not necessarily indicative of current attitudes - that is, a "reformed character" would still be listed on the register while the security was active. A possible corollary to the main register might therefore be a secondary (voluntary) list of "discharged" security subjects, who have complied with their obligations and convinced HMRC of their ability and intention to comply with their obligations in the future (although it is noted in this context that the draft legislation does not appear to provide for discharge of security on grounds of compliance).
It is important to note also that a register of securities would not in itself be a criminal sanction, nor reflective (directly) of criminal behaviour. As such, the inferences drawn by members of the public inspecting the register would depend very much upon the public perception of the aims and application of the security process itself.
If the public perception of inclusion on the register was that the individual was clearly at the very limits of those with whom HMRC is prepared to do business, and one of only a handful of such individuals in the country, then the implications would be clear and unequivocal. If however the legislation were to be applied more widely, or be called into discredit through inappropriate application, then the impact of the register would be diluted. If an individual could convincingly argue that their subjection to security was "yet another example of HMRC getting it wrong", and "bound to be overturned on appeal in a couple of weeks" then its value would be lost.
Clearly, the concept needs lengthy consideration and debate. A number of issues would need to be cleared up, such as possible Human Rights implications. The combined effect of the initial financial burden of providing a security and the subsequent risk that other businesses and customers may decline to do business with a registered employer might well be to act as an effective bar on trading at all, and possibly therefore on the ability of the individuals concerned to make a living. Against this has to be set the deterrent intent of the measure, and also the various acts precedent to imposition of the security.
It may be that if the measures are imposed purely and simply on adequately informed individuals who have made a deliberate choice to bring themselves within this regime by ignoring clear and repeated warnings from HMRC then they are proportionate and reasonable. This though will rely upon adequate safeguards being in place to ensure that the legislation cannot be applied in any other case; as set out above, this would be desirable in terms of taxpayer protection and revenue protection. The level of detailed information held on the register would merit discussion. While the identity of the individual and the tax in respect of which security was held would be essential, there may be an argument for "blurring" the information on amount of security, for example setting it within defined value brackets such as "up to £10,000", "£10, to £50,000", "£50 to £150,000" etc. including the names of specific businesses with which the individual is connected could be more controversial yet.
Q3: Is a criminal sanction at level 5 of the standard scale an effective and appropriate sanction for determined rule breakers in this context?
Yes, taken in combination with appropriate publicity.
Q4: Should the offence operate per security or per month following the request for a security?
The model for these proposals, VAT and Excise securities, operate on a transaction by transaction basis. The closest analogue to a transaction from a PAYE perspective would be the submission of the monthly PAYE return. The steady increase of the penalty as trading continues should reinforce the deterrent effect, although as noted above, the character of the offence will be as important to many potential offenders as the monetary consequence. This being the case, it seems sensible that for those offenders prepared to incur that criminal sanction there should be potential for greater financial sanction.
Q5: Do you agree these are the right behaviours for HMRC to focus its attention on, or are there other behaviours that suggest a requirement for security would be appropriate?
There have been a number of recent highly publicised cases where football clubs have been found to have accrued significant PAYE liabilities, which have in some cases been a contributing factor to insolvency or administration of the club concerned. The sums involved can be significant, not least because of the unusual business model of professional football clubs, and there have been indications that treating HMRC as a banking facility rather than a tax collecting organisation is considered to be normal or acceptable practice by some of the perpetrators. Quite apart from the direct economic impact of this behaviour, the potential influence on the behaviour of others ("If half the league/my favourite team can get away with it, why can’t I?") suggests that something could usefully be done to publicly curb this behaviour.
However, there are a number of potential defects with extending the application of security to ongoing traders who have simply built up significant arrears of PAYE. Design of safeguards would be complex, and the consultation document seems to indicate that at present such a development is not envisaged. It must be assumed that the clubs owing these sums are to some extent cooperating with HMRC in order to avoid being the subject of recovery proceedings in the appropriate format for NICs or PAYE, and taxpayer confidentiality would of course preclude detailed comment on individual or identifiable cases.
Nevertheless, when considering how to tackle arrears of employer withholding taxes, such a high profile area should not be ignored. This issue does however highlight the undesirability of running all three stages of the consultation process in parallel, as the final result, security machinery, is already set. There are clearly areas of PAYE and NICs arrears in which it is not an appropriate mechanism, but having legislated once on the area ACCA is concerned that HMRC would have neither the appetite nor the ability to secure space in future Finance Bills for further PAYE and NICs enforcement measures. It may of course be that the recent refinements of strategy, combined with the new penalty regimes, will deal with the issue of "non-phoenix repeat offenders", but they may also reduce the level of seriously non-compliant traders to a level where so few cases come to light that HMRC or other government agencies can devote sufficient resource to them that they can be dealt with under existing powers. Again, a more measured approach to the issues might have given time to gather reliable information on the area.
Q7: What would be a reasonable amount of time to allow between the issue of a notice requiring security or a decision confirming such a notice and the deadline for giving the security?
Inevitably the length of time required for a business to raise the required security will depend upon the amount of security required. As a bare minimum, seven working days should be required, but in many cases this would not be sufficient time. Given the small number of cases annually where HMRC expect the legislation to be in point and the proposal for PAYE and NICs security cases to be worked by a specialist central team it might appear reasonable to rely upon the operational discretion of the relevant officers.
However, for a lack of safeguards in this specific area to be acceptable there would need to be a corresponding legislative requirement for the giving of notices to remain the function of a limited specialised group.
Q8: Do the safeguards in the regulations strike the right balance between protecting taxpayers and tackling the behaviour of determined rule breakers?
Everyone agrees that something must be done. However, the mere fact that the current proposals constitute "something" does not necessarily mean that they "must be done".
Some commentators have rightly questioned whether the creation of a new criminal power which could potentially affect every commercial employer in the country is appropriate given the relatively small sums expected to be recovered as a result of its implementation. A parallel could be drawn with the proposed powers to deal with deliberate wrongdoing by tax agents, where the potential impact on tax agents and their businesses has caused grave concern.
However, a contrast can also be made. The deliberate wrongdoing proposals lack by their nature target behaviours which are apparently innocent run of the mill transactions, and would in the first instance be available (at least as a threat) to any tax inspector.
The PAYE and NICs security powers would be applicable only in specialised and defined circumstances, and reserved to a centralised specialist team, theoretically ensuring consistency and imposing a natural limit on the number of cases that could proceed. The new powers would be significant for any employer to whom they were applied, and to this extent the powers are extensive. However, under the current model, they would be applied only in extreme cases, which in turn justifies both the extreme nature of the penalty and explains the relatively small amount of tax at stake.
However, none of the above procedural safeguards are built into the legislation; they are all simply expectations reliant upon current HMRC procedural practice. Given the propensity of draughtsmen to incorporate "Henry VIII" clauses into every piece of legislation, even an explicit statutory restriction cannot be relied upon absolutely, but it would at least create a regime in which significant changes to the application and operation of the power would involve changes to publicly available legislation, rather than a simple revision to internal processes which could be carried out with no scrutiny or publicity, becoming apparent to tax payers only as a fait accompli.
Q9: Is the VAT guidance a suitable starting place for drafting guidance?
While there may be some common concepts, the underlying taxes are very different and the required legislation is very different. The existing VAT guidance should be seen not so much as a suitable starting place, but more as a informative background to the starting place. The impression given by the consultation document is that the aim of the new power is to be so effective a deterrent that it is never actually used. If this is the case, then any new guidance should be written with this message at the forefront, and provided to potential targets at the earliest possible stage.
Q10: Are there any other safeguards that would be appropriate in either the legislation or guidance?
ACCA is concerned that the proposals to allow HMRC to require security could effectively place HMRC in the position of a preferential secured creditor in any winding up. We acknowledge and appreciate that the strict legal position will not be one of preferred creditor. We understand that HMRC propose that any excess security not required in the event of the winding up of a company subject to security will be returned to the pot for unsecured creditors.
However, to suggest that HMRC is in the same position as any other potential creditor in being able to demand security before "doing business" with, or "supplying goods or services" to a suspect employer is false. Firstly, HMRC will have access to a different database of credit worthiness information to other potential creditors. Secondly, and more importantly, the relationship of HMRC with an employer is emphatically not that of supplier and customer. HMRC is in an absolute monopoly position. In the case of any other supplier it would be open to the employer to approach an alternative supplier in order to try to negotiate a position not requiring security/advance payment or similar, or alternatively to try to generate a business model which did not require interaction with any supplier in that field. In the case of HMRC, there is no such option. If the employer cannot afford the terms suggested by HMRC they cannot legally do business. The practical effect of the security requirements is to reintroduce Crown preference by the back door, albeit only in cases where HMRC have some prior indication that the business may pose a risk to the exchequer. Introducing a publicly available register of charges, while it would not resolve the issue, would at least enable other businesses to be put on notice of the unusual status of a business subject to security.