This call for evidence, published in February, is the latest stage in the implementation of the government’s 10-year strategy to build a trusted, modern tax administration system. If implemented, the proposals would mean significant changes to HMRC’s enquiry and assessment powers, penalties and safeguards.

The ICAS response

We support simplification and modernisation; both taxpayers and HMRC would benefit from a more streamlined, simplified system that would be easier to understand, administer and use. However, it is important that any changes strike a balance between HMRC’s interests and those of taxpayers.

A key part of any reform programme should be the consolidation of all tax management and administration provisions in one place. The Taxes Management Act 1970 would be the logical place to look for these provisions but in practice it currently contains only part of the relevant legislation. Important provisions are scattered across numerous finance acts. It is impossible for most taxpayers (and difficult even for agents) to access the relevant legislation and apply it to their circumstances.

We broadly support the greater use of digital channels and communications by HMRC, subject to important conditions being met, including:
· Alternatives for digitally excluded taxpayers.
· Digital options that work effectively for agents and taxpayers – and cover everything they need to do.
· Addressing the risk that taxpayers may miss important digital communications.

It is vital that HMRC resources are not diverted into the reform programme and away from day-to-day work running the tax system, leading to further deterioration of service levels. The government needs to provide adequate HMRC resources for initial implementation and to meet ongoing requirements imposed by reform (for example, providing more statutory reviews).

HMRC’s enquiry and assessment powers

One of the most significant proposals in this section of the call for evidence is to replace HMRC’s current enquiry and assessment powers with a single set of powers that apply across all taxes. Alternatively, circumstances or taxes where a common approach could be applied would be identified, so that appropriate powers could be designed.

Our response comments that due to the considerable differences, between taxes (particularly between annual taxes, those based on shorter return periods and those applying to one-off or infrequent transactions), it is unlikely that a single set of powers for all taxes would be feasible or beneficial.

However, there could be considerable potential benefits arising from greater alignment of powers across groups of taxes where a common approach would be feasible. Reducing the number of different regimes that need to be understood and dealt with would be beneficial. It would also be helpful if the aligned powers and processes were simpler and clearer. However, any changes must be balanced, ie not simply increasing HMRC’s powers, extending time limits for assessment or reducing time limits for taxpayers to make claims.

Penalties

The call for evidence suggests 10 proposals for reform, aiming to consolidate and simplify penalties, making them easier to understand and implement while strengthening incentives to comply.

We believe there are too many different penalty regimes to act as an effective deterrent, as taxpayers are often unaware that penalties will apply or how they operate. We question whether all penalties remain necessary – for example, is a separate penalty regime for offshore non-compliance still appropriate, given the expansion of international information sharing?

We agree that it would be useful to consider aligning late submission, late payment and inaccuracy penalties across all HMRC regimes, although further consultation would be required on detailed proposals. However, we note that the new points-based penalty regime for VAT (which is being expanded to cover ITSA returns within Making Tax Digital) illustrate the need for a different approach in some areas.

Our response supports the expansion of the use of penalty suspension in encouraging future compliance – either through automatic suspension of the first penalty or a warning for a first offence. Either option would need to be backed up by a clear explanation to the taxpayer of the relevant penalty regime and advice on how to avoid penalties in future.

Safeguards

One of the main proposals in the final part of the call for evidence is to consider the merits and challenges of aligning the appeals process with either the direct or indirect taxes approach.

Our response does support the alignment of payment requirements across regimes by extending the ability to postpone the payment of tax to indirect taxes. Hardship applications take time and resources, for HMRC and taxpayers. There is also a risk that being required to pay the disputed tax in full could make it difficult, or even impossible, for some taxpayers to pursue an appeal. This is undesirable and likely to undermine trust in the fairness of the tax system.

We broadly support encouragement for taxpayers to take up statutory reviews and alternative dispute resolution, provided HMRC is given adequate resources to meet increased demand and operate both regimes effectively. We prefer encouragement and recommendation to imposing mandatory statutory reviews in some cases.

HMRC also wants to be able to withdraw the option of statutory review in some cases – where it considers that there are no reasonable grounds for appeal, or where the dispute involves an avoidance arrangement. It believes that some taxpayers are using statutory review to prolong disputes and delay the payment of tax. Our response strongly opposes this proposal. It would be unacceptable for HMRC to have the discretion to deny access to a key safeguard to some taxpayers.

Read the full ICAS response

Chris Campbell CA, Head of Tax (Tax Practice and Owner Managed Business Taxes), looks at recent developments in the treatment of environmental land management schemes

ICAS is a member of the Natural Capital Working Group, which has been looking into improving clarity on the taxation of environmental land management schemes. We believe it’s important there’s no tax disadvantage for businesses to participate in such schemes, and it’s clear the lack of certainty in the tax treatment of environmentally beneficial schemes has been a barrier to entry. We responded to the government consultation on this back in summer 2023. When there was no mention of it in the 2023 Autumn Statement we wrote a joint letter, with the Association of Taxation Technicians and the Law Society of Scotland, to the Financial Secretary to the Treasury, expressing concerns about the delay.

Ambiguity surrounding the tax treatment of environmental land management schemes, including the woodland carbon code and peatland code, is hindering the ability of land managers to engage with them. This affects not only the UK’s ability to achieve its net-zero goals by 2050, but also has direct impact on areas such as housebuilding, where developers must meet obligations in respect of biodiversity net gain and nutrient neutrality before development can begin.

In our joint letter, we stressed the need for additional clarity on income tax, inheritance tax, VAT and stamp duty land tax, and related devolved equivalents in Scotland and Wales. We have seen some progress over the past few months in these areas, but it’s clear more needs to be done.

Income tax

In terms of income tax, we feel that there is uncertainty on whether income from carbon and other credit sales (which include both verified credits where a reduction has been achieved and pending issuance units based on future reductions) should be treated as income or capital. This distinction significantly affects the rate of tax paid, and the expenses which can be offset against it. In the Chancellor’s 2024 Budget, he announced there will be a working group with the Treasury, HMRC and industry representatives to find solutions to the areas of technical uncertainty on this, where current tax legislation or guidance doesn’t offer enough clarity.

Inheritance tax

In a welcome step, this year’s Budget also announced the extension of the scope of agricultural property relief (APR) for land managed under an environmental agreement with, or on behalf of, public bodies. It’s important to bear in mind this announcement is about ensuring APR continues to qualify for land that would have already qualified for relief, as the government has confirmed it will only apply where the land was agricultural land for at least two years immediately prior to its change of use. Land will not qualify for APR simply because of the new rules.

The extended APR will apply to lifetime and death transfers on or after 6 April 2025. It will be necessary for the arrangement to be in place for the environmental land management scheme on or after 6 March 2024, although agreements in place before that date can still qualify as long as they remain in place afterwards.

VAT

On 9 May 2024, HMRC issued a Revenue and Customs Brief on voluntary carbon credits. This latest guidance will apply from 1 September 2024 for transactions on or after that date.

The HMRC guidance defines a carbon credit as “a tradable instrument issued by an independently verified carbon-crediting programme”, but this doesn’t include compliance market credits. The carbon credit must achieve reduced carbon emissions of one metric tonne of carbon dioxide, or an equivalent amount of greenhouse gases by reference to a baseline scenario. 

The existing VAT treatment is that voluntary carbon credits are outside the scope of UK VAT, taking account of HMRC’s initial view that they couldn’t be incorporated into an onward supply due to their being no indication of a secondary market.

HMRC has taken account of changes in the way that voluntary carbon credits operate in forming a different view of the VAT treatment where the place of supply is in the UK. From 1 September 2024, the sale of these carbon credits must be treated as taxable for VAT purposes. HMRC manual VATSC06580 onwards reflects the revised treatment.

To share your views on issue of ongoing technical uncertainty, please email tax@icas.com

HMRC wins latest IR35 battle

Justine Riccomini, Head of Tax (Employment and Devolved Taxes), explains how HMRC won its case on off-payroll working against ex-footballer and commentator, Neil McCann. Read her article in full