Finance Bill Sub-Committee
Oral evidence, 15 October 2026.
The Chair
Good morning. My name is Dick Newby, and I am chairing today’s session of the Finance Bill Sub-Committee of the Economic Affairs Committee of the House of Lords. We are hearing evidence today on various aspects of the Finance Bill 2026-27 legislation. We are very pleased to have three guests who will be giving evidence: Sandy Bhogal, co-chair of the Tax Law Committee of the Law Society of England and Wales, who is with us virtually; Margaret Curran, technical officer of the Chartered Institute of Taxation; and Reuben Duffy, policy executive of the Law Society of Scotland. I have a particular sense of affinity with the Law Society of Scotland because, when I was a Minister doing financial services legislation, it produced the most detailed examination of the legislation of any body. I do not know whether this tradition has continued; it is very impressive. I will ask the first question and then we will go round the room. We are discussing the new requirement to correct, which the Government are introducing in this Finance Bill. They say this new requirement is about making explicit the obligation on taxpayers to correct errors. Do you think this is necessary? To what extent is the current legislative framework deficient in giving powers to HMRC to pursue taxpayers who fail to correct errors on their returns?
Sandy Bhogal
Both the Law Society and I take the view that further statutory compliance powers should only be introduced where a clear policy requirement has been identified. My starting point is that I do not believe that to be the case here. While it is right to say that, under the current UK tax rules, there is no general standalone statutory duty obliging a taxpayer to voluntarily notify HMRC upon discovering an error in a previously filed return, failing to correct an error can expose the taxpayer to penalties, and potentially larger penalties if that behaviour is treated as careless or deliberate. That should be enough. If you were to expand that beyond where it currently lies from a statutory framework perspective, you would think that would have to be conclusively demonstrated. We have a system of self-assessment, where a taxpayer has to take reasonable steps to ensure they file accurate returns. Sufficient burden is placed on taxpayers at that point in the cycle without them having to further police what happens post filing those returns while HMRC consider the submitted returns and any ancillary evidence or documents required to substantiate them. I can potentially see the value in HMRC being able to issue something akin to a correction notice, but I also query how different that is in practical terms to the existing powers it has. If it looks at a return filed by a taxpayer and is not sure about something, it can open an inquiry and ask for further details. There is a potential danger in taxpayers having to self-police post filing and the consequences of that being potentially deemed deliberate behaviour. Given not just this power but others that HMRC is looking to introduce, is this proportionate to what it is trying to target in terms of behaviour and closing the tax gap? I struggle to see how this power potentially helps with those objectives. In summary, that would be my take on where I see the need or indeed the justification for this measure.
Margaret Curran
I disagree because the CIOT consider this to be necessary. We have advocated for it in consultation responses made to HMRC in the last few years, when various other compliance interventions were suggested. There is a strong policy rationale for encouraging taxpayers to correct errors once they become aware of them; it is reasonable to expect taxpayers to do that. This is all with the caveat that it is clear what people need to do, which we will come on to later. We take that position for a number of reasons. We think it will help improve compliance, encourage more voluntary disclosures, and it should reduce the need for HMRC to make active interventions, which is all for the good, given the resources it has to hand. Very importantly, the measure has the potential to reduce the tax gap. Latest figures show that error, or taxpayer mistake, accounted for more than half of the latest tax gap figures. In terms of the exact figures, failure to take reasonable care was £20.8 billion, and error was £9.3 billion, so we are talking about significant amounts of tax that are due to taxpayer mistake. If this policy drives behavioural change and encourages more taxpayers to correct errors once they become aware of them, that should hopefully impact those figures. Additionally, it would reinforce the requirement on tax advisers that currently exists in professional conduct in relation to taxation, or PCRT, to which CIOT is one of seven signatories. It is basically our professional rules, and in them there is a requirement on tax advisers to encourage and assist their clients to correct errors once they become aware of them. Having an overarching statutory duty to correct will support those professional rules and help tax advisers in those sometimes difficult discussions they may have with clients when an error is identified in discussing what to do about it and how much additional tax might be payable. Sandy mentioned there are already consequences in legislation if you do not correct once you become aware of an error. There is an implicit duty under criminal law to rectify errors—for example, the offence of cheating the public revenue—but, as far as we are aware, HMRC’s prosecution policy seems to indicate that it would not prosecute most cases under that offence. There is also the requirement in penalty legislation that, if you discover an error and fail to correct it, and the error was not originally careless or deliberate, then it will be deemed to be careless. That legislation is already there. In the new draft legislation, we see a step up from that; it will be treated as deliberate. If you report an error later, it is more likely to be prompted, so there will be higher penalties. There are already consequences, but this just puts things under a statutory umbrella. So long as there is sufficient awareness raising and education, so taxpayers actually know what they have to do, then we support it.
Reuben Duffy
The Law Society of Scotland will take perhaps a middling tack as compared to the Law Society of England and Wales and CIOT. We certainly understand the policy aim behind this legislation. In principle, we are supportive of it, but we have a couple of reservations regarding the specificity of some terms, which in general need further guidance in order to properly work through this legislation. I specifically point out two unclear terms: “reasonable steps”, in terms of steps taken and when the taxpayer “becomes aware” of the inaccuracy. These are two terms that we highlighted in our written evidence as well, that we believe could do with further guidance from HMRC to specify what exactly they mean. Building off what CIOT just said, making this legislation work will depend greatly on taxpayer understanding of their obligations, and that will require clear guidance. We are supportive in general of HMRC cracking down on the tax gap, but we also note that the last couple of years have been a fairly busy period for legislation on tax conduct. We wish for consideration to be given to how this properly fits within that overall framework. We highlight particularly the recent introduction of mandatory registration for tax advisers. The obligation to comply is on the taxpayer but they will take advice from tax advisers. We will come on to that in a little while, but there needs to be further consideration of how exactly this impacts tax advisers and their professional obligations under the legislation.
The Chair
Can I just press you on the point, which I have sympathy with, about defining reasonable steps? It seems to me that is quite difficult. What form of guidance would you look for? Would it be examples of what is and what is not reasonable? As you say, reasonable is a subjective term; we find what people consider to be reasonable or common sense varies very much.
Reuben Duffy
In terms of reasonable steps, in particular we picked up the lack of a deadline for the correction. A clear timeline outlined in guidance would help taxpayers and tax advisers understand their obligations and at what speed they should move to correct errors. I could not speak to a specific example, but I can get back to you in writing when I have spoken to our tax law sub-committee; it can perhaps provide more detail on that.
The Chair
Thank you very much. I have a supplementary question, which is principally addressed to Sandy. Given that you are not keen on what the Government are doing, if this is not the way you would do it, do you have any other suggestions as to how HMRC might improve taxpayer behaviour around correction of errors? Or, as you slightly implied, do you think HMRC already has the powers to deal with errors anyway?
Sandy Bhogal
If I may, I will start with the second point first. Sufficient powers do exist and with further resourcing, HMRC could probably take better advantage of them. I appreciate that it is a hard job and therefore sometimes the easy solution seems to be to increase the scope of powers and hope that creates more of a deterrent in terms of dealing with errant taxpayer behaviour. In terms of alternatives, I would come back to what Margaret correctly identified earlier when pointing to the biggest component of the tax gap. I am using HMRC’s own statistics here. What it calls failure to take reasonable care is 35% of the tax gap, and then errors—mistakes that a taxpayer makes despite taking reasonable care—are a further 16%. Together, that takes you to over half of the tax gap. The question is, does that arise because taxpayers are not behaving appropriately, or is there something else going on? Typically, a lot of the tax gap comes from the small business sector. I am quoting the latest tax gap figures for 2024-25, but that trend has been replicated in the tax gap statistics for a number of years. That tells me that the tax code is too complicated and, as a result, compliance with it is problematic. If we really want to make a significant dent in the tax gap, we need to look at the existing tax laws and find a way to make compliance easier for the taxpayer. When you look at careless or negligent behaviour by taxpayers, I am not convinced—certainly my professional experience does not tell me—that it comes from bad behaviour by taxpayers. It is more of an issue of people struggling to understand obligations and the scope of the laws they need to comply with. Tax is inherently complicated and uncertain. Therefore, enhancing powers, which have the premise that the taxpayer is somehow at fault and their behaviour is what is driving the difficulty, is my key concern. My alternative would be a fresh look at how we legislate in the UK to consider whether there are areas of the tax code where the tax gap is wide and things can be done to address that.
The Chair
Do the three of you think that the main focus of additional HMRC efforts as a result of this provision will be towards small businesses rather than individuals, if that is where the bulk of the tax gap is found?
Margaret Curran
I do not know. HMRC has not said, as far as I am aware. But, at the moment, other things are happening that target small business in terms of guidance, so it would make sense.
Reuben Duffy
I agree with CIOT there. We are not entirely sure where the focus will be, but I echo the earlier point of the Law Society of England and Wales that resourcing is key. Wherever HMRC targets, it needs to make sure that it has adequate resources and does not give itself more powers without the resource to back it up.
Lord Carrington of Fulham
We have probably already touched on what I am trying to get at, but there will be some taxpayers, particularly very small businesses or indeed individual taxpayers, who do not have professional advisers. Others, particularly small businesses, will have professional advisers who—how can I put it?—do a cheap and cheerful procedure for their client because that is all the business can afford. How difficult will it be for a non-specialist, an individual or a small business owner to get their taxes correct? More importantly, when a customer correction notice comes through, how easy will it be for them to respond to that without incurring unreasonable costs?
Margaret Curran
You mentioned the notice. It feels to me that this correction measure is more understandable when you think of it in terms of HMRC sending a prompt to someone to make them aware that they may have made an error; but obviously they will need to check. The explanation in the notice needs to be very clear about the error that HMRC suspects has occurred and what the taxpayer should do about it. There should be an easy process to either let HMRC know, “Actually, no, I haven’t made an error”; or, “I have”, and this is how to tell HMRC. There needs to be very clear guidance especially to somebody who does not have access to professional advice. There will be a cohort of people who may struggle with this. If you have a professional adviser, they will be there to give advice. Of course, one concern is that we do not know how HMRC intends to use correction notices. Obviously, these will be new. We would hope, expect and advocate for them to be used only in cases where HMRC is pretty certain there has been an error—for example, that a source of PAYE income has been omitted. Otherwise, if they are used for broader things, taxpayers could be put to a lot of unnecessary work and cost in trying to deal with them when maybe there is no error.
Lord Carrington of Fulham
Could I just come back on that quickly? I have to say, my experience of HMRC is it goes fishing. It sends out a general notice saying, “We don’t think this is correct”. This is largely driven, particularly in the corporate sector, by possibly AI or a system-generated comparison between previous years’ figures. It says effectively, “We don’t understand why this is different. Explain it and justify it”. Is it not going to do exactly the same with these notices? Is it not just going to say, “We have looked at your tax return from last year and your tax return this year. There is a difference. Go into detail as to why that is different”?
Margaret Curran
We would strongly advocate that it does not use them for that.
Lord Carrington of Fulham
That is what it does at the moment.
Margaret Curran
It uses other prompts.
Lord Leigh of Hurley
A CCN.
Lord Carrington of Fulham
It does, does it not?
Lord Leigh of Hurley
Yes, but that is not a CCN; that is a nudge letter.
Margaret Curran
That is also a prompt. If this measure comes in, at that stage, the taxpayer may be aware that they might have made an error. They then have to do some work to investigate it, and take professional advice if they do not already have an adviser. Ultimately, if it is unfounded, as it does now, that will create a lot of unnecessary costs and work. With this measure, the stakes are higher because if you do not correct, and it is an error, HMRC comes back, decides it is an error and issues a deliberate penalty; then you are into new elements of risk.
Lord Carrington of Fulham
Do you think there ought to be a clear definition as to what the taxpayer has to do to satisfy the correction notice?
Margaret Curran
Oh, definitely, yes.
Lord Carrington of Fulham
Is there not at the moment?
Margaret Curran
The measures are new. The consultation around the correction notice is less mature than it is around the overarching duty of error correction. There should be further consultation on how these notices are going to work, what they will look like, how they are to be issued and what for and what information they will contain. That is really important. HMRC has said it will continue to engage with us during that process, which we welcome.
Lord Leigh of Hurley
Can I interrupt on that? My understanding was the CCN was going to be specific and say, “You’ve forgotten that bank account; you’ve forgotten that source of income”, whereas the nudge letters are open-ended, and you sit there worrying, “What on earth have I forgotten about?” Can we be clear on this? Will the CCN specifically say what the error is that needs reporting and be limited to that?
Margaret Curran
At the moment, we do not know because obviously they are new, but these are the sorts of things we would advocate for. Another risk of a CCN is it picks up HMRC’s spot that a taxpayer has omitted one source of income from their tax return, but actually the taxpayer did the same thing last year or the year before, or perhaps there are other errors. Another risk is that a taxpayer could make an incomplete disclosure. They should be disclosing all their errors at the same time, and there are routes to do that. Just responding to a notice that identifies one error may leave them exposed if there are other errors that they do not correct at the same time. That is a risk of these notices. It needs to be clear that they will also nudge to consider whether the taxpayer has made other errors.
Reuben Duffy
Just to go back to Lord Carrington’s question about taxpayers who do not have professional advice, earlier this year, in HMRC’s consultation on the reform of behavioural penalties, we considered that generally when it comes to penalties HMRC should not just take a black and white approach; it should consider, for example, the size and scale of the instance and look at the size of the tax loss here. Building off what Margaret just said, the frequency of errors is a key point. Is this a first offence? Is this a one-off or a pattern? What was the intent? As Lord Carrington asked, was professional advice received? If not, that also builds the case for clear and coherent guidance with examples, so taxpayers can be made to understand their duties under the legislation. Tax is complex; we all know this. There are people who will say, “Well, I won’t need professional advice; I’m going to do it on my own”. I believe that will, sadly, result in errors. Guidance is key but also HMRC discretion in making this work and building confidence in the system that HMRC is not simply punishing taxpayers for modest errors.
Lord Carrington of Fulham
I hate to come back on this all the time, but you have a view that HMRC will assist the people who it challenges. Is that realistic? Does HMRC really operate that way? I can tell you, that has not always been my experience.
Reuben Duffy
I cannot speak to that, but I certainly hope that HMRC would work to that. That should be its aim; that would be the position of the Law Society of Scotland.
Lord Carrington of Fulham
I hope with Sandy that it simplifies the tax system, but experience suggests that the opposite will happen. I suspect that, if it has the power to just demand, it will just demand rather than assist.
The Chair
Just to be clear, what has HMRC said so far about the extent to which it will explain what it is looking for?
Margaret Curran
That is key because if you receive—
The Chair
Has it said it will do it? You may think it is key, but does it acknowledge it to be so?
Margaret Curran
I hope so. It is something that we will continue to press for. HMRC has already piloted that with some of its nudge letters—these can be really vague—by stating the source of income it thinks someone may have omitted from their tax return. The feedback from taxpayers is that is really helpful because people need guidance. If you get a correction notice from HMRC, you need to know what it is concerned about, otherwise you will be put to a lot of time trying to work out what it may or may not think the error is.
Lord Carrington of Fulham
Sandy, you were a bit sceptical about the whole process. Do you think HMRC will use it correctly?
Sandy Bhogal
I am not sure I can answer that question. HMRC is an enormous organisation; it is very difficult to say that, as an organisation, it will behave in a particular way. I would say—this is both a Law Society position and my own personal view—in order to ensure that we have rule of law in the UK, state bodies need to have very clear scope of their powers. There should be limited discretion that should be appropriate and proportionate, certainly in the context of this particular proposal. I agree with a number of the concerns that have been raised. It is my understanding from the original consultation document that the threshold for HMRC and CCNs will be a reason to suspect, which is an inappropriate threshold for something such as this. The bar should be higher, particularly to your point about ensuring that legislation is appropriately used. It may well be the case that, when further draft legislation is published, the rules are tighter and these things are clarified. I would also advocate that HMRC is put on a very clear statutory footing in terms of its powers, and that we do not put too much in the discretionary guidance about what HMRC can and cannot do, for the very reasons that you have identified. Lastly, I go back to what HMRC wants to achieve. Reuben rightly pointed to the idea that legislation should hope for best behaviour by parties; but it should also cater for the potential worst behaviour, both on the side of the state as well as the taxpayer. In order for a measure such as this to be proportionate, it should be very clear about the type of behaviour it looks to target. If it is bad taxpayer behaviour, then it should be clear, and the rules should be tightened accordingly. If it looks to create a broader deterrent for all taxpayers, it is reasonable to ask whether it will provide the appropriate deterrent or simply add yet more cost and administrative burden on taxpayers, who are already trying very hard to comply.
Baroness Wheatcroft
Going back to Lord Carrington’s point, there seems to be an assumption on HMRC’s behalf—and underlying some answers we have had here—that most people have access to professional advisers at one stage or another. The self-assessment net is now so wide that this simply cannot be the case. My concern is that receiving a CCN would instil sheer panic in quite a lot of taxpayers, who are perfectly innocent in what they have done. Do you share that fear? Does HMRC have powers enough already? It can send out one-to-many letters, what you refer to as nudge letters, and probably needs to draft them more tightly rather than go on fishing expeditions. Is there a risk this will to add to the fear factor among a lot of taxpayers, who already choose not to open letters from the taxman? Is it necessary? That is really the point. Margaret, you thought it was when we started out on this session.
Margaret Curran
There is the overall statutory duty. Correction notices are just a way HMRC has thought up—perhaps a more effective nudge than a one-to-many letter—to get people to correct what HMRC thinks are errors. If it is to use them at high volume, there will need to be a lot of thought about how this is done because, as you say, a lot of people, maybe the majority, will not have an agent. Some may not respond to customer correction notices and, of course, not responding means you could end up with a penalty even if you have not made a mistake. What is HMRC going to do about people who do not respond? Some people will think, “Oh, actually, I need to go and get advice”, which they would not otherwise have done, to just protect themselves. You can see there will be more paperwork and more obligation on people. At the same time, the notice will act more as a prompt. We talked about becoming aware of an error. It is more understandable when you receive a prompt from HMRC. That is a point at which you become aware. The problem is if you do not receive a prompt from HMRC; how will anyone know or be able to prove that they might have become aware of an error?
Baroness Wheatcroft
That surely is only effective, as you suggested before, if the prompt is fairly specific.
Margaret Curran
Yes.
Baroness Wheatcroft
If it is general, the panic factor will be quite large. In the end, does HMRC need to tier the way it deals with taxpayers far more than it does at the moment? Should people who are liable for very little tax get one particular form, so it is graduated that way and it does not waste too much effort on the small things?
Margaret Curran
I certainly think there ought to be some kind of de minimis threshold. Is it going to send a notice to someone because it thinks they have omitted £50-worth of income? If you have an adviser, you certainly do not want to be spending a lot on fees that would end up being totally disproportionate to the actual tax that you have underpaid. At the same time, these notices should not be used for technical areas of uncertainty; they should be for obvious, spelled-out errors, nothing that is complicated, for example, if someone is a UK resident or domiciled. They should be kept to the simple, straightforward, obvious mistakes.
Baroness Wheatcroft
Sandy, you talked about simplification. Do you have any thoughts related specifically to this issue?
Sandy Bhogal
Simplification is a difficult overall objective; there will always be an element of complexity in tax laws. With this particular measure, if notice had to be introduced—again, for the reasons I mentioned previously, I am not sure it does—I would probably drop the first element of it and say that once the taxpayer does what they are supposed to do, which is to take all reasonable care to ensure that they file an accurate return, they have done their duty; then it moves to HMRC to take that forward as part of the normal compliance lifecycle. If HMRC feels that customer correction notices would be a useful additional tool in ensuring compliance but also assisting taxpayers in terms of getting things right, even though it is post filing, as long as they are appropriately and tightly defined, I see how that could work. It would be another arsenal in HMRC’s compliance powers, which is pretty close to what it has already. I question whether, in isolation, it is much different to contacting a taxpayer and opening an inquiry into an existing return. As Margaret rightly says, if you are talking about something where it is very clear there has been an error, then quite rightly, the threshold we were talking about earlier about reason to suspect can, by definition, be much higher. Therefore, as a result of tightening the scope of this legislation, you can hopefully simplify it by ensuring that it only applies in very limited circumstances. Off the top of my head, that is probably the best I can think of in terms of simplifying the measure.
Baroness Wheatcroft
Reuben, would that in any way fit with your thinking?
Reuben Duffy
I would refer back to the answer I gave to Lord Carrington regarding the degrees of behaviour we see. The Law Society of Scotland thinks that is key, which is why we responded to HMRC’s consultation on the broader reform of behavioural penalties. We need to understand things are not black and white when it comes to tax, even though the legislation often is in terms of behaviours. Sandy touched on the key point of complexity. Tax law is complex, and some areas are more complex than others. If people, as you allude to, are not using professional advice, then, as I said earlier, there will be mistakes. HMRC needs to take that into account when utilising this, which is why we are supportive in principle of this legislation, but there are practical difficulties that need to be worked out before implementing it.
Lord Leigh of Hurley
To disclose for the record, I am a member by qualification of the CIOT, admittedly in 1985 when it was a bit simpler, but none the less. Can we talk about safeguards? Just to scope the matter, the CIOT said in its submissions that this policy will be effected through the TMA. Can you explain which taxes it does and does not affect? Can you also explain the difference between the proposed and the current system? It must now have a system whereby it discovers undeclared income and it does something about it. What is the difference in the two routes? Sorry, there are a lot of questions.
Margaret Curran
I will take the first question about which taxes it will impact. The draft legislation is making amendments to schedule 24 to the Finance Act 2007, which is error penalty legislation. That applies to all taxes, so all the main taxes and a lot of the more minor ones such as income tax, capital gains tax, corporation tax, VAT, stamp duty, land tax, et cetera.
Lord Leigh of Hurley
Does it also apply to inheritance tax?
Margaret Curran
Yes. My understanding is it applies to all taxes. There is an amendment to section 118 of the TMA, which generally only applies to income tax, capital gains tax and, I think, corporation tax. It is unclear whether any other amendments are required in other statutes in order to tie any loose ends together. We can put that question to HMRC, but until we see the Finance Bill we will not know whether there are further amendments. What was your other question?
Lord Leigh of Hurley
HMRC must have had something prior that was comparable, so what is the change?
Margaret Curran
The change is that it will be a statutory duty to correct, and the consequences of not correcting, once you become aware, are that your behaviour will be treated as deliberate for penalty purposes; whereas currently it would be treated as careless.
Lord Leigh of Hurley
You have covered the matter for everyone. I move on to the issue of safeguarding. As we discussed earlier, in circumstances, particularly with inheritance tax, where the people making the submissions are not responsible for the asset collation, what protections and safeguards should be built into the CCN legislation?
Margaret Curran
Do you mean in terms of advisers?
Lord Leigh of Hurley
I mean particularly executors, who pay the tax but do not necessarily have the information that a taxpayer would.
Margaret Curran
That is a good question, and it touches on something we have also considered. The focus of the legislation is very much: you make a mistake, you do something about it, and if you do not do something about it, you are going get a higher penalty—that is the main focus—whereas there is a gap, which we think should be included in the legislation, around people who are unsure whether they have made an error or whether they have forgotten something they ought to disclose. People may not have, or cannot access, all the information they need to establish whether an error has been made. There are lots of examples where HMRC thinks an error has been made but the person disagrees. What do they do? It could be a very complex area of law. HMRC may not have all the facts. The escalation in risk around the consequences of not correcting an error could place a lot more responsibility on taxpayers, their advisers and others to make absolutely sure that they do their research, get all their evidence together and, if necessary, take advice or even get a second opinion. It ups the ante because the consequences of getting things wrong are higher.
Reuben Duffy
Specifically in terms of executors, I echo Margaret and say that is a good question. I can ask our trusts and successions sub-committee at the Law Society of Scotland to come back to you with a more detailed answer, as they will have more knowledge in regard to IHT. Picking up on Margaret’s point that this applies to all taxes, I would highlight that Scotland now has numerous devolved taxes that are outwith HMRC’s remit and are managed by Revenue Scotland. Consideration needs to come into play about how these two potentially divergent systems will operate alongside one another. Our most notable one is, of course, the land and buildings transactions tax. The Law Society of Scotland’s main concern about safeguards is around advisers. It is not clear to us what obligations there are when advisers identify or suspect an error on a taxpayer’s behalf. For example, one of our members asked, “What if you advise a client that there is an error in their return, and the client says, ‘I disagree’”? Is there an obligation on the solicitor to secure a correction on that? At what point does it become sanctionable conduct? This is a very pertinent and timely question, given the recent introduction of the framework around mandatory registration that I mentioned earlier. We query whether HMRC would deem it as misconduct if a tax adviser was unable to secure a correction to a client’s return. How far are we going with this? What are their obligations under the legislation? That is quite an important question from the tax advice perspective, particularly for solicitors.
The Chair
I would like to come on to reckless behaviour in just one second, but I first want to pick up a point Margaret made at the start. She said it was absolutely crucial that HMRC took steps to ensure that taxpayers understood that this was happening. If you were them, how would you do that? This is a question to everybody.
Margaret Curran
There needs to be comprehensive guidance with examples, which need to be not just obvious errors but also difficult ones around things such as: what if there is a change in HMRC’s guidance? What if there is a court or precedent decision that changes everyone’s understanding of what the tax position is? There needs to be extensive communication. It will be easier to communicate with agents. The real problem is those people without agents, the unrepresented. How is the message going to get to them? If HMRC issues a correction notice, that should comprehensively explain what the position is. But, absent a prompt or a notice, how is HMRC going to reach those people? It is a good question. It tries using social media, YouTube videos, those sorts of things. It generally gets quite good viewing numbers, so there are various options available to it, but I still think it is going to be quite challenging.
Lord Leigh of Hurley
And whistleblowers, of course.
The Chair
Presumably, a sentence could be added to the letter you get with your tax code to say the new provision is there, linked to wherever the details are. Are there any other thoughts, quickly?
Reuben Duffy
I have nothing in addition to what Margaret said. I just echo that it is important that appropriate resource is put behind public awareness of this. Q5 The Chair:. Can we come on to the proposed criminal offence of making reckless untrue statements or declaration? The overarching question here is, given that we have an existing framework of both criminal and civil sanctions, is it necessary to introduce this new category of behaviour that could lead to this sort of sanction? Who would like to start? Sandy, you are the sceptic.
Sandy Bhogal
Both the Law Society of England and Wales and I would have concerns if this was introduced. There is a lot to this, but I will be as concise as I can. There are probably five reasons why we should be careful with something such as this. First, recklessness is not particularly well defined from a legal perspective, and there is potential to confuse taxpayers, tax advisers and indeed HMRC officers. We would advocate caution there. There has not been much in the way of real consideration by the courts in tax cases on the concept of recklessness, and certainly in the case of indirect taxes, this is a not often used power. To elaborate on the differences in taxation, direct taxes can frequently be qualitatively different in scope, complexity and application from indirect taxes in terms of everything from timing and regularity of collection and filing to just the nature of the way that the taxpayer has a relationship with that tax. For example, with VAT, oftentimes the taxpayer is also in the position of the tax collector because of the way it works as a cascade tax. There are various differences that do not necessarily mean that the powers should align for consistency’s sake. That distinction should be borne in mind. It will inevitably raise concerns around the rule of law and access to justice because taxpayers may lack sufficient certainty as to how to comply with the law, and it is obviously hugely important for that to be clear in the context of criminal liability. You also have to potentially think about the way that legislation might impact taxpayer behaviour. What could be the impact on voluntary disclosures by compliant taxpayers in a situation where they are concerned about the possibility of a criminal offence? Even HMRC acknowledges that voluntary disclosure processes have worked well and are getting better and better all the time. I would reiterate my earlier point: with the powers it currently has, what is it exactly about this escalation of existing powers that the Government feel will have a significant impact on the tax gap, either by encouraging compliance or deterring non-compliance? Again, I do not think the case is clear there.
Reuben Duffy
To build on that, the Law Society of Scotland point out that HMRC’s investigative policy states that, for cases where it needs to send a deterrent and deems a criminal sanction necessary, the examples are money laundering, fraud, theft and organised crime. We query then: does this policy need to be revisited in light of this? To the actual offence itself, we take no firm position on it, for or against. I would not want to pre-empt our criminal law committee’s consideration of it, but Sandy has raised numerous points that bear careful consideration. I would also point out that in Scotland there is only one public prosecutor, the Crown Office, and the way this legislation is drafted, it is not necessarily clear that it understands that particular role. I believe there is a reference to independent prosecutorial authority or some such other thing. Those are the two points that the Law Society of Scotland wish to raise in reference to that.
Margaret Curran
On this occasion, I am going to come over a bit stronger than Sandy and disagree with this policy. The CIOT takes the position that we do not support it, particularly as it is currently proposed. It is far too uncertain what recklessness actually means. It is supposed to sit between carelessness and deliberate behaviour, but the boundaries seem really blurred. The examples that HMRC used in its consultation document did not help at all; in fact, they just muddied the waters. It was very difficult—and very worrying, actually—to see some of the examples of behaviour it would consider to be reckless. A lot of people would think, “Actually, that is probably careless, not reckless”. The boundaries are going to be really difficult to establish. It will make giving advice potentially quite difficult, especially in complex areas. As Sandy said, direct tax is different from indirect tax in that it is less transactional; there is more nuance and difficult technical positions that might need to be worked through. Another reason we do not support it is that there seems to be little evidence, or a little evidential basis, on which HMRC was suggesting it needed this offence. It is already in place for some indirect taxes, but as far as we could find out, it has been rarely used.
The Chair
As in possibly never?
Margaret Curran
I do not know. I saw somewhere there might have been one case.
Lord Leigh of Hurley
That is always a problem.
Baroness Wheatcroft
It seemed an assumption that Angela Rayner had been reckless because she did not take professional advice. Would that be a defence against recklessness, to come to people such as you?
Margaret Curran
It would be a good thing if you can prove that you took appropriate advice from a qualified professional.
Lord Leigh of Hurley
We looked at R&D tax credits a little while ago. From the examples given, making an R&D tax credit, where you think, “It might be right, it might not, but I will stick it in anyway”, which happens, would be considered reckless now, would it not?
Margaret Curran
Maybe, especially if you did not take advice from a suitably qualified professional, although some taxpayers might find it difficult to judge whether someone is suitably qualified or not.
Lord Leigh of Hurley
That is the point. That is what we discovered, that the advisers for R&D tax credits were not professionally qualified at all. Do you think HMRC is doing this to try to catch that area of tax? It is an enormous sum of money.
Margaret Curran
I do not know. One reason for introducing it is because it is a lower threshold than trying to prove dishonesty. I do not know because we have not been shown any evidence, but maybe there are certain cases that are at the back of HMRC’s mind, where it is thinking, “Actually, we could use this offence for those”.
Sandy Bhogal
It is not clear to me from the consultation document and process that followed exactly what HMRC is trying to target. I agree with Margaret that it is looking to catch behaviour that sits somewhere between carelessness and deliberate or dishonest. But the scope of recklessness is unclear in this context, as indeed it is in various other parts of the law of the land. That is one of our concerns, the idea that you cannot necessarily appropriately define the type of behaviour that you are looking to criminalise. It should be something that we take very seriously as a country. If someone is going to be potentially criminally liable, it should be very clear what the scope of that legislation is.
The Chair
As far as you are aware, is there a hard case that has led to HMRC wanting to do this? It is quite a significant proposal. If it does not use this provision for indirect taxes, one wonders why—other than a bureaucratic desire for tidiness—it has decided to introduce it. Are you aware of anything specific?
Margaret Curran
We are not, which is part of the problem. If there was some reason for it that could be explained, we may have a better understanding of why it wants to introduce it.
Lord Leigh of Hurley
This is a pattern of behaviour. Treasury and Whitehall consistently bring in mountains of legislation, and HMRC never implements it. It never, or hardly ever, goes after anyone. It is some civil servant justifying their existence, which is fine, and it may be good, but there is no good if HMRC does not actually implement legislation. Is that your experience? Your words might be slightly less pejorative than mine, but is it your experience that there is a lot of legislation that HMRC has but does not use?
Margaret Curran
Absolutely, yes.
Sandy Bhogal
I agree there are a number of powers that HMRC has that it does not use. Exactly why that is the case could be for any number of reasons, my Lord.
Baroness Wheatcroft
Could it be because it already has too many?
Sandy Bhogal
As tax rules develop, it can be difficult to have the appropriate opportunity to holistically consider whether HMRC’s compliance powers remain fit for purpose. Particularly with the way business evolves, the nature of cross-border business and how that is transacted, there could be any number of reasons why the tax code, particularly the compliance aspects of it, are always playing catch up. There are various difficulties in a democracy in there being the appropriate opportunity to re-think how these powers should be both legislated and enforced. I have a bit of sympathy with the way that the jigsaw is at the moment, and I am not necessarily sure that is HMRC’s fault. If it is being pushed to close the tax gap, it may well be it is being asked to consider things that would potentially up the ante in a way that would deter or otherwise impact taxpayer behaviour so that it helps with closing the tax gap. The difficulty I face when I look at these proposals is that, if it is not clear exactly what it is trying to do, it is difficult to be helpful in terms of better targeting the proposal. All you can do is raise concerns.
The Chair
You have done so extremely clearly, and it has been extremely helpful to us. Thank you very much. We have learned a lot, and you have given us a lot to think about and to ask future witnesses, not least the Minister when he comes later in this inquiry. Many thanks.