HM Revenue & Customs’ “aggressive” approach to curbing tax avoidance is disproportionate and undermines the rule of law, a Lords committee said in a damning report on Tuesday.
The upper house’s economic affairs committee — which includes two former chancellors, Alistair Darling and Norman Lamont — said HMRC was “not sufficiently accountable” for its treatment of taxpayers and recommended the government undertake a full review of the tax authority’s powers.
The report was also highly critical of Mel Stride, the Treasury minister responsible for HMRC, who refused to attend the committee’s evidence sessions. Malcolm Forsyth, chairman of the committee, said Mr Stride’s actions had angered peers and “did not make us feel that the fair treatment of taxpayers was being considered properly by the government. We concluded that the scrutiny of HMRC was not up to scratch.”
The report said HMRC was now being asked to clamp down harder on tax avoidance and evasion with fewer staff and had been given extensive new powers, creating a culture of “harshness” that did not consider whether taxpayers were treated fairly. It urged ministers to withdraw plans to further extend HMRC powers, which are contained in the forthcoming Finance Bill.
“When we started getting evidence that this was hitting health workers and social workers, we were shocked,” Lord Forsyth added.
The Treasury stressed it had taken “unprecedented” action to crack down on tax evasion and avoidance to ensure that everyone paid their fair share. A spokesperson said: “Parliament has given HMRC powers it needs to tackle businesses and individuals who do not pay their fair share, and it uses them responsibly and subject to appropriate checks and balances.”
The most contentious issue examined by the committee was a tax, called the loan charge, affecting people who used so-called “disguised remuneration” schemes, where an employee is paid indirectly through a third-party company, often in the form of an offshore trust. Rather than paying a salary, which would attract income tax and national insurance contributions, employees are loaned money by the trust on terms that mean it is unlikely ever to be repaid.
Many employees paid through the schemes believed they were approved by HMRC but have received unexpectedly large bills for tax avoidance after the authority’s powers were increased in 2017.
In one example a social worker, who was given little option but to participate in a loan scheme when she was made redundant, was presented with a bill for one-and-a-half times her annual salary and now faces bankruptcy.
“The council did not warn her, the Revenue did not warn her. Why did the Revenue not do more to deal with promoters of these schemes?” asked Lord Forsyth.
The committee recommended HMRC urgently review all loan charge cases where individuals were unable to pay their tax bill. It also called on the government to change the law to exclude loans where taxpayers had already disclosed their participation to HMRC.
The report also raised concerns about the retrospective effect of the tax, with loans stretching back 20 years eligible for charges by HMRC. It accused HMRC of targeting individuals to more easily recover liabilities, while doing little to pursue those who developed and promoted disguised remuneration schemes.
The Treasury said: “It is important to bear in mind that disguised remuneration schemes are aggressive tax avoidance structures that allowed some people to avoid the taxes that Parliament requires them to pay.”
A spokesperson for HMRC said: “We don’t want to make anybody bankrupt. It’s always our absolute last resort and very few cases ever reach that stage. We carefully consider each case and there’s no maximum limit on how long a customer will be given to pay what they owe. We make that decision based on each individual’s personal circumstance.”