Individuals rather than promoters of tax avoidance schemes have been targeted so HMRC can “more easily recover liabilities”, the Lords Economic Affairs Committee has said.
“We have seen little evidence of action taken against those who promote disguised remuneration schemes,” the report, released yesterday said.
“In the absence of publicised actions, HMRC appears to be prioritising recovery of tax revenue over justice by targeting individuals, rather than promoters (who could be considered more culpable).” Disguised remuneration schemes avoid income tax and national insurances contributions by scheme users being paid in the form of loans rather than in the usual manner.
The Lords said the non-ministerial department is failing to “pursue taxpayers proportionately to their circumstances”.
“We were disturbed to hear accounts of HMRC threatening individuals with arrangements that could result in bankruptcy, where individuals clearly have no assets to settle liabilities,” they added.
On the full range of tax recovery, the committee said: “There is a clear difference in culpability, for example, between deliberate and contrived tax avoidance by sophisticated, high income individuals, and uninformed or naive decisions by unrepresented taxpayers.”
Over the past few years the tax department has been granted greater powers to tackle tax avoidance and evasion.
Lord Michael Forsyth of Drumlean, chair of the committee, said the HMRC had been “granted some broad, disproportionate powers without effective taxpayer safeguards” since 2012, such as higher penalties.
He said: “HMRC is right to tackle tax evasion and aggressive tax avoidance. However, a careful balance must be struck between clamping down and treating taxpayers fairly.
“Our evidence has convinced us that this balance has tipped too far in favour of HMRC and against the fundamental protections every taxpayer should expect.”
The committee report called for these powers to be reviewed by the House of Lords and House of Commons and subject to greater scrutiny.
It suggested: “A collaborative body with a focus on powers, within a broad remit, could monitor the balance between HMRC and the taxpayer, consider new proposals for legislation, including taxpayer safeguards, and provide oversight of the issues around HMRC culture and deteriorating customer service which have caused our witnesses concern.”
The HMRC needed to “discriminate effectively” between the different activities it classifies as tax avoidance, the Lords concluded.
Additionally the report highlighted that the Finance Bill, which was introduced this year and comes into force next year, added another “disproportionate power”, as it would extend HMRC’s time limits for assessing off-shore matters to 12 years.
This would “place an unreasonable burden on a disproportionate number of taxpayers”, who would have to retain records for up to three times longer than currently, Lord Forsyth said.
The committee called on the government to withdraw this part of the Finance Bill.
It also criticised the ‘loan charge’, which applies to disguised remuneration schemes, and adds together all outstanding loans to be taxed as income in one year, in turn leading to higher tax rates.
Lord Forsyth said: “This [the loan charge] is devastating the lives of middle- and lower-income individuals, from the private and public sector, including the National Health Service, who used disguised remuneration schemes, in many cases being required to do so by their employers.”
A spokesperson for the HMRC said: “We’ve taken unprecedented action to crack down on avoidance and evasion, making sure people pay their fair share of tax and securing funding for our vital public services.
“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.”
