Budget briefing | Tax |

Budget 2021: Considering the changing landscape of tax compliance and enforcement

Overview

With the number of articles speculating on a potential increase in corporation tax or CGT rates, or the implementation of a wealth tax, it is easy to overlook possible changes to the tax compliance and enforcement landscape. However, given the number of new measures announced in the past year as part of the fiscal stimulus package to support the economy, and a tax gap of 4.7% of tax liabilities, it is also likely that the government will continue the development of its proposals to tackle tax evasion, tax avoidance and tax non-compliance.

In this briefing, we take a look at some of the proposals introduced in recent years, including those announced at the last Budget, and consider whether we can expect further announcements in this rapidly changing area.

It is perhaps worth noting that this is set against a backdrop of increased public interest in both individuals and corporations being required to pay, and actually paying, their "fair share" of tax, as the media, general public and politicians have become increasingly focused in recent years on (i) where tax revenue is coming from and (ii) instances where taxpayers have taken positions that (whilst legal) may not be seen as morally acceptable or which may constitute aggressive tax avoidance.

At last year's Budget, the government announced:

  • Time to Pay and Covid-19: The launch of a bespoke "Time to Pay" initiative, which allowed taxpayers to defer tax liabilities and agree a longer time period in which to pay their tax, together with setting up a dedicated Covid-19 helpline for taxpayers who needed it. There are a number of interesting points stemming from this announcement:

    • Will the Chancellor announce that the time to pay initiatives will be extended, given the ongoing pandemic and the number of businesses that have been forced to close their doors and the ongoing return of the economy to pre-Covid operating levels, particularly in the hospitality, transport and travel sectors?

    • Businesses should also pay close attention to whether the government makes any announcements on the continuation of the waiver of late payment penalties and interest where there are difficulties in paying taxes due to Covid-19.

    • Whether all taxpayers have been using these arrangements legitimately, for example to manage their cashflows in response to the pandemic, or whether there are more unscrupulous taxpayers out there who have sought to take advantage of the scheme such that HMRC view this area as one that has been targeted by tax avoiders. If the former approach is true, the government is likely to take a more lenient approach in allowing taxpayers to continue to negotiate ways to pay taxes to HMRC, but if it becomes apparent that taxpayers have in cases taken the latter approach, it is likely that this will be an area of increased scrutiny by HMRC and an increasing number of tax enquiries may accompany that scrutiny.  

  • Funding for HMRC investigations: Investment in an additional 1,300 compliance officers and in advancing HMRC's technological capabilities, to enable HMRC to increase its investigative and tax collecting capacity. Given the widespread reporting of potential fraud relating to the Covid-19 support payments (in particular, the Coronavirus Job Retention Scheme, on which HMRC reported in July 2020 that it had received several thousand reports of potential fraud), it is likely that HMRC's capacity for enquiries is only set to rise in the coming months. However, given the much larger deficit in the public finances compared to this time last year, it is unlikely that there will be further funding for the recruitment of additional compliance officers at the scale that was announced in 2020.

  • Notification of uncertain tax treatment: The government's intention to require large businesses to notify HMRC where they have adopted uncertain tax treatment, which the government stated is in order to help reduce tax losses caused by businesses adopting tax treatments that do not stand up to legal scrutiny. The government originally announced that these measures would apply from April 2021 and conducted a consultation process on the proposals, but confirmed in November 2020 that the introduction of the new regime would be delayed until 2022. This is therefore likely to be omitted from the current Budget, but we can expect further announcements (including a response to the consultation) later in the year.   

  • Promoters of tax avoidance schemes: Further measures to reduce the scope for promoters to market tax avoidance schemes. The aim of these changes (which have yet to be enacted) is broadly to enable HMRC to shut down new schemes more quickly and to warn taxpayers earlier about mass-marketed schemes which HMRC intend to challenge. It is relatively unlikely that there will be further announcements in this area, but what is more likely is a finessing of the changes that have already been announced and the continued pursuit by HMRC in shutting down such mass-marketed schemes. 

  • Raising standards in the tax advice market: Its intention to raise standards in the tax advice market. The government issued a call for evidence in mid-2020 to consider options to improve the market. That call for evidence described potential additional interventions that could be used, for example establishing a common standard or introducing joint liabilities for advisers (with taxpayers) for tax penalties, to ensure that tax advisers are aligned with HMRC in ensuring that taxpayers pay the right tax at the right time. This is likely to be a continued area of focus for HMRC to ensure that advisers continue to be discouraged from having any involvement in any tax avoidance.

  • Construction industry: A consultation on measures to tackle construction industry scheme abuse which were intended to take effect from 6 April 2021. It is possible that there will be a delay to the introduction of these measures, given that the construction industry is already going to be dealing with the introduction of the domestic reverse charge on construction services at a similar time, as the VAT reverse charge was originally meant to apply from 1 October 2019, but has been delayed several times and will now apply from 1 March 2021.  

  • Off-payroll working: That the off-payroll working rules would apply to the private sector and be implemented on 6 April 2020. However, as we know, the government subsequently delayed implementation of the changes to the rules (known as "IR35") to apply from 6 April 2021, despite the Chancellor announcing at the Budget 2020 that there would be no delay. However, given the reason for the delay last year was cited as giving businesses more time to focus on their response to the Covid-19 pandemic, it's relatively unlikely that any further delay to the rules will be announced.  

All of the above serves as a reminder to taxpayers of the focus of the government on tax compliance in recent years and in the years to come. Taxpayers should be mindful of their tax reputation and keep abreast of the changes in this area. Taxpayers should be prepared for HMRC enquiries, and should keep sufficient records to document tax positions taken, particularly where taxpayers have taken advantage of any of the coronavirus-related loans or incentives over the past 12 months.

 

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