Modernising the tax administration framework: the latest consultation
We outline proposals for new ways of tackling non-compliance in the latest consultation on modernising and reforming the tax administration system.
The previous government had published a 10-year strategy in 2020 to build a trusted, modern tax administration system. Before the 2024 general election there was an important call for evidence on enquiry and assessment powers, penalties and safeguards. If implemented, the proposals would mean significant changes to HMRC’s powers and to the administration of both direct and indirect taxes. By the time the summary of responses was published on 30 October 2024, the government had changed – but the new government has also committed to modernising and reforming tax administration.
Building on the responses to the call for evidence, the government now intends to consult on:
- Options for new approaches to tackle high volumes of low value non-compliance, including a model to offer taxpayers an opportunity to quickly resolve potential errors identified by HMRC and self-correct their returns.
- Behavioural penalties, including how the concepts of penalty alignment, simplification and escalation can be applied to existing ‘inaccuracy’ and ‘failure to notify’ penalties.
- Ways to improve access to alternative dispute resolution and statutory review to help resolve disputes before they reach tribunal.
The consultation covering the first of these three areas was also published on 30 October and closes on 22 January 2025.
Proposals
Four options are outlined in the consultation. We understand that the proposals do not necessarily need to go ahead as a package – depending on feedback received, different combinations of the proposals could be taken forward (or none of them).
Amendment to conditions for making claims
Changes to some tax reliefs have already been implemented, which include the requirement to supply more information upfront. For example, the additional information form has been introduced for claims for research and development tax reliefs.
The consultation proposes an extension of requirements to provide more information to other claims and reliefs. This could help HMRC with its risk assessment, allow it to identify inaccurate claims more efficiently and minimise the need for lengthier enquiries before accepting legitimate claims.
Reform of Revenue Correction Notice (RCN) conditions
HMRC’s revenue correction powers allow it to correct a taxpayer’s direct tax return where it has reason to believe the return is incorrect, by issuing a revenue correction notice (RCN) within 9 months of the return being received - the taxpayer can reject the correction if they disagree with it. There are currently different detailed rules for different taxes, so one of the proposed changes is to align the conditions and processes for making corrections (and rejecting them) across all relevant regimes, including Income Tax Self Assessment, Corporation Tax Self Assessment and Stamp Duty Land Tax.
The consultation also proposes introducing requirements that HMRC should have to explain why it is making a correction – and taxpayers should have to provide evidence to support their rejection of one. This could reduce the need for formal enquiries to be opened by HMRC and facilitate a more collaborative approach to resolving issues.
Introduction of a partial enquiry
Currently, the formal steps HMRC must take to open and close enquiries are the same whether the mistake is complex or straightforward, and similar processes are required even if the inaccuracy is low in value. This prolongs enquiries and can lead to disproportionate costs for HMRC and taxpayers. HMRC can only enquire into a return once, within specified time limits – outside those time limits discovery provisions allow HMRC to make an assessment to recover tax (subject to conditions).
The consultation proposes to amend the enquiry powers to:
- Enable HMRC to open a partial enquiry into a specific issue or section of a return. The issue would be stipulated in a new ‘partial enquiry notice’ and the checks would be related to that issue only.
- Have obligations on HMRC to work within specified time limits, subject to deadlines being met. There would be a reasonable expectation that the issues worked under this notice would be able to be worked and resolved quickly.
- Not affect the normal enquiry window and be subject to appropriate governance, in order to prevent usage that might be perceived as unfair. This might include an obligation on HMRC not to re-open any risk that had already been dealt with under a partial enquiry.
A requirement for taxpayers to self-correct
The final proposal suggests giving a new power to HMRC which would require taxpayers to self-correct their returns. There would be a statutory obligation on taxpayers to respond and, if required, act on a notice informing them that HMRC has reason to believe their return is incorrect. The consultation states that the power could broadly work as follows:
- HMRC would identify returns or claims with issues that have common features. Examples could include: several similar errors submitted by the same agent or discrepancies between third-party data and the tax return.
- Where there is evidence, the issue might apply to a taxpayer, HMRC would issue a new taxpayer self-correction notice. This notice would detail the issue and the reason why HMRC believes this has a high likelihood of affecting the taxpayer.
- The taxpayer would have a legal obligation to respond to the notice by amending their return or claim within a set period or providing an explanation as to why no amendment is required.
HMRC suggests that the new power could provide a quicker way to address common errors or inaccuracies and reduce costs for both HMRC and taxpayers. However, the consultation goes on to discuss the need for sanctions, such as additional monetary penalties, and incentives (for example, reduced penalties in certain circumstances). There would have to be appropriate safeguards, including channels for dispute resolution (potentially involving review and appeal rights). It seems unclear that the new power would actually achieve the suggested benefits.
Let us know your views
We will be responding to the consultation. If you have any feedback on any of the questions, email tax@icas.com to share your views. We also welcome input from members on other tax consultations and calls for evidence or on HMRC service levels, systems, delays and other issues (which we raise with HMRC at regular stakeholder meetings).
