Comments from ACCA to the Financial Reporting Council (FRC), April 2010.
ACCA is pleased to comment on the above consultation. We welcome the paperExcise: Modernisation and Compliance Checks: the next stage which builds upon the ongoing work undertaken by the trade, professional bodies and HMRC. ACCA continues to support and play an active role in the development of HMRC’s work to modernise and align the powers and safeguards covering the wide range of taxes administered by HMRC.
ACCA welcomes the move to modernise the powers and safeguards in the excise regimes and where appropriate align them with other taxes. ACCA is in full accordance with the principles of simplification and harmonisation of rules and regulations relating to tax matters, but at the same time recognises the particular issues and concerns which arise from the unique circumstances of alcohol and tobacco duty administration.
ACCA fully support the availability of all necessary powers for HMRC to investigate, disrupt and prevent illegal trade in excise goods. Those conducting such activities should be subject to the full force of law as they are very often linked to other criminal behaviour with a wider social impact than simply loss of revenue to the Exchequer. The speed with which action needs to be taken and the often very physical nature of such action is particular to the fight against unlawful trade in dutiable goods.
These considerations will inevitably limit the scope for alignment of alcohol and tobacco duty with other elements of the tax system. However, ACCA believes that the desire to simplify the system for those operating within it on a daily basis does not overcome the need for appropriate safeguards to be in place for each tax. Revenue traders who do not deal in physical goods should not be asked to give up their safeguards which might be appropriate for their circumstances simply because they are not appropriate for revenue traders who do deal in physically traded goods. Any such surrender of protection must be made in the light of full information about the risks and benefits.
1. Do further safeguards need to be introduced where HMRC is inspecting self storage facilities and the revenue trader is not present? What might these safeguards look like?
The safeguards appear appropriate and reasonable. Imposition of a legal obligation on the owner or manager of a storage facility to allow access to excise officers pursuant to the exercise of their powers will have the benefit not only of protecting the innocent but also of depriving storage unit owners who may be complicit in excise evasion of a means to frustrate the efforts of the excise authorities.
2. How can HMRC ensure that the new requirement to give access to documents related to goods held by those who are not revenue traders is not onerous?
The requirement will inevitably impose some burden upon the goods holders. While there may be some justification for a view that assisting excise officers is part of the duty of a good citizen, this cannot be allowed to expand into an expectation that the public will do HMRC’s work for them. However, the importance of the effort against excise fraud and evasion is such that some balance needs to be struck. The power should extend only to documents provided by the owner of the goods, and not the secondary business records of the non-revenue trader holder of the goods. Where the documents are held separately from the goods themselves (for example in administrative offices remote from the storage unit) the right of inspection for documents should be limited to normal business hours.
3. Is the right to inspect the documents which accompany goods reasonable?
The right to inspect documentation accompanying goods appears reasonable to ACCA.
4. HMRC would welcome views on the extent to which the proposed approach to carrying out inspections is seen as reasonable
Within the special circumstances which cover excise work, HMRC’s approach appears reasonable. The overwhelming support for HMRC’s current practice from compliant traders is indicative of the success of the approach taken. Formalisation of that approach should give greater comfort to compliant traders and reduce barriers to entry for new traders who need to understand the regime into which they are entering. The extension of powers where HMRC believes it has no alternative but to make an unannounced visit should improve the effectiveness of such visits and increase the rewards to HMRC relative to the risks of such visits.
5. To what extent is an explicit restriction on inspecting at purely private premises seen as a useful safeguard?
The codification of existing practice is in line with current juristic trends. The formalisation of HMRC’s current approach should not restrict their ability to inspect premises where reasonable grounds exist to believe that an excise offence is being committed and the risk of individuals attempting to use the law to obstruct officers should be minimal. Indeed, explicit codification should help protect HMRC from potential vexatious action under European human rights principles.
Where an inspection takes place at a private premises then HMRC must restrict itself to looking at the part used to house business documents. This restriction should mirror the direct tax restriction.
6. Do you agree that HMRC needs to see information which helps to understand the duty position? And, do you consider the proposed powers are proportionate?
It is essential the HMRC be able to see the information which clarifies the duty position of goods. The status of goods subject to excise is inextricably linked to the documentation concerning those goods; whether duty has been paid or not is irrelevant if the documentation cannot prove that it has been.
Any compliant trader should be happy to produce such information on request so (in the unique circumstance of the excise regime) the exercise of a right of appeal against such a request would in practice be a strong indicator that the trader had something to hide. Accordingly, the powers are proportionate and the lack of appeal, exceptionally, is reasonable.
7. Is a formal information notice approach the right one when HMRC is seeking supplementary information?
Yes. The urgency and immediacy which might accompany the initial inspection will not be present in such a request, and accordingly the usual range of taxpayer safeguards should be preserved.
8. Should other parties be able to appeal information requests and on what basis should such an appeal be available?
A balance needs to be struck between the imposition of burdens upon innocent parties caught up in unlawful operations and the ability of HMRC to successfully investigate those operations. With this in mind, the possibility of an appeal on grounds that the request is unduly onerous or the information not relevant to excise is essential.
9. What level of penalties would be appropriate to encourage compliance without being disproportionate?
The fixed penalties fall into two categories. Firstly, there is the penalty for refusal of entry where the visit has been authorised. This may occur either because the premises holder is innocent and genuinely believes the visit to be an intrusion, or because the premises holder is fully aware of HMRC’s justified interest in their activities and is seeking to obstruct it. In the former case, a deterrent penalty is not appropriate, whereas in the latter it most certainly is. ACCA therefore supports the concept of a criminal offence of obstruction in parallel with the fixed penalty regime. Penalties of at least £1,000 or possibly geared to the duty lost should be considered for those found guilty of the offence, whilst the automatic penalty for the initial failure to provide access should be set at a far lower level, say £50 or £100.
The second category of fixed penalties relates to failure to comply with information requests and deliberate obstruction. In both these cases there is little likelihood of an innocent party being caught up in the process and either unwilling or unable to conclusively demonstrate their innocence, so a higher level of initial fixed penalty, set at the same level as for the criminal offence of obstruction, would appear appropriate. These penalties should be subject to a right of appeal, to protect the putative innocent party.
Further daily default penalties and the availability of a duty geared penalty also appear reasonable in this context. As before, these should be subject to a right of appeal against the imposition of the penalty, but only on grounds that the individual concerned has conclusively proved that no excise offence occurred so the information notices were unnecessary or the 'obstruction' not actually relevant. We also consider that it would not be appropriate for an individual who was merely 'managing' the property and under instructions not to let anyone enter to have a penalty imposed against them in the absence of the legal obligation/protection discussed under question 1 above.
10. HMRC would welcome comments on the legislation for aligning the rules for how records are kept and the time limits for assessments and claims with the rules for other taxes once it is exposed for comment.
ACCA will be happy to comment separately on the draft legislation.
11. To what extent could HMRC passing on information about excise infringements to regulatory authorities be proportionate and provide an effective deterrent?
The passing of information to other regulatory authorities appears to be proportionate. Unfortunately it may be the case that this would not necessarily in itself provide an effective deterrent for those prepared to risk repeated attention from HMRC, as they are likely to be equally dismissive of their obligations to other regulatory authorities. Nevertheless, raising of the profile of persistent offenders with other regulatory authorities should at least increase the level of disruption to their activities by the authorities, and may hopefully expose some activity which might render them subject to a truly deterrent penalty.
12. What test might be used within HMRC, before information about excise infringements can be passed on to regulatory authorities? Are there other options?
The passing of information to other regulatory authorities could potentially have a disproportionate effect on innocent parties caught up in the illicit supply chain. It must accordingly be subject to safeguards and due process.
ACCA would suggest a three stage process, subject to a potential appeal stage, before release of information. The process seeks to balance the need for speed with the need for fairness while recognising that it will by definition be dealing with those who have already shown themselves to be consistently unable to meet their obligations under the excise regime.
The first stage would be notification of the individual/business concerned that they had reached the trigger point for disclosure. This notification would explain in broad terms HMRC’s concerns and that consideration was being given to disclosure of the irregularities to another agency. The notification would also give the taxpayer an opportunity to make representations to HMRC as to why such disclosure might not be appropriate – ie because they are an innocent party in the activities. It is suggested that the taxpayer be given a relatively short deadline (say two weeks) to indicate to HMRC whether they might wish to make representations or not; if no such indication is received then HMRC could assume that no representations are to be made an proceed directly to the second step with a minimum of delay. If representations are to be made then a further window of say six weeks would open before HMRC can proceed to the second stage.
Once taxpayer representations had been received or the deadline for such had passed, the matter would be reviewed by two separate senior officers of HMRC, one with detailed knowledge of the case and the other an independent reviewer. These two officers would then make the decision whether to disclose or not. If in the light of the evidence and available representations the decision was made not to disclose information to other authorities then the taxpayer would be informed of this outcome and the matter would, pending any further infringements, be put to rest. If the decision were made to disclose, the taxpayer would be notified of this and given time to lodge an appeal to the relevant tribunal. If no appeal is lodged, then disclosure would be made.
The time limits for representations/appeals can be kept short and the onus on compliance left with the trader as even in the event of disclosure they should still have the opportunity to explain to the other authority why, notwithstanding their excise failures, they remained an appropriate person to retain other licences. Proper engagement with HMRC’s notification and appeal process could reasonably be seen as evidence tending to indicate that the trader is a suitable person to engage in other licensed activities, whereas ignoring that process would indicate the contrary.
The form and content of the information needs to be carefully considered. There would need to be strict limits on the level of detail included in such disclosure so as to ensure, so far as possible, taxpayer confidentiality for other innocent parties caught up in the same illicit supply chain. It must be borne in mind that most licensing activities are undertaken on a local basis by individuals with detailed local knowledge. Accordingly it may well be that this new formal notification of excise failures would provide useful further evidence for licensing authorities to act in relation to licence holders who were already considered to be potentially unsuitable to continue to hold those licences. The level of information exchange should also be monitored to assess whether the powers were being used consistently and effectively across the country.
A further possible avenue for HMRC to explore might be to raise public awareness of excise failures, and the potential consequences of them, through local press. Such publicity should also highlight the wider social implications of excise fraud and the activities of those involved in it. Publicity at this level is likely to impact as much on end users of the illicit supply chain is it is on those directly involved in it, and greater awareness on the part of all traders that the various licensing authorities communicate with one another would have at least some deterrent effect.
13. Are there any specific issues to consider for excise fraud in using the VAT anti-fraud concept?
The most important single consideration for HMRC in attempting to apply the VAT anti-fraud concepts to excise would be to avoid the level of disruption to compliant businesses that has accompanied the VAT scheme. Within the excise regime, the single most damaging aspect of the VAT measures (withholding of repayments) will not arise, and this alone should remove some of the potential for economic harm. Nevertheless ACCA urges HMRC to consider very carefully the implications of the proposed extension of the VAT anti-fraud principles, not least to ensure no loss of goodwill from compliant businesses through the imposition of measures seen to be disproportionate and heavy handed.
Against this background, ACCA would not readily support the availability of discretionary powers to HMRC to, for example, recover from a trader duty equal to that which should have been paid on goods. in the supply chain which HMRC viewed as being at an uneconomic price. The main problem with the VAT powers seems to have been that compliant traders suffered where they fell under suspicion, as HMRC were able to withhold funds which were vital to business cash flow. In the excise regime, the funds will already be with the trader, and HMRC’s action will genuinely be a recovery of lost sums rather than retention of sums which might otherwise be lost. Provided that the process for recovery follows the same judicial route as other mechanisms for recovery of tax no further structural safeguards should be necessary. The requirement for HMRC to start legal proceedings in order to achieve any form of recovery should in itself act as a sufficient check to prevent the same level of disruption to compliant traders as was experienced with the VAT scheme.