Tax enforcement and compliance aspects of the UK Spring Statement

Chancellor Phillip Hammond was true to his word that the most we should expect from his Spring Statement on 13 March was the announcement of consultations and calls for evidence. In the event, the papers issued by HM Revenue & Customs (HMRC) and the Treasury focused on the 'new' economy and online platforms and payment companies in particular.

User compliance: online platforms

First, there was a 'call for evidence' on how online platforms can help ensure user tax compliance. The document notes the efforts already made by platforms to help with VAT compliance, in part voluntarily and in part in response to new legislation. This call for evidence focusses more on direct tax – and in particular the growth in 'amateur' trading.

The paper is generally focussed on what platforms can do to educate users but, when looking at what other countries do, there is a reference to one country requiring the platform to deduct income tax at source, which may develop as an idea by the time the call for evidence becomes a full-blown consultation.

The paper also highlights a practical difficulty HMRC has in using its 'bulk data' powers to gather information from platforms where the data is held offshore and outside the reach of HRMC's powers. It is not clear how HMRC expects to tackle that issue.

Revenue-based digital tax

The updated position paper, Corporate Tax and the Digital Economy, which focused on taxing the profits made by companies providing the digital economy infrastructure, also notes the practical difficulties HMRC would have in administering a revenue-based tax given that many of the entities in scope will be outside the UK altogether.

Whilst the paper makes it clear that HMRC stands ready to act on its own if necessary, the paper shows the difficulties any fiscal authority has with applying tax to digital companies which bestride jurisdictional boundaries. That said, HMRC interestingly points to its experience in applying VAT to overseas sellers as a reason not to have too many concerns.

VAT split payment

While on that subject, following publication in December of a summary of responses to its earlier call for evidence, HMRC has now published a formal consultation on options for a 'split payment' measure to counter VAT fraud by overseas sellers.

One of the design principles involves working out who in the payment chain is best placed to syphon off the VAT element of a transaction and pass this straight to HMRC.

In relation to transactions involving overseas sellers generally, HMRC has concluded that the 'merchant acquirer' – which 'acquires' the debt from the retailer at the point of sale and passes it on to the company who issues the payment card to the customer – is best placed to apply the split. Recognising that the acquirer may be outside the UK, the consultation suggests that the card issuer, typically UK based, will be required to operate the split itself unless, for each transaction, the card issuer is able to find the acquirer on a live register of trusted acquirers kept by HMRC. In relation to transactions through an online market place, unsurprisingly the consultation suggests that the platform itself is best placed to operate the split.

The consultation also considers options for how much money should be withheld:

• option one is the blunt approach. This involves assuming that 20% VAT applies and leaving it to the online seller to deal subsequently with HMRC to claim back any overpayment and deduct any allowable input tax.
• option two involves a form of flat rate scheme.
• option three involves the seller using past performance to calculate its likely ‘effective’ VAT rate, with option one being applied if it doesn’t do so. This option is HMRC’s preference.

Cash and the hidden economy

A call for evidence on 'Cash and Digital Payments in the New Economy' highlights the decline in use of cash but the importance of keeping it open as an option for payment, with research showing that 2.7 million people are entirely dependent on it. The paper made the news because it proposed the abolition of one and two penny coins, 8% of which are apparently thrown away.

It also notes the paradox that, whilst digital transactions should help to ensure a reduction in the 'hidden economy', the effect is not that great because for so long as there is cash there will continue to be a safe place for evasion, although presumably as the tide goes out, it will be easier to find the non-compliant traders and consumers. The call for evidence focuses in particular on why cash is still used for large transactions – the subtext being that there must be something implicitly dodgy about using wads of cash rather than a simple electronic payment.

Security for payment

Finally, building on a prior call for evidence, HMRC has started a consultation on extending security for unpaid tax regimes to Corporation Tax and Construction Industry Scheme. Such security regimes are a 'downstream' response to previous non-compliance, but the consultation also highlights a separate paper (not yet published) on 'Tax Abuse and Insolvency' and how individuals use limited liability to evade liability or avoid payment. More is expected on this soon.

All in all, whilst the Spring Statement did not include many new enforcement measures it did show the increasing trend towards HMRC using large businesses to be HMRC's unpaid tax inspectors.

Jason Collins is a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com.

This article was first published in Tax Journal on 16 March 2018 and is reproduced with permission.