A Consultation on Tax Management: Analysis of Responses

4. POWERS AND OBLIGATIONS

Tax powers and design principles

4.1 The Scottish Government proposes a framework for tax collection powers that is:

• As far as possible, clear and consistent across all taxesadministered by Revenue Scotland. This will avoid having to set out powers for each devolved tax and should make the tax system simpler and easier to understand. In turn, this will help reduce costs for both Revenue Scotland and compliant taxpayers.
• Effective in tackling non-compliance. The framework of powers will be generic, applying to all relevant taxes, but must also be effective in ensuring tax compliance.
• Proportionate and subject to clear rules and limits on the use of themore intrusive powers. The Scottish Government expects Revenue Scotland to need to use the more intrusive powers relatively rarely such as to demand entry to business premises without prior notice or search a property. There must be appropriate prior checking and approval of use by Revenue Scotland of such powers, and it must be clear when such powers could be used, and who is responsible both for granting approval and for using the powers.
• Clear in the obligations it places on taxpayers. For a tax system to work, some obligations have to be laid on taxpayers. These obligations need to be set out clearly, to help provide certainty to taxpayers. Clarity and certainty benefit both Revenue Scotland and taxpayers by avoiding uncertainties and disputes, so reducing costs.

4.2 The consultation asked:

Question 6: What are your views on the proposed framework for tax collection powers? We would be especially interested to know whether you see merit in the creation of a "Taxpayers' Charter".

4.3 Twenty respondents (71% of all respondents) addressed this question.

Table 7: Respondents to Question 6

Category	No.	%
Tax accountants and professional tax bodies	9	45
Public bodies	2	10
Legal professional bodies	3	15
Local authority bodies	3	15
Business	3	15
Total	20	100

4.4 The prevailing view was that the proposed framework for tax collection was reasonable. The concept of an overarching framework was explicitly welcomed by one respondent, in terms of the "simplicity, clarity and efficiency it offers" (Low Incomes Tax Reform Group (LITRG)). Others appreciated the emphasis on consistency (Leg, Tax); proportionality (Leg, Tax); and tackling non-compliance (Tax).

4.5 Additional tax collection powers were suggested:

• for SEPA to carry out the administration of the Scottish Landfill Tax (PB - SEPA)
• to encourage fair and efficient resolution of disputes (LA)
• to encourage simplicity and fairness (Bus, LA).

4.6 One respondent (ICAEW) proposed that "10 Tax Tenets" for a better tax system should be adopted, envisaging a system that is: statutory; certain; simple; easy to collect and calculate; properly targeted; constant; subject to proper consultation; regularly reviewed; fair and reasonable; and competitive. This respondent stressed their view that it is important that Scotland retains its competitiveness against the rest of the UK and internationally, by ensuring that any enforcement powers do not exceed those applying elsewhere, thereby reducing the attractions of Scotland as a location for business, investment and employment.

4.7 Two respondents (Bus, Tax) recommended that there should be independent oversight over the operation and exercise of the powers set out. One business respondent considered that the responsibility for granting approval for application of certain powers in individual cases should lie with an independent third party, or with personnel in Revenue Scotland at a senior level.

4.8 Some respondents supported the framework, but remarked that the challenge will be in how this will translate into practice. Three tax professionals stated that they could not give a more informed view until more detail is known on how the powers will be applied.

4.9 One legal professional body expressed concern over the proposal that Revenue Scotland's powers must be broad enough to enable it to manage the taxes efficiently and effectively, and stressed their view that it is vital that the rights and obligations of Revenue Scotland and those of taxpayers are fairly balanced.

4.10 One respondent (Tax) questioned whether the term "framework of tax collection powers" limits the scope of the principles, rather than applying these to the full range of tax management powers.

Views on the creation of a "Taxpayers' Charter"

4.11 Fourteen respondents provided views on the proposed creation of a "Taxpayers' Charter". Of these,10 welcomed the proposal, whilst four expressed caution.

4.12 The reasons documented in favour of the Taxpayers' Charter were:

• will provide clarity over rights and responsibilities of the taxpayer and Revenue Scotland (Tax)
• will affirm the identify of Revenue Scotland and its philosophy (LA)
• simple means to communicate obligations (Tax)
• to provide safeguard for taxpayers who are not represented by professional agents or advisors (Tax)
• could provide guidance to an independent complaints adjudicator or panel (Tax).

4.13 Some respondents attached conditions to their support:

• the Charter must be supported by statutory provisions (3 mentions)
• must be consultation on its detail (3 mentions)
• principles in the Charter must be capable of practical application (2 mentions)
• will need to be relatively specific in detail to be useful (1 mention)
• to be effective, there must be a high level of awareness of the Charter (1 mention)
• must be clarity over its purpose in order to avoid misunderstandings as to the protections it offers (1 mention).

4.14 A few respondents suggested content for the Charter. Four highlighted their view of the importance of setting out rights and obligations of both taxpayer and Revenue Scotland (Tax, Tax, LA, PB). One tax professional recommended that service standards for Revenue Scotland and its delegated bodies be included. A legal professional body suggested that access to information, taxpayer confidentiality and the treatment of information and deadlines could be considered for inclusion. One respondent (Leg) recommended waiting to see what standards and principles are embodied within the forthcoming European Taxpayers' Code before developing the Taxpayers' Charter, in order to promote consistency between them.

4.15 The four respondents (Bus, Bus, Tax, Leg) expressing a note of caution regarding the proposal for a Taxpayers' Charter were basing their reservations largely on what they considered to be the relative disuse of the equivalent Charter established by HMRC. One (Leg) commented that the HMRC version had limited practical application; another informed that HMRC had moved away from an emphasis on a Charter to promoting a broader service commitment which promotes taxpayers' understanding of the service, without setting expectations regarding the potential for legal redress.

Taxpayer obligations

4.16 The Scottish Government is committed to a tax system which balances the rights and obligations of taxpayers. Whilst inviting views on what taxpayer obligations should encompass, there are some obligations which it views as unavoidable:

a) A taxpayer should be required to notify Revenue Scotland or a delegated public body if they have or expect to have a liability to pay a devolved tax.

b) A taxpayer should be required to self-assess their tax.

c) A taxpayer should pay the tax due within the time period set for the particular tax / transaction. Taxpayers who wish to contest any assessment by Revenue Scotland will also be required to pay within the designated period, consistent with the approach in place for Non-Domestic Rates in Scotland. Where the taxpayer is successful in contesting the assessment, Revenue Scotland will reimburse any overpayment at a set rate of interest.

d) A taxpayer should retain tax-related records in an accessible form for a required period of time. We propose that this be five years for business records, in line with the Scottish Statute of Limitations, and two years for personal records. e) A taxpayers' records must contain sufficient detail to enable the taxpayer to submit an accurate tax return and to allow Revenue Scotland to check its accuracy if required. This is already a requirement for UK taxes.

4.17 The consultation asked:

Question 7: What are your views on the proposed obligations on taxpayers? Are there any other obligations on taxpayers which should be included?

4.18 Twenty respondents (71% of all respondents) addressed this question.

Table 8: Respondents to Question 7

Category	No.	%
Tax accountants and professional tax bodies	9	45
Public bodies	2	10
Legal professional bodies	3	15
Local authority bodies	3	15
Business	3	15
Total	20	100

4.19 Thirteen respondents representing all five sectors reported that overall the proposed obligations appeared to be reasonable. Two (LA, Bus) remarked that they were in-line with existing practice; one (Tax) stated they seemed similar to those established by HMRC. Two respondents (Tax, Bus) emphasised that consistency with HMRC is important as many taxpayers will be paying taxes under both Scottish and UK systems.

4.20 One respondent considered, that as an overriding principle, the following question should be asked of obligations intended to be imposed on the taxpayer:

"Is it actually necessary to impose this obligation; and if it is necessary, can we impose it in the narrowest possible way, both as regards the number of taxpayers affected and the number of occasions on which it applies?" (Law Society of Scotland).

4.21 Two respondents (Tax, LA) argued for the obligations to be well publicised before being implemented, one remarking that taxpayers who have tax collected by PAYE may not understand them.

4.22 Four respondents (Tax, Tax, Tax, Bus) felt it important to highlight that taxpayers also have rights, and Revenue Scotland also has obligations.

Notification of liability

4.23 Three respondents provided specific views on this proposed obligation. All considered this disproportionate for all cases:

• not workable if just the mere expectation of having a tax liability must be notified (Leg)
• should relate to actual rather than anticipated liabilities (Leg)
• presumably do not need to notify if already filing returns (Tax).

4.24 One respondent (Tax) suggested that there should be an additional obligation placed on taxpayers to notify Revenue Scotland if they become aware of a return being incorrect.

Self-assessment

4.25 Two respondents (Tax, Tax) queried whether this proposed obligation will apply to all taxpayers in the future, for example, in relation to the Scottish Rate of Income Tax.

Paying tax within the time period set

4.26 One aspect of this proposal attracted much criticism: that taxpayers who wish to contest any assessment by Revenue Scotland will also be required to pay within the designated period, and where the taxpayer is successful in contesting the assessment, Revenue Scotland will reimburse any overpayment at a set rate of interest.

4.27 Nine respondents expressed concern about taxpayers being required to pay tax during the contested period on grounds that:

• there should remain a provision to argue "hardship" and postpone payment of tax until its legitimacy is established (Tax, Tax, Leg)
• some taxpayers may struggle to pay tax which they believe is not due (Tax, Tax)
• it could threaten the solvency of some businesses (Tax, Bus)
• the obligation is more onerous than the current treatment of direct taxes in the UK (Tax, Leg)
• it is disproportionate (Tax, Tax)
• this obligation does not, in principle, fit with the self-assessment system (Tax)
• the obligation may not be appropriate for future devolved taxes (Bus)
• it may cause personal stress (Tax).

4.28 Three tax professionals argued for taxpayers to be permitted to apply for a full or partial deferment of payment until the dispute is resolved, following which, if assessed as liable, they could pay late payment interest.

4.29 Three respondents (Tax, Tax, Leg) envisaged taxpayers incurring additional costs such as overdraft charges if required to pay disputed tax, which they argued should be reimbursed, in addition to interest on the overpayment, should their case be upheld. One (Tax) recommended that the same rates of interest should apply to both late payment and re-payment.

Retention of tax-related records

4.30 Three respondents (Leg, Leg, PB) queried the accuracy of the reference to the "Scottish Statute of Limitations" suggesting that instead, the reference should be to the Prescription and Limitation (Scotland) Act 1973. Whilst one respondent (Leg) agreed with the five year retention stipulated for business records, others (Tax, PB) questioned the practicalities of setting different retention periods for business and personal records. One respondent (Tax) recommended that any retention periods set should harmonise with those of HMRC. Another (Leg) urged that retention periods for personal records ought to take account of the time limit for assessments by Revenue Scotland, e.g. ordinary time limit of four years pursuant to s.34 of the Taxes Management Act 1970.

Power to require information and power to inspect

4.31 Where Revenue Scotland is carrying out compliance activity, it will need the power to require information, and where necessary remove or take copies of documents (including electronic records), to allow it to check the accuracy of taxpayers' returns. After considering what is done in other jurisdictions, the Scottish Government proposes that Revenue Scotland should have powers relating to:

• asking the taxpayer for information
• asking a third party for information about a known taxpayer
• asking a third party to reveal the identity of an individual
• seeking information from businesses about clients who meet certain criteria.

4.32 The power to inspect can range from the minimal power of inspecting accounting records (physical or electronic) up to inspecting premises and goods or materials. The Scottish Government believes that in all but the most complex cases, validation of the amount of tax due should be concluded as quickly as possible so as to deliver certainty to the taxpayer and minimise delay and administrative cost to both the taxpayer and Revenue Scotland. To achieve this objective the Scottish Government proposes that Revenue Scotland has broad powers of inspection related to:

• inspection of records
• inspection of premises
• inspection of goods or materials (and taking samples)
• investigatory activity.

4.33 The consultation asked:

Question 8: What are your views on the specific powers for requesting information, for inspecting and sampling and for investigating? Are there any safeguards that might need to apply to them or any other powers you think Revenue Scotland may need?

4.34 Nineteen respondents (68% of all respondents) addressed this question.

Table 9: Respondents to Question 8

Category	No.	%
Tax accountants and professional tax bodies	9	47
Public bodies	2	11
Legal professional bodies	3	16
Local authority bodies	3	16
Business	2	10
Total	19	100

General comments

4.35 There was general agreement that such powers are essential, but should not be too broadly framed so as to permit application in a disproportionate manner. One respondent remarked:

"Powers will require to be proportionate but sufficiently robust to give the organisation 'teeth'" (East Ayrshire Council).

4.36 Clarity was sought on the alignment of the proposed powers with those in other parts of the UK. It was recommended (LA, Bus) that the new powers be widely publicised, in particular to make sure other parts of the UK are aware of Revenue Scotland's rights in relation to asking for information from third parties.

4.37 SEPA emphasised that the powers highlighted in the consultation do not cover the powers required to investigate tax avoidance associated with illegal waste deposits, which may be included in the Landfill Tax (Scotland) Bill.

Views on the proposals for power to require information

Ask the taxpayer for information

4.38 Twelve respondents addressed this aspect of the proposed powers. Their comments are summarised below:

• It was agreed that legal professional privilege should remain (Leg, Leg), but should apply to all professional advice on tax, rather than be restricted to the legal profession (7 tax professionals).
• There should be safeguards to avoid unnecessary intrusion and demands on taxpayers. The term "reasonably believes" was seen as too subjective in this respect, and open to inequitable application (7 mentions).
• The timescale for providing the information should be reasonable (Leg, Tax).

Asking a third party for information about a known taxpayer

4.39 Ten respondents addressed this aspect of the proposed powers. Their comments are summarised below:

• Care needs to be taken to ensure third parties do not infringe taxpayers' rights (Tax, Leg, PB).
• Provision should be made for asking banks to disclose required information. The respondent recommending this commented:

"This power is already available to HMRC and would help ensure that taxpayers do not attempt to operate in a manner outwith the spirit of the tax system" (Scottish Council for Development and Industry).

• There should be a right for third parties to appeal (Tax).
• The right to appeal should not be on the third party, but on Revenue Scotland to go to an independent tribunal to obtain an order in its favour (Tax).
• Agree that the reasons for requesting information from a third party should be put in writing and minimum standards should apply (Tax).
• This power should be deferred until a specific need for its use has been identified so as to prevent diverting effort to an activity with potentially only marginal benefit (Tax).

Asking a third party to reveal the identity of an individual

4.40 Six respondents addressed this aspect of the proposed powers. The overriding recommendations were for the power should be used sparingly, with robust safeguards in place to prevent what some termed, "fishing expeditions" by Revenue Scotland. One respondent commented:

"Such power must only be used in exceptional cases where it has been demonstrated that all other options to confirm or reveal the identity has been exhausted" (Brodies LLP).

4.41 Two respondents (Leg, Tax) urged that protocol is put in place on who can approve a request from Revenue Scotland for using this power.

Seeking information from businesses about clients who meet certain criteria

4.42 Four respondents addressed this aspect of the proposed powers. They cautioned against inappropriate use of the power which they recommended should be used only in limited circumstances and supported by:

• a right to appeal (Tax, Leg)
• approval by an independent person (e.g. Sheriff) (Tax).

Views on the proposals for power to inspect

Inspection of premises

4.43 Six respondents addressed this aspect of the proposed powers.

4.44 One (Tax) considered that the drafting should be tightened to provide greater clarity on why the power is necessary. Another (Leg) suggested legislative provision should indicate whether inspections can be video recorded.

4.45 There was general agreement that the powers should not extend to permitting Revenue Scotland to inspect domestic premises (5 mentions).

Investigatory powers

4.46 Ten respondents addressed this aspect of the proposed powers.

4.47 Several commented on the proposal that Revenue Scotland be given the power to obtain a search warrant from a Sheriff to inspect businesses without giving advance notice. It was felt that authorisation for actioning this power should be at the highest level (Bus, Tax, PB, Leg) with regular audit and scrutiny of requests (Bus). Such inspections were seen as requiring high level supervision (Leg); and should be made only in exceptional circumstances (Bus). It was commented, that in the main, arrangements for inspection of business records could be made between the taxpayer and Revenue Scotland without having to go down this route (Tax).

4.48 There was debate on who should exercise the powers on behalf of Revenue Scotland. Some considered it beneficial for in-house staff to develop the expertise to exercise the powers, at least for the more straightforward cases (Leg, Tax, Tax, Bus). One respondent commented:

"It does not appear that sub-contracting Revenue Scotland's investigative activities would be optimal in terms of control of information, competence and conduct of officials acting on behalf of Revenue Scotland and in building up the body of expertise within Revenue Scotland" (British Bankers' Association).

4.49 Others recommended outsourcing the powers for larger and more serious cases (Leg) or due to the relatively small expected size of Revenue Scotland (LA). One commented:

"If outside assistance is required in serious and larger cases, it will be essential for Revenue Scotland to involve persons with a good grasp of all the relevant tax law and knowledge and experience of criminal investigations" (Faculty of Advocates).

Indeed the theme of appropriate training for those actioning the powers, whether in-house or sub-contracted, was prominent in several responses. Two respondents (Leg, Tax) emphasised their view that if other parties carry out inspections on behalf of Revenue Scotland, then the tax authority should oversee these and retain ultimate responsibility.

Correcting taxpayers' tax returns

4.50 The powers to require information, to carry out inspections and to investigate are aimed at getting a clear picture of a taxpayer's affairs in order to ensure that the right amount of tax is paid at the right time. In many cases, the use of these powers will lead Revenue Scotland to conclude that the tax return is accurate, but there will be situations where a tax return will have to be amended by Revenue Scotland. There will also be situations where a taxpayer will volunteer new information and seek to amend a tax return that they have already submitted. It is important that there is clarity on the processes and time limits that will apply in these situations.

4.51 Key proposals are:

• Giving the Scottish equivalent of HMRC's "assessments", the title "Revenue Scotland assessments".
• Renaming taxpayer current "voluntary disclosures", "amended returns" under the Scottish system.
• Introducing a system, similar to that used in New Zealand, which allows both Revenue Scotland and taxpayers specific periods of time to amend a tax return. It is proposed that a four-year period be set for Revenue Scotland in cases where there is no evidence of fraudulent tax evasion. However, the tax authority would require to amend the tax return by issuing an assessment within one year of having sufficient information to do so.
• In cases of fraud, it is proposed that Revenue Scotland is permitted to issue tax assessments to cover a period of up to 20 years.
• Permitting taxpayers one year to amend any return.

4.52 The consultation asked:

Question 9: What are your views on the proposals set out for the amendment of tax returns by Revenue Scotland or taxpayers? Please comment on the terminology, the time limits proposed and anything else you consider relevant to the amendment of tax returns.

4.53 Twenty respondents (71% of all respondents) addressed this question.

Table 10: Respondents to Question 9

Category	No.	%
Tax accountants and professional tax bodies	9	45
Public bodies	2	10
Legal professional bodies	3	15
Local authority bodies	3	15
Business	3	15
Total	20	100

General comments

4.54 One respondent (Tax) emphasised that any time limits set need to take account of the periods permitted for key aspects of the system such as safeguards, challenges, errors by Revenue Scotland, and so on.

4.55 Two respondents (Tax, Bus) highlighted the need for wide publicity of time limits. Another (Tax) suggested that the starting point for time periods should be clarified, that is, whether from the deadline for filing, or the actual date filed.

4.56 One omission to the proposals was seen to be the arrangements for handling returns filed incorrectly as a result of carelessness or negligence (Tax).

Views on the proposed changes to terminology

"Revenue Scotland assessments"

4.57 Five respondents provided comments. Three (Leg, Tax, Bus) considered this proposal to be helpful with potential to reduce confusion with HMRC assessments. One local authority considered the proposed terminology could cause confusion in the early days, and suggested that inserting the words, "devolved tax" could aid clarity. One public body remarked that the term could create confusion on the grounds that assessments may come from agencies other than Revenue Scotland. They considered a useful alternative to be, "Scottish Tax Assessments".

"Amended returns"

4.58 Six respondents provided comments. Three (Bus, Tax, Leg) supported the proposed terminology as being fair and relevant. One (Leg) suggested changing it to, "Amended Revenue Scotland returns" to distinguish it from the HMRC system. Another suggested term was, "Taxpayer amended returns" to make clear that the amendments had arisen with the taxpayer (PB). One tax professional expressed uncertainty over the proposal, commenting that not all voluntary disclosures lead to amended returns, and vice versa.

Views on the proposed time limits

Four year limit for Revenue Scotland to amend tax returns where no evidence of fraud

4.59 Fourteen respondents addressed this proposal. Of these, 11 supported the change; the remaining three tax professionals argued that what is proposed will lead to taxpayer uncertainty. The main reasons given in support were that the taxpayer will be provided with certainty and closure within a reasonable period. One legal professional body commented that in specific circumstances, for example, associated with the LBTT where the amount of overage payable may not be known for a considerable length of time, a longer time limit may be required. Another respondent (Leg) suggested that it should be made clearer that if Revenue Scotland fails to issue an assessment within one year of having sufficient information to do so, then any subsequent action becomes invalid.

Twenty year limit for Revenue Scotland to issue tax assessments in cases of fraud

4.60 Two respondents (Tax, Tax), explicitly supported this proposal.

One year limit for taxpayers to amend a return

4.61 Fifteen respondents addressed this proposal. A recurring concern (10 mentions) was that the proposal introduces inequity between Revenue Scotland and taxpayers, with the different respective time limits being unfair and adding complexity to the system. Two respondents (Leg, Leg) recommended a three-year limit for both taxpayers and Revenue Scotland. Only two business respondents expressed their support for the one year limit for taxpayers along with the four-year limit for Revenue Scotland. One public body suggested that the limit for taxpayers should be one and a half years, in order to accommodate businesses with accounting periods straddling two financial tax years.

4.62 One view (Tax) was that where a taxpayer needs to amend their return following the conclusion of an enquiry, then additional time should be granted over the one-year limit. Two respondents (Tax, Leg) recommended that taxpayers be permitted up to four years to amend their returns in cases where they have made a mistake and wish to increase the amount of tax due.

Delegation of powers to other public authorities

4.63 It is intended that Revenue Scotland will delegate to RoS and SEPA responsibility for the collection of LBTT and SLT respectively. It is also considered appropriate for Revenue Scotland to delegate some responsibility for ensuring compliance with those taxes to RoS and SEPA. The Scottish Government is also minded that Revenue Scotland should be able to delegate to other Scottish public sector authorities as it deems appropriate.

4.64 The consultation asked:

Question 10: Are there any powers that Revenue Scotland should not delegate and, if so, what are they and why?

4.65 Seventeen respondents (61% of all respondents) addressed this question.

Table 11: Respondents to Question 10

Category	No.	%
Tax accountants and professional tax bodies	7	41
Public bodies	2	12
Legal professional bodies	3	18
Local authority bodies	2	12
Business	3	18
Total	17	100

NB Percentages may not total 100% exactly due to rounding.

4.66 Only a few respondents identified powers which they considered Revenue Scotland should not delegate:

• Enforcement duties should be subject to more consideration and debate before powers are delegated (Bus, Tax, Leg). The Law Society of Scotland suggested a mechanism whereby Revenue Scotland "warrants" appropriate individuals as tax representatives of Revenue Scotland to enable them to act on the tax authority's behalf.
• Local tax, national non-domestic rates and council tax should remain under the administration of local authorities (LA).
• Revenue Scotland should not delegate the assessment and collection of personal income tax liability (PB).
• Engagement with taxpayers and their agents over technical points (including clearances) should remain with Revenue Scotland (Tax).

4.67 One respondent (Leg) argued that to minimise confusion, the powers delegated to RoS and SEPA should be limited to collection of tax only.

General comments

4.68 Prevailing views were that Revenue Scotland should retain ultimate responsibility for any powers it delegates; that the authorities receiving delegated powers should adhere to the same standards and safeguards as Revenue Scotland regarding, for example, confidentiality; and any person undertaking delegated duties on behalf of Revenue Scotland should have received the necessary training.

4.69 Concerns were expressed that:

• Delegating powers could threaten consistency in delivery, application of rules and training of staff (Tax).
• Delegation could undermine the accountability of Revenue Scotland to the Scottish Parliament (Tax).
• There may be increased litigation if taxpayers challenge the validity of actions of delegated bodies (Leg).
• There will be cost implications for authorities taking on delegated powers (Bus).