A Consultation on Tax Management: Analysis of Responses

5. ENSURING COMPLIANCE

Promoting compliance

5.1 To provide a tax environment that makes it as easy as possible to comply and to help compliant taxpayers to continue to pay the right tax on time, it is proposed that tax legislation should be as easy as possible to understand, and that ease of use is "designed in". The Scottish Government also intends to consult on proposals for new or changed tax legislation in future.

5.2 It is proposed that Revenue Scotland will provide taxpayers and their agents with plain-English guidance material before the relevant tax provisions come into effect. Revenue Scotland will consult widely on its guidance before it is published. In addition to paper-based communications, Revenue Scotland will operate a responsive, accessible website providing information on issues that taxpayers or their agents identify as helpful or important. The website will include Frequently Asked Questions and these would be updated and augmented regularly. Where taxpayers raised specific queries, Revenue Scotland and the bodies to which it delegates its tax collection powers will respond as quickly and expertly as possible.

5.3 The electronic systems used to collect tax on-line will be as responsive and easy to use as possible, and will alert taxpayers and their agents to problems with information they are providing or to key dates within which further action should be taken. Provision will also be made for those who have difficulties accessing on-line processes.

5.4 The consultation asked:

Question 11: What else might be done to make it as easy as possible for taxpayers to comply with their obligations, and to ensure that those who wish to comply are supported to do so?

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

Table 12: Respondents to Question 11

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	11
Total	19	100

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

General comments

5.6 Three respondents (Leg, Leg, Bus) agreed that clarity of legislation is a key route to promoting compliance. Two respondents (Tax, Tax) suggested that proactivity by Revenue Scotland, for example, engaging with schools through programmes of citizenship education, and direct interaction with taxpayers, will provide valuable enhancement to more passive support such as the provision of guidance material.

5.7 Three tax professionals suggested incentivising actions such as early filing, or putting affairs in order if earlier reporting errors have been made.

Views on guidance material

5.8 Aspects of the proposed arrangements were welcomed by several respondents, notably:

• proposal to produce guidance material in plain English following tests for readability
• public consultation on draft guidance
• inclusion of Frequently Asked Questions
• proposal to ensure guidance is kept up-to-date.

5.9 Many respondents considered the proposed website to be essential, with demands for:

• helpful structure
• efficient and effective search facility
• the facility to submit a query
• compatibility with a variety of devices and different speeds of access
• comprehensive testing before going live.

Views on accessing information in a variety of formats

5.10 Respondents agreed that provision should be made for guidance material offline, in a variety of different formats, to cater for different needs, including those of people who are digitally excluded and/or disabled.

5.11 Six respondents recommended the establishment of dedicated telephone helplines, staffed by properly trained staff. Two respondents (Tax, Tax) urged that consideration be given to making helplines free. Another tax professional cautioned that Revenue Scotland should not underestimate the number of dedicated, expert personnel required to staff such helplines. One public body highlighted the importance of a single point of contact for some taxpayers, such as Landfill Site Operators.

5.12 Two respondents (Bus, Tax) requested more information on the mechanisms by which taxpayers' and agents' queries will be dealt with by Revenue Scotland, one expressing concern that addressing these could prove to be burdensome and costly for the tax authority. One respondent (Tax) considered that interpretation facilities may need to be on hand.

5.13 Another respondent (Leg) recommended that hyperlinks should be set up to take those filing returns on-line to relevant guidance, where needed.

5.14 The suggestion was made (Tax) that arrangements should be in place for face-to-face home visits or meetings in town centres, where enhanced support is needed.

Views on methods of making payments

5.15 There was general agreement across several respondent sectors that taxpayers should be offered a variety of payment methods:

• online
• cheque by post
• by phone
• BACS.

5.16 Two respondents (LA, Bus) requested that payments should be permitted in instalments.

5.17 One view (Tax) was that any new software established for tax payments should not place unnecessary burdens on micro or small businesses.

5.18 The consultation asked:

Question 12: What particular features should Revenue Scotland's systems include to help agents to operate most effectively on taxpayers' behalf?

5.19 Eighteen respondents (64% of all respondents) addressed this question.

Table 13: Respondents to Question 12

Category	No.	%
Tax accountants and professional tax bodies	9	50
Public bodies	1	6
Legal professional bodies	3	17
Local authority bodies	3	17
Business	2	11
Total	18	100

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

5.20 One key feature raised by seven respondents was for a simple and quick authorisation procedure to register agents who have been asked by their clients to deal with Revenue Scotland on their behalf. One view (Tax) was that this should ideally be consistent with that for registering agents for UK taxes. Another respondent suggested that it might be worth considering making it a requirement for agents to be regulated by an approved body such as ICAEW. They continued:

"This does not necessarily mean that all agents would be perfect, but at least they would be subject to the rules and regulations of their professional bodies and it would help prevent some unsuitable people from acting as agents" (ICAEW).

5.21 One respondent (Tax) emphasised their view that "agents" should include in-house tax staff who can operate on behalf of a group of companies. Another (Tax) argued for those in the voluntary sector who are acting on behalf of taxpayers to be given direct access to tax systems e.g. Tax Help, Taxaid.

5.22 In general, it was agreed that agents, once appropriately registered, should have access to taxpayers' accounts online, subject to suitable IT security and functionality. One respondent (Tax) encouraged Revenue Scotland to adopt a system similar to the HMRC online portal, to enable agents to have real time access to their clients' accounts.

5.23 A few respondents (Tax, Tax, PB) highlighted that some taxpayers deploy different agents for different taxes, or more than one agent for one tax. They requested that the system be developed to accommodate appropriate levels of multi-agent access. One respondent (Tax) urged that Revenue Scotland consider the appropriateness of a collaborative model for larger taxpayers and transactions, an approach which they explained had been adopted by HMRC in appointing a Customer Relationship Manager.

5.24 In terms of communication between Revenue Scotland and agents, the three main routes identified by respondents were:

• agents being copied into taxpayer correspondence automatically
• agent-dedicated phone lines staffed by appropriately trained staff
• email.

Sanctions where justified

5.25 To encourage non-compliant taxpayers to become compliant, Revenue Scotland will seek to identify a high proportion of non-compliant activity by operating systems such as risk-based and random assessments. Non-compliant behaviour would include:

• not declaring or not paying tax due, or not doing so in a timely way
• declaring or paying less tax than is due
• seeking to conceal the true amount of tax due
• refusing to provide information reasonably sought by Revenue Scotland
• not keeping adequate records to enable Revenue Scotland to check whether a tax return is correct
• concealing or destroying records or other information sought by Revenue Scotland
• any other deliberate or dishonest actions designed to enable a taxpayer to avoid paying some or all of a tax charge due.

5.25 It is proposed that in cases of non-compliant behaviour, Revenue Scotland should be empowered but not obliged to apply civil penalties. The circumstances in which penalties may be applied, and maximum penalties, will be set out in legislation. It is intended to give Revenue Scotland power to reduce or suspend civil penalties where the taxpayer has co-operated with Revenue Scotland, for example, in identifying and calculating the right amount of tax. It is believed that a proportionate regime will be achieved by giving Revenue Scotland discretion to decide whether to apply a penalty, with the amount of that penalty subject to maxima set in legislation. Maxima might be absolute amounts or percentages of the amount of tax due.

5.26 The consultation asked:

Question 13: What are your views on the list of non-compliant behaviours (paragraph 5.25 above) - for example, are there other situations in which civil penalties should be available?

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

Table 14: Respondents to Question 13

Category	No.	%
Tax accountants and professional tax bodies	8	47
Public bodies	1	6
Legal professional bodies	3	18
Local authority bodies	3	18
Business	2	12
Total	17	100

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

General comments

5.28 Five respondents (LA, LA, PB, Bus, Tax) stated simply that the list of non-compliant behaviours appeared to be reasonable. Another (LA) remarked that the list should not attempt to be exhaustive, but simply set out examples.

5.29 One respondent (Tax) expressed disappointment at the absence of a dedicated consultation on a sanctions' and penalties' regime, emphasising that in their view this is vital before draft legislation is placed before Parliament.

5.30 Three respondents (Leg, Leg, Tax) cautioned that the list did not seem to them to distinguish between tax evasion and legitimate tax planning. Another (Tax) suggested a distinction should be made between:

a) mistakes made despite taking care

b) careless mistakes

c) deliberate mis-statements and concealment.

This respondent urged that the system recognises that some errors occur despite the taxpayer being honest.

Specific comments

First bullet

5.31 It was remarked that taxpayers who do not pay in a timely way may have no criminal intent (Leg, Bus), and that late payment should not be treated in the same category as seeking to conceal tax due (Leg). Two respondents (Tax, Tax) recommended that account should be taken of hardship and the financial position of the taxpayer in cases of late payment.

Fourth bullet

5.32 According to one respondent (Tax), the interpretation of "reasonably sought" may be different between Revenue Scotland and taxpayers, and it is therefore vital that taxpayers have a right of appeal.

Fifth bullet

5.33 "Adequate records" was viewed as a subjective term by two respondents (Tax, Leg) which required clarification in order to minimise uncertainty and inconsistency in interpretation.

Seventh bullet

5.34 One respondent (Leg) expressed concern that some steps taken to avoid tax could include for example, investing in Enterprise Investment Schemes, which has been encouraged, however such action has been classed alongside dishonest actions, which are clearly criminal. This respondent remarked:

"It is unhelpful to muddy the distinction between legal avoidance and criminal evasion" (Law Society of Scotland).

Suggestions for additional non-compliant behaviours

5.35 Four suggestions were made by tax professionals:

• failure to notify liability (2 mentions)
• failure to submit an appropriate return (1 mention)
• filing a tax return late (1 mention)
• providing incorrect information to Revenue Scotland (1 mention).

5.36 The consultation asked:

Question 14: What are your views on the proposal that Revenue Scotland should have discretion, subject to maximum penalties set out in legislation and subject also to published guidance, to determine the level of sanctions? What factors might be taken into account by Revenue Scotland in deciding what level of sanction to apply?

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

Table 15: Respondents to Question 14

Category	No.	%
Tax accountants and professional tax bodies	8	47
Public bodies	1	6
Legal professional bodies	3	18
Local authority bodies	3	18
Business	2	12
Total	17	100

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

5.38 Overall, 15 of the 17 respondents who provided a view expressed clearly their support for the proposal that Revenue Scotland should have discretion to determine the level of sanctions, subject to legislation and guidance.

5.39 It was suggested that such discretion would encourage taxpayers to comply who otherwise might have simply awaited detection (Bus, Leg). One respondent (Leg) argued that a blanket approach would fail to take account of individual circumstances of taxpayers.

5.40 Caution was expressed by three respondents:

• Discretion should be limited in order not to undermine legislative intent or deterrent effect (Tax).
• The application of discretion may make one taxpayer feel more harshly treated than another as a result of the officer who had dealt with them (Tax).
• Discretion may introduce inconsistent decisions, raising the potential of a significant level of appeals and complaints (LA).

5.41 Two respondents (Tax, Tax) emphasised their view that the levels of penalties, and the range of mitigating factors, should be determined by statute rather than established in guidance.

5.42 Two respondents (Leg, Leg) argued that discretion should extend to the ability to reduce any penalty otherwise due, to zero. Another view (Tax, Tax) was that suspension of penalty should only be applied where the taxpayer is trying to comply, and not in cases of deliberate non-compliance, or worse. One prominent view was:

"The main concern comes down to ensuring taxpayers do not become subject to significant automatic penalties for behaviour that is largely a case of taking the eye off the tax ball while coping with the main game of keeping the business going" (Chartered Institute of Taxation and Association of Taxation Technicians).

Views on factors to take into account in determining level of sanction

5.43 The following factors were identified by respondents, and are listed in order of most mentions to fewest mentions:

• intent - whether deliberate or genuine error (7 mentions)
• whether first offence/previous compliance record (7 mentions)
• amount due (6 mentions)
• willingness to co-operate/improve systems/resolve the matter (5 mentions)
• length of time overdue (4 mentions)
• ability to pay (4 mentions)
• "reasonable excuse" (4 mentions)
• whether voluntary disclosure of error (4 mentions)
• whether acting in "good faith" (2 mentions)
• size of organisation/taxpayer (1 mention)
• whether caused by agent or taxpayer (1 mention)
• illness (1 mention)
• age (1 mention).

Types of sanction

5.44 It is proposed that the type of sanction that Revenue Scotland and the Crown Office and Procurator Fiscal Service might use to deal with tax non-compliance will comprise:

• warning letter
• flat-rate penalty
• daily penalty
• percentage-based penalty
• criminal prosecution.

5.45 The consultation asked:

Question 15: What are your views on the types of sanction proposed and their possible uses?

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

Table 16: Respondents to Question 15

Category	No.	%
Tax accountants and professional tax bodies	8	42
Public bodies	1	5
Legal professional bodies	3	16
Local authority bodies	4	21
Business	3	16
Total	19	100

5.47 Overall, the sanctions proposed and their possible uses were viewed as reasonable, with some attracting more detailed comment than others (see below). It was recommended (Tax) that taxpayers and their agents should be fully informed about the sanctions and their application. One respondent (LA) asked for clarification that the sanctions will not necessarily be mutually exclusive.

Views on use of the warning letter

5.48 Five respondents expressed their support for warning letters as an effective, low level sanction. It was considered that a warning letter, if used on a timely basis (Tax), could help facilitate behaviour change (Bus) before progressing to other sanctions. One respondent (Leg) suggested that the letter could contain information on options for payment arrangements. Another (Tax) proposed the introduction of warning letters of progressively different strengths.

Views on use of flat-rate penalties

5.49 Six respondents commented specifically on the proposed use of flat-rate penalties. A recurring view was that such penalties should be applied with care in order to prevent disproportionate use. A suggestion was made to introduce limits, for example, by capping the penalty at a fixed proportion of the tax at stake (Tax).

5.50 One view (Leg) was that a flat-rate penalty is not appropriate in cases where no tax is payable.

5.51 Other concerns were expressed:

• small flat-rate penalties are not cost effective to appeal (Leg)
• as a deterrent this sanction has very limited impact (LA)
• can be expensive to pursue (LA).

Views on use of daily penalties

5.52 As with flat-rate penalties, two tax professionals argued for careful application in order to maintain proportionality, and the introduction of some form of limitation, for example, relating the amount of penalty to a proportion of the tax at stake.

Views on percentage-based penalties

5.53 Three respondents (all tax) presented similar views. They argued that there is a significant difference between "careless" and "fraudulent" dealings with Revenue Scotland, with the former warranting perhaps only a warning letter and the opportunity to correct an error, but the latter more deserving of a percentage-based penalty.

Views on criminal prosecution

5.54 Three respondents (Tax, Tax, Leg) all recommended careful consideration of the circumstances whereby an agent will be subject to such sanction, particularly as the threat of criminal prosecution could deter agents from assisting some clients, to the detriment of the public interest.

Other sanctions

5.55 A few respondents identified further sanctions which they proposed could usefully be included amongst those listed in the consultation:

• It was suggested that interest on late payments, although perhaps implicit in the list of sanctions, is viewed by some taxpayers as a penalty in its own right (Tax).
• Suspended penalties are used by HMRC and according to one respondent (Tax) could be applied effectively by Revenue Scotland in cases of careless behaviour.
• Three respondents (Tax, Tax, Bus) highlighted emails and text prompts as effective low level compliance mechanisms commonly used in other industries.

Collecting unpaid tax

5.56 Currently HMRC has the power, where a Scottish taxpayer has not paid the tax due, to seek a summary warrant from the sheriff court. A sheriff must issue such a warrant if HMRC demonstrates to the court that appropriate processes have been followed and the tax due has still not been paid. The warrant enables HMRC to enforce the outstanding tax together with related costs and proceed to diligence. It is proposed that Revenue Scotland has a similar power. It could not, however, exercise this power where it has agreed with a taxpayer a time-to-pay schedule on which the taxpayer has not defaulted.

5.57 The consultation asked:

Question 16: What are your views on the proposed arrangements for collecting unpaid tax set out above?

5.58 Eighteen respondents (64% of all respondents) addressed this question.

Table 17: Respondents to Question 16

Category	No.	%
Tax accountants and professional tax bodies	6	33
Public bodies	1	6
Legal professional bodies	5	28
Local authority bodies	3	17
Business	3	17
Total	18	100

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

5.59 There was broad support for the proposals, so long as the arrangements are applied fairly and consistently. It was considered that they were consistent with those available to HMRC (Tax, Bus); and that the arrangements provided an opportunity for future incorporation of wider taxes such as council tax (LA). One respondent emphasised that different approaches should not develop for devolved and non-devolved taxes (Tax).

5.60 One respondent in particular welcomed the retention of the summary warrant system on the basis that it provides:

"an expedient and cost effective method for recovery of taxes due and payable" (Society of Messengers at Arms and Sheriff Officers).

5.61 It was recommended (Tax) that the measures taken by Revenue Scotland be usefully benchmarked against those applied by HMRC and other revenue bodies in Europe.

5.62 A few respondents highlighted their view on the merits of in-house or outsourcing debt collection. Their views were:

• Debt collection cannot be outsourced, not least due to the potential for complexity where Revenue Scotland has a duty of confidentiality which prevents its disclosure of relevant facts to the appointed outsourced agents (Tax).
• HMRC uses debt collection agencies. If Revenue Scotland has similar plans, they must be supervised properly and operate to Revenue Scotland principles and guidelines (Tax).
• Most Scottish local authorities use professional firms of Sheriff Officers to enforce debt and Revenue Scotland should follow suit. Very effective and efficient working practices have evolved over the years. Revenue Scotland should forward the summary warrant to a Sheriff Officer firm who will engage initially with the debtor to demand payment, and if no co-operation, will proceed to enforcement, using the statutory powers set. A recommended 10% penalty of the sum at stake (which has been applied historically) should be imposed with the proceeds used to pay for the cost of enforcement, thus making the process "entirely self funding" (Walter Love, Messengers-At Arms and Sheriff Officers).

Views on the proposed time-to-pay arrangement

5.63 The proposed time-to-pay arrangement was addressed specifically by four respondents. Three (Tax, Tax, Leg) recommended that the criteria for being given time-to-pay be publicised, but its discretionary basis made clear. One respondent stated:

"...guidance should be published on the circumstances in which Revenue Scotland will consider entering into such an arrangement and the factors that it will take into account, as well as on the taxpayer's obligations that will arise as a result of entering such an arrangement, which will be different to the ordinary taxpayer obligations" (Faculty of Advocates).

5.64 Two respondents (Tax, Tax) suggested that the key to effective time-to-pay arrangements is to make them flexible enough to tailor to the taxpayer's individual circumstances. One respondent (Tax) welcomed the proposal as helping some businesses to remain solvent by permitting slower payment of tax.