One of the requirements of the wholesale rationalisation of HMRC staff numbers has been for the organisation to become cleverer in deploying its resources, and in particular encouraging errant taxpayers to come clean about their evasive activities. As a result, the past 5 years have seen a series of HMRC campaigns aimed at bringing reluctant taxpayers out of the woodwork of the black economy.

The ‘one-off’ Offshore Disclosure Facility of 2007 was triggered by HMRC obtaining large quantities of information about offshore bank accounts, which it did not have the manpower to follow up in a comprehensive manner. Encouraged by the fact that this generated some £400 million, HMRC intriguingly offered a ‘New Disclosure Facility’ in 2009, thereby disproving the contention that the ODF was a one-off disclosure opportunity!

Since these general facilities, HMRC has moved to target particular trades and professions, presumably those with a less than impressive tax compliance record. These have covered doctors, dentists, plumbers, tutors, coaches and electricians, and there is a facility currently in place for those who trade in buying and selling goods on e-marketplaces. Future campaigns are proposed covering direct sales agents and the home maintenance sector (e.g. roofers, window fitters, carpenters, bricklayers and joiners).

HMRC has also run targeted campaigns based on particular problem areas within the tax system, notably the 2011 VAT initiative (to identify businesses that should have been registered for VAT but were not) and the proposed Missing Returns campaign, aimed at eliciting returns (initially for 2009-10 and earlier) from individuals believed to be potential higher-rate taxpayers.

The thrust of campaigns is usually that they offer an opportunity to make a voluntary disclosure and thereby secure a penalty weighting significantly below that which would apply if HMRC had launched an enquiry into the taxpayer’s affairs. Particularly in the light of the new HMRC penalty regime, which has tended to lead to higher penalty weightings in enquiry cases, these fixed penalties can be extremely attractive to non-compliant taxpayers.

Along with the penalty reduction ‘carrot’ comes the penalty and prosecution ‘stick’; those who fail to take advantage of facilities and are then identified as tax evaders are more likely to be prosecuted, and unlikely to be eligible for any significant discount on civil settlement penalties. This is a powerful combination of incentives for non-compliant taxpayers to come forward.

However, the proliferation of HMRC disclosure campaigns has led to some pervasive myths about the nature and extent of the disclosure incentives offered and the opportunities to make a disclosure.

Foremost among these has been the description of the campaigns as ‘amnesties’; they are nothing of the sort, nor in my view should they be. All tax due is payable, along with interest and a penalty, albeit a fixed and discounted one. In serious cases taxpayers will still be asked to sign certificates of full disclosure, inaccuracies in which are a major factor in selection of cases for criminal prosecution.

Another confusion has arisen around the scope of the facilities. It has been clear since the first Offshore Disclosure Facility in 2007 that HMRC does not in fact have the power to offer a blanket penalty discount to a specific category of taxpayers to the exclusion of all others. Thus the fact that a campaign is apparently directed at a particular category of taxpayers does not prevent any taxpayer from taking advantage of it. Thus there were a significant number of disclosures of ‘onshore’ tax irregularities under the Offshore Disclosure Regime, which HMRC accepted as being a perfectly proper use of the facility.

This brings me on to a feature of the facilities which has in my experience proved to be an annoyance to HMRC investigators, namely the fixed penalty levels. Whilst it is entirely understandable that HMRC would wish to give potential disclosers certainty about what they were letting themselves in for with their disclosure, this has created difficulties in maintaining a level playing field between ongoing HMRC enquiry work and campaign disclosure cases as regards penalty levels. This has applied particularly since the revision of the penalty regime into the Careless / Deliberate but not Concealed / Deliberate and Concealed categories.

To elaborate, by definition those disclosing under campaigns are extremely likely to come into the ‘Deliberate’ categories, which in the normal course of events would carry an absolute minimum penalty of 20%, even where unprompted. Given that the penalty level for careless unprompted disclosures is between 15% and 30%, there has been considerable dissatisfaction among taxpayers identified by HMRC as liable for such penalties in cases where they have been assessed for penalties in excess of those suffered by deliberate defaulters under the terms of campaigns.

We have also seen the levels of penalties under campaigns used as benchmarks in negotiation by taxpayer agents in ‘normal’ enquiry cases, a practice which is entirely understandable but which HMRC investigators do not relish.

Thus campaigns are not without their issues. The current e-marketplace campaign promises in particulat to be an interesting one, as it will throw into sharp relief the difficulty of distinguishing between a hobby and a trade. e-Bay in particular is widely used, and it is difficult to define the precise point at which activity moves from active pursuit of a hobby to trading. Cynics might suggest that HMRC’s view is that the answer is “when it becomes profitable”, but the question is much more complex than that.

HMRC views the question ‘is there a trade?’ in the light of what they refer to as the ‘6 badges of trade’, which are as follows:

1. The subject matter of the sale (goods usually traded, or usually held as investments?) 

2. The length of period of ownership (the shorter the period, the more likely there is a trade) 

3. The frequency or number of similar transactions (the greater, the more likely there is a trade)

4. Supplementary work on assets sold (if assets are combined, refurbished etc before sale, this may indicate trading activity)

5. Reason for sale (to make a profit, or to clear out your attic?)

6. Motive (not quite the same as reason for sale, and extremely subjective; thus a particularly tricky area)

I can envisage some very interesting disputes with HMRC over transactions on e-marketplaces, and for that reason take up of this campaign may be limited, as many taxpayers will feel they have a reasonable argument that they are not trading. This may therefore not be one of HMRC  more straightforward and successful campaigns.