The concept of conditionality – making registration for tax a condition for renewing certain trading licences – was originally mooted at Budget 2016. Clauses in the draft Finance Bill 2020-21 bring this closer to a reality for certain licensed trades.

The rationale for introducing the check is to tackle the hidden economy and close the tax gap. It appears to be modelled on similar provisions, known as tax clearances, found in the Irish tax system.

What licences will the regime apply to?

The licences (listed below) are grouped into four categories. The licences for driving a hackney carriage or private hire vehicle are in category 1. The licences for operating a private hire vehicle are in category 2. A scrap metal site licence is category 3 and a scrap metal collector’s licence is category 4.  

The rules apply to licences issued in England and Wales only, leaving scope for future extension to similar licences issued by licensing bodies in Scotland and Northern Ireland.

Previous consultation rounds had considered other forms of licence so there is a possibility these rules could apply to other sectors in the future. The consultations mentioned licences issued by local authorities for retail, trading, private security, environmental health, waste management, planning, or property lettings (eg, houses in multiple occupation) and licences issued by other government departments or by trade and representative bodies for specific sectors.

In its written evidence given to the House of Lords Finance Bill Sub-Committee (see ICAEW REP 88/20), ICAEW’s Tax Faculty said:

“In principle it makes sense to extend the measure to the whole of the UK, otherwise it could create distortions in the marketplace, (eg, taxi operators might register in Scotland even though they operate mainly in England). We appreciate that this may need legislation at the devolved level.

“As for extending it, as noted above the requirement to obtain a tax certificate is far more extensive in scope in Ireland as compared to the current UK proposals. The measure could be seen as an initial ‘toe in the water’. Once HMRC gains experience in the application of these provisions and it proves successful in its policy objective at a reasonable cost, we expect that consideration will be given to extending the scheme to other licence renewals.

“But the system needs to work effectively and efficiently first and be shown to reduce the tax gap.”

First-time applicants

Early in the consultation process, it was recognised that the requirement to be registered for tax might not have been triggered at the time an individual or company first applies for a licence. If they have not received a licence to trade, they will not have generated taxable income from that trade.

For first-time applicants, the draft legislation requires the licensing authority to:

• draw a first-time applicant’s attention to guidance concerning tax compliance;
• obtain confirmation from the first-time applicant that they are aware of the guidance; and
• draw the first-time applicant’s attention to HMRC’s power to obtain information from the licensing authority concerning the applicant (under Sch 36, Finance Act (FA) 2008 and/or Sch 23, FA 2011).

A first-time applicant is defined as somebody who has not previously obtained a licence in that category or who has had a one-year gap in holding such a licence. For example, an individual who had held a licence to drive a hackney carriage (category 1) but who is now applying for a licence to operate a private hire vehicle (category 2) would be treated as a first-time applicant. 

Licence renewal process

When an individual or company applies to renew an existing licence on or after 4 April 2022, the draft legislation requires the licensing authority to obtain confirmation from HMRC that the applicant has completed a tax check with HMRC in the previous 120 days in relation to the authorised activity.

The draft legislation envisages HMRC putting arrangements in place (possibly via a form on gov.uk) for the applicant to make their tax checks and to handle the requests from licensing authorities. ICAEW has requested that agents are designed into the process so that they are able to assist clients in performing the tax check.

There are some protections built into the planned process. The requirement for the licensing authority to request and receive confirmation that the applicant has completed a tax check before considering their application ceases to apply in the following cases.

First, if the applicant has been unable to complete the tax check for reasons outside of their control and HMRC agrees, then the requirement to complete a check is waived.

Second, the arrangements (system) for the licensing authority to contact HMRC for confirmation concerning the applicant are (for reasons beyond the licensing authority’s control) not available to the licensing authority throughout the period of five days, beginning with the day on which the licensing authority first attempts to make use of them for the purposes of the application.

Third, if HMRC has not responded to the licensing authority’s request within three days.

What is included in a tax check?

The draft legislation states that the applicant must give HMRC such information as HMRC may reasonably request in order to:

• be satisfied that the applicant has complied with their reporting obligations in connection with the authorised activity and authorised activities in the same category as that activity, or
• assess the effectiveness of the legislation in improving the tax compliance of persons carrying on authorised activities.

The second point seems particularly wide.

The legislation also lists the following particular items:

• the applicant’s name and other information enabling them to be identified (eg, an individual’s or company’s Unique Taxpayer Reference, an individual’s date of birth or national insurance number, or a company’s registered number);
• the authorised activity in respect of which they have applied for authorisation;
• information about the applicant’s existing or previous authorisations in respect of the authorised activity or authorised activities in the same category as that activity (such as length or date of expiry);
• information about any relevant authorised activity income; and
• confirmation that, in the applicant’s opinion, they have complied with such of their reporting obligations in connection with any relevant authorised activity income as HMRC may specify.

How will this affect accountants?

The aim of the legislation is obviously to reduce the hidden economy and improve compliance. Licensed traders who are either not registered for tax or who have not been fully compliant may seek assistance to bring their tax affairs up to date in advance of this regime coming into force.

Those who are already reliant on agents for their tax compliance may also seek help to perform the tax check. If you act for clients in these sectors, it may be advisable to use the full 120-day window in advance of when their licence is due for renewal to be able to complete the tax check in time (assuming that HMRC’s system will be ready at least 120 days prior to 4 April 2022).

The licences listed in the draft bill are:

• driving a hackney carriage (s46, Town Police Clauses Act 1847);
• driving a hackney carriage in London (s8, Metropolitan Public Carriage Act 1869);
• driving a private hire vehicle (s51, Local Government (Miscellaneous Provisions) Act 1976 (LG(MP)A 1976));
• driving a private hire vehicle in Plymouth (s9, Plymouth City Council Act 1975 (PCCA 1975));
• driving a private hire vehicle in London (s13, Private Hire Vehicles (London) Act 1998 (PHV(L)A 1998));
• operating a private hire vehicle (s55, LG(MP)A 1976);
• operating a private hire vehicle in Plymouth (s13, PCCA 1975);
• operating a private hire vehicle in London (s3, PHV(L)A 1998);
• carrying on business as a scrap metal dealer at a site (a site licence under s2, Scrap Metal Dealers Act 2013 (SMDA 2013)); and
• carrying on business as a scrap metal dealer as a mobile collector (a collector’s licence under s2, SMDA 2013).

About the author

Lindsey Wicks, Technical Editor, ICAEW