We need trust

KEY POINTS

• Citizens must be taxed according to the law.
• HMRC have given themselves too much power.
• Taxpayers are not treated like real customers.
• Delicate relationship with agents.
• Professional bodies should work together.

The trust between HMRC on the one hand and tax advisers and taxpayers on the other has degenerated over recent years. Anthony Thomas, who took over as president of the Chartered Institute of Taxation on 17 May, in his keynote speech at the institute’s annual general meeting, focused on the need to rebuild this relationship. His speech is reproduced below.

The theme running through Vincent [Oratore]’s presidential year was ‘making better tax law’. An important element of that theme was ‘applying the law’. One of the themes for my year continues that concept. It is summed up in the single word ‘trust’. That is, trust between HMRC and the professions, and particularly our institute.

The UK tax system depends entirely upon taxpayers complying with their obligations. For the tax system to operate effectively and efficiently, that in turn implies that there must be mutual trust between taxpayers, the tax profession and the fiscal authority. And there must be confidence that the law is applied equally to all sectors of society.

Available evidence indicates that complex laws applied by a fiscal authority in an oppressive manner result in lower rather than higher tax revenues. I think you will probably find that the US tax system provides a good example of that. My theme of trust looks at four aspects:

• the attitude of HMRC to the rule of law;
• the impact on trust of ever-increasing powers for HMRC;
• the performance of HMRC in recent years, including a comparison of what they say and what they actually do; and
• most importantly, where do we go from here: what can we as an institute do to help restore trust?

HMRC must act within the law

The attitude of HMRC to the rule of law should be that when Parliament makes the law, it is incumbent upon HMRC to act within the law. Equally, when the courts hand down an interpretation of the law, HMRC have an obligation to apply that interpretation, no matter how unpalatable it may be.

HMRC publish a vast array of press releases, statements of practice, guidance notes, toolkits and technical briefs, which at times add to the complexity of tax practice rather than assisting practitioners.

The department could be at risk of creating a belief that a failure to accept their interpretation and to take account of every piece of this supplementary material is prima facie evidence of negligence… or worse.

It is extremely difficult to have trust in the tax authorities when they feel they have the power to introduce de facto secondary legislation with no parliamentary scrutiny. We need to get back to taxing in accordance with the rule of law.

As every tax practitioner knows, since the merger of the two revenue departments, HMRC have been in a state of constant change, having also embarked on a ‘modernising’ journey. The result has been disastrous in many respects, as any practitioner or business owner could have advised.

Merging different cultures is difficult enough without, at the same time, attempting a major upheaval in organisation and procedures.

Too many powers

The impact on trust of ever-increasing powers for HMRC is worrying. Moreover, a large part of the modernisation programme has been used as grounds for giving HMRC more powers, notably to control and gain access to data, sometimes with the minimal appearance of safeguards for taxpayers and their businesses. HMRC want to collect huge amounts of data from banks, charities, businesses and taxpayers of every description.

They have obtained additional powers to levy increased penalties and have made clear that these penalties will be applied with even more vigour. Recent HMRC plans have indicated that they wish, indirectly, to regulate the tax community.

More powers have been accrued without proper consideration of all the practical implications, with the appearance of few safeguards and without taxpayers in general being aware of them until a computer-generated document arrives in the post.

Many such documents are issued incorrectly, but the onus is on the taxpayer to appeal against them. No attempt appears to be made to verify the validity of computer outputs. The overall impression is that HMRC are attempting to have automated processes make up for their declining numbers of staff, who in any case often lack proper training and the skill to make appropriate judgments.

When pressed, HMRC argue that these powers are necessary.

Last summer, the Lord Chief Justice (Igor Judge) said, quoting William Pitt, the Younger: ‘Necessity is the plea for every infringement of human freedom’. He then went on: ‘It is the argument of tyrants. It is the creed of slaves’.

Last June, at the Lord Mayor’s banquet, the Justice Secretary, Ken Clarke, promised ‘To defend the rule of law and civil liberties in a true society’.

I find both comments interesting in the context of Revenue powers. Put simply, powers must be appropriate, proportionate and, most of all, exercised in a way that is fair.

Evidence suggests that, on occasions, HMRC do not exercise their powers in a fair and proportionate manner even on those who would be classified as lower paid, as the case of the London taxi driver Mr Ho clearly shows.

All too often, the taxpayer has to bear the impact of HMRC maladministration. Taxpayers are driven to despair because HMRC are pursuing them aggressively for debts arising as a consequence of a failure to issue correct PAYE codes.

Lack of communication

The privatisation of revenue debt collection is another example where there is poor communication and where safeguards are apparently ignored on occasions, with serious implications for those having the misfortune to be involved.

There are too many consultation documents where the period allowed for responses is far too short to enable all the implications to be considered. There are too many references to ‘soft landings’ and ‘light touches’ when new legislation is implemented without due consideration.

This is fine as far as it goes, but provides little real protection and can result in capricious decisions. Moreover, new taxpayers come down with a bump after the soft landing.

Attempts by the profession to improve proposals and ensure properly considered preparation for their implementation, often by arguing for a slowdown to give more time to implement, sometimes seems to encourage HMRC to speed up: a case in point is iXBRL.

HMRC officials are happy to have closer working when it suits them and to continue to use the scarce and valuable resources of the institute to fill in gaps in their own thinking, while at the same time ignoring some sensible suggestions and recommendations.

On occasions, there is talk within the profession of our ‘special relationship’ with the taxing authorities. My own view is quite simple: I am reminded of the so-called ‘special relationship’ that exists between the UK and US governments. That is more perceived than real and always favours one side, and that side is not ours.

The professional bodies need to recognise that the ‘special relationship’ is a myth and is of little real benefit to them or, more importantly, taxpayers. We need to return to the ‘healthy tension’ between HMRC and the tax profession that existed ten to 20 years ago: no special relationships; no cosy conferences; no favours, deals and understandings; no inside tracks and private access.

Instead, there was straightforward dealing, openness and frankness with honest broking, and above all a genuine willingness to work together with total transparency and integrity.

Senior tax officials did not subject directors, businesses and the professions to the kind of lectures one would expect from a politician. The job of civil servants is, and always has been, to apply the rule of law in an even-handed manner.

Revenue performance

And what of the performance of HMRC itself in recent years?

It is difficult not to conclude that, in the last few years, and certainly since the merger, the department has had a wide range of operational failures. It was never perfect by any means, but it was once run by a team with a wide range of tax expertise and experience. This tax awareness ensured that major systemic problems were avoided.

Top management at HMRC now appears to be concerned almost exclusively with processes, coupled with an obsession with tax avoidance and tax evasion. There is a complete failure to recognise that tax is complex and, until simplified, cannot easily be converted into automated processes.

If simplification is an unrealistic goal in a complex world, then fairness demands an element of discretion and this in turn requires people with good judgment within HMRC making these decisions, and not simply computerised penalties and processes.

It is the same approach that is now forcing online filing on the elderly and disabled: an issue which the Low Income Tax Reform Group is raising in a case before the tax tribunal.

HMRC now refer to taxpayers as customers; but they do not treat them as customers. No customer would continue to put up with telephone calls that are not answered; or letters that remain unanswered for months; or constant changes in the office handling their affairs.

Loss of confidential data, mishandling of information, errors in handling the input of returns and technical errors by inadequately trained staff, have all contributed to a reduction in taxpayers’ confidence in the tax authorities.

Morale of HMRC staff is among the lowest in any government department. This is unacceptable – staff at office and operational level are loyal, hard working, focused and desperately want to do an excellent public service job; but they are being frustrated.

Lost reputation

The PAYE debacle last September is symptomatic of the problems. The reputational loss to HMRC in the past 15 months is huge; the department is, with some justification, under regular attack from the media. Trust between taxpayers and HMRC is in severe jeopardy.

A department once regarded with circumspection, but trusted and respected, is becoming disliked, mistrusted and feared. It will take years to rebuild that trust between taxpayers and HMRC. But, more significantly, trust between the professional community and HMRC is at risk too. In short, we have a tax authority which:

• Introduces de facto secondary legislation without proper parliamentary scrutiny. See the plethora of press releases, statements of practice and technical briefs.
• States that it wants to consult and be open, but sometimes allows inadequate time for meaningful and totally transparent discussion and on occasions appears to have decided the outcome in advance, as in the case of business records checks.
• Seeks more powers on the grounds of necessity without demonstrating why existing powers are inadequate or inappropriate. Take a look at the new powers recently obtained or being sought as part of the HMRC agenda, particularly on data gathering powers.
• Has significant operational deficiencies and no real indication of how and when they will be tackled. Try making contact with a call centre or requesting a reply to a letter which has been outstanding for more than a month; or talk to someone with recent experience of the privatised debt collection teams.

Retrieve the situation

Where do we go from here? My discussions with our members suggest that the relationship between HMRC and members has never been worse.

Nevertheless, we as an institute must attempt to get relationships back on an even keel. I recognise that restoring a proper professional and working relationship centred on mutual trust and respect will not be easy.

But my goal is to try to turn the tide. A good example of where trust will be required and a starting point for my goal is the forthcoming consultation on ‘Establishing the future relationships between the tax agent community and HMRC’. This is undoubtedly an opportunity to re-establish trust.

The concept of a self serve facility for agents to access certain HMRC systems to undertake basic transactions is welcome because agents are frustrated by the lack of ability of HMRC to perform simple tasks quickly and accurately.

Nevertheless, there are two key factors on which the institute must not be moved:

• There must be no attempt to shift the relationship between client and tax agent. That is paramount. Any attempt to introduce some obligations between tax agents and HMRC which impinge on relationships with clients is totally unacceptable.
• If some form of registration of agents is to be pursued, it needs to be justified in terms of cost/benefit and be undertaken by an independent body. It would be unacceptable for this to be in the hands of HMRC, whether directly or indirectly. Simply put, HMRC cannot be trusted or permitted to be in a position to act as prosecutor, jury, judge and executioner.

Agent relations

It is almost 30 years ago that a past president of the institute suggested to the then Inland Revenue, that a mechanism should be established to enable complaints by Revenue officials about performance by tax practitioners to be handled through the profession’s disciplinary procedures. It was not acceptable at that time, on the grounds of taxpayer confidentiality.

That excuse is no justification nowadays, not least because it allows HMRC to control the whole process. If the will is there, a way can be found to address that issue. After all, natural justice requires that any process should have an appeal procedure, and it is inevitable that a properly conducted appeal procedure may well involve at least some element of disclosure of a taxpayer’s affairs.

The agent’s clients can use the profession’s disciplinary procedure if they have a complaint, and do not see some element of disclosure as a problem.

And where the accusation will affect, maybe mortally wound, an individual’s ability to continue in business as a tax agent, the evidential threshold is high.

It is essential that an appeal can be made against such accusations before an independent tribunal: anything less is likely to be a breach of human rights.

There are those who think that HMRC should start by putting their own house in order before commencing a programme for registration and monitoring the performance of agents.

I have sympathy with this view, and believe that with a few changes in the way HMRC operate, at little cost, the service could be significantly improved for everyone. This should be explored with HMRC.

At the same time, the institute, together with other relevant professional bodies, should continue to debate and discuss the consultative document, while robustly defending certain fundamental principles on behalf of taxpayers, the business community and our members.

I also believe that the institute must work even more closely with the other professional bodies in an open and transparent manner. By working together, we broaden the range of practical experience. We will also be stronger, speaking with one voice on matters of significance.

It will help to ensure that we are not divided by HMRC on important issues; this will reduce the possibility of HMRC’s advice to ministers including the phrase ‘the professions are divided on this matter’. We need to engage with our respective memberships, hear their views and then shape our position.

Optimistic outlook

My hope is that by this time next year we will have been successful in starting to remove some of the danger to taxpayers, businesses and our members, and indeed the tax system as a whole, inherent in an aggressive tax authority with overbearing powers.

I would like to have started the shift back to that ‘healthy tension’ between tax practitioners and HMRC, which existed some years ago. Surely, that should be the start to the process of regaining trust and may well lead to the beginnings of a more open and fairer tax system.

Likewise, if a case is made for agent registration, the setting up of an independent oversight body for this purpose will be an important indicator that genuine trust can be established.

You will see that there are many challenges ahead in my year as president. I look forward to them, your support and working with you. This is our institute and it is our future that we are shaping together.

Issue: 4306 / Categories: Comment & Analysis , CIOT , working with tax agents , Admin