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THE RELATIONSHIP BETWEEN the revenue authorities and the tax advisers' profession is an important one and it will be interesting to see how, under the recently formed HMRC, that relationship develops. There are two very different paths which the future could follow. Adopting one path or the other is not pre-ordained: it is up to us to decide which of the paths we will follow.
Which path?
The first path is the co-operative relationship, perhaps characterised by the Working Together initiative. Under this approach, Revenue officers and tax advisers trust and respect each other. There is discussion of proposed tax changes, with a genuine dialogue to improve legislation. HMRC respect the rights of taxpayers and their advisers, putting a fence around those rights so that the conduct of Revenue officers does not even come near to infringing those rights. Disputes, and there will always be disputes about the application of tax law in particular situations, are largely resolved by agreement, with little tax litigation. Very little use is made of the criminal law, except in clear cases of tax evasion.
The alternative path can be characterised as the antagonistic or confrontational relationship. There would be mutual distrust between Revenue officers and tax advisers, borne out of a disrespect for the unprofessionalism of Revenue officers on the one hand, and a perception that tax advisers are simply engaged in avoidance on the other. Proposals to change tax laws would be rushed through with little discussion, or the comments of professional bodies would be ignored. Retrospective legislation would be brought in regularly to correct poorly-conceived and poorly-drafted legislation and to legitimise the collection of taxes from activities which are retrospectively labelled as avoidance. HMRC would adopt the view that the law guarantees the absolute minimum of rights for taxpayers, and they should be accorded no greater respect than this. There would be many disputes about the rights of taxpayers and their advisers. There would be more litigation, partly because inadequately trained Revenue officers would take bad points where they may even know that there was little chance of success, but they are simply chasing financial results. There would be more use of the criminal law, but with prosecutions often collapsing for want of evidence or lack of preparation on the part of the Revenue.
Before anyone jumps to the conclusion that I am in any way describing the different approaches taken by the two former revenue departments which have been amalgamated, let me stress that I am not. My own practice has meant that I deal far more frequently with the Inland Revenue, and have limited experience of the practices of the former Customs. Also, from my own experience and from discussions with my colleagues, it is clear that neither of the former revenue departments adopted exclusively either the co-operative path or the antagonistic path. While I might characterise the approach of the Inland Revenue as generally the co-operative path, I think some practitioners would point to a disturbing tendency to drift towards the antagonistic path.
Got the power
I do not think I am being unrealistic or naïve if I state my view very clearly that it is within our control, that is the control of tax advisers and the officials in the Treasury and in HMRC, to decide which path we follow. To the extent that outside forces, such as demands from ministers to meet targets, push towards the antagonistic path, they need to be resisted. One of the most serious tests which the new HMRC, and the new tax policy advisers in the Treasury, will have to face in the relatively near future is how far they resist pressure from ministers to go down a path of chasing tax collection targets at the expense of longer-term relations with the tax practitioners' community and the public in general. Taxation, like ballroom dancing, has ultimately to be a consensual activity.
I am a strong and fiercely-committed advocate of the co-operative path and would hope that everyone else in the tax world, whether a tax adviser or a Revenue officer, would agree with that. However, if I were Dave Varney, or Gordon Brown, or Dawn Primarolo, why would I want to adopt the path of co-operation? After all, they are chasing financial targets, not seeking to win friends among the tax advisers' profession. There are several good reasons. Co-operation can help them achieve those targets, by emphasising voluntary compliance. A confrontational approach can tie up valuable resources in endless investigations and fruitless litigation, much of which the Government will lose because judges, who are also taxpayers, expect to be treated fairly and reasonably by Revenue officers, and expect others to be treated in the same way. If HMRC are to lose even some of their experts, they will need assistance from the private sector to advise on good legislation and practice: they cannot call someone a tax avoider one day, and expect him to help them out the next.
If the Government follows a confrontational path, then it has to expect every mistake of the new department, and there are bound to be some, emblazoned over the press. If I were Dave Varney and others, I would be pushing hard for the path of co-operation. I would also realise how recent trends, for example tax shelter reporting and threats of retrospective legislation, have placed the relationship with tax advisers under real strain.
However, if we are committed to going down the co-operative path, this is part of the future that will not necessarily happen entirely by itself. We will have to work very hard towards it if we wish to achieve that.
Respect
The key factor in ensuring that we move down the correct path is the issue of respect. First, officers of HMRC need to respect the professionalism and integrity of tax advisers. In response, tax advisers need to have respect for the professionalism and integrity of Revenue officers. This will not come automatically, but will need to be earned. High professional standards need to be maintained on both sides. Both sides need to ensure that they are fully conversant with the increasingly complex body of tax law, and that claims are not put forward which are unsustainable.
Second, there needs to be respect for the rights of taxpayers and their advisers. Taxpayers and tax advisers who believe that they are being poorly treated by Revenue officers, will respond in kind. If they believe they are being cheated by Revenue officers, taxpayers and their advisers will respond with avoidance or even evasion. Respect for rights has been shown in other countries to improve voluntary compliance, which is absolutely central to efficient tax administration.
Third, and perhaps most important, if we wish to go down this co-operative route, we need to commit ourselves on both sides to respect for tax law. All tax can only be imposed by law. To seek to collect tax where there is no legal basis is unlawful and is theft, even if carried out by a Government official with high motives. The scope of tax liability is determined by the law, and not by the breadth of taxable capacity. This is something which worries me sometimes about discussion of the so-called tax gap: are we discussing the difference between the tax which the law allows the Government to collect and what is actually collected, or the gap between what is perceived to be the taxable capacity of the economy, and what is currently being collected?
The law
There will always be arguments about what the law means and its application in particular cases. Time was, I think, that the general practice of the Inland Revenue was not to try to collect tax where the argument for taxation under the law was weak. Perhaps this is an entirely personal impression, but one of the disturbing trends I have seen recently is the tendency to seek to impose tax on a weak reading of the law, or on the basis of allegations which cannot possibly be sustained on the facts.
One aspect of respect for the law is respect for the demands of European Community law. It is, at times, difficult to respect Community law in the direct tax field when one has little idea what the European Court of Justice is going to declare that law to be. However, too often the Government has been relying upon weak arguments, or simply ignoring the constraints which Community law puts upon the tax system. We need to recognise that a loss of tax created by European Community law is not a loss at all: there was simply no right to collect tax in those circumstances in the first place.
One issue, which may well arise if we wish to maintain momentum along a co-operative path, is whether tax advisers should cease offering to clients the possibility of participating in tax avoidance schemes. The gut reaction from HMRC may well be 'yes: this is the price you must pay if you want a co-operative relationship'.
The answer is not, however, as black and white as that. You might be able to ban participation in tax avoidance schemes, if there were a single, agreed concept of tax avoidance. However, it is a truism that one man's tax mitigation is another woman's tax avoidance. I do not think anyone would seriously contend that the right to organise your affairs so as to reduce the incidence of tax by lawful means is not a basic right, which needs to be recognised as part of this relationship. To suggest the contrary either means that taxpayers can never take advice about their potential tax liabilities or, if they take that advice, they cannot act upon it. An extreme statement of the contrary view is that all citizens are obliged so to arrange their affairs to maximise the payment of taxes.
However, even if one accepts the right to organise one's affairs to mitigate tax, there are different ways in which this can be done. If we ask the Revenue authorities not to seek to tax on the basis of a weak argument as to the law or facts, then it is only fair in reply that tax avoidance based upon a weak argument or a barely tenable construction of the facts should equally be rejected. This does not seem a particularly high price to pay to travel down the co-operative path.
The time is now
The choice of which path we travel, co-operative or antagonistic, is not one which is in the dim and distant future. Realistically, it is a choice facing us now as the new amalgamated department starts functioning. Which way the Treasury and HMRC decide to go may even start to become apparent this summer as we discuss the remaining parts of the Finance Bill, which contains further provisions on tax avoidance disclosure, international tax arbitrage, and other measures. It is also something that will become very apparent as the discussions take place about the powers of the new amalgamated department. If we see real respect for the rights of taxpayers and their advisers, for example, if we see discussion of a taxpayers' bill of rights, that will be a good signal that the new department wishes to go down the co-operative route. The worst signal would be if the new department simply seeks to chase financial targets regardless of the law and the rights of taxpayers.
The above is based on an extract from Philip Baker's address to the CIOT, which took place on 10 May 2005.
