Black holes

THE EMINENT SCIENTIST, Professor Stephen Hawking, has told the world that 'information swallowed by a black hole is forever hidden, and can never be revealed'. One of the consequences of the numerous reorganisations within HMRC is that they have created what many in the tax profession are beginning to regard as their own equivalent of black holes.

For many years, practitioners have railed against the Inland Revenue, often with little or no justification. In the writer's experience, the vast majority of Inland Revenue and now HMRC Inspectors are very well trained, extremely diligent and do their utmost to be helpful, although always with an eye on protecting the Exchequer.

The usual result of enquiries was that mature negotiations could take place and at the end of a project, more often than not, both sides felt reasonably satisfied.

It is not so long ago that you could call up an Inspector of Taxes and ask for an informal opinion on a matter such as a prospective termination payment and get one there and then, often having a pleasant chat about the technical ramifications along the way. This would usually be confirmed in writing, giving the kind of assurance that every practitioner and his or her client from time to time required.

Specialisation

Recent experience has suggested that problems are beginning to arise that threaten this 'friendly' system. Very wisely, the powers that be within HMRC have begun a major scheme of rationalisation. This is not just the usual euphemism for sacking people by back door routes. In this case, HMRC have closed many local offices, amalgamated others and, as a consequence, created areas of real specialisation.

We may all be familiar with the Shares Valuation Office in Nottingham, but gradually more and more tax offices are specialising in particular interest areas or, alternatively, are appointing staff members, who may not even be at Inspector level, to consider — for example — the status of individuals who may be employees or may be self employed. For better or worse, such officers will spend the whole of their time on this specialism.

This is all to be commended since, over a period of time, it should lead to quicker and better decision-making than has, historically, sometimes been the case. However, it may work to the detriment of some taxpayers who have on occasion managed to strike it lucky in the past and found an Inspector who made a wrong decision due to the fact that he or she had not been properly trained in a particular area or had not looked at it for a decade or two.

Under-trained experts?

So far so good. However, this has thrown up a number of different issues that HMRC need to address as a matter of the greatest urgency. It is becoming increasingly apparent that the fact that somebody has been given a title does not mean that he or she has necessarily been fully trained.

To compound the problem, there are many HMRC Officers who have great experience over a wide range of issues, but are no longer allowed to offer judgments in certain specialist areas and are now being forced to defer to the new experts. This is a waste of an extremely useful and valuable resource. Where an Officer is replaced by a so-called specialist who has not had full training and does not have great experience, there will be a period of months or years before the new individual really gets his feet properly under the desk. In the interim period, they will 'play it safe' giving judgments and decisions that are very much by the book, but do not accord with recognised practice and often lack that very basic skill — common sense. This can be galling where there is an apparent change of policy, merely because an inexperienced individual has been promoted beyond his level of real expertise.

Black holes

The change at local level is compounded by another recent development. Increasingly, HMRC Officers are forced to refer matters to apparently small specialist policy units before they can issue decisions.

The ostensible reasons are two fold. First, it means that real experts are able to give decisions, which should be a good thing. Secondly, precedents will not be set that could be out of kilter with the way in which the whole of HMRC are supposed to be operating. How can anybody complain about such laudable aims?

These kinds of units have been responsible for many successes, but also for the disastrous 'Operation Gourmet', in which HMRC failed to interpret the legislation relating to troncs correctly and was forced to back down, not once but twice, as it became apparent that the booklets that they had issued summarising their understanding of the legislation did not accord with anyone else's reading of it. Similarly, the extent of the relevance of the Macdonald v Dextra case ( [2005] STC 1111 ) to the world at large is being taken by HMRC to its very limits, and some might argue well beyond. It would appear that a very small team is carrying this policy forwards and that is where the problem currently lies.

To take a tax adviser at random — the writer of this article — there are currently four separate matters that have been running for periods between nine months and several years, all of which require advice from these 'behind the scenes' experts.

In each case, the local HMRC Officer has given guidance that has then been referred to an expert, who is not willing to put his head above the parapet and either give his name or speak with any taxpayer or his adviser. It seems that these individuals are greatly overworked, since they are rarely able to respond within the normal 28-day period set by HMRC's client charter. Furthermore, once they are beyond 28 days, there appears to be little impetus to persuade them that they then need to give an answer with any great degree of urgency.

The problem is nicely represented by a letter from a local HMRC Officer received on 31 January.

'Following our telephone conversation on  25 January 2006 when we spoke about submission to my colleague at the [Specialist Tax Office] I have spoken with my colleague today for an update.

'The submission I made on 28 November 2005 has, as I suspected, not yet been reviewed as the Office has arrears of work.

'My colleague has asked me to apologise for the delay and has indicated that it should not be too long before he can respond.'

It is unhelpful that while advisers are able to meet frontline inspectors and to talk at length with them on the telephone, they are never sure about what has been passed into or out of these black holes. Therefore, even when a decision does come out, there may be a question as to whether it is based on the correct information.

A brief story of time

If HMRC are to persist with using small specialist units, it would benefit both the units and the taxpayer if they were given a turnaround requirement that matched that of other parts of HMRC. Furthermore, there seems little reason why they should not be willing to speak directly with and meet individuals charged with advising and assisting those taxpayers. In this way, cases could close much more quickly and at considerably lower cost to the taxpayer. Highly valuable HMRC Officers must suffer from the same 'pick up and put down' syndrome as the rest of us. It follows that if they were able to answer queries there and then, they would take less overall time to do so. Such a change would therefore potentially free them up to review further cases.

This would also prevent the multiplication of errors when taxpayers are uncertain at the end of one period as to the position with regard to a certain element of income or expenditure and, having received no guidance, inevitably do not know what to do in the following year's tax return. It cannot be to anyone's benefit to have this level of uncertainty and the possibility that a stream of tax returns will be incorrectly completed.

Code of Practice 10

Regrettably, there has been another recent trend that possibly started with the introduction of Code of Practice 10, affectionately known within HMRC as COP10. In far too many cases nowadays, this could as easily be referred to as 'COP out'. In particular, these days it is no longer possible to get a pre-transaction ruling in most areas of tax. There are exceptions, for example SDLT and salary sacrifice arrangements as well as clearances on major transactions such as reconstructions, but something like an ex-gratia termination payment — where, in the past, informal rulings were regularly offered — has completely dropped off the list.

COP10 deals with post-transaction rulings on matters of doubt. The underlying theory propounded by HMRC is good. 'It is our policy to help taxpayers, including businesses, to understand their rights and obligations, to get their tax affairs right and to pay their tax on time. This Code of Practice sets out the various ways in which we aim to achieve this'.

It requires the taxpayer or his or her agent to provide as much information as possible to HMRC in order to enable them to make a decision. This information is set out in Appendix 1 to the Code (see box overleaf), but this is a severely formal process and it can often be difficult to ensure that enough information has been provided. Further, most transactions take place in a whirl of activity and the lead time required in obtaining guidance on legal interpretations, which can often be one or more months, may be far too long in the overall scheme of things.

Even then, there are some transactions, which are set out in Appendix 2 above, for which COP 10 will  not operate.

The solution here is a return to some policy of pre-transaction rulings as propounded by so many tax practitioners. Ideally, this might be relatively informal and quick. If necessary, it might even be acceptable for HMRC to charge a fee for such opinions. This could prove a 'nice little earner' for an organisation that would clearly love to have a little more to spend on developing the services that they are able to provide.

Appendix 1: Code of Practice 10

Information to be supplied:

• when you apply for a post-transaction ruling or
• when you ask for information and guidance on our interpretation of tax law.

Your request should begin with a simple explanation of your problem. You should also include a description of the economic and commercial background to the particular transaction where it will help us to understand it. If you have identified more than one possible way to treat the transaction for tax purposes, you should explain the practical consequences of each. Your request should then go on to give a technical analysis that is sufficiently detailed for us to fully understand the facts and problem that you wish us to consider. The following information must be included with your request:

• your name and tax reference number;
• full particulars of the transaction or event in question;
• copies of all relevant documents with the relevant parts or passages identified;
• your opinion of the tax consequences of the particular transaction;
• your explanation of the particular point(s) of difficulty that led to your request;
• details of what sections of the Taxes Acts you consider to be relevant;
• particulars of any case law, Inland Revenue extra-statutory concessions or Statements of Practice you consider to be relevant;
• your reasons for your opinion of the tax consequences of the transaction.

If you are applying for a post-transaction ruling we will interpret the last three categories flexibly in the light of your circumstances and the ruling you have applied for.

In addition to the above you must give the following information:

If you are asking for a post-transaction ruling:

• the date that the transaction in question took place;
• details of the particular aspect(s) of the transaction that you want a ruling on;
• your statement that, to the best of your knowledge and belief, the facts you have given are correct and all relevant facts have been disclosed.

If you are asking for information and guidance on our interpretation of tax law:

• full details, including tax reference numbers, of any other parties involved;
• make it clear that you are seeking considered guidance and say how you intend to use the advice, for example by publishing it.

Appendix 2

Circumstances when we will not give a post-transaction ruling and issues we will not rule on.

• On asset valuations or other issues that do not involve the interpretation of tax law or its application to particular circumstances; (if you need the value of an asset checked so you can calculate your capital gains tax then you should ask your Tax Office for form CG34).
• In response to vexatious or frivolous applications.
• In response to applications that do not involve genuine points of doubt or difficulty to you or (if you have one) your professional adviser.
• In respect of transactions which, in our view, may have been undertaken with the purpose of avoiding tax.
• In respect of the application of TA 1988, s 703 (which has its own facility for post-transaction rulings).
• In relation to the tax consequences of executing non-charitable trust deeds or settlements, and whether TA 1988, Part XV applies.
• After an enquiry into your self assessment is opened or after the time limit has passed for an officer of the Board to notify you of his or her intention to begin an enquiry.
• Where the period in question is the subject of any other enquiry by the Revenue.

Conclusion

It is possible to end this article on a note of some hope since, even if HMRC have not yet been able to come up with an answer to the seemingly insoluble problems outlined above, at least Professor Hawking found a glimmer of hope in the middle of 2004.

According to New Scientist , 'after nearly 30 years of arguing that a black hole destroys everything that falls into it, Stephen Hawking is saying he was wrong. It seems that black holes may after all allow information within them to escape'. We can only hope that HMRC's new equivalent follows suit in the very near future — or is that merely the stuff of science fiction?

Philip Fisher is employee benefits partner at Chantrey Vellacott DFK. His book, Employee Share Schemes was published by Croner.CCH on 16 December. He can be contacted at pfisher@cvdfk.com .

Issue: 4045 / Categories: Comment & Analysis , HMRC powers , Admin