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KEY POINTS
- HMRC’s duty regarding the collection of tax.
- Who ultimately decides how much tax is payable?
- Balancing the interests of HMRC and taxpayers.
- The role of the professional tax adviser.
- Ensuring justice in tax administration.
Tax is being cast as the accidental hero in the crisis that is the global financial and economic meltdown.
Not that tax is ever far from the news. It has always mattered: arguments over it can change governments, alter the way we are governed, and even give birth to nations.
Now it enters stage left as a fiscal stimulus, a character actor performing a Keynesian kick-start to an economic recovery.
A temporary cut in VAT was designed to be a helping hand in staving off the worst of the downturn; abolition of tax on savings interest is mooted to encourage us to become (once we have finished spending) a saving society.
During the past twenty-five years, tax law has grown ever more complex.
So, while there is always likely to be an argument between political parties over tax rates, there is consensus over the need to make the system work better for all: taxpayer, tax administrator and tax adviser.
The issues are not about to go away. Tax matters; if we can get the fundamentals right, with better tax legislation and better administration, then tax will not only be the hero during the dark economic times, but for every day.
Why do we need taxes?
As Wendell Holmes famously, said: ‘Taxes are the price we pay for a civilised society’.
That means tax has to be collected. In the UK that task falls to HMRC. Their duty is to collect the tax that is owed.
And what can be wrong with that – without government there is no civil society, no peace and no justice.
There is good evidence from the third world that what helps establish better government and societies is a stable tax system and the emergence of a taxpaying middle class who have a vested interest in seeing that their ‘tax dollars’ are well spent.
And, sadly, we hear too often of failed or failing states such as Somalia or Afghanistan where ordinary people find it difficult to live their lives in peace and safety.
They cannot begin to imagine what it would be like to enjoy the public services we have in the developed world. We take these services for granted and focus on their efficiency, effectiveness and cost.
A characteristic of a failing state is that it cannot raise money from its citizens to protect and support them. However much people in the UK (or other countries) resent ‘the taxman’, it is worth remembering that without a well-functioning tax system, and without an efficient and honest tax administrator at its heart, we would not live in the society we do.
Is there a better way?
If we concede that good tax administration underpins the freedoms we enjoy, we should still debate how the tax administrator goes about its business.
HMRC have recently been discussing (and have recently published) their ‘purpose’. They say that they are tasked to: ‘make sure that the money is available to fund the UK’s public services’.
At first glance, who would contest that? It is certainly a fact that HMRC’s function involves performing the role set by government of collecting revenue.
But hang on a minute. Whose job is it to decide that ‘the money is available’? Doesn’t parliament have some role in there?
HMRC don’t, I’m sure, set themselves up to be a latter-day Morton (Chancellor to Henry VII and of ‘fork’ fame – see Box).
So surely that purpose should have reference to the authority given by parliament, and not hint at something that could be taken, one day, as carte blanche to collect regardless.
Much has happened in parliament to erode the power of the legislature against the executive. The result of losing such checks and balances is to have an arm of the executive that potentially lacks restraint or accountability.
This wider debate has gone on for many decades and in areas well beyond taxation. It is for constitutional historians to draw their conclusions over the rights and wrongs of it all.
What history does tell us, is that when checks and balances are ineffective for tax and its administration, the consequences can be dramatic.
We saw this when the barons rose up against King John, when Wat Tyler objected to the original poll tax and when Bostonians decided that, however much they liked a cup of tea, it would be better to throw the chests of tea in the sea than pay tax without representation.
So, fairly obviously, there have to be controls on the tax authority in their quest to get the most out of that accidental hero, tax. And our current civil service do take safeguards seriously.
There has been extensive discussion around this and the proposals for HMRC powers. There is an element here of that old question: who guards the guards?
Quis (or quod?) custodiet?
Taking safeguards seriously is one thing; letting the guards decide the safeguards is another. Tax affects everyone and the danger of giving an arm of the government more power is that it begins to believe that the ‘ends justify the means’.
The consequence of that is resentment against tax itself as opposed to against the methods of tax collection. It needs to be borne in mind that, for all the talk about avoidance and evasion in the UK, we have a pretty good attitude here to tax – the great majority, whilst not wanting to pay more tax than they have to, basically want to comply as simply and painlessly as possible and then just get on with life.
So, while ‘taxes are the price of a civilised society’, any dilution of the principles of the rule of law when collecting tax will undermine the very civilisation it is meant to foster and protect.
That is why it is so important that the Government has decided to create a forum that will oversee the implementation of the new HMRC powers.
How much power?
Officials argue, understandably, that they need significant powers to pursue tax evaders.
But what criteria can we use to judge whether they are asking for too much power? Should it be a concern that the powers necessary to police the evader are also used to check on the fundamentally compliant?
It is easy to evoke past battles over civil liberties and ignore the challenge of collecting tax in a world where money flashes around the globe at the touch of a button, borders are porous and people are mobile, while the demand of the public for services and active government continues.
The other side to this is that every day, thousands of HMRC staff deal with tens of thousands of taxpayers.
Every interaction has the potential for justice or injustice. What do we rely upon to ensure that the tax collected is what parliament required and that it is collected in the manner which parliament prescribed? Can we rely on the courts?
Yes, but only up to a point, m’lud. Legal processes are slow and expensive. They are often a disproportionate response to what may simply be differences of view between taxpayers and tax authorities.
This is why the commitment to a HMRC charter – crucially with its foundation in statute – is a vital step in making sure that things stay in a proper balance.
Another useful step is the establishment of the HMRC review process – the option of having a separate HMRC person or team look at a decision, rather than take a dispute straight into the tribunal system.
Coupled with the Adjudicator function (though it is time for that position to be constituted properly independently of HMRC) and of course our fully independent judiciary, we do have a lot of safeguards.
But the concern remains that in the powers arena HMRC, if not completely judge, jury and expropriator on its own, have a lot of discretion.
These concerns have been expressed publicly of late and it behoves our authority to take note and make sure that in doing the (difficult and challenging) job they are tasked with, they make sure they strive to keep a basis of goodwill between themselves and taxpayers.
Where are the advisers?
In practice, the tax system relies on tax advisers – members of the CIOT and other professional bodies – to work with their clients and HMRC to ensure that the tax voted by parliament is correctly assessed and collected.
We do, after all, have a tax system that is based on self assessment or, if you prefer it, privatisation.
Without taxpayers and their agents putting a lot of work in, the tax system would not function – or government would have to spend a lot more to make sure that the money continued to flow in.
Some of the rhetoric of three to five years ago branded tax advisers as part of the problem, conniving with their clients to avoid lawful taxes.
The OECD took this on board and the Seoul Declaration set in motion a study to look at the perceived problem and ways that countries could deal with it.
We’ve now had the OECD’s Cape Town Report, largely compiled by HMRC, which acknowledges that tax advisers are more part of the solution than part of the problem.
HMRC have certainly come to appreciate the benefit of having quality tax advisers in place and are working more towards the ‘enhanced relationship’ with them.
The questions we should ask are: can this extend to concrete benefits for advisers – or more correctly their clients – who are required to make sure there is full and open disclosure?
Who makes sure that only valid filing positions are taken (which isn’t the same as saying that everything has to be in accordance with HMRC’s positions on issues)?
And, in turn, if HMRC have problems with an adviser’s behaviour, will they take that up with the professional body that imposes standards on its members, in the same way as advisers will want to use the charter to help maintain standards of performance at HMRC?
Professional and courageous
A modern, open, democratic state needs taxes and an efficient and honest tax administrator, but consider for a moment a world without tax advisers who were independent, professional and strong enough to speak up for their clients.
Who would a taxpayer go to for advice on his tax liabilities – HMRC say that their job is to ‘make sure that the money is available to fund the UK’s public services’.
Yes, but what do I have to pay? – asks the worried citizen.
States which cannot fund themselves and therefore protect their citizens are described as failing. States that can fund themselves without the consent of their citizens are authoritarian at best and dictatorships at worst.
Tax advisers enable taxpayers to pay the tax that they have consented to pay through the parliament which represents them.
It is not for HMRC or any tax authority in a democracy to be the final judge of taxpayers’ tax liabilities – that is for the courts and parliament.
An independent, professional and courageous community of tax advisers is one of the bulwarks of a modern democracy and this is summarised in the motto of the CIOT – ‘Justice between citizen and state’.
Peter Fanning is chief executive of the Chartered Institute of Taxation
