Less is more

KEY POINTS

• Setting out the principles of good regulation.
• Changing HMRC’s regulatory culture.
• Balancing risk and regulation.
• The challenges of reducing administrative burdens.
• Examples of good and bad practice.

In May each year the Chartered Institute of Taxation elects a new president at its annual general meeting.

The meeting is immediately followed by the CTA address where the new president invites a guest speaker who will give a presentation on a chosen subject.

This year’s president is Andrew Hubbard and he invited Teresa Graham, chairman of HMRC’s Administrative Burdens Advisory Board (ABAB) to speak about her experiences in deregulation and better regulation and the impact that this has on businesses, particularly the smaller ones.

Teresa started with a potted history of ABAB. This group had been established following the report, Regulation – Less is More, which she had co-authored as deputy chair of the Better Regulation Commission.

In fact, Gordon Brown, as the then Chancellor, had exempted HMRC from the report; nevertheless, the department voluntarily set itself the targets of a 10% reduction in the forms and returns businesses had to fill in and a 15% reduction in audits and inspections by March 2011, aiming to save £358 million.

Dave Hartnett then invited Teresa to chair ABAB and she stressed that the only target that the board is particularly interested in is the one that it set: ‘to make a noticeable difference’.

Teresa provided a potted history of ‘the war on administrative burdens’, noting that in 1979 the Conservative government had hopes of reducing regulation: ‘there was some regulatory topiary but the legislative leylandii continued to grow’.

She acknowledged that ‘well-designed regulation can drive up standards and regulation can be good for consumers, business and the economy… but there is no such thing as cost-free regulation and one person’s protection can be another’s burden.

'The challenge for government is to put in place mechanisms to ensure that new regulatory proposals are really necessary and will not have unintended consequences or impose avoidable burdens on its stakeholders.'

Five principles of good regulation

Teresa set out five principles of good regulation.

• Proportionality. Regulators should only intervene when necessary. Remedies should be appropriate to the risk posed, and costs should be identified and minimised.
• Accountability. Regulators must be able to justify the decisions they take and they should expect to be subject to public scrutiny.
• Consistency. Government rules and standards must be joined up and implemented fairly.
• Transparency. Regulators should be open and keep regulations simple and user-friendly.
• Targeting. Regulation should be focused on the problem and aim to minimise any side effects and avoid any unintended consequences.

These principles should act as a check to the regulatory instincts of Whitehall. Impact assessments (IAs) also had a role to play and Teresa suggested that the CIOT might like to review some previous IAs to see how accurate the cost/benefits had proved to be.

She also felt that a culture change would be needed before government can be persuaded that regulation is not always the best way of achieving its policy objectives.

This is particularly the case when regulation is the knee-jerk response to public demands – say, via the Daily Mail – that something ‘must never be allowed to happen again’.

Risk and regulation

Perhaps the first step in reducing regulations is to work out why there are so many. Sir David Arculus, a former chairman of the Better Regulation Commission, had described bad regulations as ‘being like moles on the lawn. It is futile to chase around armed with a spade, hoping to hit them on the head the moment they surface.

'While you are dealing with one, a dozen more are appearing behind your back. The best way to stop bad regulation – and moles – is to dig down to the root of the problem.'

The commission concluded that regulation is a product of the way society perceives and responds to risk, but it questioned whether it was possible or desirable to control every risk in life.

‘The law of diminishing returns suggests that, the smaller and more remote a risk, the greater the cost of eradicating it. There is a point beyond which the costs to society outweigh any benefit.’

Teresa was concerned at the pernicious effect of regulation in eroding civil liberties and undermining basic societal principles such as ‘buyer beware’ and relationships based on trust rather than suspicion.

‘Regulation appears to be predicated on the demeaning assumption that all consumers are feckless, all workers are careless and all businesses are polluters.’

She was also concerned that personal responsibility was being eroded and people are drawn into a false sense of security by assuming that everything risky has been regulated and thus everything else must be safe because otherwise it would have been regulated.

The work of ABAB

The members of ABAB come from business as well as practice and aim to bring a business perspective to the analysis of the administrative burdens of tax on business.

They want to focus on the irritations in the tax system, prioritise areas for action, act as a sounding board in developing solutions, help in communications with business and monitor HMRC’s progress.

Teresa had five main priorities:

• To make a difference. Looking at the ‘top ten’ irritants as reported by businesses, even if they are not the most costly, should get a positive response. Rather than, say, simply reducing the number of questions on a form to result in a slightly less long form, a better approach would be to simplify an area, such as car benefits, that nobody – including HMRC staff – gets right.
• To achieve a net reduction in administrative burdens.
• To make proposals that are credible, ambitious and imaginative. ‘We need to think outside the box and work with our constituency contacts to implement what we must in the least burdensome way.’
• To help change the deep-rooted regulatory culture that exists at the moment. ‘I want to see a willingness to challenge the tyranny of the status quo and to strive for solutions beyond the predictable.’
• To share ideas. It is essential to ensure that deregulatory ideas resulting from the work of ABAB, whether directly or sourced through individuals’ members’ networks, are shared with HMRC and HM Treasury.

To facilitate this, Teresa recognises that the ABAB board ‘needs to understand HMRC’s appetite for risk and how best it can loosen reins while ensuring it maximises the tax take’.

Unfortunately, Teresa found that HMRC’s approach to working with ABAB was met with rather different responses.

‘So what did my board find when it started its work with HMRC?

• a reluctance to engage in the agenda and with us;
• we’ve always done it that way;
• we’ve always collected that information;
• a tendency to blame the Treasury for inaction by hiding behind policy arguments especially whenever we were getting close to a win;
• a “can’t do” approach to the simplification agenda;
• a poor understanding of risk and its management;
• a lack of understanding of what business needs: certainty, safer and timely dialogue, commercial understanding, planned approach to change, no tinkering, clear and simple guidance, getting it right first time, sufficient simplification so that it has the option to engage agents or do it themselves.’

To counter these attitudes, HMRC introduced ‘challenge panels’. These challenge key HMRC directorates to make a proportionate contribution to the targets from their area of responsibility.

Because HMRC may be too close to the problems to see them, ABAB has a key role in feeding the challenge panels with external ideas.

Teresa is happy that the panels have started to rebut HMRC’s previous lines of thought and will not tolerate a ‘can’t do’ attitude and will persist in identifying sufficient initiatives to meet the targets.

Getting it

Teresa has found that HMRC have moved away from their previous indifference.

Her ‘overall summary to date’ is that ‘some directors have “got it” and are embedding burden awareness into the daily lives of their staff; one or two directors still haven’t “got it”, and most directors are “getting it”’.

As a reflection of the work that has been done so far, the National Audit Office cited ABAB as a model of effective and good practice in its report, The Administrative Burdens Reduction Programme 2008.

So what has ABAB helped achieve to date and what has disappointed it? Teresa gave four examples where she felt that work had gone well.

• Income shifting: rather than looking at the rights or wrongs of this, ABAB pointed out the practical consequences of the policy framework that had been adopted by HMRC.
• Payrolling of benefits: opinions are polarised, but ABAB ensured that the issue was properly debated.
• Letter writing and communications: HMRC now have a much improved set of templates.
• Annual investment allowance: ABAB pushed for a targeted set of relatively easily applied rules.

Conversely, there were subjects that might be labelled ‘could do better’. As examples, ABAB was concerned at the complexity of the IBAs regime, which has now been abolished.

Similarly, many capital gains tax complexities were swept away when the 18% rate came in.

However, the introduction of the new complexities of entrepreneurs’ relief showed that people are prepared to put up with a higher administrative burden if it leads to lower tax.

Understanding HMRC

Naturally, as a means to an end, it is important that Teresa understands HMRC’s attitude to their customers. Having attended one of their customer focus workshops, she found that some, shall we say, less than favourable terminology was being used.

‘Given that HMRC’s vision is to put the customer at the heart of everything they do, I’d say they had a bit of a challenge ahead of them,’ noted Teresa.

That said, this attitude might be acceptable on the basis that HMRC should be ‘giving grief to the “won’ts” and the “chancers” and leaving everyone else alone’. This is assuming that it’s the former categories that were being described by officers!

To put things into perspective, in Teresa’s experience of reports on HMRC attitudes from her contacts, the department is generally seen as helpful and an example of good practice.

She also noted that many customers want to seek help directly from the department; so where does this leave tax advisers?

In her opinion, the ones who advise their clients to deal directly with HMRC when it is in their interest to do so, and who only bill them for work when the client needs their help, should be in a stronger position.

She had little sympathy for the agents who lose business as a result of scaring their clients into only dealing with HMRC via themselves.

Teresa’s main concern was that smaller businesses often had just as much regulation to deal with as larger ones, but did not have the corresponding resources to do this.

She had various suggestions on how HMRC could help here.

• Simpler legislation and helpsheets.
• Taking the fear out of HMRC inspections – possibly helped by agents not instilling fear of these into their clients.
• Providing certainty.
• Knowing the customer– for example, making sure that guidance was suited to its target audience.
• Better use of the Business Link website.

Final words of advice

To conclude, Teresa suggested that HMRC should focus on the risks and respond proportionately, reassure taxpayers about what’s happening, make clear and targeted data requests (no fishing), take timely action, show empathy with their customers, be professional, act as a joined-up organisation, and provide education and certainty.

If they do this, the rewards should be that the department makes more effective use of time, exhibits better commercial awareness, helps business compete on a level playing field, and makes the UK economy more competitive.

Hopefully, these are aims that all those involved in taxation should be in favour of.

Issue: 4209 / Categories: Comment & Analysis , HMRC powers , Admin