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KEY POINTS
- Do HMRC want trust or control?
- Favouring formality over an informal approach.
- The importance of proving fraud first.
- Imposing checks on agents.
- Advisers should make their views known.
Last April HMRC issued the consultation document Working with Tax Agents. Readers of my article With us or against us? may remember that I was fairly scathing of the suggestions.
Among the pre-Budget papers were two more on this subject: HMRC’s response to the April consultation and a new consultation, Working with Tax Agents: the Next Stage.
Before looking at these I will mention another relevant factor that has emerged since last April: Dave Hartnett’s Hardman lecture, Tax, Transparency and Trust.
I raise this because I am confused as to what HMRC mean by working with agents. Dave started (and ended) by addressing us as ‘sisters and brothers in tax’.
Later he asked, ‘What can we do together to promote trust in the tax system?’.
He went on: ‘We are interested in establishing a joint body with the professions to look at professional standards across tax practice, public and private’.
Finally he said:
‘Our future strategy for tax agents points to HMRC seeking a common standard of conduct and competence that would allow agents to self-serve through our systems and assume the responsibility for greater compliance on behalf of their clients. There is a great issue of trust here, and I invite all tax advisers here to tell us how we might do this in practice, or whether it is simply impractical.’
I mention Dave’s talk because I am troubled that Working with Tax Agents should have been put forward by HMRC not as a laudable aim in its own right but as part of the department’s powers review. I have no need for powers over my sister and brother.
Why should Dave want new and, it appeared from the April consultation, draconian powers over his sisters and brothers in tax? Indeed, wanting new powers to control me is the antithesis of trusting me. It is the hallmark of distrust.
The answer is that Dave does not want to trust me at all.
He wants wide powers to control what I do and to punish me if I fall short of his expectations. He can then get me to do much of the work currently done by his staff, because this will ensure that I do it under his supervision.
At least I assume that is what is meant by allowing me to self-serve through HMRC’s systems and assume the responsibility for greater compliance on behalf of my clients, which, incidentally, is not something I can recollect ever having asked to do.
I raise this because it colours my approach to the new consultation document. This focuses on three areas:
- disclosure to professional bodies;
- deliberate wrongdoing by agents; and
- high-volume agents.
None of these ought to be controversial, but all of them seem to me to have been presented in a way to provoke controversy.
Consultation? Really?
Before looking at what is proposed I should stress that the more controversial issues raised in April have not been jettisoned. They have simply been put on the back burner; no doubt some, if not all, will be addressed anew in the next few years.
HMRC say that document was ‘an initial high-level consultation intended to raise issues and ask questions rather than propose solutions’. That is certainly not how it read to me.
Nor did the HMRC workshop that I attended in October seem to me much like consultation. HMRC gave no feedback, were not interested in discussing their proposals and seem to have largely rejected the fairly unanimous suggestions that came out of the workshop.
The Revenue appears to be listening but not hearing, and certainly not discussing, which is what consultation was traditionally about.
It ain’t broke, so why fix it?
A good example is what the new document says about disclosure to professional bodies. It notes:
‘Some of the respondents to the consultation pointed to a precedent for a more informal and flexible approach… This was done on a trial basis… the feedback from these approaches was often extremely positive… The overall success of the scheme can be judged by the fact that all of the agents approached were able to improve on a voluntary basis without the need for onward referral to their professional bodies.’
Hurrah! Or perhaps what HMRC are really saying is this:
‘We proved that an informal approach works, so we scrapped it. We therefore need more powers so that we can try a formal approach instead. We’re HMRC. Our motto is, why use something informal that we know works when it is possible that something more formal and that puts us firmly in charge might work too?’
HMRC, however, do not think they need a change in law. They think they ought to take formal steps more often to disclose behaviours to an agent’s professional body.
The probable snag here is that informality works because it is aimed at education; formal reporting is aimed at disciplining wrongdoing. The carrot works, so let’s throw it away and try the stick. That will show agents how much we really believe in mutual trust.
Who regulates who?
Actually the existing powers do not work, so that approach will at least give us a bit of fun when the first judicial review of HMRC’s breach of confidentiality comes to be heard. Commissioners for Revenue and Customs Act 2005, s 29(3) allows HMRC to disclose confidential information to ‘a body which has responsibility for the regulation of a profession’.
The fact is, however, that the Institute of Chartered Accountants in England and Wales does not regulate the accountancy profession. It does not even regulate a segment of it. It does not regulate me at all; it does no more than require me to comply with its ethical code and internal rules. That is far removed from regulation.
Nor do the Chartered Institute of Taxation or the Institute of Indirect Taxation, both of which I am a member, regulate me or, indeed, regulate any ‘profession’.
But, clearly, I have no problem with HMRC letting me know they do not want workable powers in this area, even though I am saddened that they seem to have closed their minds against resurrecting the successful, informal approach that was agreed and approved in 2000 to seek to improve standards.
Not a bad idea
On wrongdoing, I have no problem with HMRC taking new powers to deal with agents who are involved in deliberate wrongdoing. I would much prefer that HMRC prosecute such people, although I understand that the Government has deprived the department of the resources to do this in more
than a handful of cases.
Indeed, I suspect that the entire powers review, and the huge damage that it has done to the relationship between agents and HMRC, is largely down to the Gordon Brown/Alistair Darling pressures for HMRC to operate on an increasingly shrinking shoestring.
Be that as it may, I am unaware of the legislative provision that requires HMRC to ‘police the tax system’.
CRCA 2005, s 5 gives the commissioners responsibility for the ‘collection and management of revenue’, but collection and management are administrative roles, whereas policing, which implies enforcement, is quasi-judicial role that the Act does not thrust upon the commissioners.
Again, I accept that where the commissioners have been starved of funds to fulfil the obligations placed upon them they may have no real option but to seek to thrust their work on to others, such as agents, and then police how we carry out such unwelcome tasks.
What they want
What do HMRC want to do? First, they want to access the working papers of tax agents who have been involved in deliberate wrongdoing. However, they have their own definition of working papers. Have a look at annex B of the document.
There is much there that seems to me to have nothing to do with tax. So, what actually do HMRC want?
I think they desire a new procedure that would require an agent who they suspect of fraud to give them access to his client working papers and his own business records.
This is very different from TMA 1970, s 99, which says that if HMRC prove fraud on one client they can access the working papers of other clients.
This seems reasonable because HMRC will already have proved (on the balance of probabilities) the agent’s involvement in fraud. Section 99 applies only to direct tax, and I would support its extension to indirect tax, but that is not what HMRC want. They want to do away with the need to prove fraud first.
They accept that:
‘It is clearly right that tax agents should be able to attend any part of the application [to the First-tier Tribunal] which considers whether or not their behaviour is deliberate. In a very small number of cases it might be appropriate for HMRC to protect the source of information when seeking access to working papers.’
Hearings in secret
Is this a sufficient safeguard? Under the current law I can attend the whole of the penalty proceedings against me that could trigger the operation of TMA 1970, s 99.
At such proceedings I have the same rights as I would have had I appealed against an assessment. What rights will I have in being able to attend, not the application to the tribunal for access to my working papers and business records, but merely the part (if any) of the application that considers whether or not my behaviour was deliberate?
In considering that question, will the tribunal be able in practice to ignore what HMRC have told them in the part of the hearing from which I have been excluded? I hope so.
Will I have confidence that the tribunal will do that? No. How can I have confidence that a tribunal will ignore what it has been told in secret proceedings from which I have been excluded?
Furthermore, what about that caveat of ‘any part’? Do HMRC envisage there will be cases in which the tribunal will be content to grant an order without even listening to my side of the story?
In his Hardman lecture, Dave Hartnett spoke a lot about transparency, much of which seemed to have little to do with tax. It is an odd relationship that he seeks in which he he expects transparency from agents, but wants to sweep away transparency when it comes to agents’ rights.
I confess that I am scared stiff by the suggestion that if someone were to make an unfounded allegation against me HMRC think that tribunal should exclude me from being allowed to challenge the allegation ‘to protect the source’, and that they should be allowed to destroy my practice (which is likely to be the effect of an order to open up all of my files to HMRC), rather than first have to prove some element of fraud on my part.
This seems to be resurrecting the medieval floating test. This was a trial under which the accused would be accused of witchcraft if she survived being plunged under water; if she drowned it was proof of innocence, albeit coming too late to be rectified.
If HMRC find evidence from my working papers to prosecute me they will have their evidence of fraud. If they do not, my livelihood will have already been destroyed and HMRC’s finding will come too late to rectify the matter.
Under s 99 the department has to face me with my accuser or, more likely, manage without any help from the accuser before the tribunal. In criminal proceedings I am entitled to face my accusers. That seems to me the only fair procedure.
Fraud by any other name
What happens if I am found guilty of deliberate wrongdoing (which seems a curious euphemism for fraud: curious because it downplays the criminality, and I am puzzled why HMRC should want to do that)?
HMRC think there should be a penalty of up to 100% of the tax lost subject to a maximum of £50,000. That seems wildly excessive to me. I have met qualified accountants for whom £50,000 is getting on for two years’ income. Such a person would probably be bankrupted by this kind of penalty.
My concern, however, is that this is not proof to a criminal standard; it is proof to the far lower civil standard. In such circumstances, fairness ought to dictate that a struggling small practitioner should not be subjected to a far higher effective penalty than a wealthy partner in a large firm who behaves in the same way but has the assets to avoid bankruptcy.
In most cases the agent will not have personally benefited from the fraud and, even where he has, the benefit is unlikely to be related to the amount of the tax. Accordingly, I can see no logic in a tax-related penalty.
High volumes of what?
The proposals on high-volume agents are puzzling. This is not an area in which I have experience, so I can comment only with diffidence. Apparently, some agents are submitting high volumes of repayment claims that they know to be unjustified. If so, my view is that such fraudsters should be put out of business.
However, that does not appear to be HMRC’s view.
HMRC want the power to ask the fraudster to carry out specific checks and confirm to them that he has done so. He can then apparently carry on defrauding HMRC, presumably because they will have a note on their file saying the fraudster has confirmed to the department that everything is in order, and that should satisfy the National Audit Office.
If so, I think HMRC underestimate the NAO. More to the point, I think fraudsters ought to be prosecuted; making life a bit more difficult for them is an inadequate remedy.
I am concerned about who is a high-volume agent and what is a knowingly incorrect claim. I know, for example, that there are agents who prepare accounts for a large number of taxi drivers and who estimate the cost of petrol based on the mileage of the cab.
In the context of the average income and profits of a taxi driver that does not seem to me to be an unreasonable method of arriving at the profit. Indeed, it is probably more accurate than looking at lots of petrol receipts and trying to work out whether they all relate to the business.
If HMRC want to insist that such an agent adds up all of the petrol receipts, the cost of doing so will probably force most taxi drivers to prepare their own accounts. I very much doubt that is in the public interest.
It is not just taxi drivers. Many of us include some estimates in preparing accounts. I imagine that high-volume agents have to balance volume against price and, to keep prices low, are forced to adopt reasoned estimates of many expenses.
If that is right, it seems daft to me for HMRC to look for verification; what they ought to look at is the validity of the financial model on which the agent bases his estimates.
Lopsided logic
Indeed, I think that sums up the entire HMRC approach to working with agents. They have identified problems, decided on their own solutions, and then invited comment.
In Dave Hartnett’s world of trust, on the other hand, I think that HMRC would identify the problems and discuss with the professional bodies and other interested parties how we might best work together to find practical ways to resolve them. Sadly, we do not live in that world.
Thus, at the risk of attracting the ire of Taxation’s editor, who may resent paying me twice for the same words, I end this article as I ended my previous one. I encourage readers to download the consultation document and express their views on it, preferably to their professional body if they are a member of one.
Please do not ignore the opportunity.
