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KEY POINTS
- Will HMRC’s staff reductions lead to tax reductions as a consequence?
- Service failures and a lack of training in the department.
- What will be the result of the reduction in investigations?
- What additional tax might another 20,000 HMRC officers raise?
- Is it time for ‘the amnesty to end all amnesties’?
- A need to reinvigorate HMRC and the tax system.
At the time of writing, between the second and third election debates, the pundits are predicting a three-horse race at the general election with no real certainty as to who w
ill be Prime Minister, let alone Chancellor of the Exchequer.
In any event, I wish to bless the new Chancellor with my congratulations and, as a bonus, a free gift that might be worth somewhere in the region of £20 billion.
Even in the current economic crisis, it is hoped that Alistair or George or Vince – or whomever else – will regard that sum as worth taking a little trouble to earn.
Cutting off your nose…
For decades now, there has been an imperative on the public sector generally and the Inland Revenue (latterly HMRC) to cut costs, seemingly almost regardless of the consequences.
Soon, human capital – as people have become known – might well be dispensed with completely in the public sector, in the same way it seems that both London Underground and the library service have found ways of operating without human intercession at their respective sharp ends.
But while improving efficiency is undoubtedly a commendable goal, some might wonder whether in certain circumstances the principle of cost cutting at all costs can be taken way too far.
The HMRC Departmental Report published in 2009 shows that permanent staff numbers were cut from 96,000 in 2003/04 to 78,000 if the 2009/10 plans were correct. In fact, the business plan for 2010/11 suggests that the cuts were even more successful, with fewer than 70,000 employees in place, and that this was to be reduced to 64,000 by March 2011.
This is still only the tip of the iceberg, as the latest projections indicate a further 20% reduction by 2014.
In the case of HMRC, it would not be too far fetched to conclude that if we continue on the current road of reducing numbers by significant percentages each year, then before too long every member of staff will have been dispensed with and, possibly as a consequence, every computer will have been closed down.
That might raise cheers from some, but will do little for the balance of payments.
If that is achieved, then the new Chancellor will be able to stand up and boast that Civil Service expenditure in this expensive area has been cut by a further few billion pounds.
However, without wishing to sound too radical, there are occasions where it is well worth spending at least a little bit of money to gain many times the amount invested.
Service failures
Generally, government statistics tend towards meaninglessness but recently, when it was announced that in a single year HMRC failed to answer 40 million telephone calls, this really struck home with this writer, especially having spent so much time frustratingly waiting at the end of a seemingly dead phone line.
With the best will in the world, the staff answering the 60 million calls where the phone was actually picked up (typically after a long wait according to the statistics) are often not adequately trained for the task of assisting with anything other than the most basic of questions.
Does nobody stop to wonder whether among these 100 million calls, there might not be quite a large number offering those with the appropriate training an opportunity to recover taxes that are not currently being accounted for correctly?
Statistical evidence is one thing, but the anecdotal can be equally powerful on occasion. HMRC cuts mean that rationalisations take place with increasing rapidity. On many occasions, this leads to dissatisfaction among members of staff.
That is bad enough, but it gets worse because job cuts leave a position in which too few people remain who are adequately qualified to cover high-powered roles when experts retire or decide to take up a job in the outside world, typically as gamekeepers turned poachers in the accountancy profession.
Nowadays, if one is lucky enough to get into a conversation with a senior tax inspector, it does not take long for them to bemoan the current state of affairs.
Unless PKF is unrepresentative, it has become apparent that far fewer HMRC PAYE audits are taking place in various major conurbations now than would have been the case ten or 20 years ago and there seems little doubt that similar reductions will have applied across the tax net, giving defaulters a degree of comfort in their assumptions of probable safety in the realm of tax avoidance.
It is very good to know that HMRC now take a targeted approach and there is little doubt that if their targets are well chosen, the amount of money that they are able to recover from each audit or investigation will be far higher than if they just use a scattergun approach.
Even so, having a system where paying the correct amount of tax has become optional for many does not seem acceptable.
Some numbers
One imagines that the new Chancellor, whatever his political affiliations, will understand simple economics. If that is the case, he (or, who knows, perhaps she) might wish to consider a radical new approach to fiscal efficiency.
It is therefore proposed that, as part of the brave new world of 21st century New Labour/Conservative/LibDem/coalition government, there is a major volte-face. A demonstration will require a few fiscal assumptions, but the results are impressive.
First, it does not seem unreasonable to suggest that if HMRC increase the number of well-trained investigators in their efforts to recover tax, each one will make ten times his cost with no great effort.
That is bound to apply up to a point and at the moment, let us take the view that another 20,000 officers with an average cost of £35,000 could do exactly this.
A little bit of not-very-higher mathematics might suggest that this would lead to a recovery of £7 billion each year at a cost of £700 million.
There is no reason to believe that these levels of recovery could not be repeated for at least a three-year period, by which time there has to be at least the possibility that the country might be far out of recession, in no small part as a direct result of taking adventurous actions of this type.
Philosophies and amnesties
In other countries, and across other industries, it is generally accepted that if you want people to abide by rules and regulations, you either need to control them very closely or have efficient auditing processes to put the fear of retribution into their hearts.
Imagine what Premier League footballers might do if there were no referee or second, third, fourth and fifth officials plus millions watching on television. Similarly, it appears to be globally accepted that most transport systems require electronic gates to protect revenues, if fewer inspectors, these days.
One direct consequence of taking action of this type would be to allow the extension of the amnesty process. At present, HMRC are on record as stating that while they are happy to pursue more targeted amnesties, following the regimes already applied for those investing in Liechtenstein or working as doctors, there are simply not the resources available to implement a national amnesty for all taxpayers.
However, if everybody in the country knew that they had six months to declare all back taxes with a relatively benign regime, let us say only a six-year recovery plus a fixed 10% penalty, it is quite terrifying to imagine how much the Exchequer would bring in. It may well be that the figures indicated at the beginning of this article could be seen to be a mere drop in the ocean.
And if, as part of that amnesty, it was made known by the government that anybody discovered as a defaulter after the end of the six-month period would not only get ‘the book’ thrown at them, but also face a 20-year recovery as well as an unmitigated fixed penalty of 100% of underpaid taxes, what would you do?
Of course, one has to say that if this new amnesty was given as little publicity as those to date, what you actually would do is be completely unaware of it, unless you were an avid reader of the tax press.
Therefore, as part of this new spend-to-save investment, it might be wise for HMRC to put aside a relatively modest budget to let people know about what really could be the ‘amnesty to end all amnesties’.
Fairness
Setting aside the fiscal benefits for a moment, there is also an overarching requirement in a civilised society for fairness in the operation of its tax system. This means that every taxpayer has the right to believe that if he complies with his obligations, he will be in the same position as every other taxpayer.
There is a real risk that if a suspicion begins to creep in that certain elements of taxation have become largely voluntary, then those who do pay the tax will, not unreasonably, feel deeply resentful and suspicious towards their fellows. And some might even come to the conclusion that the only way to ensure fairness is to neglect their own responsibilities as well.
Once again, the way to override this risk is to arm the tax authorities with the weapons that they require in order to operate fairly and efficiently for the benefit of us all.
Conclusion
It is sad to be accused of being cynical, but on occasions that does happen to the writer. While some of the ideas in this article might turn out to make rather less money than is proposed, there seems to be a strong possibility that others could bring in more.
Therefore, it would be a brave new Chancellor who would wish to suggest that the country would be worse off by taking the kind of steps put forward rather than cutting even more highly trained and highly experienced staff and replacing them with computers and barely-trained call centre staff.
In conclusion, after offering my congratulations, I issue a challenge to the Chancellor, whichever party or parties you may be representing in the new government.
Reinvigorate HMRC and you could become the superhero that you always imagined you would be when you entered political life all those years ago.
Philip Fisher heads the employment tax and rewards team at PKF(UK)LLP and can be contacted via email. The views in this article are his own and do not necessarily represent those of PKF(UK)LLP.
