Wasted opportunity

KEY POINTS

• Tax agents and HMRC need to work together.
• Figures extracted from old information.
• Tax agents can be cost effective for HMRC.
• HMRC should ascertain which agents have a poor compliance record.
• Possibility of an agent registration system.
   

Those who know me well are aware that I am a very patient man. I accept that I have to be willing to invest time in order to achieve results and that there are often frustrations and setbacks along the way.

Along with many in our profession and in HMRC, I have consistently advocated the benefits of working together with HMRC to deliver a more efficient tax system.

There have certainly been some frustrations and setbacks on that front in recent years, but they reinforce rather than diminish the importance of continuing to engage or the commitment to do so.

I therefore had high hopes for the National Audit Office (NAO) report ‘Engaging with tax agents’, published on 13 October and knew that the team working on the report understood the importance and value of that relationship. I suspect that you hear a ‘but’ coming.

You do.

Please forgive me if the next few paragraphs sound a little out of character, but if someone suggested that you should advise a client to take a serious management decision based on figures five years old, extracted from their accounting records without reference to the nominal ledger codes and looking only at the debits while ignoring the credits, would you perhaps be just a little uneasy about their methodology?

Yes, so would I.

Unexpected conclusion

That is why I am more than uneasy about the conclusion drawn by the National Audit Office from an examination of a sample of around 5,000 random HMRC enquiry cases from 2004/05 in which they have considered only those where tax underpayments were identified, distinguishing between represented taxpayers and unrepresented taxpayers (but not between taxpayers who are represented by a professionally qualified agent and taxpayers who are otherwise represented).

The conclusion drawn by the NAO is that:

‘self assessment income tax returns filed by represented taxpayers are more likely to have under declarations of tax than returns filed by non represented taxpayers’ and that the under declarations for self assessed income tax ‘could be more than £2.6 billion’.

Smaller firms are, it is suggested, associated with higher rates of under declared self assessed income tax than the largest 100 firms.

But based on the methodology adopted, I cannot see these as safe or credible conclusions.

Neither can anyone I have spoken to outside the NAO. It effectively questions agents’ professionalism and has the potential to seriously undermine trust between our profession and HMRC, trust that is vital to the effective running of the UK tax system.

Many will read the NAO’s conclusion as saying that you would do better to submit your own tax return than use a professional.

That is precisely the way journalists I spoke to on the day of publication had read it (the Financial Times’ headline was ‘NAO criticises tax agents’ and the Guardian’s ‘Taxpayers with accountants get their returns wrong more often’).

It is the way that every tax adviser and accountant I have spoken to has read it. It is the way the general public and politicians will read it.

I am sure that, at this point, the NAO would say ‘ah, but that is not what we are saying’.

Perhaps so, but with respect it was pretty obvious that it was what the report would be perceived as saying and I find it hard to comprehend why the NAO apparently did not understand that, nor indeed the effect it would have.

To make matters worse, the point was given prominence in the NAO’s press release.

This is despite the fact that, according to the report, the average tax liabilities of unrepresented taxpayers were only £1,000, less than 7.5% of the average tax liabilities of represented agents: the words chalk and cheese come to mind.

The press release is supremely unhelpful and exceedingly counterproductive. I simply cannot understand why the NAO chose to do it.

Preferred action

What do I think they should have done?

I suggest that they should at least have looked at overpayments as well as underpayments and that they should have segmented the agent population.

This would have given a more credible idea of the actual net tax loss (or gain) and would have identified where the problem, if there really is one, actually lies.

Then we could have sought ways to solve it. If they could not properly segment the agent population from the information available, they should have waited until they could.

If the NAO had in fact found, from a properly segmented analysis of the agent population and taking account of both over and under declarations, that a particular section was responsible for systematic underdeclarations, I would have been among the first to say that the appropriate house should be put in order.

All I can currently say is that the NAO may potentially have unearthed a problem but that we don’t actually know what it is. And if we don’t know what it is then we can’t resolve it.

The NAO does acknowledge that more analysis is needed on the reasons but, again, it would have been better to do this analysis before attempting to draw conclusions, even if that involved delay.

Casting a shadow

If I sound just a little angry, it is because I am.

I am angry because this single element of the report overshadows many sensible observations and recommendations and because I believe that it will be counterproductive in efforts to achieve something that is in the best interests of HMRC, agents and taxpayers: effective and efficient tax administration founded on a high degree of mutual trust and an adherence to high standards.

Many people within the profession and within HMRC have invested – and will continue to invest - massive amounts of time and effort in trying to achieve these goals. 

The tragedy is that the rest of the report actually contains some pretty sensible stuff.

So rather than dwell further on the counterproductive element, let’s move on to the other findings and recommendations.

Working with agents

Right at the beginning of the report, there is a very welcome acknowledgement that HMRC ‘recognises the importance of tax agents’ and that ‘tax agents can have a positive effect on tax compliance’.

It goes on to say ‘it is possible that without the intervention of tax agents, the level of non compliance would be higher’.

As most professional tax agents have hundreds of clients, it is ‘clearly efficient for HMRC to engage with intermediaries’. The NAO also, reassuringly, has ‘no evidence that tax agents are supporting non compliance’.

These comments are welcome, positive and are entirely consistent with the conclusions of the Organisation for Economic Co-operation and Development’s ‘Study into the role of tax intermediaries’ 2008.

Agents incidentally are defined in the report as those authorised and paid to act on another’s behalf in their dealings with HMRC.

The agent population in the UK is estimated at around 43,000, of whom 70% are members of a professional body.

The report sets out various initiatives HMRC has introduced to work more effectively with agents, including dedicated telephone lines, agent account managers, agent toolkits, joint learning initiatives, the Compliance Reform Forum and Working Together.

Agents told the NAO, however, that issues such as delays in processing PAYE code changes, the quality of technical advice and response times were current causes for concern and that service standards have fallen since the merger of the Inland Revenue and Customs & Excise in 2005.

The agent authorisation (64-8) process was cited as a cause of particular frustration. Online filing on the other hand was rightly held up as a notable success story with 89% of agents filing tax returns online in 2008/09 compared with 54% in 2007/08.

This compared with only 51% of unrepresented taxpayers and saved HMRC significant processing costs. Engaging with agents can clearly save the department money.

The NAO considers that HMRC could save even more by reducing the cost of dealing with represented taxpayers and, while noting that HMRC does not separately identify the costs of working with tax agents, estimates that the department spends around £215 million each year on these interactions.

It acknowledges however that the department would probably incur most of these costs and probably more if it had to deal direct with the individual taxpayers.

The NAO says that HMRC could reduce post from agents – costing the department an estimated £18 million a year – by dealing with agents’ letters more quickly to avoid the need for agents to chase for replies.

It also advocates encouraging agents to make greater use of existing web-based services or providing enhanced electronic services such as structured e-mail, self-serve agent authorisation and even self-serve PAYE coding amendment for clients, something the ICAEW has been advocating for some time.

Again, these are all welcome and eminently sensible suggestions.

I am particularly pleased to see the NAO advocating close working between HMRC and the agent community to design new systems and services that would lead to efficiencies for both parties, something that has been done with great effect already through the Working Together E Group and the Carter Agent Steering Group. 

Know your agent

The study highlights a fact that is perhaps surprising: HMRC have little information on whether individual tax agents are associated with higher or lower levels of compliance.

This lack of data means that the department cannot tailor its approach to agents. It also means that neither HMRC nor the NAO can identify agents who may have worrying client compliance patterns.

I agree with the NAO that this is an area where HMRC should invest time and resource. Nothing has really replaced the mythical (or was it?) District Inspector’s black book, since the effective demise of the district structure.

It is about time that something did.

I have no problem with HMRC risk assessing agents based on any reasonable measure.

Risk assessment is a powerful tool that HMRC need to deploy effectively in order to manage the UK’s tax system. Competent agents, i.e. the vast majority, could be largely left alone.

The NAO points out that the Australian Tax Office has successfully used risk profiling to target agents with clients displaying a pattern of high risk behaviour and to achieve a reduction in non-compliance.

It also says that HMRC have increased the levels of under-declared tax recovered from large businesses corporation tax cases by focusing resources on higher risk cases. The NAO recommends that HMRC should:

• make the case for investment to improve data systems;
• establish a system for regularly collecting and monitoring compliance data and use this to target interventions according to the track record of each agent; and
• measure the impact of risk based interventions in terms of additional tax collected.

These recommendations seem eminently sensible.

I also welcome the recommendation that HMRC should provide support to agents experiencing difficulties and provide feedback on agents’ compliance records rather than just concentrating on sanctions.

While a stick is sometimes necessary, a carrot is the better approach.

A new strategy

Finally the report notes that HMRC is developing a new strategy for dealing with, perhaps engaging with would sound better, agents.

This will, it appears, segment the agent community, distinguishing between non-profit, friends and family and paid tax agents.

HMRC do not currently impose any conditions on firms or individuals wishing to work as tax agents, whereas some countries operate agent registration schemes, potentially requiring them to meet minimum requirements if they wish to represent a large number of clients or access ‘self service’ facilities.

This idea has surfaced periodically (Lord Carter suggested it in his 2006 report and it was again floated in the 2009 Working with Tax Agents consultation document) but has previously been discounted on grounds of cost and practicality.

HMRC are apparently again considering the idea. Registration could give increased rights and access including facilities to amend tax codes and manage payments more effectively.

HMRC would create a knowledge base so that it could tailor its interaction with a particular agent based on the agent’s performance.

To conclude

Overall this report makes many sensible recommendations, says many good things about the contribution agents make to the operation of the UK tax system and highlights some of the genuine concerns agents have about HMRC service standards.

It advocates a joint approach which makes obvious sense.

It recommends that HMRC should work closely with the tax agent community to benefit from our views and ideas and to gain commitment for change. In short it recommends working together: I’m all for that.

But for the life of me I cannot understand why the NAO chose to include, especially so prominently, something that it must have realised would be far more attractive to journalists than all of the sensible stuff.

What a wasted opportunity.

Paul Aplin OBE FCA CTA(Fellow) is a partner with AC Mole & Sons and chairman of the technical committee of the ICAEW Tax Faculty. The views expressed in this article are his own.

Issue: 4277 / Categories: Comment & Analysis , Admin