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KEY POINTS
- The TPG meets to discuss topical matters under the Chatham House rule.
- Is there a crisis of trust between the tax profession and authorities?
- Are things getting better and how bad is morale in HMRC?
- The business records check programme seems a microcosm of the professions concerns.
- Can the profession help HMRC address the problems highlighted by the Treasury Committee report?
As tax professionals, I can probably take it for granted that we all like to talk about tax, tax law, tax administration and the latest tax developments: all things tax, then.
The Tolley Tax Practitioners’ Group (TPG), which meets at Halsbury House, is a forum to discuss tax-related matters and the fact that those who are working in the higher echelons of our business are invited to attend hopefully means that thoughts, comments and suggestions that arise will be reflected upon by those who have influence on the operation of the tax system.
The Chatham House rule applied, so comments are unattributed, allowing those attending to talk without fear or favour.
The latest TPG meeting was held at 6pm at Halsbury House on Tuesday 20 September 2011, and the aim of the session was to concentrate on the relationship of tax professionals with HMRC and, regrettably, how this has deteriorated over the years.
This subject – and the level of service that is on offer from the department – arose out of a previous TPG meeting and the fact that this is of major importance to practitioners is perhaps evidenced by the following entry on the CIOT website:
‘Anthony Thomas, the... president of the Chartered Institute of Taxation (CIOT), has set the tone for his presidency with a speech emphasising the importance of trust between the public and their tax advisers on the one hand, and HMRC on the other.
‘He said: “A fair tax system requires respect on both sides. HMRC are at risk of damaging the trust that has been built up over centuries between tax payers and tax collectors”.’
Opening remarks
Setting the scene, the opening remarks of the meeting were that trust between taxpayers and HMRC is in severe difficulty and balanced on a wire. A government department that had been trusted is becoming mistrusted and feared and it was suggested that this would take years to correct.
A factor that is perhaps more significant to the smooth running of the administration of the tax system is that the level of trust between tax professionals and HMRC is also at risk. It was suggested that we have a tax authority that:
- introduces de facto secondary legislation (e.g. press releases, technical briefs, statements of practice, etc.) without proper Parliamentary scrutiny;
- states that it wants collaboration to be open, yet does not allow enough time to consider its proposals and sometimes appears to have already decided in advance what it wants the outcome to be; the business records check consultation [see below] being suggested as a case in point;
- seeks more power without demonstrating why its existing powers are not appropriate (e.g. data-gathering); and
- has significant operational difficulties, as shown in the recent Treasury Committee report, which highlighted deficiencies in answering post, reconciling PAYE liabilities, etc. and there seems to be little indication of how these matters will be resolved.
Not a good place to be
There was no apparent dissent to these propositions and it seemed to be generally recognised that the above is the case and that this is ‘not a good place to be’. So how can the profession get HMRC to do things better?
This does, of course, beg the question of how easy it will be for change to be implemented. And is the situation made worse because board members have little practical tax experience; a shortcoming reflected in the fact that no non-executive members have a background in tax.
After the meeting I did check HMRC’s website; the work of the board is described as follows.
‘The board will have the following responsibilities:
- The development and final approval of the overall strategy of HMRC.
- The development and final approval of the HMRC communications strategy and sign off significant HMRC communications identified within the communications strategy.
- The development and final approval of the culture and values objectives and strategies.
- Approve final sub-strategies of lines of business and functions.
- Approve final business plans (including the annual financial plan).
- Advise the chief executive on the appointment of senior executives.
- Ensure the strength of the top team by participating in the appointment of and advising on the ongoing competence of board members, ExCom members and other key appointments.
‘In approving the strategies and plans the Board will ensure that the views of HMRC’s stakeholders are taken into account.’
Bearing in mind Dave Hartnett’s initial reluctance to apologise to taxpayers for the fact that several million of them would find that they had overpaid or underpaid tax over the past few years – something that I listened to with my jaw falling open as it was first broadcast by the BBC – makes me wonder if the announcement might have been worded differently had some practitioners with ‘coalface’ experience been involved in its ‘sign off’.
Without such practical experience, one also wonders how effective such an unrepresentative board can be in ‘approving the strategies and plans’ and ensuring ‘that the views of HMRC’s stakeholders are taken into account’.
It was thought at the TPG that it could therefore be beneficial for the department’s governing body to have some experienced tax practitioners on it, although there was doubt as to whether the department will take this on board.
However, without such experience it seems unlikely to improve.
Getting better?
It was suggested that HMRC seem to have a perception that things are improving and in some areas – dedicated telephone lines, for example – they may be, but in others, answering post being a prime example, they are not.
The professional bodies have signed up to getting HMRC to a better place – some firms have agreed to HMRC coming in and seeing how things really are, but will HMRC have the same perception?
Again, there seemed to be no great disagreement with this summary, but some underlying causes were mentioned.
Perhaps the first was that HMRC concentrate on making money for government rather than spending it. There was also doubt about whether departmental statistics for correspondence are accurate. Do the dates on letters reflect when the letter was actually posted?
This is worrying when, for instance, it concerns matters that might require an appeal and half the appeal period has gone before the letter is received. In contentious cases it is probably worth keeping the envelope showing the postmark if there is one.
Perhaps ensuring that office procedures include the date-stamping of all incoming post should instituted as a matter of course.
Another suggestion was that it would be very helpful if HMRC could explain on their website the mechanics of how their letters are issued so that the tax tribunal could understand that taxpayers are not prevaricating.
One line of thought was that HMRC make a reasonable amount of money from what might be perceived as their unreasonable behaviour regarding missing or lost claims. This would have to be made up somewhere else. Are HMRC interested in being reasonable?
The recent instances where penalties for missing or late forms P35 were not sent out until four months had elapsed from the filing date were mentioned as a case in point, as was the tax tribunal’s view that an organ of the state should not use its own administrative delays as a cash-generating machine.
This P35 reminder problem had been known about for three or four years and HMRC did nothing about it. Was it in the tax department’s interest to do anything about it?
Was it therefore unsurprising that there was a loss of trust?
On behalf of HMRC, it was suggested that this might simply be ‘cock-ups’. For example, the lack of paper to issue July 2011 self assessment demands. It was commented that paper demands in India and China may have caused this shortage.
Morale
Surprise was also expressed about HMRC’s contention that things are getting better given the low level of morale in the department.
Experience was given of officers having no pride in the department, making disparaging remarks about it, asking the tax practitioner for a job at a client meeting, and having no confidence that they would themselves have a job in the near future.
Were HMRC having to do deals with the staff union to ensure that appraisal forms were completed? Does the department really need to be like this? It seems to reflect a lack of communication.
In any organisation, it seems reasonable to assume that if the people at the top don’t set the example of how the department should be run, then those lower down will not.
There is nothing worse for morale than seeing colleagues leaving, threats of redundancy, knowledgeable employees retiring, and offices moving or closing. The recent suggestion that poor reviews by employees might lead to office closures would not help.
So, can the profession help things get better?
While there was sympathy with those employees at lower levels, there was unhappiness at the attitude of higher-grade officers and their pursuit of some taxpayers.
As an example, one question was why HMRC did not put information concerning safeguards about visits, etc. in their documentation?
Do HMRC think that this is not important or that taxpayers will not understand? There seems to be a high-level assumption that officers will act properly, but experience showed that this was not always the case.
There was worry that the new business records checks were an example of innovations being introduced from foreign tax jurisdictions where different cultures applied.
If the taxpayer has been penalised when they feel that they have been doing things properly or to the best of their ability, will this lead to a backlash?
Alternatively, should the profession simply accept that they are not trusted by HMRC and that this is the way things are? The view was expressed that, as tax professionals, it is our job to encourage clients to be upfront and ‘play a straight bat’, but we had to recognise that things are different now.
Furthermore, are tax professional wasting their time being involved in consultations, given that there is so much consultation, a lot of which seems to be preordained.
It was felt that advisers should always respond to consultation, but should recognise the need to be succinct. If legislation does go wrong we should be able to say that we tried to explain this.
Other musings on the nature of HMRC included the question of whether civil servants just want to do things the way they want to do them without thinking about consequences?
Does the profession need to explain to HMRC the professional ethics that they operate by?
Perhaps the CIOT should start training tax officers. By bringing them into the institute and they should understand those ethics and then be able to get these values back into HMRC.
Is the department and its strategy out of control? There is a point of view that HMRC have a lack of resources, but with 70,000 or more employees they are one of the largest employers in the UK.
Business records
Coincidently, two days after the TPG meeting, the CIOT released the following statement regarding HMRC’s business records checks programme, which seems to encapsulate many of the concerns about HMRC’s blunt approach and their relationship with the profession.
‘The CIOT is strongly supportive of efforts to improve record keeping by business. However we continue to have serious concerns about a number of aspects of HMRC’s programme.
‘During the consultation process we queried the legal basis of applying penalties before a tax return has been submitted. These questions remain. HMRC have still not provided any satisfactorily clear reasoning to justify their belief that they can charge penalties in-year before the return goes in. In our view it is questionable whether HMRC have the power to do that.
‘We continue to be concerned about how HMRC judge whether records are adequate – there have been some clear misunderstandings within HMRC as to what constitutes “adequate” records as opposed to “incomplete” records. For example, despite HMRC’s powers team indicating that, in-year, a “full shoebox of invoices/receipts” was adequate, we now understand that the new compliance team considers that retaining a set of purchase invoices without listing them is inadequate, even for the smallest businesses.
‘In our view that is entirely the wrong approach. What counts as adequate records needs to have regard to the sort and size of business. That involves the exercise of judgment. Expecting the smallest businesses to have perfect records kept up to date every day is frankly unrealistic, inappropriate and wholly out of kilter with the Government’s stated aim of reducing burdens on business.
‘The CIOT is also unhappy about HMRC’s handling of the process of expanding this programme. They have begun rolling out the programme before providing evidence that the trials conducted earlier this year have been cost-effective. Additionally, HMRC had already started rolling out the expanded programme well before today’s announcement. Communications seem very much an afterthought. That is not the way to build a good relationship with tax advisers.
‘This matters, because tax advisers are an essential part of the solution in this area. Advisers understand HMRC’s frustrations about businesses that keep poor records. We are keen to work with HMRC to arrive at an appropriate and sensible approach, so that we can educate business about good practice and support them in improving their systems. But HMRC’s approach in this area seems to be a blunt instrument designed with little or no input from professional bodies, and their approach has given many the impression that their objective is more about revenue raising – through the application of substantial fines – than spreading best practice.’
Many of the comments in this press release appear to reflect the concerns expressed at the TPG meeting.
The critical questions
As the meeting drew towards a close those in attendance wondered whether progress had been made in answering the questions that had been laid out at the start of the meeting?
The first question was ‘what is the root cause of HMRC’s issues?’ We seemed to have nailed this down to cutbacks and falling morale for those at the lower echelons. If a government department feels that it is in decline that makes life difficult.
This was not helped by the attitude of those at a senior level to the tax profession. Do they really think that 90% of professional work is developing complex tax avoidance schemes?
In reality, the profession sees that 90% of their work is helping businesses to comply with an ever more complex tax system.
This leads to the second question of ‘how do we build a better relationship based on trust and honesty?’ Advisers can change what they do, but can they change HMRC? There is definitely a communication issue to prove to HMRC that the aim of the profession is to see that individuals and businesses pay the right amount of tax and comply with the system, and to dispel the view that might previously have been held that the profession was part of the problem. But how is this to be done?
Do HMRC have an instinctive approach that taxpayers are getting everything wrong, so that officers will always have suspicions?
If HMRC can say that every enquiry results in a liability, does it follow that there will always be potential additional tax liabilities?
There was little response to the question of whether anyone had dealt with a case where HMRC had pointed out an error made by a taxpayer in HMRC’s favour? Are HMRC really doing what they should be doing and ensuring that the correct amount of tax is paid?
The system seems to be stacked against the taxpayer. It needs a political will to change the mindset that the profession is trying to ‘outdo’ HMRC. There is a need to continue to show that the profession is an important part of running the UK’s tax system.
Them and us
Is part of the problem with gaining trust that, like the judicial system, we have an adversarial tax system and that each side is trying to do the best that it can rather than trying to find a middle way? HMRC are deeply politicised and it may be ministers that need to get the message that constantly pillorying the profession is not going to improve matters.
Another suggestion was ‘never ascribe to malevolence what can be adequately explained by incompetence’. Are HMRC up to being malevolent?
However, a contrary view was the experience of officers writing different letters depending on whether a firm had a tax department or not. The perception was that HMRC will ‘push the envelope’ to get more information from the latter than the former.
The third and final question is ‘how can we, as tax professionals, help HMRC to address the issues raised in the recent Treasury report?’ Alternatively, perhaps we should omit the first word and simply ask: ‘can we help them?’
Bearing in mind that professional bodies have agreed to work together with HMRC to show what things are really like, the feeling remained that things could not be changed in two or three years; it would be a much slower process.
Drawing to a conclusion, it was important to keep things in perspective. Political statements – like paying the ‘right amount’ or the ‘fair amount’ of tax – should be ignored. The more material point is that HMRC should know that most of what we do is not abusive, but are worried about what is.
Likewise, the profession does not worry about what the department does get right. However, if the profession knows that HMRC are doing something wrong we should be highlighting this in the same way that HMRC would do if the profession was doing something dishonest.
The reality is that the vast majority of HMRC staff are as honest as they always were. Similarly, it was suggested that they were always unhappy; public servants always are!
Are we ever going to be in a better place? Is the reality that the vast majority of practitioners do not have the resources to be involved in consultation and simply take the view that what will be will be?
Furthermore, is the fact that HMRC are demoralised and suffering from a lack of resources and knowledge a great business opportunity for the tax profession?
Conclusion
There seems little doubt that there needs to be change. The professional bodies need to engage with government and the tax authorities, but there also needs to be stability in the tax system.
One suggestion was that a future debate might focus on the apparent culture of mistrust which seems to be the perception that ministers have of the tax profession and the need to change that perception and culture.
Perhaps I’ll see you at that meeting.
