You gotta have faith

KEY POINTS

• The importance of believing in HMRC.
• How does HMRC’s work in tackling tax avoidance square with recent disclosures?
• Tax spending must be as effective as tax collection.
• Government waste undermines the tax system.

Now I think of it, I don’t think I’ve ever really said a proper thank you to my parents for the way they brought me up.

So, ‘Thanks mum; thanks dad; I may not have come right out and said it, but I really appreciate it’.

I like to think I’ve tried to retain their values, be polite, do the right thing, do unto others, etc., respect other people. There’s much more I could say, but you get the idea.

Perhaps one of the lesser values they taught me was not to drop litter – a common family joke is that, as a child, I was incapable of dropping a sweet wrapper even if I was standing knee deep in rubbish – and anyone who looks into my coat pockets will see – from the old receipts, odd post-it notes, scraps of old tax case reports and the like – that this remains the case.

Like many of us of a certain age, another value that was instilled in me was to trust the police. And I always did until I saw a policeman assaulting someone for no apparent reason.

Perhaps it shouldn’t work this way, but that made me rethink the whole basis of that trust and it was never entirely restored. Those in a position of power must use it wisely.

Of course, the odd Curtis wandering around doubting whether he trusts the police is not going to make much difference.

However, and while I am not trying to suggest that all those involved or even a majority of them took part for that reason, one thing that last summer’s riots did show us was that a society has to have faith in shared values.

Destruction of these shared beliefs is not unlike a nuclear reaction: if only a small minority dissent then, like the odd neutron (or the odd Curtis), they fly around without doing too much damage.

But once a critical mass of doubt is achieved, a chain reaction starts where the actions of one cause ever more actions from others until an explosion is the result.

The police found to their cost that once a certain number of people decided to stop believing that they should act lawfully and started to run amok, there wasn’t a great deal they could do about it.

Believe in tax

What has this all got to do with tax? Well lately, I have been wondering if HMRC are in danger of sleepwalking into a similar situation with the general taxpaying public.

All the time that the majority of taxpayers believe that ‘the system works’, everything is OK; that majority send in their tax returns and pay their liabilities on time.

But if that belief is undermined, faith in the system is on shaky ground. There are, and I suspect there always will be, a proportion of the taxpaying public who do not want to belong to ‘the tax club’, and HMRC will have to devote time and resources to these, but are their actions actually encouraging compliance in the generally law-abiding and tax-paying population?

We have just had the announcement that there will be ‘Thirty new taskforces to tackle tax evasion’; do we really need them and how many more can HMRC afford?

So my question is whether the edifice of the tax system is slowly being chipped away.

For example, I suspect that rather like last summer’s riots, HMRC’s ‘PAYE fiasco’ (or should that be fiascos?) didn’t do a great deal for faith in the tax system.

And this may be particularly the case as the sort of people affected – pensioners, people with more than one job, etc. – are the ones that we would expect to be engaged within the tax system.

Dave Hartnett’s ‘no need for an apology’ didn’t help. I sat at home listening to his performance on Money Box with my jaw getting nearer the ground.

Evidence, I thought at the time, that ‘HMRC ‘just don’t get it’. Wouldn’t a simple apology, a simple explanation that a new computer system (a government computer system that actually, by and large, seemed to work) was highlighting problems with the old one, and a simple statement that the department would do all it could to help people pay their arrears, have been better?

Since then, I think there has been further evidence of this lack of understanding and the employer PAYE penalty charges are another good example.

Waiting four months to send a reminder of an outstanding tax return is not helpful and I don’t think HMRC’s excuse that they ‘don’t issue penalties because lots of employers and their agents are very busy at deadline day’ cuts it either.

Neither are matters helped by stories of so-called ‘sweetheart’ deals.

However much HMRC might protest and however much they might legally be correct, hiding (or appearing to hide) behind the cloak of ‘taxpayer confidentiality’ is not going to help the perception that they are going soft on the big boys and their gazillion pound liabilities, while the little guy paying a few thousand suffers.

Likewise, if taxpayers are reading that MPs believe that Dave Hartnett has been ‘unduly cosy’ with big business, they may well begin to believe it themselves.

It’s a little like the adage that ‘owe the bank a hundred pounds, you’ve got a problem; owe the bank a million pounds and the bank has got a problem’, HMRC have got a problem, but again do they get it’?

Bigger picture

The problem, as I see it, is that once faith is undermined, then other chinks – which might previously have been seen to be unrelated – now start to look as though they are all part of a bigger picture.

For example, fraud in the tax system. Yes, HMRC have just achieved a conviction over the attempted misuse of tax relief for charitable contributions but, as Mike Truman pointed out last week, quite what the longer term effect of the department’s loss in the Harry Redknapp case will be remains to be seen.

And this is without a detailed consideration of the £100m VAT frauds that we read about every so often. There has got to be something wrong with a system that allows fraud or attempted fraud on such a scale.

Only the other day I received an email with a statement by the Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts:

‘Taxpayers are losing out by up to £1.2 billion a year through the large scale evasion of alcohol duty by organised criminals. The problem is only getting worse and HMRC must do more to tackle the problem. It is difficult to stop criminal activity, but HMRC have not done enough to deter it through actively pursuing criminal sanctions against fraudsters. There are on average just six or fewer cases a year for alcohol duties fraud in which convictions are achieved. This must improve and HMRC must get tougher on this type of fraud’.

HMRC really do need to be seen to be effectively tackling large-scale tax avoidance and evasion to avoid the perception that these are on the ‘too difficult’ list and that ‘the little guy’ is an easier target.

Whose job is it?

HMRC seem to lurch from one faux pas to another. In an interview with the Telegraph last month, and using the example of payments to a builder or cleaner in cash allowing them to evade VAT or income tax, Dave Hartnett said that ‘householders have a duty to ensure that other people do not evade paying their share of tax’.

Well, like my faith in the police, I might have had more faith and belief in that statement if it had not come to light shortly afterwards that HMRC (although at whose behest we wait to hear) were complicit in arranging for senior civil servants to receive their salaries via personal limited companies, thus allowing them to avoid higher rate tax and National Insurance charges.

Now, the man in the street may not be au fait with the technicalities of employment status and the IR35 legislation, but I wouldn’t bet against him realising that paying corporation tax at 21% is a much better deal than paying a top rate of tax of 50% with National Insurance contributions on top.

I suspect that many taxpayers will think that what Mr Hartnett should actually have said was, ‘HMRC have a duty to ensure that other people do not evade paying their share of tax’. If that’s not the case, what are he and his colleagues being paid for?

Houses in order

A ‘flavour of the month’ is the number of houses, particularly in central London, but also elsewhere, that are owned by offshore companies so that future sales will avoid stamp duty land tax.

I am sure that HMRC would like to close this loophole down, although their stance is probably not helped by their sale of the Inland Revenue estate to an offshore company a few years ago – perhaps another ill-advised move.

On this subject, isn’t it the case that you have to ensure that your own house is in order?

There is also the problem that it is not just the collection side of tax, which is HMRC’s remit, that is coming in for criticism.

Stories of government waste abound, from aircraft carriers that haven’t got planes and are likely to be mothballed as soon as they are built, fire control centres that have been built at great cost but will remain empty for the next 20 years while rent will be paid, down to fig trees in Portcullis House.

And let’s not get started on MPs’ expenses and house ‘flipping’.

While we at Taxation are mainly concerned with the calculation, mitigation and collection of tax – as I presume are the majority of our readers – the reality is that this is only looking at one side of the coin.

The other side concerns what this tax is being spent on, and perhaps more importantly, to what effect.

My fear is that the real problem with this slow drip, drip of news of financial incompetence is that it undermines our confidence in the system.

I am not trying to make an excuse for tax avoidance or, dare I say it, evasion, but it doesn’t take a lot of imagination to understand why an increasing number of people – especially the middle (chattering) classes might start to take the view that they are able to spend their money in a much better way than the government – both local and national.

After all, if you give a family member some money only to see them frittering it away, it’s unlikely to encourage you to keep giving is it?

The fact that this perception is becoming more common is probably also evidenced by the widespread support for the government’s present proposals that benefits should be capped.

Why should someone who is not working be receiving a higher income than someone who is – and certainly the average wage would seem a logical upper limit. Although even here there seems to be a difference of opinion.

The latest figures from the Office of National Statistics show that the average employee salary in the UK for 2011 was £26,871.

However, the Department of Work and Pensions say that their proposed £26,000 benefits cap effectively represents a net pay figure and tell me that the average pay is £35,000.

This is probably academic while stories of benefit claimants living in expensive houses in central London abound.

Conclusion

When all is said and done, I wouldn’t want readers to think that it’s all HMRC’s fault, although I do think they need to take a more holistic view of their operations and how these are perceived.

The problem is that we are all to some extent complicit in this because while we want to vote for tax reductions, we are reluctant to vote for corresponding spending cuts.

Perhaps this might be one of the lasting benefits of the current recession – that it has forced a government to take a long hard look at just where our taxes are actually going.

I wonder if Mr Gauke should start to play a role in this and impress upon the spending departments – who rely on the efforts of HMRC – the importance of ensuring that tax revenues are spent wisely.

Rather more financial acumen seems to be needed in the government’s dealings with the commercial sector which is, it must be remembered, driven by a profit motive.

So the next step is continuing pressure on both the effective collection of our tax and the spending of it.

Unless we all start to have a shared belief that the system is fair and is working, more and more people will lose faith in it. And that’s a little like keeping the country tidy isn’t it?

Once more than a certain number of people are dropping their litter in the street, the rest of us – maybe even yours truly – start to think that we’re wasting our time taking our rubbish home with us; and before you know it we’re also dropping our drink cans, fast food wrappers and the like in the street.

And is it me, or is there an increasing amount of rubbish lying around nowadays?

Issue: 4343 / Categories: Comment & Analysis , Admin