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HMRC overview 2011: The fiscal chess game decoded

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16th Dec 2011
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You might think that HMRC would be tempted to keep a low profile as 2011 draws to a close, considering the amount of media attention they have attracted for a series of high-profile blunders throughout the year, says Straughans’ Mike Fleming.

Not only did half a million people end up with two months longer than everyone else to make their second tax return payment - due to the laughable fact that the Revenue ran out of paper - HMRC also could not fail to conceal that the tax gap is still a staggering £35bn and that more than six million people are out of pocket, having overpaid on their tax return. All good reasons to sit tight and avoid further scandal.

A glance at recent press coverage reveals the opposite. In mid-December HMRC was still hitting the headlines, with the news of the appointment of current transport secretary Lin Homer as chief executive.  While some welcome Homer’s appointment on the grounds that her broad experience of chief executive roles in local and central government should give her a strong hand at the tiller, the decision to place Homer at the helm has in fact weakened the Revenue’s position on two counts. Homer has no background in tax; at a time when public demand for an overhaul of an outdated tax system is increasing and the system which brings revenue into our struggling economy is in tatters, surely it would make sense to have somebody who understands the complications of the process overseeing it?

Secondly, it is not so much a question of what Lin Homer brings to HMRC, but what it will lose through the ‘retirement’ of permanent secretary for tax, Dave Harnett, who will step down from his role in summer 2012. Subjected to criticism for his role in the Goldman Sachs and Vodaphone deals, Hartnett has nevertheless been an indefatigable agent on behalf of the Revenue since he joined the IR as a tax inspector in 1976.

Hartnett championed many improvements to the tax system, especially in the areas of tax avoidance and non-compliance, as well as the establishment of the Joint International Tax Shelter Information Centre (JITSIC). In pushing Hartnett out - because I think that is what his ‘retirement’ boils down to – HMRC is not only losing a formidable force for generating revenue but also creating a yawning chasm at the top of the organisation, where Hartnett’s skills, knowledge and expertise will not be replaced.

A worrying tradition has developed, with the Revenue repeatedly appointing non tax-specialists: for instance chairman Mike Clasper’s career history includes executive positions at BAA and Procter & Gamble. When Hartnett retires, the executive committee will boast one sole tax professional, Stephen Banyard, in a board of ten. I cannot be alone in finding this unsettling.

So are things really that bad at HMRC? A cursory glance over the remit letters sent to former chief executive Lesley Strathie by Alistair Darling and David Gauke respectively would reveal that yes, they are. The remarkable similarity of the letters makes plain the lack of real progress since June 2009 – they crystallise concerns over the size of an unmanageable tax gap, the chaotic implementation of PAYE and poor customer service and bemoan the organisation’s continuing struggle to step up to meet it’s ‘stretching target’ to reduce tax credits error and fraud to 5%.

Of course, the one thing that is not wrong with HMRC is its ability to spin positive stories about itself. This year is a case in point, with the Revenue presenting themselves as bringing good tidings to the taxpayer on a number of occasions.

The revelation of the continuing enormity of the tax gap at £35bn was carefully timed to coincide with the government’s announcement at the Liberal Democrat conference that 2,250 extra inspectors have been allocated to tackling tax avoidance, thus positioning the Revenue as taking positive action. Little was said about the fact that tax avoidance in fact counts for a mere 7% of the deficit, with the majority of the gap caused by problems with VAT and incorrect tax returns.

In a further example of putting a positive spin on a negative story, HMRC insisted that they were doing the best thing by taxpayers by making sure they refunded the six million people who had overpaid on their tax return ‘by Christmas’. Playing up their concern that taxpayers should not be out of pocket when doing their Christmas shopping was not enough to detract from the fact that these errors should not have happened in the first place, and that they will keep on happening until the system is overhauled.

The fiscal chess game looks set to continue into 2012, with the publication of Graham Aaronson QC’s recommendation for the introduction of a general anti-abuse rule (GAAR) in November this year paving the way for the revenue’s next move. It looks likely that HMRC will implement a narrowly focused GAAR, which will naturally be presented as a positive step. The Revenue’s claim that the introduction of a GAAR would deter abusive tax avoidance, reduce legal uncertainty and create a more level playing field for business ignores the danger that it could operate with all the subtlety of a sledgehammer. If not properly managed, such a ‘catch all’ rule could create as many casualties as it would capture those genuinely engaged in criminal tax avoidance. A clumsily imposed GAAR could prove particularly detrimental for SMEs, and could end up hinging on semantics – lawyers’ interpretations of what is ‘reasonable’ – rather than sifting out the criminals from those merely engaged in legitimate tax planning .

Another concern I feel when looking forward to 2012 is that HMRC appears to be moving towards the introduction of a fully-online self-assessment system. The Revenue understandably maintains that this will represent a step towards reducing the huge potential for error which plagues the system, however I can’t help perceiving it as yet another strategic move on the Revenue’s part to get the taxpayer to do their work for them. For millions of taxpayers – especially those with small, cash-based businesses or limited internet access, a fully online system could prove a further hindrance, not a help. A glance at many of the online forums dedicated to tax reveals that even those who are competent users of the internet struggle to complete the online form – and the Revenue will surely use the introduction of a fully-online system as an excuse to make further cuts to their helpline service, leaving more people than ever in the dark.

It’s hard to be positive about HMRC’s ability to turn things around in 2012. In a year when economic growth is predicted to stall still further to 0.7%, even an organisation in shipshape condition would struggle to bring in enough revenue to balance the books. Not only does HMRC face an impossible task, the organisation itself is rife with internal issues, a canker which is destroying its ability to perform efficiently. The extent of the problem is illustrated by the results of the Revenue’s recent People Survey, which indicates disaffection amongst HMRC staff on a massive scale, with only 26% feeling that there were opportunities for them to develop their career at HMRC, and only 29% believing that any positive action would be taken on the results of the survey.

Looking into the crystal ball, the only way I can see things improving dramatically at the Revenue is if, first and foremost, they address the significant systemic issues which are consuming the organisation from within. Once achieved, from a position of strength they can start to claw back some control over the self-assessment system which has been inadequately policed for the last 14 years.

A renowned tax audit experiment carried out in Denmark revealed what you would think was the obvious point that a nation’s tax evasion rate reduces almost to zero when income is subjected to third party reporting. However, what is more interesting is that the tax evasion rate for self-reported income reduced dramatically when taxpayers were sent threat-of-audit letters, with evasion dwindling further still when actual audits were introduced. This confirms the importance of adequate monitoring and physical policing of the tax system, giving the lie to the notion that HMRC can ever save the nation money by cutting back on staff.

I would argue that the only way for HMRC to significantly increase the revenue it generates is through specialising its workforce, not cutting it back. An injection of more highly skilled, targeted tax inspectors to regulate the self-assessment process would reap huge rewards, while the reintroduction of more experienced tax professionals at board level would give those at the very top of the organisation the clarity to steer a clear course for the Revenue through what prospects to be a challenging year ahead.

Mike Fleming is a partner at Straughans Chartered Accountants and Tax Advisers and former Inland Revenue Tax Inspector.

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By glynisbm
16th Dec 2011 14:32

Hear Hear

Well said!

The trouble with HMRC is that they don't listen to their experienced staff who actually do the work before they bring in these new systems and then they end up throwing good money after bad when it all goes wrong; you're absolutley correct in that HMRC need a tax preson to bang the table on its behalf (which Dave Hartnett did do to a certain extent) and I honestly don't think Ms Horner will be in a position to do that! 

 

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By ireallyshouldknowthisbut
17th Dec 2011 13:23

tax gap is HMRC's failing

I would say the main issue from a tax gap point of view is that they simple dont do enough investigations, and when they do the calibre of staff is increasingly patchy. 

I was used to the old style formidable tax inspector for some years who tended to head straight for the problems and the big numbers. When you got one of those on your case you knew about it, but at the same time could normally settle a deal and pay what was due as you were dealing with a tax professional.  But in the past two or three I have come across staff with barely a grasp of the rules and had bizarre arguments with them about things they simply didn't know that have dragged on for months on end. As for finding anything of substance, they are only going to do so by luck.

Given the data available to HMRC they ought to be able to vastly increase the tax take, just by doing some proper digging around with decent staff, and also instead of just counting the tax taken by the team doing the work (which tends to dwarf the cost of the team) also count the more important deterrent effect.

At the moment the deterrent effect simply isn't there for many tax payers and it seems by essentially assuming everyone is honest we are slipping down a hole. Humans will always try and get away with something if they dont think they will get caught. Witness driving on the motorway when a traffic officer is on the road, suddenly everyone does 70. Without a visible deterrent people just flout the rules, the difference with tax of course is that it pays for itself many times over!

 

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