Two weeks on, and time for another Treasury Committee hearing on the ‘tax gap’, this time featuring representatives from professional bodies, including the CIOT’s John Whiting, and Tax Aid.
You can watch it in full here. A rough report on the hearing appears below. This is based on my own notes only and some remarks have been paraphrased or summarised.
First questioner was Conservative MP Andrea Leadsom who posed a series of questions around ‘voluntary compliance’, asking if this was the best way to close the tax gap and how it could be achieved.
Consensus was, yes, that making it easier for people to comply was better all round. Partly, said Chas Roy-Chowdhury of the ACCA, this was about having a simpler system, hence the importance of the work of the Office of Tax Simplification. Frances Corrie of Tax Aid observed that often people cannot get answers to basic questions about their taxes from HMRC and therefore lack certainty about whether they have met their tax obligations. While a tax agent is paid to persevere and get answers, unrepresented taxpayers who fail to get through to HMRC several times may just give up. Both John Whiting and the ICAEW’s David Heaton made the point, however, that it was not an either/or. It did need to be easier for people to comply but it would be wrong for HMRC to give up on tackling evasion.
The tax gap and rule of law
Conservative Andrew Tyrie, who chairs the main Treasury committee (this was technically a sub-committee, though one comprising all members of the main committee!), was next up. He probed the question of whether HMRC were right to be focusing so heavily in their vision statement on closing the tax gap.
Up to a point, said John Whiting. Like any business you have to have aims and objectives in mind, but it would worry him if that was their only aim – in part because of the difficulty of measuring it. Questioned further he suggested that making sure everybody’s tax bills are right ought to be another aim. David Heaton said he felt the tax gap was entirely misleading as no-one really knows what taxpayers should pay (that is, that much of the time there is no definitive ‘right amount’).
Andrew Tyrie then drew attention to the comment of Anthony Thomas, in his inaugural speech as CIOT President, that we need to get back to taxing in accordance with the rule of law. He queried whether it was possible to do that while simultaneously using tax gap estimates based on judgements about the spirit of the law.
John Whiting replied that with the spirit of the law you had to ask: whose spirit? HMRC believe their interpretation is right but others may disagree. The CIOT, he said, have always preferred taxing by what the law says.
Andrew Tyrie asked whether it was fair to bash HMRC for constant failures when the cause may lie in legislation they have to administer. John Whiting responded that it was reasonable to say they (HMRC) take a certain amount of blame but all involved in the legislative process must also share in it. We need legislation that is easier to apply and better framed in the first place, he said.
Lib Dem John Thurso asked how much HMRC’s assertion that ‘intervention yield’ is going up year after year can be relied on.
David Heaton said that some of the clients for whom he does tax investigation work settle for more than they think they owe because the alternative is going through a lengthy and difficult process with a (sometimes aggressive) HMRC. He said he didn’t know how the Revenue compiled intervention yield figures so he couldn’t comment on that. John Whiting said that the Revenue had got better at targeting, looking in the right places and assessing risk. That was why intervention yield was improving.
Frances Corrie said that Tax Aid’s work sometimes involves explaining to taxpayers that HMRC are right and they have been inadvertently evading tax. The question then, she added, is ‘why have they allowed to me to do it for so long?’ Tax owed for even four or five years, plus interest, plus a penalty, can come to a large figure.
Targeting and offshore
Sub-committee chairman George Mudie (Labour) said he was particularly exercised by tax evasion through offshore accounts. Chas Roy-Chowdhury said this could often be hard to pin down. The Government does have disclosure regimes to target those with offshore accounts but, he said, they should also be going after people who don’t pay any tax whatsoever, drawing them into the system. This has been part of the strategy, he said, but perhaps HMRC have not been tough enough.
George Mudie pressed the witnesses on whether they were clear what areas HMRC had targeted. Chas Roy-Chowdhury said they had been told in advance in some cases and after the event in others. He added that they sometimes found out when tax advisers’ clients tell them about the contents of HMRC’s letters to them. David Heaton highlighted that day’s announcement targeting takeaways in London.
John Whiting said that there was the opportunity for professional groups to provide feedback on some campaigns, such as that targeting plumbers, and to get them tweaked, but what it wasn’t was ‘is it a good idea to go for plumbers?’. The CIOT had pressed HMRC to make disclosure opportunities generally available to encourage people generally to be compliant.
The hidden economy and encouraging people back into the system
The SNP’s Stewart Hosie suggested there was a growing consensus that HMRC are neglecting people outside the system entirely. A number of witnesses questioned this, but did agree that more could be done in this area. It was agreed that the Tax and Benefits Confidential Helpline is poorly publicised. Frances Corrie observed that often there are personal events in people’s lives which make them want to regularise their tax affairs. It needs to be as easy as possible for them to do this. John Whiting added that it was not just the amount of tax being demanded but HMRC asking for it immediately rather than being ready to agree terms for payment over a period of time, which was putting people off.
Stewart Hosie probed whether there was a place for third party agencies to mediate between HMRC and those who have not been paying their full tax obligations, to enable an assurance to be provided that, in his words, “you’re not going to be hit for £20,000”. There was some disagreement on this. David Heaton felt there was no need and that the Revenue could handle that role. Frances Corrie said that Tax Aid sometimes found themselves doing that but it was very resource intensive. She also said that most individuals think they will be prosecuted even if they voluntarily disclose. If HMRC put a statement up that said you won’t be that would be an incentive to come forward. However John Whiting felt that the Revenue would not want to do this because they would want to reserve the right to deal with egregious tax evasion through prosecution. He did feel that third party groups could play a role. Stewart Hosie indicated that he felt the committee might have a go at challenging the Revenue rules which do not permit this to happen.
HMRC legislation through guidance and agreements with big business
The sixth member of the committee present, Andy Love (Labour) raised the prominent role of quasi-legislative HMRC directions and guidance. He asked whether this was filling a gap left by the failure of politicians.
There was general recognition that guidance was necessary. However Chas Roy-Chowdhury said it was a problem that part of the tax gap is legal interpretation and avoidance. Guidance is guidance but HMRC should not frame it as being the law. John Whiting made a similar point, speaking of HMRC guidance becoming ‘tertiary legislation’, portrayed as virtually having legislative force. This was not a substitute for getting the law right in the first place!
Andy Love said he thought there was a growing perception that HMRC was going easy on big business. All three representatives from the professional bodies were sceptical of any suggestion that the Revenue had ‘gone soft’ but it was acknowledged that there was a public perception issue. Responding to a follow-up question, John Whiting said big companies would not be influenced by media coverage of the Vodafone case as they knew the situation and knew that the tax bill ultimately facing Vodafone would be what both sides deemed fair.
David Heaton observed that HMRC’s litigation and settlement strategy (LSS) had affected the way cases were handled. In pre-LSS days, he said, you would sit down with an inspector and argue the pros and cons of the case and something would come out which made sense. LSS had led to a binary (win or lose) situation – creating that distinction. A consequence was that the Revenue were forced to abandon cases where in the past they might have negotiated a settlement. Taxpayers likewise. He said there was something to be said for going back to the way things were done pre-LSS.
Sub-committee chairman George Mudie came back in to raise the issue of letters sent by HMRC to people owing (or, in some case, wrongly thought to owe) tax threatening them with bailiffs and offering no right of appeal. John Whiting agreed this had been mishandled and should not have happened. David Heaton observed that there had been what he called a ‘processising’ of HMRC’s compliance system – they had become reliant on computers.
In response to a further question from Andy Love about the signing off of HMRC’s tax agreements with business, John Whiting said that it would look a lot better if, in each case, two independent members of HMRC’s board could confirm proper process has been followed. He suggested this made the case for more members of the board with tax experience. Andy Love asked whether the US model of having an inspector general for tax administration was a possible direction to go in. John Whiting was sceptical, suggesting it sounded like another quango, and said he would rather cure any problem within the Revenue.
CIOT External Relations Manager
Friday 15 July 2011