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Comment: The state we’re in

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There is now an urgent need to address HMRC’s culture and start to rebuild the department in a way that genuinely recognises the needs of both the taxpayer and its own people. This will not be easy, but the department’s new chief executive, Jim Harra, who is the first career inspector to lead HMRC, has the corporate memory and ability to handle the task. The huge increase in tax legislation over the past decade is a challenge to us all. What is needed is a change of emphasis – from simplification to reduction. There are challenges too in improving standards of the wider profession. The professional bodies have led the way, but the many advisers who operate completely unregulated market represents a significant challenge for us all. The professional bodies cannot address this issue on their own; they need government and HMRC to work with them.

A new year, a new government and, at the time of writing, the prospect of a post-Brexit February Budget as it seems certain that we will leave the European Union at the end of this month. But the new year is also important for the new head of HMRC. The appointment of Jim Harra, as the troubled HMRC’s new chief executive, is significant. Jim is the first trained and career tax inspector to lead the Revenue in more than 20 years and the first career inspector to lead HMRC. We should expect that if anyone can get a grip on HMRC it’s him, although the noises from within Number 10 around whole scale change to how the civil service operates will add to his concerns.

The new year will of course bring new challenges to the whole of the tax profession at a time when we are all grappling with significant changes such as Making Tax Digital, HMRC’s never ending Agent Strategy, the internationalisation of tax strategy, and the very changed anti-avoidance landscape. The prospect of further change is likely to terrify or depress some, leave others shrugging their shoulders with indifference, and a few relishing the prospect. Change is simply a fact of professional (and HMRC) life, and I am sure that very many of us are hardened to even the most radical change. But, and it’s a big but, the UK tax system has been subject to almost constant changes in law and practice over many years, and being in a constant state of flux is not good for any of us. Is it possible to imagine any other area of the law that is subject to the uncertainty and upheaval we see in tax?

The good old days?

It is easy to think that what we face is more significant than the challenges of the past, but is it? This year marks 45 years since I joined what was then the Inland Revenue. I remember the date, 25 August 1975, only because Bruce Springsteen released Born to run on the same day. The Boss is of course still running; me, not so much and not so fast these days. Back then, the ongoing changes to the UK tax system were profound and certainly equal to anything we face now. It was the dawn of a computer based Inland Revenue and new ways of doing things collided with a tax code that had a legislative structure and guiding principles based largely upon a 19th and early 20th century business world.

‘Imputation’ (remember that?) was brand new, ‘unification’ of income tax and surtax was ongoing, capital gains tax and corporation tax were a decade old, and the old schedular system (including the infamous Schedule B), with all its different computational rules and payment dates, remained the basis for determining income tax liabilities. Compared to today, calculating an income tax liability was not easy, as with the investment income surcharge there were 11 rates of income tax and numerous reliefs. I have no doubt that tax avoidance was rife among the wealthy and big business, but little or no attention was given to it outside of the Revenue’s Special Investigations Section, who you never met or heard from. At the local level, most avoidance issues were tackled as ‘technical matters’; indeed, the official term was ‘legal avoidance’. All that would change just a few years later with Rossminster and the later start of the Ramsay line of tax cases.

The oddest thing at that time was the fact that a married woman did not exist, or at least did not exist for tax purposes at any rate. Try explaining to an irate Glasgow factory worker late on a Friday afternoon, when she has had too much tax deducted from her wages, that she needed her (in many cases unemployed) husband’s permission before the Inland Revenue could talk to her! (This curious approach was the subject of a splendid talk given by Helen Thornley and others during the interesting Women in Tax group debate on independent taxation just before the end of last year.) As for customer service, in many Inland Revenue offices post was weighed instead of counted; at one point during the 1980s, managing the volume of post proved more important than dealing with it.

It was a great education in how mad the whole tax world was back then. Coming back to Schedule B, a few years later I came face to face with the reality that Schedule B was just a massive tax giveaway available only to the very wealthy. Think of it as an early form of the ‘magic money tree’. For the more cynical, it was a clear example of the ‘smoke and mirrors’ approach to tax policy that gives an appearance of progressiveness. It was a tax scheme in all but name – and those who today pretend that there is equivalence between an individual savings account and a tax avoidance scheme really have no idea. I can recall my astonishment at the number of hugely wealthy landed individuals who had lower marginal rates than I did, through access to fantastically generous tax reliefs that seemed otherwise to have no wider social or economic benefit, and it has made me intolerant of those who focus only on headline tax rates when discussing fairness.

Unleashing HMRC

But the big difference between then and now is the power and posture of HMRC in its dealings with taxpayers, compared to the Inland Revenue. I hope that the challenges facing HMRC will not be lost on Jim Harra, and it will be obvious to him that many of the challenges HMRC face are not new. What is new is that many of HMRC’s problems reflect its very different culture from what went before, and Harra has the corporate memory to recognise this. These days, the challenges facing HMRC attract far less sympathy from both large business and taxpayers than they did a decade ago. This should be worrying.

There is an urgent need to address HMRC culture and start to rebuild the department in a way that genuinely puts the taxpayer and those who work at HMRC first. The poor and at times unacceptable behaviour that we have seen at both an institutional level and by individual HMRC officers, many of which have been highlighted through social media and by various critical tribunal judgments, reflect an approach that some have described as ‘out of control’. It is not good enough and must be addressed. The government’s constant tinkering with the tax system plainly does not help. However, the draconian powers that HMRC has persuaded the government to introduce in recent years, combined with the significantly more formal arrangements whereby a taxpayer can dispute a tax demand, have empowered HMRC as never before. There can be no doubt that HMRC has abused this empowerment at times, most obviously in the way it has set a bar that feels divorced from real life and which many taxpayers find it difficult to meet.

The utter shambles that is the loan charge is testament to how it all can go horribly wrong. Yet those at the top of HMRC did not listen; or if they did, they did not take effective action even when it was clear that it was all going wrong. Just before the end of last year Sir Amyas Morse delivered his independent report, and he has recommended changes to the loan charge that will alleviate much of the unfairness. In doing so, however, he has created what seems to be a more favourable position for the least compliant participants. We have never seen anything even remotely close to it and it’s not over yet. A few years ago, I wrote that what HMRC expects to happen rarely ever does and even a relatively small numbers of objectors can cause significant extra work for HMRC. I was writing then about why HMRC might come to regret accelerated payment notices (Tax Journal, 24 July 2014). Almost everyone involved in or with the loan charge manned the barricades, but to anyone familiar with this issue (other than it seemed some in HMRC) the warning signs of disaster were there from the start. Despite this, HMRC’s own impact assessment claimed that: ‘This measure is not expected to have a material impact on family formation, stability or breakdown.’ I am sure the families of those involved would disagree, but even in 2017 this should have been seen for what it was – complete nonsense that did not sit well with the later comment in the same document that ‘the government expects that some individuals will become insolvent as a result’. If the outcomes for many of those caught by the loan charge were not so serious, you could laugh at the utter absurdity of these statements.

Changing the culture

But changing the culture of HMRC will not be an easy task. First, of course, HMRC needs to want to change. Much greater attention needs to be given to the training of HMRC officers and to the leadership at all levels within HMRC, which at the present time often seems to be absent. In its place is high level governance that has only a limited remit. Two things in particular stick with me from the Revenue training during my time: the first, very early on, was that ‘the purpose of an investigation was to get a settlement so pick the right cases’; and much later when I joined the Large Business Office was the importance of recognising that ‘in very many cases the tax issues stemming from large complex transactions would be grey, not black and white’.

Compare that to the black and white world that HMRC tries to pretend exists now. Compare it to the number of multi-aspect and other enquiries that HMRC now often opens on a wing and a prayer, refusing to give the slightest insight to where it sees the risks and so dragging the enquiry out for month after month, pursuing enquiries that are wholly divorced from the reality of what HMRC is capable of achieving. It was suggested to me recently that around half of all Code of Practice 9 investigations are settled for nil. If true, that is an astonishing statistic when compared to the past.

Alongside the loan charge is IR35. This year, IR35 is being extended to private sector businesses and making them responsible for compliance (following on from the similar change imposed upon the public sector). However, IR35 is a discredited approach to tackling disguised employment that has been widely criticised. Even for HMRC it has resulted in hit or miss outcomes, and more recently the taxpayer appears to more regularly come out on top. IR35 often involves very aggressive investigations by HMRC officers, some of whom seem barely competent and this is leading to poor case selection. Think Lorraine Kelly. What was (and is) needed was a proper evaluation of whether IR35 works as intended, hits the right targets and produces the right outcomes. It also needs some attempt at a rationalisation of the rules to reflect more effectively the policy of discouraging disguised employment, having regard to how the tribunal and courts have interpreted the rules. It is almost certain that, going forward, some genuine cases will run into difficulties with client companies that are wary of falling foul of HMRC.

Looking forwards, not back

So, with the change in tone and posture of HMRC compared to the Inland Revenue, we could be forgiven for thinking that HMRC is at war with the taxpaying public and their agents. Being sentimental, whilst the tax system of the 1970s might have been mad, the Inland Revenue did seem to have more regard to the fact that compliance was difficult and that most of the time most taxpayers tried to do their best. Today, can you imagine being a taxpayer? Of course, we are all taxpayers. I mean an ‘ordinary taxpayer’ or, more precisely, an unrepresented taxpayer. All I can say is God help them. Just imagine trying to make sense, unaided, of how to comply in relation to a range of relatively everyday transactions when such compliance has been made more and more difficult, at the same time that thousands of individuals are being brought within the self-assessment system due to child benefit, student loans and so on? And, at the same time, imagine you are reading about error after error being made by HMRC, sometimes with catastrophic financial outcomes for the taxpayer, or for HMRC; and yet HMRC expects perfection from you, with anything less potentially being within scope of what are now swinging penalties that are, at times, ruthlessly enforced.

All that said, I still believe that the fundamentals are there. During my year as president of the CIOT, I met many current HMRC officers who want to do a great job, see the challenges and are really interested in how HMRC can improve. Indeed, the large majority of HMRC officers I have met over the years have been reasonable and businesslike in their approach. HMRC has many high-quality people but it also has far too many officers who see aggression and confrontation as their key skills. Its governance structure is not flexible enough to encourage more effective intervention in individual cases that will inevitably go seriously wrong, resulting in utterly depressing headlines and the tribunal criticism we have seen at times. The number of such cases will be relatively small, but due to their impact will appear to be more widespread. Again, the loan charge demonstrated a lack of strategic understanding on the part of HMRC, as some in HMRC no doubt took the view that, since the numbers involved were only a fraction of the overall taxpayer population, all HMRC had to do was bunker down.

So far as government is concerned, we can probably forget many of the pre-election promises; few will be followed through or at least not in the way claimed. Even if they are implemented, it’s not what we need. The huge increase in tax legislation over the past decade is a challenge to us all. Do we need around 20,000 pages of tax law? It’s great for lawyers but hopeless for the rest of us and I expect even many lawyers find it depressing. Even with the work of the Office of Tax Simplification, progress is slow. What is needed is a change of emphasis: this should not just be about simplification but also about reduction, and better still not adding to the pile in the first place. Even where there is a case for legislative change, too much of what we get suffers from a lack of detailed consultation with expert input from experienced tax professionals who understand how any change is likely to impact the wider society and, crucially, how any change of law can be effectively implemented.

Too often, change is reactive, in place of taking a considered approach to the tax system as a whole. As a result, we have seen change after change that has not addressed the structural imbalances, for example between income and capital taxation or the availability of tax reliefs, so encouraging a sense of bitterness that the wealthy have it easy. Making tax easier for the many must be made the main priority. We have reached a point where almost half of all individuals pay no income tax. This is presented as a good thing, but we are losing sight of the fact that it means almost half of all individuals have income of less than £13,000 a year and a smaller and smaller number of individuals are paying most of the income tax. It may sound counter-intuitive, but it seems to me that good news would be that more people are paying income tax.

The part played by professional bodies

Then there is the challenge to the professional bodies. The big external challenge is professional standards, as it has been for some years. Despite the work done by the seven professional bodies governed by Professional Conduct in Relation to Taxation (PCRT), far too many in Parliament and HMRC have failed to see the importance of the regulatory structure PCRT has created, together with a determination to ensure that members of these organisations adhere to those professional standards. They are not perfect and plainly they will continue to be adapted and revised as we go forward. Here it was disappointing that, last October, HMRC gave evidence to the Public Accounts Committee (PAC) on the role of tax agents, stating that ‘the UK tax market was a completely unregulated tax agent market’. Those of us in the professional bodies who have advocated and driven changes in the approach to professional standards will rightly feel aggrieved, as will those who have worked hard, year after year, to try to get HMRC support in reducing the scale of the unregulated (unqualified) tax agent market. Put simply, I have heard more grumbles from HMRC about the quality of some elements of the tax agent community than I have heard positive suggestions for change; and, even after all these years, HMRC has still not put into effect in any tangible sense its agent strategy. And while the CIOT and ATT have for many years encouraged HMRC to use the disciplinary processes available through the Taxation Disciplinary Board, only now is HMRC showing signs of effective engagement.

What we are to do about tax advisers who operate in the ‘completely unregulated market’ is a significant challenge for us all, however. We have, in my view, reached a point where government needs to decide what it wants, since we cannot go on with a situation where professionally qualified tax agents are openly or by implication denigrated, and where HMRC gives an impression to Parliament that it has no option but to let professional bodies get on with it. This simply ignores the significant efforts made by the PCRT bodies to encourage HMRC to differentiate between professionally qualified tax advisers, including individuals who are employed by regulated firms, and the group of 30,000 or so tax agents who operate according to their own rules.

The professional bodies cannot address this issue on their own: we need government and HMRC to work with us. Yes, some of the issues raised will be more difficult to overcome than others; but unless we start to discuss how to move forward, we will stay stuck in a situation where HMRC appears before Parliamentary Committees and tax agents are damned with at best faint praise. HMRC’s explanation to the PAC that many taxpayers choose their adviser ‘based upon a recommendation from a mate’ and that it ‘was a shame so many returns by the self-employed prepared by agents contained errors’ give an insight as to how far we have to go.

In my view, we need to be moving towards a position where only professionally qualified individuals can give tax advice. We cannot expect government to change the landscape overnight, nor could or should it, but it can make clear and set a direction of travel, together with an end date, by which the whole of the profession would be compliant with such an approach. Even if the timescale was 10 or 15 years away, we must start a process that means that, at some point, taxpayers who need advice can obtain it with confidence that it is given by a qualified professional who has professional indemnity insurance, who adheres to an agreed common set of professional standards and rules, and who crucially has the respect of government and HMRC for the part that adviser plays in supporting the tax system. The days when many advisers and taxpayers saw the tax system as fair game must end and it will only do so when all parts of that system recognise their ownership and interest in its purpose, efficiency, effectiveness and fairness. The message should be simple: if you don’t like having to comply with professional standards, do something else for a living.

In the end, we face the same problems today as those faced by past generations; namely, how to build new approaches and technology into an old system. That old stalwart the Taxes Management Act 1970 is, unbelievably, still going strong. Today, there are new voices in the market, including tax academics and lobby groups such as the Tax Justice Network and Taxpayers Alliance at opposite ends of the debate, so the structure of the tax code is more under scrutiny than ever. Even so, there is reluctance by government to grasp the mettle and start a process of renewal that risks us simply proving Einstein correct: insanity is doing the same thing over and over again but expecting different results.