Examination of Witnesses (Questions 20-39)
HM REVENUE AND
CUSTOMS
1 MARCH 2006
Q20 Greg Clark: Indeed, of course.
I am not suggesting you have more, but in the processing it strikes
me that with savings that might be possible through technology,
to have 30 people saved over a network of 68 offices is less than
half a person per office and does not seem terribly ambitious
on the administrative side.
Sir David Varney: It will take
time. We want to get data in a form which is called XBRL, extensible
business Reporting language, which has the advantage of labelling
data with its place in the accounts when we get data in that format.
So some of the savings you are seeing partly reflect the number
of people involved, partly they reflect a cautiousness about how
quickly this filing will come in.
Q21 Mr Mitchell: It all looks very
haphazard to me as a mere taxpayer. There we all are as taxpayers
hounded by Adam Hart-Davis telling us to get it in or our wives
will all leave us and our children will die and all sorts of things
and the horrendous penalties of being late, yet you are carrying
on in a fairly haphazard fashion. You have no idea what the tax
gap is, how much companies are paying below what they ought to
be paying. You do not look at other taxes due from companies except
in 9% of the cases, which I should have thought was a strange
way of proceeding, and you have no idea of the effect of penalties
when they are exercised. Why is it so haphazard?
Sir David Varney: It is not haphazard.
You can not cut the number of inquiries in half and increase the
yield by 42% by a random walk in the dark. I do not buy that for
a second. No country has a robust way of identifying the tax gap
for revenue and corporation tax. We have just seen a recent Report
which has tried to assess corporation tax and having been the
Chief Executive and Chairman of two of the PLCs, I can look at
the figures with a degree of expert knowledge of what those figures
are and it is very difficult for outsiders to be able to work
out what the tax position is. What we are talking about is a stock
and flow of money and it is quite difficult for outsiders to understand
what is going on in the tax books; they can know what is going
on in the published accounts. What we are doing is trying to run
a risk management exercise, to make a deployment of resources
commensurate with the risks involved to the Exchequer and that
is done over a number of offices. If you are in HMRC, given the
number of offices we have, the number of people, the number of
businesses we deal with, you would expect complexity. However,
that is not haphazard, that is an attempt to try to deal with
what is a very complicated organisation with lots of interfaces.
Q22 Mr Mitchell: But it looks as
though you are being much kinder and gentler or dilatory with
companies than you are with individuals.
Sir David Varney: You will not
find many companies which would agree with that. Our job is not
to hound people: it is to help the people who want to comply.
Q23 Mr Mitchell: Your job is to bring
the money in.
Sir David Varney: Our job is to
help people who want to comply to comply and to bring those people
to account who are eroding the tax system by seeking to evade
taxes.
The Committee suspended from 4pm to 4.07pm
for a division in the House.
Q24 Mr Mitchell: I was just arguing,
hypothetically of course, that you make it sound like this is
some kind of voluntary donation and it is your job to facilitate
it, whereas in fact it is a tax. It is the rent that companies
owe for being able to operate in this country and it is your job
to get as much out of the bastards as possible.
Sir David Varney: My job is to
enforce the law enacted by Parliament. I should find some conflict
between the term "bastards" and getting the most money
out of them commensurate with their obligations under the law.
Q25 Mr Mitchell: Yes, but this is
a far more accommodating attitude than is taken to the ordinary
individual taxpayer.
Sir David Varney: I do not think
that is true. We are dealing with a large number of companies.
We deal with individuals. We try to deal with everybody on the
basis of fairness and what is appropriate under the law. We should
have an advert encouraging people to use our whistle-blowing service,
which people already use, which is across the whole gamut, whether
individuals or companies.
Q26 Mr Mitchell: The random inquiry
work found that 40% of the returns contained errors. In whose
favour?
Sir David Varney: The Report gives
an indication of the top three errors. The first one was understated
sales. You would normally understate sales for the benefit of
the owners of the business. There is personal expenditure, putting
private expenditure through a corporate vehicle, which would usually
be for the benefit of the private individuals. The section 419
is loans to directors. So the top three would be of benefit to
officers who would be understating their incomes and that is why
there might well be a yield in terms of their income.
Q27 Mr Mitchell: What happens to
those who persistently make errors in their favour? Are they scrutinised
more rigorously?
Sir David Varney: Yes, obviously
and there are penalties that can be laid there up to 100% of the
tax. We have a regime which we have to go through which Parliament
has laid down in terms of what is an appropriate penalty to put
in place.
Q28 Mr Mitchell: Why is there such
a wide variation in performance between areas? Is it a question
of smaller offices or more remote offices being hicks from the
sticks and companies giving them the run-around or what is it?
Mr Banyard: Companies are not
giving them the run-around, but some of the areas are quite small
and so the performance variations you get are magnified simply
because of the small number of people involved. They are also
magnified because you are only taking a one-year snapshot here
of work that runs over a couple of years or so. Although we have
not run a two-year average we should expect the variation between
offices to be quite a bit smaller if we looked at two years as
a whole. Yes, there are variations and we are going to use this
Report to help us drive the lower performing areas up to the performance
of the higher ones, but these figures give a very stark picture
which is only a snapshot.
Q29 Mr Mitchell: So where should
I set up my company if I want to pay less corporation tax?
Mr Banyard: There is no place
where we could safely suggest you set it up if you want to avoid.
Sir David Varney: But there is
something in what you say about areas and if you were to take
figure 12 you would find that there would be a function of areas.
In some areas, of course, you have large numbers of companies
and therefore you have the staff who can build up large amounts
of skill and interchange; in others you have much less economic
activity and therefore you have less coverage.
Q30 Mr Mitchell: It is striking that
while income tax has been rising fairly steeply, corporation tax
has not. A number of reasons are given in the Report, but is one
of the basic reasons the fact that companies are establishing
themselves offshore?
Sir David Varney: No, we do not
see that. If you look at figure one on page 10, if the Chancellor
were here he would be talking about the fact that he made two
corporate taxation reductions from 33% to 31% in 1997 and then
in 1999 to 30% and that led then to a decrease in corporation
tax returns. More recently corporate profitability has increased
and therefore corporation tax receipts have gone up, although
it is still a small proportion, about 13% of our total tax take
from the population at large.
Q31 Mr Mitchell: But given the fact
that the economy has grown so much, the number of companies has
increased, you would expect corporation tax to be higher.
Sir David Varney: The Chancellor
has reduced tax; he also has an agenda in terms of looking at
the competitiveness of our tax regime against other countries.
At the moment we think this year we shall collect something like
£42 billion which is up 26% on last year. That reflects partly
corporate profitability; it partly reflects the rising oil prices
and therefore profitability of the North Sea. That is really a
judgment for Parliament. My job is to collect what you ask me
to collect. It is your job, with respect, to determine where you
wish to levy it.
Q32 Mr Mitchell: Suppose I decided
to establish Mega Mitchell Corporation.
Sir David Varney: That would be
high risk.
Q33 Mr Mitchell: Like News International
or like Virgin in some tax haven, what happens then? Is no assessment
made at all for corporation tax purposes?
Sir David Varney: Let us take
the general case of Mega Mitchell, a hypothetical company, typically
that company would have a large number of subsidiaries. What we
would be taxing is the subsidiaries in the UK that were here.
We would be looking to see whether there was economic activity
which was done in the UK and which was properly accountable for
UK tax.
Q34 Mr Mitchell: The profits were
to a trust in Liechtenstein or British Virgin Islands or somewhere
and the question is: what taxation is possible on profits earned
here but actually channelled through tax havens?
Sir David Varney: Well there is
a fair debate and we are in front of the House of Lords from time
to time on the interpretation of tax law and what is accessible
and the fact is that at the moment tax revenues from corporation
tax are rising.
Q35 Mr Mitchell: Slowly.
Sir David Varney: It is for you
to make that judgment, not for me to make that judgment.
Mr Banyard: We have legislation
which seeks to prevent profits on economic activity in the UK
being shifted to tax havens. We have transfer pricing legislation
and we have controlled foreign companies' legislation, which attempt
to keep in the United Kingdom profits and the tax on the economic
activity which is generated here.
Q36 Mr Mitchell: It is always interesting
to know what proportion of its earnings a corporation like News
International pays in tax in this country and what proportion
just goes offshore. I bet the overwhelming proportion goes offshore.
Sir David Varney: We are not allowed
to comment on individual taxpayers.
Chairman: If you want to do better you
should employ Mr Clark's wife to give you some advice.
Q37 Angela Browning: Sir David, in
one of your earlier answers to the Chairman you said, and you
repeated it in another answer, that 10% of effort goes into random
inquiries. Are you not just fishing in the wrong pool here? When
you say they are random inquiries, surely the art is in getting
a better return for the amount of resources you are spending on
trying to recover corporation tax? Would it not be better if you
had a lot more focus, for example, by way of sector or some other
way of disaggregating all these companies so that you get a better
return? What actually are you doing in order to do that? From
what we have heard, it still sounds pretty random.
Sir David Varney: 90% of our activity
goes into targeted risk assessment activity. We do not have full
knowledge of what the risk is that we are managing out there,
so the percentage of random inquiries is to drive out and improve
our knowledge and intelligence of two sets of issues: are they
systemic errors which regularly happen, which by better education
we can eradicate from the system? Then, what is the nature of
risk and how is it changing? So, we have to make a judgment. Our
judgment was that 10% was about the right level of resources to
devote to this, because the people we use cannot be used on revenue
raising errors while they are used on random inquiries and they
are pretty high cost.
Mr Banyard: I was just going to
add that we do 4,500 full inquiries, where we go into books and
records. Four hundred of those are in the random programme, which
enables us to see where the risks are and whether our risk analysis
is actually picking up the key risks and you need the random programme
to give you that assurance.[2]
The other 4,100 cases are selected on the basis of risk analysis
and our strike rate on those, or our success rate, is 81% which
is as good as any other fisc in the developed world as far as
we are aware. On top of that we do some 39,000 of the aspect inquiries
where we are going in and perhaps looking at just one particular
point where we are not sure whether the tax treatment is right
or not.
Q38 Angela Browning: If you look at what
the Report tells us, on those full inquiries specifically not
the aspect inquiries, we are told that the median for the additional
tax yield is £7,200. When you compare that with the costs
of those inquiries, for example at paragraph 4.4 on page 30, it
shows the staff costs and at figure 12, which we looked at earlier
on page 31 next to it, you can see that the staff costs on those
full inquiries are between £3,600 and £9,800. That does
not seem to me to be particularly good value for money.
Mr Banyard: The full inquiry has
an average yield of £27,000.
Q39 Angela Browning: Then the figure
I have read must include the aspect inquiries.
Mr Banyard: The random inquiries
bring in a yield of a tenth of that.
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