Select Committee on Public Accounts Minutes of Evidence


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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