Select Committee on Treasury Minutes of Evidence


Memorandum submitted by Tax Faculty of the Institute of Chartered Accountants in England and Wales

  1.  We are writing to provide written evidence in response to Press Notice No 15 issued on 18 December 2006 in which it was noted that the Treasury Sub-Committee (the Committee) will hold an evidence session on 24 January 2007 on the above.

  2.  For your information we have explained who we are in Appendix 1 and have set out the details of our earlier comments to the Committee on the HMRC Committee in Appendix 2.

EXECUTIVE SUMMARY

  3.  Management of the merger is the key to success. We are concerned that post merger the overall management structure of HMRC lacks clarity and focus, both for HMRC staff but particularly for external stakeholders.

  4.  The new Chairman, when appointed, needs to address urgently our concerns about the overall management of the organisation and communicate clearly what the future arrangements will be.

  5.  We are very concerned that HMRC is stretched in a number of directions and that direct and indirect tax services "on the ground" have deteriorated. We welcome HMRC's work to address these issues but much more needs to be done to improve matters and prevent them deteriorating further. We also think that HMRC should commit to a long-term programme of tax simplification.

  6.  Lord Carter's report has set ambitious targets for improving e-services but, whilst our members are broadly enthusiastic about moving to e-compliance, there is a widespread lack confidence in HMRC's IT systems and their ability to deliver when most needed. We remain convinced that there is a need for an independent review body modelled on the US experience to ensure effective delivery.

  7.  There is a need for a clear assessment from HMRC, and ideally also HM Treasury, as to how in practice tax policy is being developed and a programme of improvements to ensure that tax policies will work "on the ground".

  8.  There have been a number of poor quality consultations over the past year. We recommend that a new overarching consultation group is established and that HMRC appoints a "consultation champion" to ensure that the views of stakeholders are taken into account at an earlier stage in policy formation.

  9.  HMRC needs to improve tax compliance but should devote more resources to understanding the reasons for poor compliance rather than just loading more penalties onto taxpayers. We believe that there should be some independent scrutiny of the powers review and that more concrete proposals should be published to protect the legitimate expectations of the taxpayers.

  10.  We are concerned that a number of important and necessary business tax policy reviews appear to have stalled. Particular initiatives which appear to have stalled include the taxation of small businesses and the proposed reforms of corporation tax. The uncertainty this creates needs to be resolved and the reviews brought to completion within set timetables.

DETAILED COMMENTS

Management of the merger

  11.  It is still relatively early days in the merger and there will inevitably be many teething problems. Management of the merger is the key to success. However, we are concerned that post merger the overall management structure of HMRC lacks clarity and focus. The lines of management accountability and responsibility are not always clear, either it seems to HMRC staff or to external stakeholders.

  12.  We are concerned that nearly five months after the departure of the first Chairman of HMRC, Sir David Varney, at the end of August 2006, no permanent replacement has been announced. We understand that candidates are being considered.

  13.  Given the pressing need to take decisive action in a number of areas, we believe that Committee members will want HMRC officials and the Paymaster General, who are giving oral evidence to the Committee, to provide a clear indication of when it is anticipated that this key position will be filled on a permanent basis.

  14.  The new Chairman needs to address urgently our concerns about the overall management of the organisation and communicate clearly what the future arrangements will be.

  15.  We are concerned that the merged body is being pushed in too many directions. The pressures on HMRC are considerable: to increase revenue, improve compliance and fight fraud, deliver improved services (particularly e-services) and to manage a tax system which is in a constant state of flux and where the volume of tax legislation has doubled in ten years. This is against a background of cuts in budgets and staff numbers. There is a danger that HMRC will not achieve its ambitions through initiative overload and lack of resources.

  16.  Many of the pressures mentioned above are outside of HMRC's control, but we think that there is a pressing need to implement a long-term programme of tax simplification that goes beyond the current Tax Law Rewrite project. This will benefit HMRC in the longer term but it will require more resources in the short-term.

Customer service issues

  17.  Our members are very concerned that HMRC's services "on the ground" have deteriorated. We have highlighted these issues to the Committee in previous submissions, but the concerns are widespread and cover both direct and indirect taxes.

  18.  In relation to direct taxes, the concerns centre around HMRC's reorganisation into Area Management and call centres, which have left our members unable to identify or speak to HMRC staff with the necessary knowledge and experience to discuss and resolve issues. We appreciate that this reorganisation pre-dates the merger. However, the recent Regional Review Programme coupled with reductions in staff levels of 12,500 in the period to 2008 and a further 12,500 thereafter, leave us extremely concerned that, not only will customer services not improve (as envisaged by the HMRC merger), but that they will deteriorate further.

  19.  We recognise that HMRC is under severe cost constraints and that returning to a local structure based around Tax Districts is not likely to be an option, but there is an urgent need for HMRC to work with agents to identify how local contact can be improved so that issues and difficulties can be dealt with quickly and efficiently at a local level. We welcome HMRC's stated objective to work more with us and the setting up of the Tax Adviser Strategy Unit is a positive step forward in this direction. We welcome also the commitment to revive the Working Together initiative at local level. However, these are still very embryonic and we would welcome further commitment to turning them into focussed and clear strategies.

  20.  Turning to the wider interests of the public, if agents find it hard to know how to contact the right person at HMRC, how much harder must it be for unrepresented taxpayers? With the move to contact centres, cut backs in local offices offering face to face services, and the increasing use of the internet as the sole way of disseminating information, there is a risk that the options and services available to ordinary taxpayers (and in particular more vulnerable customers) will be reduced below an acceptable level.

  21.  We commend the recommendations made in the report published on 17 November 2006 by Sir David Varney Improving links with large business. The recommendations will go a long way towards improving certainty for large businesses but we are concerned that implementation of these recommendations will be hampered by the need for HMRC to continue cutting costs and staff as mentioned in paragraph 15 above.

  22.  In relation to indirect taxes, the time required to process VAT application forms has become a serious concern, and is hampering the ability of small business to become established and start trading successfully. We have seen recent evidence that the estimated time taken for processing VAT applications is 12 weeks. Further, the prospective taxpayer is advised not to contact the office dealing with the application during that time, as that might delay the process further.

  23.  New businesses are not allowed to issue VAT invoices until their application has been accepted, but are expected to "charge" VAT to customers and then issue a VAT invoice and pay over the VAT once registration has been received. The reality is that most customers are likely to defer or withhold payment until a VAT invoice has been issued, causing severe cash flow problems for new businesses.

  24.  We appreciate that more extensive checks have been instituted to combat the very real menace of missing trader (MTIC) fraud and that HMRC recognise the problems caused by the delays and are seeking to address them. Nevertheless the delay in processing is far too long and we would have thought that most businesses (except those that look high risk) should be able to be registered within a month at most, and ideally within 14 days. HMRC need to work more closely with businesses and their agents to reduce the current processing time to a more acceptable period.

Information technology, the website and e- services

  25.  Both the Inland Revenue and Customs & Excise had substantial IT infrastructure and their own websites. The process of integrating the IT infrastructure of the two departments, their numerous legacy systems and their websites is inevitably complex. Lord Carter's Review of Online Services published on 22 March 2006, to which we contributed, set out an ambitious timetable for the expansion of HMRC's e-services and identified a number of strategic improvements required if the government's policy objective of increasing the use of e-filing is to be achieved. Key recommendations included working in partnership with stakeholders and improving the reliability and robustness of HMRC's e-services by adopting best practice from private sector IT experience. The appointment of Steve Lamey as HMRC's Chief Information Officer and the appointment of Mark Holden to head the Carter Programme demonstrate that HMRC is looking to recruit from the private sector , in order to replicate industry best practice, and we welcome this.

  26.  We believe that changes to HMRC's online services should be driven by the needs of taxpayers as much as by the needs of HMRC and that well designed, robust services will drive take-up automatically: The key issues that still need to be addressed are as follows:

    —  HMRC's IT strategy should be published and progress monitored by an independent body modelled on the Electronic Tax Administration Advisory Committee (ETAAC) in the USA.

    —  HMRC's IT systems still have a reputation for being insufficiently robust and often fall short of the standard experienced in the private sector. As the 31 January filing deadline approaches, our members are once again expressing concern that the online filing system does not appear to be as robust and reliable as it should be.

    —  In the past, systems have been launched to unrealistic timetables, without adequate testing and at times in the knowledge that they were flawed. We fully endorse Lord Carter's recommendation that systems should only be launched when they have been fully tested and confirmed to be fit for purpose and believe that this principle must be adhered to if the mistakes of the past are not to be repeated. The importance of this principle cannot in our view be overstated.

    —  Barriers to take up have often not been properly understood. Effective engagement with stakeholders provides the opportunity to avoid this occurring in future.

    —  Experience in other tax administrations suggests that there is considerable scope for further enhancement of e-services. Further electronic services could include an electronic R40 repayment claim and prepopulation of returns.

    —  HMRC need to make greater use of email.

    —  HMRC's website needs to be revamped and we understand that this is in progress.

  27.  A recent survey by the Working Together E Group found that accountants in practice are broadly enthusiastic about moving to e-compliance but still lack confidence in HMRC's IT systems. A significant number said that their lack of confidence was such that they would not recommend clients to pay their taxes electronically. The survey highlighted the fact that certain groups of SA taxpayer cannot currently file via HMRC's' Filing by Internet (FBI) system and the functionality of FBI needs to be enhanced to rectify this.

  28.  The proposal to withdraw the facility to generate HMRC approved paper substitute returns will leave those taxpayers and their agents who are unable to file using FBI because of functionality issues no choice but to handwrite the entries on their returns. This seems to us to be a retrograde step.

  29.  We welcome HMRC's progress in resolving many of these issues, particularly the more open and effective consultation that has taken place since Lord Carter's report was published. We are committed to working with HMRC to facilitate the delivery of IT systems that reflect the needs of agents and taxpayers and are fit for purpose when launched. Lord Carter's proposed expansion of e-filing and his suggested timetable are, however, ambitious and this is why we believe that an effective independent review body, modelled on ETAAC, is needed to ensure effective delivery.

Development of tax policy

  30.  An important element of good policy development is a clear understanding of what will, and what will not, work in practice. That is why our concern since the very beginning of the O'Donnell Review has been that HMRC, and not just HM Treasury, should be involved in policy formulation as they have the experience of the implementation of policy.

  31.  Chapter 5 of the O'Donnell Report set out very clearly how it anticipated policy formulation would operate with—in broad terms—HM Treasury responsible for new policy formulation and HMRC in charge of policy maintenance.

  32.  We are not convinced that this distinction is working in practice. There appears to be a lack of clarity about which department is responsible for policy formulation and what involvement HMRC actually has in the development of tax policy. We suspect these concerns stem from the fact that HM Treasury cannot formulate tax policy in a vacuum and that it needs the considerable practical input and expertise of HMRC to design tax policies that work on the ground.

  33.  We think that there is a need for a clear assessment from HMRC, and ideally from HM Treasury as well, as to how in practice policy is being dealt with under the current system and a programme of improvements to address the issues mentioned above.

  34.  We think the lack of clarity has extended into a need for the newly merged body to be "seen to be doing things" and thus the proliferation of initiatives, sometimes without any apparent cross-communication. A good example is the review of HMRC powers which is currently underway (see also our comments at paragraph 42 et seq below). This is a worthy project to merge the existing powers of the two legacy departments and should bring about practical improvements. An advisory board has been set up to look at the "high level" strategic issues and various other parts of HMRC have input to the process. However, this has not gone smoothly. The first visible "fruits" of the review led to a programme called "interventions". This was a pilot to encourage taxpayers to comply but was poorly communicated to those affected, badly implemented and led to the whole project having to be completely rethought. It caused confusion to taxpayers and tax advisers.

  35.  Secondly in this area HMRC is progressing a rewrite of the administrative legislation (the New Management Act project) which seems to cut across a number of its other initiatives in its area. We would suggest that some clear mapping of on-going projects would aid communication and help improve consultation—on which we have commented further below.

Improving consultation

  36.  Because the dividing line between the respective roles of the two departments in policy formation appears to be blurred, with a resultant lack of clarity and accountability, we think that consultation processes have suffered. There have been a number of poor quality consultations over the past year, in particular Lord Carter's proposal to change the self assessment filing deadlines and the changes to the inheritance tax rules for trusts.

  37.  We are concerned that the need to seek views and input from external stakeholders has sometimes fallen into a "black hole", with neither department paying sufficient attention to understanding the needs of stakeholders.

  38.  This lack of understanding of the needs of stakeholders was highlighted in a recent interview with the Acting Chairman of HMRC published in Tax Adviser where he admitted that HMRC

    "`were taken aback at the nature of the response' in relation to the inheritance tax and trusts proposals in the 2006 Budget."

  Given that HMRC had been consulting for two years previously about the reform of trust taxation (during which time the question of changes to the inheritance tax had never once been raised), the announcement of this policy change was a serious blow to the credibility of HMRC's commitment to consult on key policy issues, particularly given that the initial announcement lacked clarity and failed to appreciate the immense practical difficulties that would ensue from the original proposals. Similar issues arose in respect of the blanket acceptance by HMRC of the filing deadline proposals made by Lord Carter, the matter not having featured in any discussions with stakeholders during Lord Carter's review.

  39.  These consultations have resulted in considerable antipathy amongst our members and much wasted time on all sides trying to rectify the damage done and reach practical solutions. Given that much of the input to these consultation exercises comes from members who volunteer their time and resources without charge, these failings discourage them from getting involved in future consultation exercises. HMRC needs to work more closely with HM Treasury and external stakeholders on improving consultation processes and ensuring that the voice of external stakeholders is taken into account in all policy formulation.

  40.  Post merger we note that HMRC appear to be increasingly using informal consultations. We appreciate the usefulness of informal consultations and are happy to support them, but often their usefulness is compromised when unreasonably short timescales are imposed for comment, and we think that HMRC needs to allow more time for constructive input.

  41.  HMRC have proposed a new overarching body to oversee relations with tax agents and advisers (see comments above) and we think that this body could be used to improve consultation and provide greater strategic oversight. HMRC appear to be thinking along similar lines and we think this should be implemented as soon as possible. As part of this, HMRC also needs a consultation "champion" whose responsibility should be to consider all policy changes from the viewpoint of external stakeholders so that their legitimate concerns are addressed right at the start of policy formulation.

Improving taxpayer compliance

  42.  It is important that the merged body continues the work to improve taxpayer compliance. HMRC's review of "powers, deterrents and safeguards" is a once-in-a-generation opportunity to improve the current rules. We have commented in detail on the proposals published to date and most of our comments are still pertinent, see for example our representation TAXREP 17/06 which is available at http://www.icaew.co.uk/index.cfm?route=139273.

  43.  We are concerned that the review appears to be heading in a direction in which powers and penalties will be increased without either corresponding protection of taxpayers' rights or HMRC taking greater steps to better understand the reasons for poor compliance and whether other changes might assist improving compliance.

  44.  The need for HMRC to understand the reasons for poor compliance was underlined by the report last month of the National Audit Office HM Revenue & Customs: Filing VAT and Company Tax, the NAO made two key recommendations with which we agree: namely that:

    —  HMRC should improve their understanding of which businesses do not submit their returns on time and why, so they can focus their efforts on those which are late in filing both VAT and CT returns; and

    —  HMRC should track the effectiveness of the regime on compliance including the amount of any penalties imposed and paid.

  45.  In respect of the first point, the constant changes to the tax system and the doubling of tax legislation in 10 years do not encourage good compliance, reinforcing the comments we made above about the need for a programme of tax simplification.

  46.  We are concerned that HMRC are attempting to achieve too much in too short a period and that the bodies that are being consulted, including Tax Faculty, just do not have sufficient resources to cope with the process.

  47.  We remain concerned that public trust in the outcome of this review is compromised by the fact that HMRC have a conflict of interest, which we believe is underlined by the `penalty-based' approach they have adopted. This conflict of interest is likely to become worse if HMRC become the new money laundering regulator "of last report". For these reasons, we believe that there should be some independent scrutiny of this review.

  48.  Given the concerns about proposals for greater penalties and the lack of concrete proposals for protecting the rights of taxpayers, we recommend that further consideration is given to protecting the legitimate expectations of the taxpayer. HMRC should consult on the means to deal appropriately with taxpayers' rights and obligations and we believe that the culmination of this process should be the publication of a taxpayers' "Bill of Rights".

Business tax policy

  49.  We are concerned that a number of important and necessary business tax policy reviews appear to have stalled, with little or nor progress on the issues since the merger. Whether this is a result of the merger diverting resources into other projects, or whether the policy issues are proving intractable, or there are other reasons, we do not know but the lack of direction is causing uncertainty and we believe that there is a need to reinvigorate the reviews and bring them to conclusion within stated timescales.

  50.  The first area of concern is the taxation of small businesses and encouraging such businesses to be innovative and entrepreneurial. It is a particularly difficult area in which to develop tax policy as there is a very fluid dividing line between the employed, the self employed and those running small businesses. The Government has been looking into this tax area for some time and produced a consultative paper in December 2005 but since then there have been no real indications of likely policy in this area. In the meantime the 2006 Pre-Budget Report announced further anti avoidance measures in relation to Managed Services Companies which are a further attempt to stop what is perceived to be exploitation at the interface between the individual, the small business and the self employed.

  51.  The second area of concern is the continuing review of corporation tax reform, which was launched with a consultation document in August 2002 and now appears to have ground to a halt with the proposals only partly implemented.

  52.  We ask that Committee members use the current evidence session to obtain a clear understanding of the current state of these reviews and ask for commitments from HMRC to bring them to a speedy conclusion.

17 January 2007


 
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