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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