Examination of Witnesses (Questions 120-139)
HM REVENUE AND
CUSTOMS
28 JANUARY 2008
Q120 Dr Pugh: If we had a boom in
2006/2007 and the amount of tax-take did not increase, does that
not suggest that there is some serious evasion going on or that
you are getting less capable of identifying it?
Mr Hartnett: I think there were
policy changes, which either Melanie or Freda may want to comment
on, that affected the tax take.
Q121 Dr Pugh: It was an odd year!
Mr Hartnett: No, I think it was
just a year when there was some change, and you see this; but
I think both corporates in the UK and their advisors, were you
to go and talk to them quietly, would say that the Large Business
Service in HMRC and our specialists are a pretty determined bunch
and very good at driving down tax avoidance.
Ms Dawes: Perhaps it would be
helpful to clarify corporation tax receipts on large business.
There was indeed a small fall in real terms between 2005 and 2006,
but there was a very large rise in 2005 compared to the year before.
It was a 33% in real terms rise. That is the broad context. The
very small fall can be entirely explained and indeed reversed
by the fact that there was a change in the instalments regime
for North Sea taxation and we effectively collected an extra quarter's
worth of tax in 2005/2006 which raised the figures, and that was
not repeated the following year. There was not that falling-off
that—
Q122 Dr Pugh: For the moment I will
accept your explanation. Can I go to the two big ideas in the
NAO report? One is that you should concentrate on the big fish
rather than the minnows. Is there a dilemma here, because I would
be very happy, as a minnow, to have my tax affairs rather loosely
looked at and for you to go after the bigger fish; but there is
a principle of equality here, is there not, a principle of zero
tolerance? How do you balance things out?
Mr Hartnett: In this way: when
we started taking forward our response to what is described in
the report as the review of links with business, and modernising
the approach of the Large Business Service, as I have said on
a number of occasions, we wanted to match resource-to-risk. We
thought that we would have a very low engagement level with what
seemed to us to be low-risk corporates. The corporates did not
want it like that; the corporates said to us: "No, we need
an engagement with you; we need to be able to talk to you about
issues." It is not zero engagement, if I can pick up your
term with smaller corporates, and no-one is getting away with
anything that we are aware of. We will always collect tax that
is there to be collected. What we will not do is pursue very small
risks when there are very big risks to be pursued.
Q123 Dr Pugh: The second big idea
is a more client-centred approach; we get rid of tax inspectors
and we have client relationship managers. Is there any real evidence
that that makes any significant difference?
Mr Hartnett: I think it does make
a very real difference. We have not got rid of the tax inspectors;
they are still there and some of them have become client relationship
managers. We have two tasks to balance out, Dr Pugh. We need to
help and support business in relation to the tax system and we
need to be pursuing tax liabilities and tax risks as well. For
a very big corporate, it may have stamp duty, corporation tax,
PAYE, National Insurance—I will not go further—to
pay, and what we are doing through our case relationship managers
is saying, "Here is one person who will manage your relationship
with HMRC"[10]—
Q124 Dr Pugh: I know what you are saying
and I know the proposition you are putting forward and what you
are suggesting you are going to do; what is your evidence for
thinking this works any better than any prior system? Have you
got any evidence?
Ms Dawes: We have got lots of
evidence of individual cases, when actually having somebody going
in as the client relationship manager across all the taxes has
allowed them to—
Q125 Dr Pugh: You have evidence of
the general trend as well as the individual cases, have you?
Ms Dawes: I think the general
trend is the progress we have made by re-prioritising our work
over the past year. We could not have done that without the client
relationship managers in place who knew the business inside out.
Q126 Dr Pugh: If you have any general
evidence, can you submit it, please? I came across the expression
in this report, "intervention yield"; that is your public
sector target, is it not? There is a public sector target as a
whole of £3.5 billion under-payment of tax to be sorted out
and obtained. Intervention yield though, which you are marked
on, is really money you get when you have to go looking for it;
you have to knock on the door of a firm and insist that they pay
it. Is it a good indicator of how well you are doing; and can
you give me a general picture of what you think the corporation
tax element will be in that £3.5 billion of underpaid tax
that we are looking at?
Mr Hartnett: Let me unpack it
a bit by saying this. Our yield in relation to big business comes
in three forms. It comes from investigation and inquiry, and this
is a straightforward amount of money. It comes from looking at
issues and perhaps seeing that big corporates are taking a tax
relief a year or two earlier than they should, and so we reverse
that. The big issue where we have got good evidence about improvement
is that a lot of our work, more and more every year, is happening
in real time before tax returns are sent in, before accounts are
signed off; and we are able now to measure the impact of our work
there, and it is growing.
Q127 Dr Pugh: It is a fair indication
of the progress you are making; the question you did not answer
is that if we are going to get £3.5 billion from under-payment
of tax which we did not get before, what percentage of that will
be corporation tax?
Mr Hartnett: I do not think we
targeted a percentage, but perhaps we could give you an answer
in writing when we have got to the end of the period, when we
can break it down. [11]
Q128 Keith Hill: Mr Hartnett, I was a
bit worried that you were not able to complete the answer that
you were giving to Angela Browning when you were describing a
company where you were meeting regular obfuscation difficulty
from tax advisers. Do you want to tell us a little bit more about
that? You implied that this was part of a pattern.
Mr Hartnett: It can be a pattern,
Mr Hill, sometimes. Again, a quick illustration: if a firm of
advisers has sold a scheme to a corporate, and we believe the
scheme does not work, then we will invite the corporate to agree
that and pay the tax. It will not surprise you that sometimes
they do not do that and we are forced to litigate. We then see
the firm of advisers maybe appear in support of the litigation,
and work really very hard to slow that litigation up as much as
they can. We use all the powers and techniques available to us
to try and move things along faster. Have we got perfect powers
to put in what I describe as jet propulsion behind that? No. We
are constantly looking at our powers to see if there are ways
to improve them, and the review of powers that is going on could
lead to further modernisation of information powers. We are determined.
If we think there is something improper about the approach taken
by the tax advisers, we will not hesitate to go and see the chairman
or someone else at a major firm. Not very long ago, probably 12
months ago, we went to see the vice chairman of a major firm to
say that we were very concerned about what they were selling to
clients—they had sold it about a dozen times—and how
they were defending it. That vice chairman agreed with us and
wrote to all the clients to say that that scheme did not work.
We welcome that.
Q129 Keith Hill: There is a pattern.
Mr Hartnett: There is a pattern
of those who have devised a scheme and sold it, of wanting to
defend it. They have got a big skin in the game, as they say;
they have got a big investment in it.
Q130 Keith Hill: How many cases do
you take to litigation in a year?
Mr Hartnett: Quite a lot. We developed
a litigation strategy, which is referred to in the NAO report,
where we will not negotiate if we are confident that our interpretation
of the law is right, and we will take them to litigation. Can
we move them all ahead as fast as we would like? Not often.
Q131 Keith Hill: That is why you
are looking for new powers, or possibly looking for new powers.
How many cases will you have in court at any one time?
Mr Hartnett: I cannot give you
at the moment a precise figure. We can drop you a line.[12]
Q132 Keith Hill: That would be helpful—and
also for a year.
Mr Hartnett: Sure.
Q133 Keith Hill: On the whole, is
it worth it, taking companies to court?
Mr Hartnett: I think it is. Sometimes
we lose. More often recently we have won and demonstrated that
our interpretation of the law is right. Yes, it is well worthwhile.
Q134 Keith Hill: The Large Business
Service deals with 700 companies. How many of these will get their
returns wrong in an average year?
Ms Chaloner: It probably depends
what you mean by "wrong". A large proportion of them—there
will be issues that we will need to question, to look at to understand
whether or not our interpretation of the tax treatment is the
same as the company's interpretation of the tax treatment. Some
of the companies' systems may be faulty, and therefore what comes
out in the computations is wrong. Clearly, in those circumstances
we want to work closely with the company to get them to a point
where their systems are right. The other big area is the avoidance
schemes, where they would say very clearly that in their view
their computations are right; and we would say that we do not
agree with the interpretation. It is hard to say it is black or
white.
Q135 Keith Hill: Are both of those
cases of the company making an innocent mistake?
Mr Hartnett: You can certainly
see that, Mr Hill. Again, a quick example: I remember being, frankly,
fascinated by the tax implications when I first saw a satellite
leasing arrangement by a major bank. We did not think the bank
had got it right but we did not think they had got it wrong deliberately
in any sense. This was really the cutting edge in telecommunications
and taxation and we worked together to get to a right answer.
It was very difficult.
Q136 Keith Hill: How many of these
700 do you reckon are deliberately trying to dodge their tax liabilities
in any given year?
Mr Hartnett: It is very hard to
give you an answer. We see now much fewer schemes than we have
seen before, but they would regard themselves under an obligation
to reduce their tax liability, and it is a question of how they
go about doing it.
Q137 Keith Hill: If you look at figure
10 on page 23, which analyses the additional yield resulting from
your compliance activities, leaving aside accelerated yield, the
pre-return—I would take that to be an example of your good
practice; you are working with the company in advance and trying
to advise them how to make an accurate return and all the rest
of it. By contrast, direct yields is when you think it has gone
wrong, and you have actually gone in there, intervened and said,
"Now look here, this is a serious mistake". You might
say that the yield of pre-return work is the correction of innocent
errors and misconceptions and all the rest of it, but that does
not seem to produce very much, only 6% of the overall return,
whereas 79%, which is the direct yield, is when you have had to
go in there and say, "Your self-assessment is inadequate;
we want to look at this more seriously." That suggests to
me that there is perhaps more deliberation in inaccurate returns
than innocence in inaccurate returns, but I may have got it wrong.
Mr Hartnett: With great respect,
one might draw that conclusion just from one year, but if one
went backwards over a period, I think the pre-return work—one
would be able to trace back to a point—I do not know where
the point is—where there is almost nothing because those
pre-return discussions with corporates did not happen. It is a
much more effective use of our time to look at an issue in real
time with a corporate and resolve the issue if we can, than to
have to put a big team together to undertake an investigation
that could take—
Q138 Keith Hill: I am sure you are
absolutely right, that it is the best way to do it. It seems to
me co-operation is the best way of handling these things. Let
me just ask my final two questions—we are under tremendous
pressure from our Chairman here! Let us go back to the £8.5
billion of corporation tax under consideration each year. What
kind of things does that under-payment result from or putative
under-payment?
Mr Hartnett: It is not necessarily
the same amount each year. That is the amount of corporation tax
that our people have registered as at risk in the 12 months to
February 2007. It could be any of the things we have discussed
this afternoon. It could be because maybe we were concerned about
a scheme of tax avoidance, about how capital allowances have been
claimed; and even perhaps about deduction for pensions, as Angela
Browning was talking about earlier on and whether or not it fitted
with the rules. It could be literally anything.
Q139 Keith Hill: One final observation:
if £8.5 billion is the figure that you kind of estimate for
one year, looking back what is the total, do you think? Is it
possible to arrive at an estimate of what may be the under-payment
under consideration?
Mr Hartnett: I do not think we
can give you an estimate with any accuracy. The only thing I can
say with certainty, Mr Hill, is that some of that £8.5 billion
will turn out to be not actually tax that we should be collecting—we
have seen a risk and examined a risk and we agree it has been
treated properly. Some of it will be tax that we absolutely do
need to collect and may end up fighting our way through the courts
to do so.
10 Note by Witness: During 2007 HMRC commissioned
research on the experience of our large business customers. The
findings identify what is important to business and where improvements
have been made. The introduction of the Client Relationship Manager
role is seen as both important and as having had a positive impact
on LBS customer experience. Across the large business population
as a whole, 1 in 5 customers have noticed an improvement over
the last year, with the perception of improvement significantly
higher (31%) for customers dealt with wholly by LBS, reflecting
the impact of the CRM. Back
11
Note by Witness: This information is not yet available.
We will send the Committee a further note following the end of
the financial year. Back
12
Ev 17 Back
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