Examination of Witnesses (Questions 140-156)
HM REVENUE AND
CUSTOMS
28 JANUARY 2008
Q140 Geraldine Smith: Looking at
the staffing figures, you spend £28 million a year on 600
staff, and they manage to bring in £23.8 billion in tax,
which seems pretty good. If you had more staff, could you bring
in more money?
Mr Hartnett: That is a very good
question, if I may say so! I do not think we know. There will
be a law of diminishing returns somewhere. We are investing in
the Large Business Service and in other areas. Just below the
Large Business Service are a lot of pretty large companies dealt
with by our local compliance people. We are investing there and
training there. The issue that is hardest of us for all time is
how we protect the integrity of the whole tax system in all its
manifestations—small business through to big business. We
need to get the resource-to-risk ratios right but we need to protect
the whole system. It goes back to Mr Touhig's point: are we training
enough people? As we bring in these 140 new people to do taxation
work, we have been asking ourselves that same question.
Q141 Geraldine Smith: Are they on
performance-related pay?
Mr Hartnett: To an extent, but
not very significant.
Q142 Geraldine Smith: I find it amazing
you have got 50 businesses out of the 700 that are paying 67%
of the total corporation tax in one year. How do those businesses
feel? Why do they pay the tax when you have got 220 paying none
and another 210 less than 10 million? Do they not feel that you
may be missing something? What is the difference?
Mr Hartnett: An awful lot of these
corporates absolutely want to pay tax, and work very hard at doing
that.
Q143 Chairman: What did you say?
Mr Hartnett: I said a lot—the
rest, Chairman, is a matter of record—want to pay.
Q144 Geraldine Smith: The 220 do
not, do they? They are not paying anything!
Mr Hartnett: I gave you part of
the answer to that earlier on. A large number of those are only
in London for access to the capital markets and have no taxable
profit in the UK. Others have large accumulated losses and still
more have actually failed, and do not exist.
Q145 Geraldine Smith: What about
the 210 that pay less than 10 million?
Mr Hartnett: Maybe that is the
right profit. If you imagine the FTSE100, there are the mighty
multinationals at the top. I think the UK has one or two of the
top seven banks in the world. Go down to the bottom of the FTSE
and there is a constant rotation as things are happening to companies,
and they are very much smaller. I can see Melanie wants to come
in and add to this.
Ms Dawes: I just wanted to explain
why it is that a such small number of the top 50 pay 67% of the
corporation tax. If you look at the market capitalisation of the
largest 700 UK-owned businesses in the UK—it is not quite
the same as the Large Business Service population but not far
off—you will find that 67% of market capitalisation comes
from 50 companies. It is a very similar proportion. To some extent
we are seeing a reflection of the economy; the large corporate
economy in the UK is reflected in the corporation tax system.
Q146 Geraldine Smith: Are you reasonably
confident that everyone who should be paying corporation tax is?
Mr Hartnett: We are reasonably
confident. We are not completely confident because the work we
do, the yield we produce, shows that that is just not right. However,
we believe we are very effective in monitoring whether the corporates
are paying what they should pay, but we are not complacent.
Q147 Geraldine Smith: Do you think
the penalties are strong enough when people are avoiding tax?
When does efficiently managing your tax affairs become tax avoidance?
Mr Hartnett: I am sorry, I need
to be slightly technical for a split second. Penalties where there
is dishonesty—and avoidance will, pretty regularly, not
involve dishonesty—penalties for evasion, penalties for
serious lack of care. The new regime I mentioned which comes in
through 2008 and then applies to returns from 2009 will I think
give us a very useful weapon to use with corporates and other
taxpayers so that innocent errors are not subject to penalty,
but serious lack of concern about getting things right and worse
will pay more penalties than have been paid before.
Q148 Geraldine Smith: Going back
to the issue of staffing, if it is a difference between paying
zero tax and hundreds of millions, then I expect they are going
to invest heavily in making sure they have got people that know
exactly what they are doing and know the tax system inside out.
How can you compete with that? Do they poach your staff? I think
you have been asked earlier for some information about that, but
has there been any in-depth work done, looking at that to see
how many staff you are losing?
Mr Hartnett: We are constantly
looking at that and why it happens and what people are paid when
it happens. For the last two years it has happened in very small
numbers, and that is what we are going to provide. We have been
doing some of this too. We have been hiring people out of the
major accounting firms. We have more tax-qualified accountants
working with us today than ever before. But the other group we
have tried to persuade to join us are quite senior partners out
of the major firms who retire, rather earlier than tax inspectors
do, and we ask them to come and join us and help us with our very
complicated technical work—and they do.
Q149 Geraldine Smith: This has been
touched upon earlier, but do you think corporation tax is too
complicated? Do you think if it was simplified you could gather
more tax?
Mr Hartnett: This is a cheeky
answer—if I may! I would rather you asked me a slightly
different question but I will answer both. I would rather you
had said to me, "Mr Hartnett, what about the complexity of
business, global business and multinational business in particular?"
I think the way both domestic and international business has grown—commerce
is complicated. I remain to be convinced that a massive simplification
of corporation tax would necessarily lead to more yield.
Q150 Chairman: I was very surprised
by this statement, which I do not think has been adequately covered
so far, in paragraph 2.24; that 49% of all open inquiries were
over two years old, with 13% over four years old. That seems incredible
to me, that you are allowing these inquiries to go on for so long.
That might explain some of the problems we have been talking.
When can you clear this backlog?
Mr Hartnett: It has reduced, Chairman,
already. I will be corrected from the left or right if I have
got it wrong, but 49% is now down to 42%; the 13% is down to 10%.
Q151 Chairman: Still, 10% over four
years old.
Mr Hartnett: A major transfer
pricing case—and this is true of every developed country
in the world—say involving half a billion pounds or more,
will rarely be settled in under that. Some of them go on for ten
years, be it in the UK, the United States—
Q152 Chairman: You are getting all
this money back with interest, are you?
Mr Hartnett: Absolutely.
Ms Dawes: Can I just add to that,
that although the percentages may not seem to have fallen very
much because we have reduced the overall number of inquiries open
quite significantly by nearly 40%, we have cut by 46% the number
over two years old in the last year and by 51% the number over
four years, so there are some quite big reductions.
Q153 Chairman: You are a very convincing
witness, Mr Hartnett, and you keep trying to convince us things
are getting better, but reading a couple of things here, in paragraph
2.19: "Our consultation with the large businesses in early
2007 indicated they had high expectations from the Department's
new approach of focusing resources on higher values of Corporation
Tax under consideration. But some businesses reported that they
had yet to experience the new approach and expressed frustration
at the continued number of low value enquiries and additional
work involved in responding to questions on a large number of
enquiries." We read later on, in paragraph 2.39: "In
our consultation with large businesses, they expressed support
for Sir David Varney's proposals and the operating model and welcomed
the Large Business Service's more collaborative approach, which
they considered a move towards best practice... But some reported
that they had not experienced the more open and trusting relationships
the Department was advocating and that the old enforcement culture
still existed." I put it to you that despite your convincing
performance this afternoon, that old enforcement culture still
exists and it is here in the report. Do you agree?
Mr Hartnett: What I would really
like to say, Chairman, is "trust me".
Q154 Chairman: Trust you! In God
we trust, not in Mr Hartnett!
Mr Hartnett: Let me say this.
We have more work to do on the old tough enforcement culture as
is described here, and we are doing it. We survey our big business
customers on a regular basis and 31% of them said to us recently
that they had noticed a big improvement since we had introduced
relationship managers that Dr Pugh asked me about; and I hear,
as do Melanie and Freda, more and more often, that our approach
in managing resource-to-risk is making a difference. I mentioned
earlier the OECD study, which we presented recently to the OECD's
forum for tax administration to 43 countries, and we talked to
business leaders there from all over the world who talked about
the approach that we talked about here today, and commended it
to tax administrations, and meant it.
Chairman: Right. Shall we give Mr Mitchell
the last word if he wants it?
Q155 Mr Mitchell: It would be nice
if we had a yield per capita for your inspectors in the Large
Business Department compared to the yield per capita for the people
involved in pursuing benefit fraud—a much larger number,
I think, involved in pursuing benefit fraud. That is just an observation.
I wanted to follow up a question unctuously that the Chairman
asked right at the start. If the Companies Act required companies
to publish the profits generated in this country—take an
imaginary company and call it News International or something—and
it was required to publish the profit generated in this country
and the tax paid in this country, the corporation tax paid in
this country on those profits, your job would be much easier,
would it not? That is the question. We would all be able to see
how well you were doing!
Mr Hartnett: I fear, Mr Mitchell,
you are leading me out on thin ice again, but—
Q156 Mr Mitchell: Would it make your
job easier?
Mr Hartnett: It might, but the
whole purpose of, for example, double taxation treaties, is to
resolve issues like that. I am not sure it would make my job a
whole lot easier because we would want to explore all those published
figures because the tax rules are not so simple that they would
enable us to say, "Thank you for publishing the figure of
profits in the UK; we are simply going to tax that." We would
want to explore that in great detail, as we do now. I do not think
it is a panacea.
Chairman: Thank you Mr Hartnett. That
concludes our enquiry.
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