The administration and effectiveness of HMRC

Written evidence submitted by PCG

Introduction

1.1 This paper outlines PCG’s concerns with regards to HMRC’s administration and effectiveness, in response to the questions posed by the House of Commons Treasury Sub-Committee.

1.2 PCG is an independent, not-for-profit representative association, founded in 1999, for the estimated 1.4 million freelance professionals in the UK.

1.3 It is a membership organisation, funded by subscriptions from its 20,000 members. Our members work across all sectors, both public and private, in diverse fields such as oil and gas, IT, defence, the creative industries, and others.

1.4 Freelancers in managerial, professional and semi professional occupations contributed an estimated £82bn to UK GDP in 2008. (Oxford Economics, 2008)

1.5 PCG has used extensive survey data of its membership to assist in its response

HMRC’s performance as an organisation and whether it is delivering its key aims

2.1 HMRC’s performance as an organisation is of particular concern to PCG members because of the "IR35" legislation. For the smallest of small businesses, it is crucial to assess whether this complex legislation applies. PCG members making every effort to comply with the law have been faced with heavy handed and aggressive investigations and a general lack of understanding by HMRC of their tax position. Rather than working with business to ensure compliance, too often HMRC’s actions ensure it is seen as working against the users of the tax system.

2.2 HMRC lists a number of obligations to the taxpayer in its charter

· What you can expect from us- We will:

o Respect you

o Help and support you to get things right

o Treat you as honest

o Treat you even-handedly

o Be professional and act with integrity

o Tackle people who deliberately break the rules and challenge those who bend the rules

o Protect your information and respect your privacy

o Accept that someone else can represent you

o Do all we can to keep the cost of dealing with us as low as possible

(HMRC Charter 2010 - http://www.hmrc.gov.uk/charter/index.htm )

PCG believes that HMRC has failed to meet all of its obligations in the charter, particularly its commitments to treat taxpayers as honest, to be professional, and to help and support taxpayers to get things right.

2.3 PCG believes HMRC’s performance as an organisation has much room for improvement. Regular surveying of our members has consistently revealed concerns surrounding HMRC’s conduct. In a survey of PCG’s membership, conducted by ComRes in July this year, some 84% of PCG’s members described HMRC’s conduct as an important issue for them, with the majority describing this as a "very important" issue for PCG to consider. HMRC’s conduct was thus second only to the taxation system as a whole as a concern for members. Simplification of the tax system would no doubt make compliance easier, but until this aim can be realised HMRC must improve the way it communicates with taxpayers, so it can better meet its aims of being fair and reasonable

2.4 HMRC has failed to effectively target its investigation and compliance activity. Of the 1,493 IR35 cases and investigations PCG has been involved with, HMRC has won just 8. This clearly demonstrates that resources are being wasted by targeting legitimate taxpaying businesses- not "treating taxpayers as honest" as the charter promises. Each of these cases has the potential to cause considerable distress and significant financial and administrative burden for the contractor being investigated. Coupled with the fact that HMRC’s compliance activity on IR35 raised just £9 million between tax years 2002/03 and 2007/08, it is clear that HMRC is underperforming in its aim to be an efficient body.

2.5 For each IR35 enquiry, HMRC sends on average 15 written communications, 20 telephone communications, and 19 email communications. [1] Despite the cost [2] and effort involved, HMRC was successful in only 7% of enquiries. This outcome is considerably lower than their success rate in random enquiries, which are around 32% for income tax and 40% for corporation tax.

2.6 PCG undertook a survey of its members who have been investigated for IR35 compliance in October 2009. This highlighted a number of areas of interest:

· 58% of freelancers who have experienced an IR35 investigation found HMRC fairly or very unreasonable

· Almost half (46%) of those surveyed stated their investigation took more than five years and a further 17% said their investigations took between one and five years.

· Three quarters of those surveyed stated that they felt intimidated by HMRC during their investigation.

· A quarter of members surveyed said that their investigations went back more than five years.

These figures show a need for a better dialogue between HMRC and the taxpayer. Contractors legitimately working through their own limited company too often find HMRC an intimidating, aggressive body which doesn’t understand their business rather than a neutral, fair, and business-friendly collector of tax. Better communication and an increased focus on "helping and supporting the taxpayer to get things right" as described in the charter, are clearly needed.

2.7 Tax investigations cause particular distress to PCG members, and compliance activity is costly. Tax inspectors have been known to contact a contractor’s client without permission, putting the contractor’s future prospects at risk.

2.8 PCG’s 20,000 members are all businesses in their account, who all strive to organise their affairs in a legitimate manner, and meet all the legal duties required of them. Aggressive HMRC behaviour, and inefficient use of HMRC resources can make this an administratively and financially burdensome process. In some cases, this can even be a distressing experience, when contractors are subjected to lengthy and baseless IR35 investigations. PCG wishes to see HMRC better deliver on the pledges made in its charter.

What the implications are of HMRC’s spending review settlement and will it be able to deliver the Government’s aims on tax compliance

3.1 The 2010 Comprehensive Spending Review announced that whilst HMRC’s budget would be cut by 15% in real terms, £900 million of the resulting savings will be "recycled" into additional work against tax avoidance, evasion and criminal attack, with the aim of bringing in an extra £7bn in tax revenue by 2014/15.

3.2 Before looking at overall compliance a distinction must first be made between tax avoidance which is completely legal and tax evasion which is, and clearly should remain, illegal. The inclination to treat them as the same thing must be resisted. If HMRC tries to seek a ‘one size fits all’ solution, it is difficult to see how it can fully deliver the Government’s aims on tax compliance.

3.3 Simplification of the tax system must be one of HMRC’s priorities if they are to fully tackle tax avoidance. Presently unclear regulations, particularly for freelancers in the case of IR35, make it difficult to know whether one is complying fully with the appropriate regulations. This can make unwitting evaders out of people who are, to the best of their ability, seeking to comply with the law. To this end PCG strongly welcomes the formation of the Office of Tax Simplification.

3.4 PCG welcomes renewed investment in tackling tax evasion. However given that the real term budget cuts as set out in the CSR must ultimately lead to job losses one must question whether HMRC will have adequate resources to make the best use of the investment. The aim of bringing in an extra £7bn in tax revenue by 2014/15 is admirable but unless a solid strategy is put it in place quickly, it runs the risk of looking like an arbitrary target.

What HMRC’s priorities should be for the future

4.1 It is essential that HMRC make it as simple as possible for taxpayers to understand the tax system. Taxpayers should also feel that the tax system is fair, consistent and predictable. All taxpayers, especially businesses, must have confidence in HMRC to administer tax collection in such a way that they can be certain of what their tax liabilities are.

4.2 HMRC must endeavour to make it make it easier for limited companies to pay the right amount of tax. Presently thousands of the very smallest limited companies operate in perpetual fear that they may be subjected to a time consuming and damaging IR35 investigation. In many cases those companies cannot know whether they are caught by IR35 or not as the rules around IR35 are so unclear. In order to clarify this situation, HMRC must offer open and honest guidance to its customers.

4.3 HMRC must regain the trust of its customers. HMRC’s customer charter commits it to treating their customers as honest however PCG’s members frequently report that in practice they feel as though they are being treated as tax avoiders.

4.4 PCG’s members report that their relationships with HMRC have completely broken down. Limited company contractors are in many cases reluctant to seek advice from HMRC for fear that it will trigger an IR35 investigation. HMRC must change its emphasis from one of suspicion and interrogation to one of support and guidance.

4.5 HMRC must improve its communications with taxpayers, as evidenced by its handling of the underpayments which surfaced in September 2010. It is important that HMRC is perceived to be a professional and efficient institution.

3.6 Communications have been badly hindered in the past by the difficulties that taxpayers have faced when trying to make contact with HMRC. More resources must be given to call centre and correspondence teams.

3.7 All tax policy making must be done at HMT and not at HMRC. HMRC must focus exclusively on collecting the right amount of tax from its customers and making that process as simple as possible.

December 2010