JOURNAL 36

SQUEEZING UNTIL THE PIPS SQUEAK?

A recent article in The Times said that by 2008 HMRC have been told to raise an extra £11 billion from improved compliance and enquiry procedures. As the total yield from direct tax is only about £126 billion this suggests either that the government believes that a staggering 8% of total tax revenues are lost by reason of mistakes (as opposed, I imagine, to fraud, most of which could not be identified by improved compliance and enquiry processes) or that the role of HMRC has changed from its traditional philosophy of seeking to collect “the right amount of tax at the right time” to seeking to collect as much as possible irrespective of whether it is legally or morally due. My impression is that it is the latter, but more of that anon.

The article went on to explain that HMRC staff have been told that the more money they raise from taxpayers the bigger bonus they will receive. I am not privy to the inner workings of HMRC but can virtually guarantee that this latter claim is nonsense. Firstly, I cannot see the staff unions agreeing to a system from which only a small proportion of staff could benefit or in which the ability of staff to benefit depends on how management decides to allocate jobs to individual people. Secondly it would be political suicide for any government to agree to the adoption of such a system as this would give a strong impression that the government were out to milk citizens for as much as it could get irrespective of the rule of law, and the citizenry would undoubtedly express their contempt for such a policy at the next General Election. Thirdly, if citizens lose confidence in the perception that HMRC seek only to collect the correct amount of tax, such loss of confidence would undoubtedly lead to a massive increase in tax evasion as people would see little point in complying with the law in circumstances where the State itself is not prepared to do so.

I understand that the Times article was repeated elsewhere in the press. I would not expect a newspaper to print a story that it believed to be so far fetched as to have not a scintilla of credibility. Which brings me back to whether HMRC are any longer trying to collect only the right amount of tax? This probably depends on how one defines “The right amount of tax”. Is it the amount that Parliament has laid down or is it an amount based on whatever figure an HMRC officer may pluck out of the air? Most people with little knowledge of tax would dismiss the latter alternative as a possibility. However the tax system, unlike most other areas of law, is not based on the principle that a person is innocent unless and until proved guilty, but rather on the somewhat odd concept that what he owes is whatever figure an HMRC officer may pluck out of the air unless and until he proves that the officer’s figure is wrong! This is a slight exaggeration. The officer cannot pluck a figure wholly out of the air; if he carries out an enquiry into the return he is required to “state his conclusions” from the enquiry, but this would seem to enable him simply to say “I conclude that the taxpayer had not evidenced everything to my satisfaction and I therefore conclude that his real profits are £X” (being the figure he has plucked out of the air). If he wants to make an assessment after the enquiry window is closed he has to form an opinion that income that ought to be assessed has not been assessed, and then form an opinion of what that amount is – but again this seems to enable him to pluck any figure that he wants out of the air.

I do not believe that, as a generality, HMRC pluck figures out of the air. However they do seem to me to be increasingly taking the view that people who receive cash in the course of their business and for whatever reason choose not to use an electronic till, as they are perfectly entitled to do, must have something to hide and that accordingly their accounts must be unreliable. I think this a very worrying trend. It is not for HMRC to determine what sort of records a person should maintain. Indeed it is very important that it is not for HMRC to do so, as my experience is that some HMRC officers expect people to keep the sort of records that went out of fashion in the 1950s and which nowadays no business person in his right mind would incur the very heavy costs of maintaining.

It is in this context that pressure from the government on HMRC to raise extra taxation from improved compliance and enquiry processes is extremely worrying. It is very easy for an HMRC officer to enquire into a small business, add on an amount of extra tax that the business does not owe in accordance with the intentions of parliament, and say to the taxpayer, “Either pay up or disprove my guess”. HMRC say that the taxpayer is protected because he has a right of appeal to independent appeal Commissioners. However this is somewhat disingenuous. The appeal Commissioners can only reach a decision on the basis of evidence and even then must uphold the HMRC guess unless they are satisfied that the evidence indicates that it is more probable that the HMRC’s figure is wrong than that it is right.

The problems of the HMRC approach to cash transactions also seems to me to be aggravated by the fact that HMRC families presumably operate to different standards to other people. I imagine that each week they ensure that their children give a receipt for their pocket money and would not dream of lending money to an adult relative without ensuring that a legally binding agreement is drawn up first. At least that is how I imagine that HMRC parents run their families, because HMRC officers with whom I deal seem most surprised and unbelievably suspicious when I tell them that a client has received money in cash from a parent and cannot produce the documentary evidence that they expect to accompany such gifts.

Pressure on HMRC to produce greater amounts of tax, where the real incentive on officers to do so is simply the ability to raise assessments that they know that the taxpayer cannot disprove, is far more worrying to my mind than paying officers commission on what they collect (which I hasten to add I do not believe that HMRC will ever do).

I would myself like to see “improved” compliance and enquiry processes” from HMRC, as I imagine would all other tax practitioners. It is depressing that, despite adverse reports from the Public Accounts Committee, no Treasury Minister has ever accepted that the level of mistakes by HMRC staff is unacceptably high. It is equally depressing that no Treasury Minister has ever admitted that the level of technical knowledge of many of those HMRC staff that interface with taxpayers is unacceptably low. I suspect that all tax practitioners would confirm the accuracy of those two statements. This is not intended as a criticism of HMRC staff; it is a criticism of HMRC staffing and training policies, both of which are of course dependent on the resources that the government are prepared to make available to HMRC.

Slashing 25,000 HMRC jobs, as the government have done, may make for good political soundbites. It does not make for a good tax system. It is wholly unrealistic for the Nation to ask HMRC to collect the right amount of tax without giving them the resources to do so. That is what is really worrying. A government that slashes resources to an utterly unviable level but at the same time demands that HMRC produce increased tax revenue can surely not expect it to achieve this within the constraints of collecting only the exact amount of the tax imposts that parliament has thought appropriate.

Robert W Maas