The tenth birthday of HMRC
has been met by many calls for a detailed structural review. Whether such a review would be helpful, I am not sure – it may simply lead to yet more change (and an increased volume of criticism), which could get in the way of HMRC’s key purpose of making sure that money is available to fund the UK’s public services.
What I want to do is to reflect – from a personal, and possibly unique, viewpoint – on HMRC’s current performance and where I think it should make efforts to improve.
I am writing, I hope, as a critical friend. From late 2008, I spent two and a half years as a relatively senior member of the anti-avoidance team, working mainly on large corporate disputes. Before that, I was in-house and so a ‘customer’ of the Large Business Service (LBS). I am now back in private practice, advising clients – again, mostly larger companies – on disputes with HMRC.
So I truly feel that I have seen HMRC from all angles over its lifetime.
A key part of HMRC’s vision is for customers to feel that the tax system is simple and even-handed, and that HMRC is a highly professional and efficient organisation. Ensuring that the system is simple is hard for HMRC to achieve, particularly when politicians seem intent on adding complexity at every Budget.
How, though, is it doing at being even-handed, professional and efficient?
There is much muttering about the ‘cosy relationship’ that HMRC has with large business, and the ‘sweetheart deals’ that were supposedly done. It is true that HMRC, following the Varney report, decided to allocate its resources in a more targeted fashion, and that this has led to a drive for ‘cooperative compliance’.
On the whole, I see this as positive. Most of the time, there is an ‘adult to adult’ relationship and many other countries are seeking to copy the model developed by HMRC for dealing with large business. It should also be firmly stated that the Park report found that all of the settlements investigated represented good value for the government, and were not unduly generous to the taxpayers. (I should note that I worked for HMRC when at least one of those settlements was concluded, but had no personal involvement.)
HMRC’s anti-avoidance strategy has been discussed at length, and in recent years a raft of measures such as DOTAS, the GAAR and, more recently, the APN regime have significantly shifted the playing field. In 2005, Dave Hartnett said he wanted to ‘stamp out’ avoidance by 2008. I suspect that it will never be eradicated entirely, but I think that this is an area where HMRC has made significant progress.
Where much more progress now needs to be made is in the levels of service provided to the much larger compliant population.
The problems for small businesses or individuals in contacting HMRC have been well aired, and HMRC acknowledges that it needs to do better (and is now investing more funds in customer service). Even for large businesses, though, it often takes too long to reach the fabled ‘decision point’.
I think there are three key reasons for this:
This is the same problem which leads HMRC to think it is an acceptable target to seek to answer 80% of phone calls. For larger businesses, its aim is to reach a ‘decision point’ on enquiries within 18 months. This is better than not having a target at all, but it is a long way from ‘real time working’ and, in practice, HMRC often takes far longer than that to bring an enquiry to a conclusion.
Frankly, there is often little sense of urgency, and a total lack of appreciation of the costs of uncertainty to business.
I understand why HMRC wants to ensure consistency in its handling of disputes, and that the LSS has been a major tool in combating avoidance. Some years ago, a number of large corporates did engage in ‘portfolio behaviour’ – entering into additional schemes so that there was something to give away in a settlement.
But the LSS is now making it hard for HMRC to reach a sensible resolution of difficult technical issues, particularly where the transaction does not come close to being a ‘contrived scheme’.
The problem arises particularly where both the taxpayer and HMRC have a ‘strong opinion’, so neither is willing to concede; in effect, this is a true 50:50 issue (and do bear in mind that, on average, 50% of QCs’ opinions are wrong!). If this were a commercial dispute, both parties would take account of the risks and costs of litigation, and would probably reach a settlement. It is extraordinarily hard to do this within the confines of the LSS.
Alternative dispute resolution is showing some early promise, but is not suitable for all cases; particularly where HMRC considers that a ‘point of principle’ arises, even if the principle is only that a technical specialist has given a firm view on the issue.
The LSS remains appropriate for dealing with avoidance, but it needs to be overhauled to allow more flexibility in dealing with non-avoidance issues.
When I joined HMRC, I found myself working with a group of tax professionals who had high standards of technical knowledge and ability, and who generally had a good understanding of business issues.
But I was shocked at how complex the decision making process was, and how much resource is wasted in seeking to achieve consensus between all the ‘stakeholders’ and aligning ‘partnership interests’. This seems to be deeply rooted in the Civil Service psyche: the answer is only yes if everyone agrees, so if one person is not happy, no decision is taken.
The issue has, I fear, been exacerbated by the regular attacks on HMRC’s competence, particularly driven by the Public Accounts Committee under Margaret Hodge.
While it is right that major decisions should be scrutinised, the level of criticism has at times been grossly unfair and has naturally led to excessive caution. It is much safer to get as many people as possible to sign off on a proposal; and indeed not taking a decision at all can seem safer than taking the wrong decision.
This also has an impact on resources. I am sympathetic to the need for HMRC to have the resources to do the job properly, and think that recent cuts have been too deep.
But I do not think that HMRC values the time of its people as a scarce and valuable resource. For example, the average attendance at a conference with counsel from the private sector would typically be three or four people; at HMRC, having 12 people there was not uncommon.
I remember one case where a project team had put a recommendation to a disputes board, which had approved the next steps. A relatively minor new piece of information was discovered, and a discussion ensued between the 12 or so members of the project and case teams. The discussion was not about whether the information made any difference, but whether the issue needed to go back to the disputes board. I am convinced that in a professional firm, either one person would have made a decision without bothering the board, or there would have been a short conversation with a member of the board to decide whether a further referral was necessary. Instead, no fewer than 20 emails were exchanged, all copied to all 12 members of the teams. Just imagine trying to charge a client for that time in a professional firm!
I firmly believe that addressing this issue would make a significant difference to the performance of HMRC. I know that many people are sceptical of management consultants, but a book by Bain & Co called Decide & deliver (written by Marcia Blenko, Michael Mankins and Paul Rogers) rang true with me: people at all levels need to be equipped to make decisions, and to keep on doing so.
Many years ago, I wrote an article called ‘A question of trust’ (Tax Journal, 30 June 2003). I argued that in order for the tax system to work well, there needs to be a degree of mutual trust between taxpayers and tax authorities.
I now think that we need to begin to trust HMRC, and to help it build its own confidence in the way that it operates – and particularly in how it takes decisions. That means, in particular, that we need to accept that HMRC will not always get it right – and if so, HMRC needs to be able to apologise swiftly, put the mistake right and move on.
Too often, the Adjudicator’s annual report says that this is not done. As was said long ago, the man who makes no mistakes does not make anything. We need to stop having unrealistic expectations of perfect performance.
HMRC needs to develop a sense of urgency about bringing issues to a conclusion. Targets should be more ambitious (settlement within six months should be achievable in most cases) and timetables should be set early in an enquiry and adhered to. I believe this approach would be welcomed by most businesses, large and small, and would drive significant improvements in customer service.
Within HMRC, the customer relationship manager should have the authority to resolve matters, taking into account the views of policy or technical specialists, but not simply acting as a postbox while various stakeholders endlessly debate the point.
In many ways, I am advocating a return to a role akin to that of the old district inspector, while accepting the need for governance and oversight to ensure consistency. Trust will therefore also be important within HMRC, so that those in relatively senior positions have the confidence to take decisions and to know that they will be supported by higher management if necessary.
This also needs to work for smaller businesses and individuals. It is not feasible to devote the same level of resource to a smaller, less complex case as it is to a large PLC, but a key part of HMRC’s vision is that taxpayers should see the system as even-handed. I noticed, when I was in HMRC, that the more junior inspectors were, not surprisingly, allocated the smaller cases (in local compliance rather than LBS), but often lacked a senior colleague to whom they could refer tricky questions.
Again, setting clear targets for taking decisions, giving inspectors the power to take those decisions, and making available the back up of a senior colleague (whether in the same office or at the end of a computer) should improve service levels and also staff satisfaction levels.
Does all of this require lots of money? No.
It requires mainly a different way of thinking: a real focus on how decisions are made, and making them more efficiently, should save money, as well as making HMRC an organisation better fitted for dealing with a business world which will move at an even faster pace over the next ten years.
