"Unacceptable" HMRC under fire from Treasury Select Committee

16 August 2011. Published by Daniel Hemming, Partner

The House of Commons' Treasury Select Committee (the "Committee") recently released its report entitled "Administration and effectiveness of HM Revenue and Customs" (the "Report").

This followed a lengthy inquiry, during which the Committee considered dozens of written submissions and heard oral evidence from the HMRC s, industry bodies, senior HMRC officials and the Exchequer Secretary, David Gauke MP.

The Report, much of which focussed on day-to-day administration and customer service issues, concluded as follows, in a political acknowledgement of what many taxpayers and advisors have been only too well aware for several years:

"The evidence we have received in this inquiry has been disturbing.  HMRC's delivery of services to the general public has fallen to unacceptable levels in several areas".

Although the Report is worth reading in its entirety, Chapter 6, considering compliance issues, should be of particular interest to tax practitioners and those involved in disputes with HMRC.  Two particular issues were highlighted: settlements with large corporates and HMRC debt collection.  

Vodafone and the large corporates

Dave Hartnett, the Permanent Secretary for Tax, gave oral evidence to the Committee on 16 March 2011 (for a copy of the full, unedited transcript of the day's evidence, click here).  Unsurprisingly, a substantial portion of the MPs' questioning focussed on HMRC's handling of disputes with the largest corporates and in particular the Vodafone CFC settlement, which attracted a great deal of attention in the mainstream media.

Mr Hartnett, who claimed to have taken ad hoc legal advice before giving evidence to the Committee which had cleared him to disclose more about the settlement than ever before, mounted a staunch defence of the £1.25bn settlement, which he said reflected the "actual liability".  He also expressly denied certain allegations levelled at him in the press, namely that he and Vodafone's head of tax met regularly in secret to make the deal ("we had nothing whatsoever to do with each other") and that he "stood aside" lawyers and other experts in order to get a deal done.  He also dismissed the £6bn figure touted in the press as reflecting Vodafone's actual liability as "absurd" and said that "no serious or reputable practising accountant in this country […] would be able to endorse it", before adding later that "there were plenty of tax QCs in the UK lined up telling us and the media that we were not going to get a penny through litigation".

Mr Hartnett was also challenged on HMRC's approach to the largest corporates generally.  Jesse Norman MP, having noted that in 2009/2010 HMRC's large business service levied only £442,000 in penalties, amounting to less than 1% of the total tax undeclared and 200 times lower than the rate for small businesses, asked at one point: "[w]hy are you so much less tough on big business?".  Mr Norman also implied that HMRC were too reluctant to pursue cases against large corporates through the Tax Tribunal.

Mr Hartnett was predictably bullish in his responses to these points, commenting that: most disputes with large corporates tended to turn on "differences of view on technical aspects of taxation" (one might expect this to lead to more litigation with large corporates!); a failure to take reasonable care (which might justify the levying of a penalty) was much less common amongst large corporates; and, he could not recall "seeing a case of evasion in very big business in the recent past […] it's mostly avoidance".   

Although the questioning on the subject was at times fierce, it is notable that the Report is (perhaps disappointingly for those corporates and individuals who do not have a member of HMRC's senior management on speed-dial) quite restrained.  This is particularly striking given the Report's forceful criticism of many other aspects of HMRC's administration.  The section on large corporate settlements concludes: "[t]he public needs to be assured that cases involving large sums of money are being settled correctlyEqually it is unfair on HMRC staff and damaging to public confidence that the Department can be the subject of repeated allegations it cannot refute, even if these are groundless."

As the Report recognises, it is difficult for the Committee, or anyone else for that matter, to fully assess the Vodafone or any other large corporate settlement without being privy to information confidential to the parties.  It is therefore welcome that HMRC are coming under increased political pressure to not only strike the best deal for the general body of taxpayers, but to be seen to be doing so.  However, in the particular case of Vodafone it should be noted that this was a protracted piece of litigation with a number of published decisions, so much of the relevant material was and remains in the public domain.  Anyone wanting to form their own view as to the direction the litigation was heading before the deal was done should take the time to consider the decision of the Court of Appeal in Vodafone 2.

Debt collection

The Report is less restrained in its criticism of HMRC's approach to debt "management", as it is euphemistically described.  It notes a worrying lack of communication between HMRC Debt Management and other departments resulting, for example, in debt continuing to be aggressively pursued in circumstances where it has already been discharged.  The Committee also felt that HMRC were profligate in their use of aggressive correspondence which, for example, threatened distraint proceedings, in circumstances where the amount owed was under dispute (or nil, as mentioned above) or the recipient was an elderly or vulnerable person.  

In his evidence before the Committee, David Gauke MP, Exchequer Secretary to the Treasury, defended HMRC's use of private debt collection agencies in preference for the recruitment of additional HMRC staff, claiming that they offered greater flexibility and that, through the use of these agencies, "£140m has been recovered that would otherwise have been written off".  It is not clear why this tax would otherwise have been written off and why it could not have been collected by additional permanent HMRC staff.

Alarmingly, he also refused to rule out selling debt to private agencies, though said there were no plans to do this at present.  The Committee was clearly concerned by this prospect and the Report notes that "[a]ny moves in this direction would be a major change and should not be contemplated without widespread consultation at an early stage".

Sanity prevails

Refreshingly, the Report concludes with an acknowledgment that any further cuts to HMRC are likely to have adverse consequences for both taxpayers and the Exchequer:

"HMRC collects revenue for the Government of more than a hundred times the amount it costs to run.  Given the fiscal position, it would make little sense for the Department to be cut back further if resource reductions in addition to those plans already agreed would have to effect of reducing receipts, displacing disproportionate costs onto the wider economy or further eroding public confidence in the tax system.  Great care will be needed before any further savings are planned or implemented."

Whether such political sentiments will be sufficient to prevent further counter-productive cuts to HMRC's budget in coming further years of austerity remains to be seen.


...and finally

With talk doing the rounds that the 50p income tax is to be abolished, the FT report that some Liberal Democrats are now pushing for a replacement - the bizarrely dubbed "son of mansion tax" - which would affect all homes (not just second homes) worth over £1m. Of course, the world of tax is no stranger to misnomers ('self assessment' and 'national insurance' for instance), but referring to a tax which would potentially capture a two bedroom terraced house in Fulham as a "mansion tax" could be another one for the list. Hopefully the officials in Whitehall can come up with a more boring but apt title, should this idea ever make onto the statute books.

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