Parliamentary inquiry into capacity and capabilities of HMRC
ARC welcomes the chance to comment on the draft terms of reference for the APPG inquiry in the capacity and capabilities of HMRC. This type of review was suggested by the Labour Party in February 2015. As the Guardian put it: “In a speech to party members in Swansea, he [Ed Miliband] promised to open an ‘aggressive’ review into the culture and practices of Revenue and Customs (HMRC) that would report within three months.”
Any review must be comprehensive, independent and informed, and must have the confidence of taxpayers and those who work within HMRC. The time has come for a general review embracing governance, management structure, culture, powers – and how they are used – service delivery, digital strategy, training, efficiency and effective. His [Paul’s] preference would be for the review to consider the balance between revenue-raising, cost-cutting and service delivery.
ARC said at the time that we believed there was a risk that any review was being commissioned with its outcome to some extent pre-ordained. It was announced in terms of HMRC failing, and seemed to anticipate weaknesses before any work had been done. We cautioned that “any review to be “conducted without preconceptions or a predetermined conclusion” and “our members had been subjected to “unhelpful and unnecessary criticisms”. Tony Wallace, ARC president, said: “It almost seems to blame them for there being avoidance and evasion.”
The APPG ToRs are similar to the ICAEW’s 2015 ideas but are more fully developed and detailed. It is here that we have our major concern, namely that the detailed questions will generate a very large amount of work.
Capacity seems to mean different things to different people and probably at different times and in different circumstances! We can also recall the Cabinet Office Capability Reviews – Igniting passion, pace and drive! Capability is the ability to do something. In the HMRC context it covers a range of things:
- Legislative capacity, i.e. the legal powers to be able to do the things needed to prevent avoidance and evasion, to investigate it, to litigate/prosecute when needed, and an informed policy making process to underpin the making of legislation
- Administrative capacity, i.e. the technical and people infrastructure that supports staff in their work, e.g. suitable buildings, up to date IT and computer systems, HR functions to administer “pay and rations”
- Staff to carry out the compliance/assurance work, including enough people in the right locations and teams, with the right mix of training, a good leavening of experience, informed and supportive management, paid enough to recruit, retain and motivate.
- Effective strategic and tactical leadership that sets direction and priorities, overcomes difficulties, gets staff engaged in their work, provides public support and explanations of the work HMRC does.
Issues of strategy, customer service, reorganisations into a new estate, making tax digital, to name the more obvious, are large areas on their own, any of which could become the subject of any enquiry. Add in all the other areas of “aggressive avoidance” (which is a term of art not definition), “actual size of the tax gap” (where there is not even a consensus on what it is or how measured), measurements of yield, use of Connect, and much more, and it is easy to see how the enquiry could be overloaded.
In our view the sheer breadth and depth of all the areas itemised in the ToRs creates the real risk that each area can only be dealt with at a relatively superficial level, and possibly over a long period of time. Quite apart from that, there is the associated factor that many of the questions require the full co-operation of many organisations, particularly HMRC. As the APPG is not a Select Committee we suspect that HMRC may regard its relationship with Parliament as being discharged via its reporting obligations (including the NAO) to the Treasury Select Committee and the Public Accounts Committee. The PAC has recently published a report on tackling tax fraud. This covered some of the areas proposed by the APPG, e.g. effectiveness of management information, prosecutions, and the nature of the Tax Gap.
Furthermore, the TSC is already engaged in a substantial review of UK tax policy and the tax base. Its ToRs (see below) definitely overlap with the ones proposed for the APPG. Andrew Tyrie, chair of the committee, said the committee’s inquiry into UK tax policy and the tax base will look at the making of tax policy and examine the UK’s shrinking corporate tax base and whether HMRC is doing enough to tackle tax avoidance. It will investigate whether radical changes to the tax system are needed and will look at whether recent initiatives have been effective in tackling avoidance. And we imagine that there will be some (limited) overlap with the Review on tax policy making by the Institute of Government, Institute for Fiscal Studies (IFS) and Chartered Institute of Taxation.
Accordingly, to achieve delivery we would suggest a pause to reflect on the range of areas currently in scope, possible overlap with other enquiries, and whether the APPG should refine the areas it wants to examine. Otherwise there is a serious risk the review will potentially be relatively superficial, given its breadth, and that its outcomes could be partially pre-ordained.
ANNEXE: Terms of reference of the TSC inquiry into UK tax policy and the tax base
The making of tax policy
• To what extent, if at all, has the Treasury complied with the principles of tax policy, set out in the annex?
• Have the entities involved in tax policy (HM Treasury, HMRC and the Office for Tax Simplification) performed adequately?
• Does the Treasury have the expertise to design tax policy? Does it make effective use of HMRC advice?
• What simplification measures, whether or not considered already by the OTS, now need examination?
The problem of the shrinking tax base
• To what extent is the UK’s corporate tax base being eroded as business is increasingly conducted globally?
• Are there particular sectors that are more mobile and do those sectors make a disproportionate contribution to overall tax yield?
• What other changes are occurring in the UK tax base, and how should the UK Government react to these changes?
Radical solutions to the problem of the shrinking tax base
• Given the inevitability of some sort of tax gap and of differences in interpretation of the “correct amount of tax”, should the Government address the problem of the shrinking corporate tax base through more radical changes to the tax system?
• If so, what type of corporate tax structure could ensure that revenue is collected in accordance with the principles of tax policy and in a way which minimises the risk of base erosion? For example, should business taxation be based on turnover rather than profits?
• Should the Government consider other forms of taxation (such as the proposals of the 2020 Tax Commission) when considering how to raise tax in the future, particularly from businesses and wealthy individuals?
• Is there a case for a wholesale review of capital taxation?
Other mitigations of the problem of the shrinking tax base (addressing tax avoidance and non compliance)
• Have the recent initiatives (GAAR, the accelerated payments regime and notifications under the Disclosure of Tax Avoidance Schemes) been effective in tackling avoidance?
• To what extent will projects such as the OECD’s Base Erosion and Profit Shifting (BEPS) project and common reporting standards help in tax collection?
• What further international cooperation is required?
• March 2015 Budget contained a challenge for the tax professional bodies to take a greater lead in setting and enforcing clear standards around the facilitation and promotion of avoidance. Is that likely to succeed in encouraging more responsible behaviour from tax advisers? Do tax advisers need to be regulated?
• What, if anything, should be done to maintain or improve a culture of compliance or a sense of tax morality among the full range of taxpayers?
The administration of tax
• Has the merger of the Inland Revenue and Customs and Excise been a success, and have there been too many subsequent reorganisations within HMRC?
• Are the Treasury’s and HMRC’s plans for “Making Tax Digital” (as set out in the “roadmap” published on 14 December 2015) adequately designed and acceptable?