The top tax myths – and how they prevent us from making better tax policy
Iain Campbell reports from Westminster on ARC’s parliamentary event on debunking long-held tax myths.
On Wednesday November 18, in the Macmillan Room at Portcullis House in Westminster, ARC hosted a wide-ranging discussion on four tax myths. The meeting was chaired by the Financial Times tax correspondent, Vanessa Houlder, who kept everyone to time, despite the complexity of the issues. It was a packed room, with last minute arrivals having to stand at the back – including a few late running MPs! The audience was a diverse group, with David Gauke, the FST, and Rob Marris, his Labour Shadow, MPs, politicians, academics, lawyers, tax professionals, NGOs, business representatives, and civil servants, all taking up ARC’s invitation to discuss the myths. By the end there was a lot of consensus on four things:
- Appreciation to ARC for creating the event and organising it (along with our comms partner, Connect Communications)
- We needed lots more time to discuss the full implications of what speakers had said
- HMRC had to be properly resourced (even if that meant different things to different speakers!)
- The Tax Code was too complicated and generated avoidance opportunities, as well as making it hard for customers and their agents to get it right.
ARC’s President Tony Wallace welcomed everyone to the meeting and set the context for the event. ARC, as you would expect for a trade union representing senior professionals and managers from across HMRC, is keen to see our tax system properly resourced and working for the benefit of the whole of society.
Tony reminded the audience that voluntary compliance with the UK tax system was high and that this reality was founded on the common belief in the goodness of taxation. Tax lies at the heart of the social contract that exists between each individual citizen and the state. If that contract were to break down, either because the tax system itself was perceived to be fundamentally unfair, or because the belief took hold that people could avoid or evade taxes with impunity and without challenge, then the nation would be infinitely poorer for it. That was not something that could be allowed to happen.
There were four myths discussed:
- Closing the tax gap is possible even without a properly resourced HMRC (led by Helen Baird-Parker of ARC)
- The tax affairs of the low paid are simple (led by Robin Williamson of the Low Incomes Tax Reform Group)
- Companies are up to no good if the effective tax rate they pay is lower than the headline corporation tax rate (led by Rob Fontana-Reval of the CBI)
- Corporate tax competition is good (led by Diarmid O’Sullivan of Action Aid)
Closing the tax gap is possible even without a properly resourced
Helen Baird-Parker made the strong case that, on the surface, HMRC had managed to cut costs and shrink without affecting its core business of compliance. Yields had gone up but she pointed out this was the result of more investment. If you looked at the other side of the coin, customer service, it was wholly different. Customer service and compliance were not polar opposites; they were different sides of the same coin.
She reminded the audience of the recent public criticisms on call handling and the knock on to voluntary compliance. The forthcoming CSR cuts would have a huge impact. HMRC was still feeling the effects of CSR2010, but it had just agreed a 21% cut in real terms for CSR2015. That would take away £650mn, and possibly cost 12,000 jobs. Helen ended by pointing out that this focus on costs meant we were not building on good customer service and missing the opportunity to tackle those who wanted to break the rules.
The tax affairs of the low paid are simple
Robin Williamson of the Low Income Tax Reform Group (LITRG) began by saying that if the well-off needed tax advisers the same was just as true for the low paid. Their affairs were not simple and they had to contend with complex rules that often treated people with the same economic circumstances in quite different ways for tax, national insurance and a series of benefits. For example, the starting point for NIC was not the same as the starting point for paying income tax, or if you are self-employed you had to pay two types of NIC, Class 2 and Class 4, only one of which entitles you to contributory benefits.
LITRG had just completed some modelling of recent changes. They had discovered that if you are paying tax and NIC, while claiming tax credits plus housing benefit and council tax support, a person could end up retaining only 4p for every additional pound of income. He hoped that the current review of NIC and tax might lead to a more rational and fairer system but until it did they would continue to lobby for changes.
It’s essential to distinguish between “tax management” and illegal tax avoidance.
Rob Fantana-Ravel of the CBI accepted that some companies had been guilty of unacceptable tax avoidance and the CBI did not support such behaviour. However, it was not the case that all companies did this. Having an effective tax rate below the headline rate usually meant companies were using tax rules in ways that Parliament had intended. A company responding to such incentives, by claiming deductions against its corporation tax bill, was engaged in ‘tax management’ and it was essential to distinguish this from illegal tax evasion or abusive schemes to avoid tax.
The reliefs included things like group relief, capital allowances, losses carried forward, and R&D tax credits. Rob argued that these and other reliefs were there as a delivery mechanism for broader social and economic policy objectives – such as encouraging investment, innovation and environmentally friendly practices, and creating employment.
Corporate tax competition isn’t always a good thing.
Finally, Diarmid spoke about corporate tax competition and the belief this was good, attracting foreign inward investment which helped create jobs. Unfortunately, this was not always the case and there was evidence this competition threatened to become a race to the bottom. In fact, in some countries, especially developing ones, tax competition was supplemented by grants and incentives. He also questioned whether it was true that a pound of profit spent or distributed by a private company would necessarily produce more benefit to society than a pound of tax revenue spent by the state (because companies and states have different ends).
He said that charities were particularly concerned at what the IMF had described as spillover effects. This meant that the economic costs of corporate tax competition were felt much more acutely in developing than in developed countries. One reason for that was the fact developing countries relied much more on corporate tax than did developed countries. Diarmid said tax policy had to recognise that tax competition has been one of the primary drivers, possibly the biggest driver, of tax avoidance. Poorer countries have far fewer resources to confront this problem than richer countries.
The panel discussion
There was a panel of four, all with wide experience of tax and politics:
- David Gauke MP, Financial Secretary to the Treasury
- Rob Marris MP, Shadow Financial Secretary to the Treasury
- Heather Self, Partner at Pinsent Masons
- Tony Wallace, President of ARC
As might have been expected the members of the panel did not agree with each other, or accept all the myth busting. David Gauke praised HMRC’s compliance record over the last five years and the record results it achieved. He agreed HMRC had to be properly resourced and also that customer service standards had been unacceptable earlier in the year. But he believed the current figures were much better. Further, the move to digital personal tax accounts would remove many of the 40m phone calls made to HMRC. He did not take up Helen’s challenge to stop the cuts!
The minister agreed on the need for simplification for the low paid and said that the increase in the personal tax allowance should go a long way towards achieving that. He supported the CBI view on tax rates and tax reliefs, but disagreed with Diarmid on the possible negative effects of tax competition, saying the UK supported international reforms to the tax system.
Rob Marris agreed that HMRC should be fully resourced and that we should build on its record of bringing in additional yield. He thought there had been too big a reduction in staff numbers and quoted figures from the House of Commons Library in support. David Gauke challenged him on the numbers and there was a light hearted moment of ministerial scrutiny, before he concluded that the number was indeed too high.
Rob also supported the LITRG paper, and much of what Diarmid had said. He accepted the CBI views but felt that the whole tax system was too complex and this created opportunities for clever accountants to find loopholes. He said that Parliament needs to look at whether tax reliefs do what they are designed to do. In that context he supported changes to tax relief for pensions – a view FDA president Gareth Hills later expressed concern over.
The next speaker was an accountant, Heather Self, and she said that in general accountants did not look for loopholes but tried to work with clients to achieve good commercial outcomes. She felt HMRC was still reacting to public criticism of a few years ago, but challenged HMRC to move on and be slicker in its decision making, and to trust in the judgement of its senior staff.
One of her examples of ‘over-governance’ involved staff muting a call from HMRC as it is was felt to be OTT. This led Jim Harra (HMRC DG for Business Tax) to argue that governance was certainly needed but that he was grateful for that feedback!
Tony reminded the audience that HMRC does a great job. However he was concerned that cuts of the order of 21% would present HMRC with a significant challenge to meet all that was asked of it. He said whatever the shade of the current or any future government they could rely on the professional support of the civil service. But the civil service needed the resources to make that delivery a reality. Cut after cut made that ever more difficult.
The audience reaction
There was a lot of support for the view HMRC had to be properly funded. Paul Aplin (Chair ICAEW Tax Faculty Tech Committee and HMRC Admin Burdens Advisory Board) said that he was not completely convinced by the digital agenda, but if he was offered an 18:1 return on investment then why would you not go for it? John Whiting (OTS) pointed out that he was a Board member for a UK tax authority with a 98% success rate in call handling. He raised some laughs when he admitted that Revenue Scotland only had 42 staff. But his point was the need to review reliefs and simplify – asking for all the lobbying to stop to let it happen. Robin Williamson said they would stop when they had achieved their goals.
But Stephen Herring (Institute of Directors) challenged the idea that HMRC was underfunded, saying it seems to be well-off compared to the US Inland Revenue Service. Helen Baird-Parker argued that it was just not possible to compare the two organisations as the tax codes and administration of tax was so different between the two countries. She invited him to suggest what HMRC should stop doing, or do less of.
Wallace, also responding, reminded the audience that, when subject to scrutiny by the National Audit Office in relation to what had been delivered from the £917 reinvestment in 2010, as Paul Appin also pointed out, £18 had been generated for every pound spent – with areas like Large Business generating a return of £62 for each pound spent. A return on investment of that scale would make any business happy, so why not invest in the skills of HMRC.
As the meeting came near to the 11.30 finish, nobody was in a hurry to go and it continued until nearly 11.45. Reaction on Twitter and elsewhere has been very positive. Attendees asked about our theme for the next event and to be added to the mailing list now, to make sure they got it into their diary. The event was videoed so we will be seeing how we can make that available to members and attendees – although I think arcforum might collapse under a two-hour video upload.
But before that video goes live, you can follow the comments via #ARCTaxMyths.