Publications on the internet
Treasury Committee - Minutes of EvidenceHC 1371 Closing the Tax Gap: HMRC’s record at ensuring tax compliance
HOUSE OF COMMONS
TAKEN BEFORE THE
Administration and Effectiveness of HM Revenue and Customs: Closing the Tax Gap
Wednesday 13 July 2011
John Whiting OBE, David Heaton, CHAS ROYCHOWDHURY and Frances Corrie
Evidence heard in Public Questions 109 - 177
Taken before the Treasury Sub-Committee
on Wednesday 13 July 2011
Mr George Mudie (Chair)
Mr Andrew Love
Mr Andrew Tyrie
Examination of Witnesses
Witnesses: John Whiting OBE, Tax Policy Director, Chartered Institute of Taxation, David Heaton, Chairman, Tax Faculty, Chartered Institute of Accountants in England and Wales, Chas RoyChowdhury, Head of Taxation, Association of Chartered Certified Accountants, and Frances Corrie, TaxAid, gave evidence.
Chair: Good afternoon. Can I apologise to you, we are going to go very quickly and I know you are always brisk and brief, but if you could stick to that it would be much appreciated. We are coming to the end of the session and meetings are piling up and we are attending two or three meetings at the same time. Members, we could lose a quorum if we are not going through it quickly. I am taking too long already. Welcome and thank you for coming. Andrea Leadsom will start the questioning.
Q109 Andrea Leadsom: Good afternoon. Thanks for coming. I would just like to talk to you briefly about compliance to begin with. The fact is that, as you all know, just under 80% of the theoretical tax take is voluntarily paid by the British public and only 2.9% roughly is paid following compliance, and similar figures in the US. Would you agree with their assessment in the US that actually the best way to improve compliance is to increase the voluntary compliance? Could you comment on how we might achieve that if you think that is a realistic possibility? Mr Whiting, will you start?
John Whiting: Yes, by all means. Basically, yes, I agree, voluntary compliance is clearly better. It is more efficient all round, setting the right atmosphere, making sure people realise it makes sense to comply and pay their dues. Of course, that is not to say you give up on policing the hidden economy, tracking evasion, avoidance, but encouraging people to comply, making it easy for them to comply, has to be in my view the right route. What that means is giving a certain amount of incentives. If we touch on the hidden economy, giving incentives and encouragement to come out of the hidden economy and get straight, rather than just automatically hitting people with a penalty, is very often a better route.
Q110 Andrea Leadsom: Would any of you care to disagree with Mr Whiting?
Chas Roy-Chowdhury: No, I think John is absolutely right. I also say that what we need is a simpler tax system where the taxpayer actually understands their obligation. I think that is where we have the biggest problem in the UK-with the high level of complexity. Certainly, with the OTS, which John chairs, there has been a lot of work done in this area and further work in the coming years, but we need to make sure that is actually driven home and we do end up with a simpler system rather than just the standstill. I think that is one of the areas that the ordinary person in the street and businesses have a real problem with. They do not actually know when perhaps they are doing something wrong or when they are not complying.
David Heaton: Could I just add I think one of the issues we have is the increasing drive to making everything happen online. There is a big slug of the population, mainly pensioners, who are not eliterate yet and I think it is very difficult to get to those in the same way as you would get to employers, for instance. I do think I would agree with both John and Chas. We do need to make it easy for people to comply, but I do not think the answer is all "e".
John Whiting: Exactly.
Frances Corrie: Could I say for the unrepresented that we see at TaxAid we are obviously contacted by people who are trying to get their tax right and often cannot find the answer to what may to us be quite basic questions, but they cannot identify where the information is online or they cannot apply it to their own circumstances. Therefore, they are left without the feeling of certainty that they have actually met their obligations, which is what they are looking for.
Q111 Andrea Leadsom: That takes me on to the next point, which is we had evidence from the FSB a couple of months back who said that they felt that the complexity and the poor service of HMRC was actually causing new businesses to fail to register for VAT, for example, because it was simply too difficult. I wonder to what extent you would all agree or disagree with the risk that HMRC’s problems with its administrative effectiveness have had a knock-on effect on the level of voluntary compliance because it is so difficult to comply.
Frances Corrie: If I can come in on that, I would certainly say that the difference, I think, with agents, who have been very vocal about the lack of service that they have met, but agents are paid to persevere and to carry on until they get it right, but the individual who fails to get through several times may just give up. If it is giving up on registration, if it is giving up on making a time to pay arrangement, you have lost them out of the system.
Q112 Andrea Leadsom: Then, if I am not putting words in your mouth, you would agree that HMRC’s own internal problems would cause a worsening of their voluntary compliance?
Frances Corrie: I think that is right. The people who start off with the will to comply may lose that will if it is made too difficult, as John has said. It needs to be easy.
John Whiting: I would echo that completely. I think our Low Incomes Tax Reform Group would say that it has to be easy; people have to be able to get through. As David rightly says, it must not all be electronic. I know, if I put my Office of Tax Simplification hat on for a minute, this is one of the biggest difficulties that small businesses cite to us, the difficulty of getting certainty, closure on their dealings so that fundamentally, coming back to your first question, a vast majority of taxpayers are compliant. They want to close, move on to the next thing. That must be easy; no worry, as Frances says, about, "Oh, have I finished everything?"
Q113 Mr Tyrie: I would like to discuss the treatment of HMRC and the tax gap to start with. Could I begin with you, Mr Whiting? The HMRC vision is to close the tax gap, among other things. Do you think that is the right vision for HMRC to have?
John Whiting: I go along with it up to a point and I think it is like any business; you have to have aims and objectives in mind and things that you measure. It worries me if that is the only vision and objective that they have in mind, partly because of the difficulties of measuring it and partly because another objective, surely, should be possibly to increase the gap by making sure that the low-paid, for example, get all the credits and benefits that they are entitled to. As I say, I think it is something that has to be looked at and has to be a guiding light, but certainly it should not be the only one by any stretch of the imagination.
Q114 Mr Tyrie: What would be the others you would like to-
John Whiting: Well, as I said, a certain vision of making sure everybody’s tax bills are right, I think, would be a very good one.
Chas Roy-Chowdhury: May I say something about the tax gap? I think in terms of the definition, if we looking at this pie chart that I think you have cited in previous hearings, to what extent are they going to close the part about legal interpretation, about avoidance, about failure to take reasonable care? The failure to take reasonable care you can do something about. Evasion you can do something about. But the 15% relating to legal interpretation or the 17.5% relating to avoidance, that is just their opinion. There is a big definitional problem and, I think, "What is a tax gap?" It is like trying to get hold of smoke. There is no proper idea what that is and then we are trying to close it. I think we should be going after compliance and people trying to pay the right amount of tax and these sort of things we have been talking about where those who are unrepresented, small businesses or large businesses, they can actually comply and pay the tax they owe easily. Then we should be going after the tax evaders rather than having these kind of fairly esoteric difficult to define ideas within the tax gap, which no one can really ever agree on.
David Heaton: I think, if I may, I would probably go further than John or Chas. I think the tax gap is entirely misleading. The definition of what taxpayers should pay compared to what is actually paid is not very helpful, it is less than helpful, because nobody really knows what taxpayers should pay. I do not think the Revenue is in a position to identify that number. I think the tax gap is wholly misleading and I think, as John says, that the effort should go into helping people to comply and policing people to make them comply.
Q115 Mr Tyrie: It is hardly surprising, therefore, that a department that some have described as close to failing is in that condition if its vision, the first line of its vision, is something that is describing an impossible task. The first words of the vision line are, "We will close the tax gap," which you are saying is meaningless.
David Heaton: No, there is a tax gap, there is no doubt about that, but I do not think that is the way to attack what they really want, which is collecting more money.
Q116 Mr Tyrie: I will bring you in in a moment, Mr Whiting, again on a slightly different point. Did you want to add something?
John Whiting: Purely that I come back to I think the tax gap is worth looking at and if it is measured on a consistent basis and if one sees it spiralling up, then that does suggest things are not going right or it is a source of questioning. But it should not be, as I think we are all saying, the only driver. It is worth looking at.
Q117 Mr Tyrie: I was actually going to come on to you anyway, Mr Whiting, so bad luck. The Chartered Institute of Taxation, with which you have had something to do over the years, the inaugural address of the president stated, "We need to get back to taxing in accordance with the rule of law". By that he presumably means collecting the right amount of tax, using the phrase you used a moment ago, or often you hear the phrase "the correct amount of tax." Do you think it is possible simultaneously to achieve that, while using tax gap estimates based on judgments about what has been called the spirit of the law rather than the rule of the law? The spirit of the law is a phrase that a number of people have used with reference to HMRC’s approach to tax collection.
John Whiting: If you start using the spirit of the law, it is very much as David has alluded to, whose spirit? Who is saying what is the right answer? Inevitably, HMRC are suggesting their interpretation is right. We have always much preferred-as our president, Anthony Thomas, has stressed-taxing by what the law says, not by opinions or whatever.
Q118 Mr Tyrie: It is clear that the purpose, vision and way of HMRC is in a terrible mess. That is what has just been told to us in evidence, although HMRC will have an opportunity to rebut that. But then that leaves the question is that their fault or is it the fault of the legislation they have been asked to administer?
John Whiting: The legislation that we have in this country is very complex. I totally go along with Chas’s earlier comments. It is over-complex. As you well know, Mr Tyrie, I am trying to do a little bit about it and trying to simplify in certain areas, but it is only a very small part that I can do something on. But what we need-
Q119 Mr Tyrie: The question I am asking is, is it fair to bash HMRC for what appear to be constant failures when the cause may well lie in the legislation that they have to administer or implement?
John Whiting: I think it is reasonable to say HMRC take a certain amount of the blame, but in a sense we all are involved in getting the legislation through. Hopefully, we are getting a better process on new legislation, more consultation, steadier evolution, which should get us to legislation that is easy to apply, better framed in the first place. As I say, clearly Parliament has its part to play in that process. You quote the HMRC vision, Mr Tyrie. The vision of HMRC also talks about their job being to collect taxes to pay for Government services, but actually what they talk about is making sure the money is available for Government services. I have always had a slight problem with that because I thought that was more Parliament’s job and, again, HMRC’s job is to collect the taxes that are due under the law.
Q120 Mr Tyrie: Judging by the evidence we are hearing, it strikes me that this purpose, vision and way needs quite a bit of redrafting. That is the first line of the purpose section of this document you have just quoted and you seem to be making pertinent remarks about that. The first line of the vision section seems to be under attack. While we are on this HMRC vision, I just would like to take some evidence on one more line, which says, "Our way". I have to admit I am expressing a view myself rather than collecting evidence in saying this, but I wonder whether you share with me a concern with the line, "We are passionate in helping those who need it and relentless in pursuing those who break the rules".
John Whiting: Well, certainly I and my body have expressed concern about that. It is perhaps inflammatory language, some of it, but it is right to say that they should pursue those who break the rules.
Mr Tyrie: And that we should try and collect the right amount of tax.
Q121 John Thurso: Can I ask about the intervention yield and how relevant or not this is? I do not know quite who would like to have a go. Mr Heaton, perhaps I could start with you. I have a chart here that shows that the intervention yield has gone up every year between 2005-2006 and 2009-2010, starting at 7.4 and going up to 12.6. What does that tell me, if anything?
David Heaton: I think I should preface this by saying that I do quite a lot of tax investigations work, so I have seen quite a lot of that intervention yield in the clients I have had to deal with. I think, to give the Revenue credit, their efforts over the last few years have improved immensely. Their targeting is better; their risk assessment is better; their focus is better. On the negative side, I think that they have been criticised for being too aggressive and some clients will pay rather than prolong the process. From personal experience, I have a particular case in mind where the company had just finished some lengthy litigation in the European Court and did not want to go into another tribunal case, whether or not it had a strong case did not matter, they just did not want another case. I was instructed by the finance director to settle at any price. Not strictly at any price, but he was not too worried about it. They had made a provision in the accounts because the Revenue had written to them and said how much they thought they owed, and we settled. I think the figure the Revenue had started asking for-off the top of my head-was £1.2 million. We settled at £65,000 in the end.
Q122 John Thurso: Bit of a difference between the two.
David Heaton: Yes, there was an argument about principle and we agreed in the end that the principle that HMRC were looking at was not the right principle to consider in that case. We came to what was probably the right answer at the end of the day. I think Professor Freedman said a couple of weeks ago there is not a right answer in tax, and I think that is probably fair in that kind of situation.
Q123 John Thurso: That case you have just raised could be the system working rather well, which is somebody at the Inland Revenue says, "What ho, this looks like a chunk of money we should get." The company hire a very qualified and efficient professional, and you end up arriving at the right answer based on the correct principle and the proper amount of tax is paid.
David Heaton: Yes, that is right.
Q124 John Thurso: But how does that help me with my intervention yield? Are they saying that the 1.2 is in the figure or the 65?
David Heaton: Well, that is an interesting point and it goes back to Mr Tyrie’s question about the tax gap. The way the tax gap was described to me by somebody in the Revenue probably 12 months ago now was the difference between the tax that the Revenue thought was payable and the tax that was eventually paid, but the issue was with that first number, which comes back to your intervention yield. It was described as, "We tell our people how much their target is, what the yield is that we need from them, and they have to issue assessments to achieve that yield". They go out and they look for values on the jobs that they cover in a particular month. It is clear they have targeted yield. They break it down into chunks just like any business would. They have a job to go out and look for errors that taxpayers have made and correct those errors. The first number they start with is the number that they aim for, so there is a certain amount of self-fulfilling prophecy about it, I think.
Q125 John Thurso: HMRC print a table of key performance and it has intervention yield and, as I say, 2005, 7.4; 2009-10, 12.6. What I would really like to know, is how robust are those numbers? What do they mean and what do they tell me about HMRC? Because, superficially, they say HMRC is doing a great job, but if all the numbers are as flaky as they might be, it could tell me absolutely nothing.
David Heaton: Well, I don’t know how the Revenue compiles those statistics.
Q126 John Thurso: Anybody have any help there or shall I stop?
John Whiting: I can do no more than echo David’s earlier points and I have no immediate example to cite in parallel to his. But the Revenue, I think, has got better at targeting, looking in the right places, assessing risk. That is the basis of the intervention yield seemingly improving. Are they, of course, tackling only the easy situations? Are they missing some of the others? That is a different question.
Chas Roy-Chowdhury: Well, I think there is this issue of the low-hanging fruit. They are going after those who are actually in the tax system. We have already mentioned about the taxpayer trying to comply and they are getting it wrong, and if the Revenue are then picking those targets based on, well, hopefully based on the risk assessment strategy, then there are perhaps harder targets but ones which could yield a lot more in the evasion part of their pie chart, which I think they should really be focusing on. Some of which they are slightly focusing on through the offshore disclosures, the trade disclosures, the doctors’ and dentists’ disclosures, but perhaps they are going too much after those who are more visible and not after those who are less visible or invisible.
Q127 John Thurso: Another table that we have had from the Revenue is the average revenue generated per tax officer. Clearly, if you can say that activity is producing more per person than that activity, as a manager, key performance indicator, you go that way. I might look at this and I see that air passenger duty is 425.7 per officer, whereas inheritance tax is 6.9. I could come to the conclusion I do nothing about inheritance tax and I spend a great deal of time chasing air passenger duty. But doesn’t that actually tell me that air passenger duty is very simple, administered by honest people and there is no real need to do much compliance, whereas inheritance tax probably needs a lot more work?
David Heaton: It could also be a feature of the number of people doing the work. Air passenger duty is a very, very specialised area. I cannot imagine the Revenue have more than a handful of people working on it.
Q128 John Thurso: But according to statistics, it is a huge yield?
John Whiting: Yes, it is very simple and in many ways if you quote the statistics on VAT, that all has a very good payback for the numbers of people involved because, of course, the taxpayer does most of the work. The trader does most of the work on VAT, air passenger duty. Inheritance tax does involve far more work by everybody, far more negotiation. Therefore, in terms of yield per Revenue official, it is much less.
Q129 John Thurso: The point, therefore, is that these statistics, while interesting, have to be taken in the context of what they really mean?
John Whiting: Yes.
John Thurso: And not just used as simplistic-
John Whiting: Again, look at a trend.
Chas Roy-Chowdhury: I think also the taxes, because I think with air passenger duty you either got it right or you got it wrong, whereas I think for inheritance tax IHT is a grey area. There is no exact answer, perhaps.
Frances Corrie: Could I make a point here on the improved targeting? Some of what we do is explaining to taxpayers that actually the Revenue have this absolutely right. They have been inadvertently evading tax because-well, I could come up with a list of examples but probably not at the moment. The question there sometimes from the taxpayer is, "Well, why have they allowed me to do this for so long?" If their targeting is that good, if it is picked up after the first year, you can put it right and everybody can go forward on the right basis. But if it has gone on for four or five years and they are then coming back for the tax on all that, it has put the individual, who did not intend to do this, in a very difficult position.
John Whiting: Because typically there is a number of years of the personal allowance that has been double allocated or whatever to claw back and the taxpayer in his or her innocence did not realise this and, of course, the Revenue have little incentive to actually sort it out because the target is not framed in that sort of way.
Q130 John Thurso: What would happen if we introduced a rule in Parliament that anything the taxpayer had not got right within 18 months, too bad, they have missed it?
John Whiting: Well, of course, it has been cut down generally from six years to four years fairly recently.
Q131 John Thurso: But do you think we ought to be much tougher and say two years or 18 months and just say-because the point you make, I have a lot of constituents who suffered from the problems with PAYE, many of them pensioners, and actually the claim that they have now had for two years is giving them quite big difficulty.
John Whiting: Well, exactly.
John Thurso: What they all say is, "How come these people are meant to know this Government did not get it right?"
Frances Corrie: Yes. We also see it, in fact, in cases of outright nondisclosure. This would be evasion if they had really known what they were doing, but they have fallen into some of the traps of complexity sometimes and then you are looking six years with no problem.
John Whiting: The problem about cutting it right down to perhaps two years is, of course, still there are plenty of people who are actually due some tax back through no fault of their own. There are the mirror images of the examples that Frances and I are referring to that Tax Help for Older People sees regularly, and to cut them off after two years would be unfair. I think it would be a little precipitate to cut it down further. If everything is running smoothly, then perhaps we can come back to this in a few years’ time.
Q132 John Thurso: The point, John, I think made before us often is this whole struggle is a bit one-sided, which is if HMRC make a mistake they can come after you whenever they feel like it and you have to pay and that is an end of it. If they have your money, they are frightfully sorry but that is the end of it, whereas if you make a mistake and you have their money, then it is massive fines and they come after you with the full force of the law and they are frightfully aggressive. It is a bit of a one-sided battle.
John Whiting: Yes. We had the earlier example; the thread of VAT registration was mentioned. Of course, if you fail to register for VAT that is quite an offence and in many ways rightly so. But for a small business that then suffers from the Revenue’s delay in registering, that can be extremely painful because when you finally get your registration through, you were, of course, supposed to be charging VAT from the moment you applied. Now, the Revenue have done a lot to try and reduce that gap, but the penalties and the pressures are a bit lopsided as effectively you are alluding to, Mr Thurso.
David Heaton: I do think that we have to be fair to HMRC as well in that your 18month example of a cutoff date would make it extremely difficult for them to make system changes. One of the issues we have at the moment is the problem with converting all the Pay As You Earn databases on to a single database, the NPS. That is what has caused a lot of the problem with the coding notices, which were in many cases spurious. I even had a self-employed client who received one because of an old employment that had not been wiped off the system. They cannot do that kind of change quickly and if we simply brought down the shutters to say, "I am sorry, guys, you only have 18 months to make sure this tax is collected," I think it would make their job intolerable.
John Thurso: Thank you very much, and back to you, Chairman.
Q133 Chair: Thank you very much, John. Could I just ask Chas there, you say they would be better chasing the hard to find targets? I am particularly exercised by offshore, for example. I would be told by some that if you chase after it there is not much money there because they are all honest people paying taxes in various-you are suggesting we go for them. What returns do you think we would find?
Chas Roy-Chowdhury: Well, I think by the very nature of the evasion it is very difficult to actually pin down, but if we look at the pie charts that there are, there is a significant number under criminal activity, under tax evasion, and I think we ought to be looking at those areas rather than those people who are getting it wrong or the Revenue interpretation does not agree with what the people are doing or they have made errors. Because these are people who are actually registered for tax; they are trying to comply; they are getting it wrong or they are making the wrong payments. But over and above that there is this population that just are trying their best to stay below the radar and we do not seem to be doing enough to really tackle those. I think under the various disclosure regimes it has been a good thing to go after people with offshore bank accounts, with the Lichtenstein agreement, the people who have been under-declaring, but we should also just be going after those who are just not on the system at all. I think there has probably not been enough work done on that. I do not know what the yields from that would be, but clearly, we talk about tax ethics, from an ethical point of view they are the people who just do not want to pay any sort of tax whatsoever. They are the ones we should really be focusing on so they realise that there is this line in the sand that they cannot cross in terms of not paying tax, and to actually draw them into the system and going forward they will start paying tax, which has been a part of the disclosure strategy but perhaps not sufficiently tough enough to capture enough of the tax evaders.
Q134 Chair: If I can ask you as a group, are you content you know where they have targeted in the past? Let us say up to this year, where they have been targeting? Are you just taking their figures where they say, "We have this from our scrutiny of people and our chasing people."? Do you know the areas? In other words, if HMRC said to you, "Well, we are doing that but it is difficult," would you be able to say, "Well, you are not."?
Chas Roy-Chowdhury: No, in terms of that sort of forensic analysis we do not have the information to do that. We have been part of groups to deal with the offshore disclosures, etc., but not in sufficient detail to actually say, "Well, actually, you could do this in a certain way." We have been told after the event in some cases, such as when they have gone after the doctors and the dentists. Yes, they were doing that and we could have a different approach, but we have not perhaps been brought in close enough to what they were doing to be able to say, "This would be better," or "That would be better," other than after the event.
David Heaton: I would echo that. I think they have had some success where they have picked a target and announced that target. We do not always know what their projects are and for obvious reasons if you are the police you are not going to tell people they are about to be raided. Today, I think they announced from HMRC that they were going to concentrate on takeaways in London. That is their latest project.
Q135 Chair: Clearly easier than looking at the Cayman Islands, isn’t it?
David Heaton: Well, probably. It follows on from Chas’s point, really. If they pick a target because they have found some non-compliance in that area, it makes sense to go after more non-compliance in that area. The difficult judgment they have to make is where to stop. When does the law of diminishing returns kick in? We know about the doctors; we know about the dentists; we know about the Plumbers Tax Safe Plan; we know about Lichtenstein. We do not know what other major projects they have on, but trends do emerge.
Q136 Chair: The point I am trying to make, are you up to date with the areas they are targeting now with their £900 million?
John Whiting: Only to the extent in a sense everybody is, because they have not shared their plans with us, if that is what you are meaning, Chairman.
Q137 Chair: Yes. Did they share them with you last year, John?
John Whiting: Not really, no. It is no more than Chas says-
Q138 Chair: When they come back to us and say, "We were very successful," if you do not know the target, we are only taking their word that they-
Chas Roy-Chowdhury: To answer your question, I think the only way we find out in terms of their targets, leaving aside these specific type disclosures, is when clients or members come and say these are the areas that HMRC have been writing to them about. We find out from the other side, if you like, from the taxpayers’ point of view, but we do not get told from HMRC this is the compliance activity.
John Whiting: But if you go back, and to use an example, the Plumbers Tax Safe Plan that David has mentioned, we knew about that slightly in advance because they did share some of the draft ideas and plans with us, the draft documentation, on a very confidential basis just before it was launched. We and I suspect the other bodies gave some feedback on it and tried to tweak it, but that was solely tweaking and adjusting. What it was not was, "Do you think it is a good idea to go for plumbers?" In many ways, I respect that. That is up to them to make the decision. One of our general feedback points was why not make sure that this is a generally available facility and, coming back to earlier threads that I think Frances and I both touched on, which is encourage more people generally to come out of the hidden economy and get compliant. We had said that to them. So far they have not picked that up.
Q139 Chair: You see, in the written evidence to us, they suggested 65% of their investment, the £970 million, would be focused on the mass market. I was asking David before the meeting what the hell the mass market was in tax evasion. We have a Division. We will be back in 15 minutes, hopefully.
Sitting suspended for a Division in the House.
Chair: Sorry, you were saying to my very intelligent question-probing it would be called? Who is picking it up? Was it you, John? Were you stopped in mid-flow? You were going to bare all, weren’t you?
John Whiting: Probably, Chairman, if you could remind me of your precise point. What was the question?
Chair: Just give me an answer, John, never mind the question.
John Whiting: Forty-two.
Q140 Chair: Andrew, what were we speaking about downstairs- offshore? You have no idea. The tax gap seems to be imagined; 42 is the official figure, but who accepts official figures? That is the official figure, so that is the lowest it can go and it goes to over 100 million. What about offshore money that we should be picking up?
John Whiting: I am sorry, Chairman, I should pick up on your question obviously.
Chair: Yes, you remembered.
John Whiting: You are right. One of the things I think the Revenue has to do, and it clearly is a balance, is to get the message over to taxpayers that there are no easy ways of avoiding-
Q141 Chair: Have you taken me off offshore?
John Whiting: Well, bear with me. There are no easy ways of avoiding/evading tax. There is a message to be got over and there is an element in recent years that the message has become, at one stage, that if you parked money offshore the Revenue could not find it. Now, of course, they have done a good deal to try and tackle that with some of the disclosure arrangements, with more of the exchange of information, to start getting the message clear that there is no easy hiding place for money. There is clearly a need for the Revenue to keep up the pressure on offshore money. There is a lot of discussion about agreements for exchange of information with Switzerland, for example, which would be very significant. There is a need to pursue that, and-it is quite challenging for the Revenue-a need to pursue all areas, to keep up the pressure generally. Difficult as it is, it comes back to the need to pursue all these difficult areas, not just the easy, low-hanging fruit or pressurise small businesses.
Q142 Chair: I will come back to you, Chas, and you can think about your answer. But when you say there is no easy hiding place, aren’t the offshore areas easy hiding places? I am just thinking of two schemes. When Leeds United were bought out under doubtful circumstances, the Leeds members asked HMRC who on earth owned Leeds United because it was based in the offshore. No answer was ever forthcoming. To this day nobody can say who owns it. The transparency, the opacity, I suppose; it is a black hole, isn’t it? Then there was the business of Barclays with the company they formed and put their bad assets in. I have not seen any explanation from HMRC about their arrangements. The financial press raised it, gave it up after a couple of articles, and Barclays have carried on with it. I know there have been developments, but they have gone unimpeded with a lot of money at stake. Now, isn’t that a hiding place?
John Whiting: Yes, and what you are getting at is that there are not the transparent rules of ownership. There is not the equivalent of Companies House in many places where you or I can go to look up a company, find out who owns it and trace it through, which we can do in the UK. That does not necessarily apply in lots of other jurisdictions. Without wishing to sound as if I am splitting hairs, it is more of a regulation/corporate law/disclosure- type issue rather than a tax one, but the two are interrelated. From the Revenue’s point of view they are clearly right in continuing to pursue exchange of information agreements and getting information about tax matters from other overseas authorities.
Q143 Chair: I understand, but, coming away from the Cayman Islands because we have a connection, but an offshore that is not a British protectorate, you could speak about regulation, but it still is a tax matter here. Our regulator cannot regulate another designation, but our tax people have every right and every duty to be following the money and making sure that whatever proceeds are properly taxed, yes? Do you think Inland Revenue do that? Do they have the facility to do that?
John Whiting: They do. They are pursuing it.
Q144 Chair: Are they doing it?
John Whiting: They are doing quite a good job of getting more exchange of information agreements with increasing numbers of territories. If they find that Ruritania is being used as a haven, I think they are quite switched on to go to Ruritania and try and pursue that.
Q145 Chair: Do you think they have done it with the Cayman Islands?
John Whiting: I cannot comment specifically on that. I know that they are-
Q146 Chair: Ruritania sounds a bit easy to get at, but the Cayman Islands and the like seem to be harder nuts to crack.
John Whiting: They have at least got as far as an exchange of information agreement and how much that is being used I do not know. I do not know if colleagues have-
Q147 Chair: Right, Chas, should we pursue these? What are your observations on John’s very pertinent comments? Somewhat guarded, but pertinent.
Chas Roy-Chowdhury: Yes, we certainly should. I think once we have these various agreements such as with Liechtenstein and other jurisdictions, we need to stick at it, because it is much easier, if you like, once the car is running to push it along than to actually then go back and reinvent it. I think we need to make sure we pursue people who have squirreled away money from activities in the UK, when they have never paid tax in the UK and they are clocking up interest or other forms of gains outside the UK, and we need to make sure they actually pay tax on those monies. There is no question about it, and that is exactly the sort of tax evasion that I was talking about earlier. Rather than going after those people who are on the tax radar, let’s go after people who are out and out evading, who are not paying at all any sort of fair share of tax they should be towards the UK economy.
Chair: David, I will just stop you because my colleague wants to go and when he goes we almost have to finish the meeting, so I had better bring him in. Carry on, Stewart.
Q148 Stewart Hosie: I have all the time in the world, within reason. Frances, there seems to be a growing consensus that the Revenue are neglecting people who are outside the tax system entirely. Do you have any evidence that they are making any serious efforts to get those who are outside the tax system into the tax system?
Frances Corrie: Well, the efforts that we have seen are in the area of the campaigns that have already been mentioned, so at my end of the scale and possibly not even then. The offshore, of course, does not on the whole tend to affect our clients. Plumbers, possibly, but I have to say we did not see a huge number contacting us because they were worried about this campaign. Some of the areas that I think have been floated as possible on the horizon, like eBay traders and what is the other? Oh, part-time coaches.
John Whiting: Tutors.
Frances Corrie: The sort of moonlighting addon ones. I think there is a mixture there of people who do not know that they should be paying tax on this, have a suspicion but have not got round to doing anything, and are quite clear that they should be and are determined not to. We probably deal with the first two out of those three. To revert to a point that John has made, campaigns in their nature, as I understand it, are fairly limited. They give limited opportunity and from the Revenue’s point of view the advantage is that there can be specific followup, though I do not think we have really yet seen the impact of that as far as individuals are concerned. They had not seen the results of people being found out and possibly prosecuted.
Q149 Stewart Hosie: Obviously, if people are found out and prosecuted in a sector, it might well provide an incentive for others in that sector to suddenly discover that they perhaps should have submitted their accounts, and that is perfectly reasonable. But in terms of the proactive work the Revenue are doing to encourage those outside the system into the system, I think you said yourself that the Revenue operate this Tax and Benefits Confidential Hotline, the TBCH, but that it is not publicised anywhere and it is difficult to find on the Revenue’s website. Is this something they do often?
Frances Corrie: That is right. The Revenue will, in fact, say that anybody can volunteer if they have been outside the system. They can make a voluntary disclosure at any time and they will in practice get terms similar to those that have been announced in the campaigns. But this in itself is a message that is not widely publicised. We would like to see a more permanent, visible and transparent route in either through the helpline or, as online is the preferred mode, something on the website that enabled people to effectively get themselves back into the system at the time when in our experience what prompts people back into the system is very often personal events in their lives. It is not the availability of a campaign or even the thought that the Revenue are more closely breathing down their necks. It is their partner who has told them to get themselves sorted out or there is a baby on the way.
John Whiting: It is not just the amount of tax, it is also being very ready to spread the payment, because too often somebody approaches the Revenue from the low income sector, finds that understandably they have tax to pay, the Revenue start adding interest and penalties, you can understand it, but then asking for that amount to be paid immediately, well, it will put people off and it is just not a runner.
Q150 Stewart Hosie: Indeed, I understand that perfectly well. But I just want to keep probing this TBCH, this helpline, because apparently they refuse to help anyone who is reflected anywhere on HMRC’s system. This is apparently what tax agents have said to us. Now, if that is true and someone had a part-time job or a seasonal job and they were in the system and then out the system and there was perhaps a discrepancy, and then a year or two later they say for whatever reason, "I want to get back in, get this sorted out, and I know I have some stuff to pay", the helpline would help them. Is that not back to front? Surely these are precisely the people that we want to-
John Whiting: Because they are wanting to come in.
Stewart Hosie: -legalise and regularise?
John Whiting: Of course, the Revenue cannot be a soft touch because it cannot be, "Oh, I have just decided to drop out for a year. Give me a deal for coming back". The Revenue are entitled to probe the circumstances, but the mindset must be there, dare I say it, a little more commercial, to encourage the customer-bear in mind that we are all customers-back into the Revenue’s tender embrace, to make it encouraging, to make it worthwhile and, as Frances has said, to make sure the facilities are there to get them back on the straight and narrow.
David Heaton: Probably worth pointing out that the Revenue have for some time had what are known as Grabiner groups within their special investigations teams around the country. They have had people who are specifically devoted to identifying the ghosts and the moonlighters. They glean their information from various sources. So they are making efforts to attack that sector of the market. What you do not see very often is a prosecution to encourage people to-well, the stick side of the carrot and stick approach. John has been talking about the carrot. You do not see the stick either.
John Whiting: It is needed, I agree.
David Heaton: It goes back to the Chairman’s point about offshore. The Revenue did a campaign where they served information notices on the five big banks and received information about people who had offshore accounts. Have we seen any prosecutions as a result of the people who they think they have found but did not come forward under the amnesty opportunity? I do not think we have seen any yet.
Q151 Stewart Hosie: It might also be, of course, that they are inundated with data and that 99% of the people with offshore accounts are paying €250 a week or a month to fund their Portuguese apartment, at which point it is frankly meaningless in terms of the tax system. However, you mentioned moonlighting and ghosting, and an incentive or a stick in order to encourage more. Is there anything else that the Revenue could do to tackle ghosting and moonlighting other than the obvious campaigns or the obvious publicised prosecution? Is there any specific action they could take other than the things they are already doing?
David Heaton: I can’t immediately think of anything. They have been at it a long time.
Chas Roy-Chowdhury: Well, the latest disclosure is about VAT registration. That in itself is one of those areas where education is necessary. I think there are a lot of businesses that do not realise that they need to register for VAT based on turnover, not based on profit. Really, to answer your question, and things we discussed earlier, we have a very complex tax system where people do not understand the jargon and the language we all use. I think HMRC could do more to educate the ordinary person in the street, the ordinary business, so that they actually head off a lot of what then become tax evaders. People then realise two, three, four years down the track they have been evading tax, and then it is very difficult for them to contemplate coming back into the formal economy where they have to pay interest, they have to pay penalties, they have to work out what the tax was. It is just better that they just do not do that. I think rather than let people get into that situation, let’s get out there and educate people. We had a situation where HMRC used to go and see new businesses to make sure that their records were all up to scratch and businesses used to use them, but then they stopped when HMRC then, where they found mistakes, started to take action against them. We need a situation where HMRC are more proactive in teaching people when there is a tax obligation and what that is and how to deal with it.
Q152 Stewart Hosie: That is helpful. Can I just go back to the encouragement to get people into the system? Because I have certainly seen some facts that many people do want to be in the tax pot, they do actually want to make their contribution. It strikes me there is a place for third party agencies, bodies, charities to help people, but the Revenue rules do not allow these discussions to take place. They might with a proper accountant, a certified accountant, but not with a third party body, even if they are experienced. Is there some merit in the Revenue having a register of, I don’t know, trusted third parties where they could have these preliminary discussions to allow a trusted third party to say, "You are not going to be hit for £20,000, you are not going to be thrown in jail, but there will be an agreement of repayment terms to be reached"? Is there a place for that kind of trusted third party organisation in the big picture on this?
David Heaton: I do not think you need that trusted third party. I think the Revenue is perfectly capable of fulfilling that role. It just needs a change of attitude.
Frances Corrie: I think to some extent that that is the role that we find ourselves doing. It is not one we can take on to any huge extent because it is very resource intensive. To some extent, we would as usual be pushing back to individuals to self-help as far as they can with guidance. One piece of information that you mentioned there, which is very important, is the question of prosecution. Most individuals think they will be prosecuted even if they voluntarily disclose, so the fear of that is something that positively holds back. Now, if there was a statement on the Revenue website, "Give us your information through this secure link and as long as it is a full disclosure and honest and so on, you will not be prosecuted" I think they would get a lot more customers.
Q153 Stewart Hosie: Why don’t they do that?
John Whiting: Because they do not want to say a blanket, "Of course, you will not be prosecuted if you give the information" because they understandably have to reserve the right to prosecute somebody who, frankly, has been doing very egregious tax evasion.
Q154 Stewart Hosie: Indeed. David, you spoke about changing the culture, but when we had the Revenue here a little while ago I think they said something like a small percentage of people do evade and a large number, I think it was about 30%, would evade if they thought they would get away with it. The culture of the Revenue is a third of the people in this room want to cheat. This is just an extraordinary starting point for the Revenue, is it not?
David Heaton: I think the survey they shared with us suggested that 7% of taxpayers are deliberate wrongdoers. That is an attitude of mind, I think, and most of those people will not be converted easily by any Revenue department, however draconian the powers might be. Going back to John’s point from earlier, I think there are ways and means of persuading people, helping people, to get things right. The Revenue systems do not help them at the moment. I will give you a real life "for instance". A company came to us referred by the solicitor because they had bought another company and found irregularities in the Pay As You Earn. They wanted to make a disclosure, put it right. Absolutely exactly what you would expect; nobody supports evasion and most businesses do not support evasion. We wrote to the Pay As You Earn district, which I think was in Lincoln, off the top of my head. We heard nothing for weeks. When we followed it up, they had sent the case to another office. We left it a couple of weeks because internal post at the Revenue is notoriously slow so we did not chase it. Eventually, we did chase it again, "Oh, no, we have sent it to Bradford". So we chased it in Bradford. Bradford told us it had gone to Glasgow. Nothing happened coming back from Glasgow, so we chased Bradford again and they said-because of a personal connection I managed to speak to somebody in the Bradford office because it is on my doorstep. They said, "We will see what we can do" and they managed to retrieve the case from Glasgow back into Bradford so that somebody could deal with it. Part of the issue in dealing with cases like that is it is not easy to do.
Q155 Stewart Hosie: So a company identifies a discrepancy from a company they have acquired. They want to sort it out. The paperwork goes all round the country and the poor company are sitting there panicking, this is taking such a long time, they have found something wrong. It is debilitating for senior management, debilitating for the company.
David Heaton: Yes.
Stewart Hosie: Who is responsible for that?
David Heaton: Well, I think the issue at base is that HMRC have reorganised the way they work and as part of that reorganisation responsibilities have been dissipated in different directions. Some of the time people just do not know who is responsible.
Stewart Hosie: Extraordinary.
John Whiting: On your point about whether a third party group could help, yes, I think they could. I accept David’s point; it is really the Revenue’s job to help. Being realistic, people will not trust them completely. Is there scope for TaxAid, Tax Help for Older People, groups like that to help? Yes, there is. The stats will show it is actually money quite well spent if there is a bit of seed corn money passed from Treasury, Revenue, to help bodies such as that to help them.
Q156 Stewart Hosie: The Revenue rules, as I understand it, do not really permit this?
John Whiting: No, but to the Revenue’s credit they have actually funded TaxAid and Tax Help for Older People and the Low Incomes Tax Reform Group to a degree. There is scope for doing more.
Q157 Stewart Hosie: You are very experienced and you know the Revenue inside out, is there an open door this Committee might want to push at to encourage them to be more supportive of trusted third-party organisations.
John Whiting: I am not going to say there is an open door. There is a door. It has been opened, a little bit has been put through and it has been shut again. You could have a go at opening it a bit more.
Stewart Hosie: That is helpful, thank you.
Q158 Mr Love: I want to focus on the role and activities of HMRC, but before I do that I want to go way back to our beginning and really to talk about the tax gap. Our inquiry is focused on the tax gap and I was rather surprised to discover that there seems to be quite a difference of view about what, if any, role the tax gap can play. I accept that there are areas like avoidance or legal interpretation where it may be somewhat dubious to contain firm figures, and we have heard here Richard Murphy, who I am sure is well known to all of you, who is at one end of the spectrum and of course some of the attacks and inquirers are at the other end of the spectrum. So, we accept that there will be no unanimity about the figures, but I think we can expect unanimity about there being a gap. There doesn’t seem to be unanimity about the role it should play with HMRC and I think some of you were emphasising that perhaps they played too central a role in what they have done. So, the question I am asking is, do you accept there is such a concept as the tax gap, and do you think it is beneficial for the work of HMRC that that plays a role in the way that they address the public and people who should be paying their taxes? I do not want to go on with this for a long time but if anyone has-
John Whiting: Just briefly, yes, I accept there is a tax gap, yes, it should play a part. My concern is it is up there graven in stone, too rigid and playing too central a part because of all the issues about what exactly is the gap and how is it defined.
Q159 Mr Love: Would you all agree with that?
David Heaton: I am not sure I would agree that it should play a part in the target-setting. Because of the uncertainties about how that number is calculated, and they are major uncertainties because it is an essential part of our assumption, I think it is very difficult to use that in any kind of meaningful way in setting a target for increasing collection. We have evasion, we have avoidance, we have mistake, Chas’s pie chart. I think it is difficult to put anything meaningful on that number. Yes, there is a tax gap, I would not disagree with that. I do not think we can use it in any meaningful way to set targets because we do not really know what it is.
Mr Love: I think that is agreeing with the point that John Whiting made; how HMRC choose to use it is an issue.
John Whiting: That is certainly what I see as-
Q160 Mr Love: I just wanted to be absolutely clear about that. I am going to jump around a little so I do apologise for this. All of you commented on the role that HMRC seems to be playing, if I can put it broadly, in the legislative process, directions, guidance. It seems to be filling a vacuum and I think the view that you have taken collectively is this is not their role, they should collect taxes. The question I really want to ask is, if it is not their role, if there should be a minimal use of directions and guidance, how do we fill that gap? Are politicians not performing properly and how do we ensure that we do the necessary that does not drag HMRC into that vacuum?
Chas Roy-Chowdhury: I think HMRC should provide guidance and it should provide its own view but I guess the main problem that I have is that a part of the tax gap is legal interpretation or avoidance. I think that is the real area where they should be interpreting the tax gap, producing figures on the tax gap. That isn’t really, I think, part of it, or certainly legal interpretation isn’t. I think for the ordinary, unrepresented taxpayer especially, the website does contain quite a lot of valuable guidance and information and I think that can help people. So, I think they should provide guidance but they should not frame what they say as being the law. That is really where we are talking about this, if you like, ethical taxpayer type dimension that they should not really be encroaching on to.
Q161 Mr Love: Can I perhaps ask you, John? There has been quite a lot of criticism of the way Parliament goes about this process and secondary legislation seems to be more and more in use. Do we have the boundaries correct? Is HMRC only going up to where it is expected that they would or are they being sucked into a more quasi-political role?
John Whiting: In short yes, they are being sucked into that. You say secondary legislation. One of the problems we have is that HMRC guidance becomes tertiary legislation and is portrayed as having virtually legislative force. What is the problem? Well, the problem is that the base legislation is not clear enough. I agree with Chas, there is always going to be a place for some guidance and that could be very helpful, provided it is written properly, but it should not be a substitute for getting legislation right in the first place. We cannot have tax by law, untax by concession. We should be taxed by what the law is. The solution is clearly a better process of getting the law right in the first place, giving it proper time, proper consultation, proper debate.
I have high hopes for the Government’s tax policy-making programme. The ideas that they have set out, that is very promising. But it does require an acceptance that getting the right answer on tax will take time and if you look at the current Finance Bill, which I am conscious that certain Members will have been looking at, possibly more than they would wish to, there is a lovely example in there, "disguised remuneration". It is over 60 pages and really one looks at that and thinks, "There must be a better way" particularly as you know there are going to be more amendments in next year’s Finance Bill.
Q162 Mr Love: The Office of Tax Simplification must have been somewhat perturbed after all their good work that they were-
John Whiting: I do put up a slide regularly that quotes two numbers, which are 100 and 382 and ask people to recognise which is which, as I am sure you and the Chairman will get it. One hundred is the number of pages of legislation that is being abolished as a result of the OTS’ work and 382 is the length of the Finance Bill before it was amended. So, we are losing but we are not losing by quite so much.
Q163 Mr Love: I don’t want to get into this because this is not in a sense our inquiry, but, John, perhaps you could set out for us very briefly how you think Parliament could do better and not drag HMRC into areas-
John Whiting: I think I come back to give it time, do the tax policy-making process properly, so that what comes to Parliament has basically been almost stamped as approved by bodies such as ours to say, "This works". Then the HMRC guidance can concentrate on arguably what it should do, which is just to help the ordinary person understand it.
David Heaton: One of my close colleagues has been working with Revenue on the disguised remuneration in particular and I echo everything John said. It was first published in draft in December, then we had another draft for the budget, now we are on to the third or fourth version-is it the fourth version at report stage? There are so many issues with those 60 pages of legislation. We have 214 pages of internal revenue guidance that have been published plus umpteen frequently asked questions. It is not satisfactory that the legislation has been changed three times in six months and we still don’t know what all the answers are. Again, John’s point, tax it now but let some people off by concession, is not right, but that is exactly what is going to happen because there is some collateral damage in that legislation that is not intended.
Chas Roy-Chowdhury: I am on the Revenue committee dealing with disguised remuneration, but in some ways that piece of legislation is defective to start with because it is a rules-based piece of legislation that you will have to change every year as other tax legislation occurs that may be caught by this. So, what we need is a system where it is much more principles-based and it can stand the test of time.
Q164 Mr Love: Because of time constraints I am going to have to ask not everyone replies to every question, so I shall direct them. If I have the wrong person then perhaps you can holler at that point. I wanted to ask you about relations between HMRC and the tax profession. There has been some suggestion that it is at an all-time low. Would either Mr Heaton or Mr Chowdhury want to comment on that?
Chas Roy-Chowdhury: I sit for ACC on the Agent and Strategy Committee with HMRC and we worked together to produce the consultation document that has been published, so a discussion document that has been published, and we have meetings with them next week, so it is an ongoing dialogue. I think at the professional body level we have a lot of useful contact and we do try and make some useful changes for the taxpayer, for the agent and for HMRC, and for Government obviously. I think on the ground there are some real issues for taxpayers and for agents dealing with HMRC because a lot of the work that we do at the HQ level with HMRC is one thing, but in terms of where agents are trying to engage with HMRC at the grass roots, trying to deal with tax problems, that is where the real work needs to be done where there is, I think, a feeling that things have hit an all-time low.
Q165 Mr Love: So, you would not disagree with that. At the professional level and contact it is reasonable, but out there, when people have to contact their local tax office or officials, it is really very bad.
John Whiting: A very important distinction, and I refer you to my President’s article, I think you may have seen.
Q166 Mr Love: I think we have it here. I wanted to go on and just touch upon the intervention yield. You will be aware, and the Chairman mentioned this earlier on, that the Government has agreed an additional £970 million and in return the intervention yield is to rise by £7 billion over the next four years. That is a significant advance. I wanted to ask, if we are to believe the figures of course-and I understand that it is difficult to get absolutely accurate figures from HMRC-the intervention yield has gone up every year. The suggestion is, and you have touched upon this earlier on, that they have had to focus their activities. We need to remember continuously the number of employees has gone down by roughly a third I think it is during that period when it has been going up, so they have had to focus. One of the suggestions is that they have done that on the large businesses rather than low-level compliance. You have talked a lot about low-level compliance. Have they been focusing on the larger cases? Is that the reason why they have been able to bring in these increased takes from the intervention yield?
David Heaton: I am not sure that it is all to do with large business. One of the numbers I think in the £7 billion yield was the offshore disclosures, which I think is not going to be repeated. They offered the opportunity to come forward. They offered a deal, which people who really wanted to come forward will have taken, so I don’t think that will be repeated so I do have doubts about whether they can sustain that.
Chas Roy-Chowdhury: I think the LBS strategy, the risk-based strategy on large businesses, is yielding revenue. Clearly in the NAO report last week there are something like 2,700 aspects still open that the NAO have looked at. That is yielding very well and that is about discussion and agreement between taxpayers who are well represented and well advised on both sides. So, I think that is a strategy worth pursuing. It does seem to be yielding significant amounts and so it is an area which is-I don’t think it is low-hanging fruit in that particular area, I think it is something that is an area that should be looked at where there is just a, if you like, disagreement in interpretation, or not agreement in interpretation but there is the ability to agree amounts of additional tax for HMRC for the UK.
David Heaton: I think it is important not to miss the small print in that NAO report though. The 2,700 issues are issues that they have identified, not issues where there is tax due, and they have come up with a figure, I think it was £25.5 billion, at stake in relation to these 2,700 issues.
Q167 Mr Love: I want to come back to other aspects of the NAO report, but let me just ask you about the litigation and settlement strategy, because we have been told that HMRC were planning to re-launch that. What is the rationale behind that?
John Whiting: I think it is refresh and re-launch. I suppose any initiative needs looking at again every now and again so I would not argue with that. But I think there is a feeling that it does need bringing up to date, particularly in the context of what in many ways has been quite successful, the HMRC internal review process, which over the last couple of years has allowed quite a lot of taxpayers to challenge things that have come up, has led to quite a few things being withdrawn, and it all needs another look at the whole litigation and settlement attitude of the Revenue. If you go back to when it was first launched we heard a lot about how they were going to litigate their clear cases, and that goes back to something we touched on earlier. Yet we have not seen, for example, litigation come out of the offshore disclosures. So, it does need looking at again I think is about all I can say on it.
Q168 Mr Love: Let me ask you, because of course one of the reasons I suspect the NAO looked at this area was a growing perception that a consequence of the litigation strategy was that they were, in perception at least, going easy on some of these big businesses. Do you think that is a danger? It would appear that the industry, if I can call it that, thinks that this is a sensible way forward, but in terms of public perception-maybe HMRC have handled it badly-there is undoubtedly a perception that big business is getting away more easily than they should be.
David Heaton: I think there is a job to be done to correct that perception. I think the perception is wrong, if indeed that is what people think. The litigation settlement strategy really only affects the way that cases are handled. Going back into the pre-LSS days, it was quite often the case that you would sit down with an inspector and argue the pros and cons of a case and you would reach an arrangement. Something would be agreed that made sense for both the taxpayer and for the Revenue. The LSS in some ways created a binary situation where you have either you win or you lose. If the Revenue decided to take it on they thought they were going to win. If they did not decide to take it on it was because they thought they did not really have a sensible chance of winning, like more than 50%. I think creating that distinction with the litigation settlement strategy, even if it is only a perception of that distinction, because the Revenue do not think that it is quite that binary, you are in a way forcing the Revenue to abandon cases where in the past they might have negotiated a settlement. Equally there are taxpayers who will abandon cases where in the past they might have decided that they would probably fight on the basis that they would be able to get a reasonable deal. I think there is something to be said for reviving the pre-LSS period when taxpayers and Revenue could have a proper discussion of the pros and cons of all the issues in the case without resorting to law and come up with a sensible answer.
Chas Roy-Chowdhury: I think the large business strategy quite often does come to settlement without going to court. That obviously does not come out because the information is confidential. So, I think they have not gone soft at all, because where you have a complex organisation the business itself may not be entirely clear if there is UK tax to be paid or not and so I think that and some of the other things we have heard about offshore jurisdictions, I am not sure that the Revenue have gone soft on any of these areas. In fact what has happened for large businesses is where they are probably paying as much tax as they need to within the UK. I am not saying "need to" in terms of what they can get away with but in terms of what they are required to pay.
John Whiting: The thing to pick up on in some ways is, certainly from my experience with big businesses, they do not see the Revenue as any sort of soft touch, whatever the public perception is. The large business service, as colleagues have said, is successful.
Q169 Mr Love: John, let me put this to you. If you take the Vodafone case, clearly it was going to end up in litigation over many, many years. Do you think there is any impact on the attitude of other large businesses that might say if we continue to threaten litigation they will deal with us and they will settle at a lower level because they don’t want to go through the litigation process?
John Whiting: I can’t comment directly on Vodafone. The perception that large business will have is they know the rules of the game, they know how easy or difficult the Revenue is. They will not be influenced by any perception of the Vodafone deal because they will know that Vodafone, just like themselves, like any other FTSE 100 company, will have arrived, after some pretty tough negotiations, with what both sides feel is a fair estimate of the tax due. Of course what the problem with it is, it is the optics, if you like, it is the perception that a company gets away with it, but I think the rest of the large business types of companies will know that Vodafone or whoever did not get away with anything.
Q170 Chair: I am an ordinary bloke and in my constituency we would say you are wrong, John, in terms of perception. In this room we challenged a Minister on the letters that were being sent out to ordinary individuals, often vulnerable, often elderly, that suggested they owed a certain amount of money, never negotiable, often thousands of pounds and it had to be paid within a month, and if they did not there would be bailiffs put into their house. They would take goods, they would sell the goods, and they actually spelled out how they would sell them at a reduced price. They would advertise this to their embarrassment among the community, and there was no appeal and there was not even any suggestion to contact us if you disagree. How can you say-
John Whiting: I completely agree with you, Chairman.
Q171 Chair: You cannot say big businesses are not being treated differently from the individual.
John Whiting: With respect-
Chair: That means you do not agree, with respect.
John Whiting: With the greatest of respect, Chairman-
Chair: That is even worse.
John Whiting: I know. We are talking about different situations. I totally identify with the sort of situation you say about the elderly person. I have seen a number of those cases through Tax Help for the Older People-
Q172 Chair: John, did it happen last year? Is this a new departure? Is this part of getting this money in?
John Whiting: It does seem to have been ramped up a bit, and that needs sensitive handling. It comes back to the point I was trying to pursue with Mr Hosie that having a known sort of third-party organisation that would be there and was well known-
Q173 Chair: But, John, with the greatest of respect back, why do you need a sensitive person to object? If anybody who was doing business with you sent you that letter you wouldn’t need a third party. If they were not a public body you would take the business from them and go elsewhere.
John Whiting: I completely agree, but they need help as to how to challenge the Revenue.
Chair: They should never receive that letter. Never, ever send that letter.
David Heaton: It is not just vulnerable taxpayers who are receiving that kind of letter. One of my clients is a multi-millionaire, he is a qualified solicitor not in practice anymore, he received one of those letters for £2,500. They were going to come and seize his TV and his car to settle the debt. As it happened the debt did not exist. The tax return had been amended online, and we had an electronic acknowledgement that it had been amended online, so the debt did not exist but the debt collectors did not know about it and when they sent the letter out they sent it out based on false information. They are not just targeting the vulnerable.
Q174 Chair: No, I said these letters were going out to ordinary, individual taxpayers, a number of them vulnerable, a number of them elderly, but it was the indiscriminate nature of the letters going out. The tone of them, the threats in them, that you would not expect a public body would lower themselves to that level.
John Whiting: This clearly should not happen.
David Heaton: It should not happen. There is a certain amount of, I may be using a made-up word here, but "processising" of the compliance system. They are relying a lot on computers to send out letters.
Q175 Chair: I do not challenge them on sending out letters but I challenge them in terms of the tone, the threats and also-we discussed it earlier, I don’t know if it was Andrew or Stewart-it is their attitude that they are not there to collect money in the nicest possible way. They are there, they will tell you how much money you owe and if you don’t do it the threats start emerging. No that they might have made a mistake or they wish to discuss it or that you have a right of appeal. That is always absent. It is just "we want this money" and that is what it is.
Chas Roy-Chowdhury: I think it is lack of human understanding, commercial understanding. Because they would not like to receive a letter like that themselves, they wouldn’t like their mother to receive a letter like that, so I think they need to understand more about the impact they have on the outside world.
Q176 Mr Love: I wanted to touch upon the NAO report because in terms of these large company cases it commented on a need for greater transparency and I would ask you to comment on that.
Chas Roy-Chowdhury: In terms of the settlements?
Mr Love: In terms of the settlements. It went on to say that the governance procedures were not entirely to the satisfaction of the NAO in that some of the people that were involved in the cases then signed them off. Do you think there are governance changes that ought to be made? Then of course there is the suggestion that there should be some independent verification a bit like the American system where there is an appointed official that independently verifies what the-how do you comment on all of those?
Chas Roy-Chowdhury: On the governance issue, I think clearly we need to make sure that the tax agreement is something that is acceptable to the Government, i.e. HMRC, in terms of this higher fiduciary role. Within HMRC the person looking at the situation as a totally objective observer who would have nothing to do with the case at all would need a lot of legwork to get to the same conclusion and understand the reasons why the final settlement was agreed. So I think there probably needs to be some interaction between the person signing off the settlement and being involved in the settlement itself. So, I do not necessarily think that as long as there is more than one individual involved, et cetera, that should present a problem.
John Whiting: But again it comes back to a point I was trying to make to the Chairman. It is the optics of the thing; it would make it look far better if there was more independent sign-off. So, if commissioner A has finally done the negotiation then to have two independent members of the HMRC Board-
Mr Love: Which I think is the point that the NAO was making.
John Whiting: Yes, not so much to redo the work but to confirm that proper process has been followed. There is a role here I think for stronger non-executive directors, or whatever the term is, of the HMRC Board. Some people there who perhaps have more tax experience who could be in on this. You could envisage people who sat as non-executive directors who represented the sort of organisations we four represent and who could say, "Yes, HMRC are following good process. Not going to argue with the settlement one way or the other, but there has been a good process followed".
Q177 Mr Love: What about the system in America-the Inspector General for Tax Administration? I am not sure if you are aware of that system, but that gives an entirely independent-
John Whiting: It is one way to go, but-
Mr Love: You don’t seem overwhelmingly enthusiastic about the American way.
John Whiting: It seems like another quango. I think I would rather try to cure it within the Revenue.
David Heaton: It does seem like an attempt to cure a problem that does not really exist.
John Whiting: You can improve the Revenue, I think, rather than create something new.
David Heaton: Knowing the people who are involved and knowing the processes that are gone through within the Revenue at local level and above that, the levels of supervision involved in cases like this, I have no doubt whatsoever that the cases that have been signed off have been signed off correctly. I probably have not seen the evidence the NAO have seen, obviously, but I don’t think there is any suggestion that there was any impropriety at all in any of these situations and I am not sure that anything would be added, other than as John says optically, by having some kind of independent oversight.
Chas Roy-Chowdhury: I would also add that in terms of the timing-as previous evidence has said-of some of the settlements, I don’t think that timing has been influenced by anything whatsoever from a political perspective.
Chair: Thank you very much for your evidence. It has been a very constructive
session. I am sorry you had so few people here but it has been well worthwhile.
John Whiting: It is the quality that counts.
Chair: I am sorry we had that Division, but there you are. Thank you very much.