Taxation published this article on 16 July 2015.
In a question and answer article for Tax Journal (6 March 2015, page 8; see www.lexisurl.com/kf8ty), the replies by HMRC’s director general for business tax, Jim Harra, appear to have generated a fair amount of unrest and even anger amongst tax agents. I suspect that was not Jim’s intention. When I read the article – “HMRC’s plans on working with tax agents” – I glossed over it; however, on re-reading it I can understand the concerns and wanted to address them. First, because this is an area that particularly interests me and, second, I think they demonstrate that there is a huge gulf between what agents do and what HMRC want them to do. I think this gulf may well be unbridgeable and someone needs to explain why to HMRC. There are two main issues. Jim said that, “When an agent is managing the tax affairs of businesses, HMRC really shouldn’t have to intervene to resolve non-compliance that could have been identified and sorted out by their agent … The key thing for me … is making sure we’ve got the maximum value we can from having an agent in the relationship between HMRC and the taxpayer”. He also said, “When an agent represents a taxpayer, we will want to know what services an agent is providing. This could be a perfectly professional basic service, or it could be one which offers lots of added value … so that an agent’s client presents to us as compliant or low risk”. Let’s start with the relationship. I don’t see myself as being “in the relationship between HMRC and the taxpayer”. I see myself as having two separate relationships. I have a relationship with my client. This is a contractual relationship. Broadly speaking, provided that it is both legal and ethical, I will sell him whatever tax service he wishes to buy. In most cases he wants me to complete his tax return from the information he provides to me (including preparing any accounts needed to do this), he wants me to protect him from what he perceives to be is the aggravation of HMRC, he wants me to tell him if he could arrange his affairs more tax efficiently, and he wants advice on the tax treatment of specific transactions. That is what I sell him. Because ethically I want to protect my firm’s reputation, I will however also question any information that the client provides me that on the face of it does not make sense to me. I have a completely separate relationship with HMRC. I have always assumed that is a relationship of trust between two tax professionals dealing with one another. I do not see myself as “managing” anything. Like any agent, when dealing with HMRC I am the representative of my client. As neither I nor my client have any contractual relationship with HMRC, I cannot see any basis for HMRC to want to get “the maximum value” from my informal relationship of trust. My legal obligations are wholly to my client. My ethical obligations are to comply with the ethical rules of the professional bodies of which I am a member; in my case, the ICAEW and the CIOT. I like a quiet life. Within the constraints of my contractual bargain with my client, I am happy to work together with HMRC to resolve any issues arising on my client’s tax affairs as expeditiously as possible. However I am not willing to be pushed around by HMRC. It takes two to tango. If HMRC want to get the maximum value out of their informal relationship with me, they need to work with me. If they adopt a “We-don’t-care-about-your-experience-we-know-best” approach to dealing with me, as is frequently the case, they cannot realistically expect to get maximum value out of me. I have 50 years of experience as a tax professional; I doubt that anyone within HMRC can match that. Accordingly for someone with a lot less experience to suggest that their experience beats mine is hardly likely to endear them to me. I do think that there are things that HMRC can do to get maximum value out of me. If they tell me what is worrying them, I am probably in a better position than they are to work out what information can best be provided to alleviate their worries. If they say, “Give us such and such information” and it is difficult to produce, or it is not readily apparent to me that it is relevant to my client’s tax position, I am going to challenge their demand. That is actually a waste of time for both of us, but if that is how they wish to work, I have no option but to react accordingly. Accordingly if HMRC want to get maximum value out of their relationship with me, they are pushing at an open door; but they need to push it not try to kick it open. Let’s move on to non-compliance. Jim says that 44% of the estimated £34billion UK tax gap is due to non-compliance by SMEs. Because 70% of SMEs use a tax agent, he seems to attribute that non-compliance to poor work by agents. HMRC’s “Measuring Tax Gaps 2014” tells me that the total tax gap is £34billion, of which only £15.1billion relates to SMEs. It also tells me that of the £34billion total, only £4.2billion relates to failure to take reasonable care and another £4.5billion relates to legal interpretation, i.e. where there is a dispute over the application of the law. So the total of non-compliance by SME’s amounts to £1.8billion – still a significant figure but actually a much smaller figure than the £15.1billion that Jim suggests. But what is non-compliance? HMRC regard not doing things on time as non-compliance but, while that may delay the collection of tax, it does not result in a loss of tax. Most of us have lots of cases where we reach the stage that it ceases to be cost-effective to fight HMRC’s view and reluctantly advise the client to concede. HMRC regard that as non-compliance, but it is nothing of the sort. It is pragmatism. Does non-compliance include mistakes or only cases where penalties arise? I know that a lot of agents agree penalties where no penalty is actually due. That is not non-compliance. It is either ignorance of the law or pragmatism. I assume that the £4.5billion of legal interpretation is not regarded by Jim as non-compliance even where at the end of the day HMRC convince the taxpayer that their view is right. That brings me to Jim’s second point. I don’t think I am providing a basic service to my clients; I think I am providing a Rolls Royce service. The confusion is because Jim is looking only at the compliance bit, which is a very small part of what the client is buying from me. On that bit I am providing a quality service of what the client wants to buy. Jim thinks that if I say to clients, “Pay me more money to do extra work that is of no benefit to you but which will give HMRC more confidence in your tax return”, they will be happy to pay me. Sadly, I think he is wrong. Indeed, I am pretty sure he is wrong because when audit deregulation came in, we tried to convince clients that there were benefits in continuing to have an audit done even though they were no longer forced to have it, and virtually everyone said, “No thanks!”. I am not going to do free work for HMRC. Nor, I suspect, are any other agents. That means that Jim’s vision is an illusion. That does not mean that HMRC and agents cannot work closer together. For example, I would not mind helping HMRC by automatically telling them what estimates I have used in preparing a client’s accounts. But I am not going to do this if I think that HMRC are going either to then disallow the estimates or automatically challenge them. They need to grow up first! They need to recognise that the law requires the client’s accounts to comply with UK GAAP and if some information is missing, that requires the inclusion of estimates. Profit is the difference between income and the expenses of generating it, not between income and those expenses for which one holds a piece of paper. Of course HMRC are entitled to question whether my estimate is a reasonable one. However, if it is, they are not entitled to seek to substitute their judgement for mine. I want my clients to pay the right amount of tax. I thought that was what HMRC want too. But I am increasingly wondering whether those who claim that HMRC want to collect as much tax as possible may be right. Accordingly I think that if Jim wants to get the maximum value from agents, he first needs to sit down with agents’ representatives and understand what agents do and why. He can call me any time he wants! He also needs to understand that, if the law requires the inclusion of something, seeking to throw it out because there is no documentary evidence to support it, is a waste of everyone’s time. In return, agents ought to be prepared to recognise that there is more they could do to help HMRC at little or no cost. But first both sides need to recognise that both HMRC Officers and tax agents are not enemies facing one another across the barricades; they are professionals doing a professional job to the best of their ability with a common objective that our clients should pay the right amount of tax; no more and no less. But that requires both sides to start by looking on one another as equals. Sadly at the moment I do not think that HMRC are prepared to take that step. Robert Maas is a consultant at CBW Tax. He is also chairman of the ICAEW Tax Faculty’s Enquiries and Appeals Subcommittee and author of Guide to Taxpayers’ Rights and HMRC Powers
One of the UK’s leading tax experts, Robert was awarded the 2013 Lifetime Achievement award at LexisNexis Taxation Awards (which are the gold standard of excellence in the UK tax industry).