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Reducing the UK Tax Gap Proposals from ARC – representing HMRC senior staff Who are we?
The Association of Revenue and Customs (ARC) is both an independent trade union and the HMRC section of the FDA, the trade union for senior managers and professionals in public service.
ARC represents around 2600 members in HMRC, at grade 7 and above, as well as trainees in grade 7 entry schemes.
We articulate the views of the professional staff working in HMRC to collect taxes from individuals and businesses operating in the UK.
We are partners with HMRC in the Consultation and Negotiation Agreement signed in May 2007. HMRC also recognises ARC as a stakeholder on professional matters within HMRC.
ARC is firmly committed to the principles of equality and diversity in both employment and the delivery of services.
Executive summary Since 2009, ARC has been making the public case for sustained additional investment in HMRC. We continue to argue that further investment in HMRC will deliver additional revenues to UK plc and is an important way in which the Government can address the current funding deficit. This paper sets out an interim proposal setting out ARC’s view on where relatively modest investment could produce substantial additional yields, over and above the additional £7bn already promised each year by 2015. We intend to develop and refine these interim proposals with a view to producing a comprehensive investment package prior to the 2013 Budget. Further investment should be focused on increasing professional resources in:
policy-making areas; those working to ensure large businesses pay the right amount of tax; general compliance work; legal teams; delivering more help for agents and customers; and Increasing HMRC’s long-term capabilities to tackle fraud and evasion.
To support this work we are also calling for a review of the impact on the UK tax base in three areas: new forms of technology; the capacity of businesses to incorporate in a choice of jurisdictions; and the growing use of offshore intermediaries.
To be fully effective we believe this work will have to be done on an international basis, perhaps via a working group sponsored by the Organisation for Economic Co-operation and Development (OECD). ARC Interim Investment Proposal Tackling avoidance and technical tax gaps 200 additional senior tax professionals and 200 HO/SO tax professionals to challenge avoidance by large employers. Cost £64m. Projected yield over four years £1500m. Additional legal resources, 150 trained lawyers and 50 legal assistants, to accelerate litigation of the Tribunal backlog and accelerate yield. Cost £35m. Projected yield £2000m. Investment in customer and agent support Business expansion unit of six senior tax professional staff at a cost of £1m. Projected yield over four years £35m Building future capacity Recruit an additional 100 graduates each year to train as senior tax professionals. Cost £20m. Projected yield over four years £150m (but yield will quickly build to £600m per annum as these trainees complete their training and develop into experienced tax professionals). Total cost: £120m Total projected yield: £3.7bn
Background 1. Like all government departments, HMRC has been asked to make efficiency savings. However, because of the unique position of HMRC as the tax collecting department, the Government has reduced its plans to cut HMRC resources (described as a £917mn ‘reinvestment’) but in return set demanding targets for HMRC. ARC members are playing a leading part delivering these targets and are committed to ensuring they are achieved. 2. Increasingly, there is greater recognition and cross-party support for ensuring that HMRC is properly resourced so that everyone plays their part in tackling the deficit, particularly those trying to avoid their obligations. 3. Recently there has been an unprecedented amount of interest and debate around businesses social responsibility to their communities, and in the operation of international tax law. This is partly prompted by the latest HMRC estimate of a Tax Gap of £32bn, but intensified by public exasperation at how some business, are using complex rules, accounting procedures and international agreements that set out how, where and when Governments can tax the profits from international trade, multinational companies and commerce via the Internet. 4. These issues, and the level of political and public concern, highlight the need for further investment in HMRC to ensure the UK collects the right amounts due to it across the full range of tax lost (including estimates of £5bn for tax avoidance and £4bn for legal interpretation). It is essential for HMRC to be fully and professionally staffed in order to work within what is an extremely complex legal framework. UK tax gap – the scale and nature of the problem 5. Every developed economy has a tax gap. It is the difference between the amount of duty and tax due under the law and the amount taxpayers pay voluntarily. HMRC describes the tax gap as “the shortfall resulting from fraud, error, non-payment and artificial avoidance schemes”.
6. ARC has not produced its own independent estimates. In our view, no matter how the tax gap is measured (£32bn or any higher multiple) it is sufficiently large to require action. This gap would be even larger, at approximately £50bn, were it not for the work done by HMRC to counter it, yielding over £13.9bn in 2010/11 and £16.7bn in 1 2011/12 It is important to note that the estimated £5bn tax lost to avoidance (see below) is, on HMRC’s figures, only about 15% of the tax gap. 7. Nobody has produced a comprehensive and accepted definition of avoidance 2 although judges have tried many times and HMRC has a list of ‘pointers’. We would adopt transactions or arrangements which have little or no economic substance or which have tax consequences not commensurate with the change in a taxpayer’s (or group of related taxpayers’) economic position, and which have tax consequences not intended by parliament. 8. The Government is also now introducing a General Anti Abuse Rule (GAAR). In our view a rule that tackles only highly abusive, contrived and artificial schemes has substantial and unintended risks. The danger is that the existence of a GAAR introduced with this stated principle will encourage the view that any arrangement not caught by the ‘narrow’ GAAR is responsible tax planning and should be accepted. In other words it will, in the minds of taxpayers and planners, legitimise aggressive tax planning and thus encourage more, not less avoidance activity. 9. Of equal concern is the £4bn tax lost through legal interpretation. While this area may not fall within ‘avoidance’, it very often involves complex grey areas which cost the Exchequer large sums. Legal interpretation relates to the potential tax loss from cases where HMRC and individuals or businesses have different views of how, or whether, the law applies to specific and often complex transactions. Examples include the correct categorisation of an asset for allowances, the allocation of profits within a group of companies, or the VAT liability of a particular item. Skilled professionals are vital if HMRC is to be able to reduce the technical tax gap. 10. Whatever the forms of the tax loss, the result is the same; there is less money to pay for vital services such as schools and hospitals and honest and compliant taxpayers end up paying more.
Closing the gap – current measures to increase HMRC capacity 11. HMRC has to make an overall net reduction in costs of over £2bn by 2014/15. This means losing an additional 13,000 staff over the Spending Review period, taking staff numbers down to 56,000 by 2014/15 compared with 96,000 in 2005. 12. There are currently significant areas of compliance work that are not benefiting from the £917m reinvestment including; corporate avoidance, dealing with errors and mistakes, technical and procedural advice, employment duties and ghosts/moonlighters. 13. Mike Eland (then HMRC’s Director-General Enforcement and Compliance) confirmed to the Public Accounts Committee that from 2005 to 2010 HMRC was obliged to reduce in size. Its remit was not to reduce the tax gap. He accepted that if additional resources were available HMRC would have brought in additional money, with 10:1 being a “reasonable proxy”, and a return of 30:1 might be likely by the end of the CSR 3 period. As Lin Homer recently told the Treasury Sub-Committee “we are a pretty 1
HMRC Annual Reports 2010/11 and 2011/12: http://www.hmrc.gov.uk/about/reports.htm http://www.hmrc.gov.uk/avoidance/aag-risk-assessing.htm 3 Q 27, 32 and 21, HM Revenue and Customs: Compliance and Enforcement Programme, http://www.parliament.uk/documents/TSO-PDF/committee-reports/1892.pdf 2
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good investment.” On that basis, ARC urges the Government to agree with HMRC on what additional returns it could produce if there were even more additional funding for HMRC. 14. ARC members are senior professionals engaged in work that brings in the lion’s share of the £16.7bn tax gap closure delivered by HMRC last year. This work is incredibly cost effective. An ARC member earning £50,000 per annum can expect to generate additional yield of at least £1.5m each year; a return of 30 times the cost. And for every £1 of additional yield the Exchequer benefits by an additional £1 through the deterrent effect of this work, both on the subject of the compliance intervention and on those who might be tempted to cheat on their taxes. 15. ARC members are engaged in tackling the biggest tax risks, whether as tax professionals, policy makers, lawyers, accountants or managers. At the top end of this work the yield can exceed 180 times the cost. Even at the lower end of this scale an ARC member earning £50,000 per annum can generate enough additional revenue to pay the salaries of 50 nurses or all the teachers in two medium-sized schools. Closing the gap – ARC proposals to increase HMRC capacity 16. ARC has welcomed the recent steps HMRC is taking to increase its capacity to tackle tax loss and reduce the tax gap. These are:
very substantially increase the staffing in the enforcement and compliance business areas (although it is, in fact, redistributing a declining HMRC resource rather than being an absolute increase);
a commitment to long-term recruitment of the next generation of tax professionals -240 in 2012 and 110 each year going forward to 2017 (although, as we point out below, this is insufficient to maintain existing capacity);and
investment in some very specific areas (e.g. specialist units that deal with specific groups of customers).
17. But ARC believes that far more can be done to reduce the size of the tax gap and therefore reduce the budget deficit. It cannot be right that, at a time when every family in the UK is being asked to make significant personal sacrifices to reduce the deficit, tax cheats are depriving the Exchequer of over £50bn each year. A tax system that is fair to all can only be achieved if HMRC has sufficient resources to tackle tax avoidance and evasion across all sectors. This work is highly cost-effective, repaying the investment in skills and resources many times over. We set out our proposals for further investment in HMRC to ensure the UK tax system is fair for all 18. Some of these proposals will not take effect at once and in the short-term HMRC may need to invest to develop a cadre of highly skilled and knowledgeable tax professionals, to build and strengthen existing expertise. We believe that tackling the tax gap requires a mixture of action, short-term and medium-term, both to accelerate outstanding payments (work in debt management and in litigation) and to take on risks currently not addressed adequately. In brief, HMRC has to be given the necessary tools to do the job. This includes: I.
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Ensuring policy objectives are fair, that legislation is simple and hard to avoid or evade (ARC supports the work of the Office for Tax Simplification (OTS).
Treasury Sub-committee, Oral Evidence, 31 October 2012, Q101, http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/uc673-ii/uc67301.htm
II. III. IV.
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Designing out the opportunities for avoidance and evasion in its own processes and procedures. Additional investment for front line compliance teams Increasing its resources in the key areas of supporting compliance, such as training and developing additional senior corporation tax specialists to challenge large business tax returns, and more senior tax professionals to challenge avoidance in direct, indirect and employment taxes. Helping agents and customers by extending the customer relationship management (CRM) model to a further 1000 large businesses. The CRM model has delivered improved voluntary compliance, faster resolution of tax issues and improved customer satisfaction. ARC welcomes the recent decision to substantially increase the resources for HMRC contact centres. But ARC members are unable to deal on a one-to-one basis with advisors and give the quick professional decisions that would make life simpler, easier and less stressful for many small and medium sized businesses and encourage voluntary compliance. We believe a small investment can be used to deal with exceptions handling, reinstating the knowledge base, dealing with more complex technical issues, and providing more specific points of contact for agents and intermediaries. Increasing its legal capacity with additional highly skilled tax lawyers and legal support officers, to help address the considerable backlog of cases 5 in the litigation pipeline , with very substantial tax at stake, as well as to give more support for criminal investigations and prosecutions. Accelerating the provision of high quality IT support (e.g. in case management). HMRC should create a business expansion unit to examine ways that HMRC can work with other government departments and businesses to support UK business. This might be through HMRC doing other audit/checking work, giving direct advice on inward investment, supporting the Department for Business, Innovation and Skills (BIS) and the Foreign and Commonwealth Office (FCO) in getting out the message that the UK is a good place to do business. HMRC is sitting on a demographic time-bomb. There are 13 times as many staff aged over 50 than those aged under 30. Whilst we welcome the planned recruitment of 110 graduates each year to undertake the senior tax professional training course, this will not be sufficient to replace people leaving through retirement. ARC believes the number of graduate recruits should be increased to 210 each year. And there should be a one-off exercise to externally recruit chartered tax advisers and internally select staff with the ability to undertake the accelerated senior tax professional training.
Policy review 19. Over the last three decades there have been fundamental changes in new forms of technology, the capacity of businesses to incorporate in a choice of jurisdictions, and a growing use of offshore intermediaries. Increasingly, services are providing a larger part of national income and traditional concepts of residence and taxation run the risk of being overtaken or side-lined by these changes. Along with other fiscal authorities the UK may be losing the ability to match tax revenues with the economic substance of trading and investment activity. 20. We believe it is now time for a review of the impact these changes have had on the UK tax base. To be fully effective we believe this work will have to be done on an international basis, perhaps via a working group sponsored by the OECD. Already 5
The NAO report Tax Avoidance: tackling marketed avoidance schemes (http://www.nao.org.uk/publications/1213/tax_avoidance.aspx) points out that “HMRC has 41,000 open avoidance cases relating to marketed schemes used by small businesses and individuals, and has yet to demonstrate whether it can successfully manage this number down.”
there is work underway to try to address the fact that many of the international agreements have their origins before the Second World War. The UN’s Economic 6 and Social Council is looking at issues like taxing ‘technical services’ (even when the 7 service provider has no physical presence). The OECD recently reported on transfer pricing and intangibles, and its head of transfer pricing recently noted on Radio 4’s Today programme: “We have issued a report this summer saying that the returns related to these brands and patents should be attributed to the locations where the real economic activities take place… We should at least make sure that where the activities take place, that is where the profits go, and not to some sham company in a low tax jurisdiction.” ARC believes the government should engage fully with these activities to ensure that the UK tax base is preserved. Conclusion 21. Despite the Government’s austerity programme the UK budget deficit is still estimated to be in the region of £126 billion. And at the same time HMRC’s latest estimate of the UK tax gap is £32 billion. 22. HMRC is on course to deliver the additional £7 billion each year to 2015 as part of the £917 million reinvestment programme. ARC believes that in achieving that, HMRC will have demonstrated what we have been saying consistently over recent years that by investing in key personnel in HMRC, its main revenue raising department, the Government will be guaranteed a significant return; one it could use to draw down the deficit, to avoid further austerity measures, or to fund economic recovery and growth. 23. This paper has set out the union’s compelling arguments for investing in HMRC. It has highlighted the scale and nature of the problems, considered the measures needed to address them and sets out an achievable interim investment proposal, which demonstrates the substantial returns which would flow from even a modest investment. 24. But the scale of the budget deficit and the tax gap are such that modest investment is no longer enough. ARC will continue to develop and refine its proposals into the new year and, in time for the 2013 Budget, will produce a comprehensive investment package to convince the Government that now is the time for it to abandon caution, be bold, and back a cast-iron winner.
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http://www.un.org/ga/search/view_doc.asp?symbol=E/C.18/2012/4&Lang=E
http://www.oecd.org/tax/publiccommentsreceivedonthediscussiondraftonthetransferpricingasp ectsofintangibles.htm
