A new dawn
Date: 19 February 2010
Authors: Peter Vaines
Issue: Vol 160, Issue 7405
Categories: Opinion, Tax
I was greatly encouraged by the publication of the latest HMRC Charter in November and by the comments made by Dave Hartnett in the 2009 Hardman Lecture. I really hope that this will represent the beginning of a change in the relationship between HMRC and the taxpayer.
Any objective reading of the professional press in recent years gives cause for anxiety about the relationship between HMRC and the taxpayer.
There is a widespread perception that HMRC inherently distrust taxpayers and assume that most people are fiddling their taxes.
In my view, this would not be a sensible stance—first, because I do not believe it to be true, and second because such an approach creates a serious risk of being self-fulfilling.
Similarly, while I believe most tax advisers regard HMRC officers as highly skilled professionals of integrity, this is not a view widely shared by taxpayers who are often surprised at such a view.
I think that part of the problem is that the tax profession consists of two completely different elements—neither really understanding the other.
It is a bit like the two ladies who were arguing across the street from their doorways. It was observed that they would never agree because they were arguing from different premises.
Opportunity
However, it seems to me that the new Charter and Mr Hartnett’s comments provide a real opportunity for change. I agree wholeheartedly with Mr Hartnett about the need for trust and it would be deeply regrettable if taxpayers were to lose the trust in HMRC which has existed for such a long time.
There is a perception that the drive for cash (and political interference) has caused HMRC to take a much more aggressive stance in all areas of taxation. I have no idea whether this is true and I profoundly hope it is false. I am sure everybody would agree that the integrity of the tax system should not be sacrificed on grounds of expedience (or in pursuit of higher tax collections); the preservation of trust in HMRC must surely be paramount.
Culture
It seems to me that this is a question of culture. The culture of an organisation comes from the top and while not wishing to sound naïve and idealistic, I would suggest that now Mr Hartnett has declared publicly that HMRC will at all times act with fairness and integrity, if he were also to declare that he will not defend any action, or any of his representatives, who fall short of this standard, this could make the most enormous difference.
Practitioners will not be slow in drawing episodes of unfairness and poor behaviour to Mr Hartnett’s attention and if he were to acknowledge that such things do happen and we can learn to trust him to do something about it, I believe this would have a seriously beneficial effect.
A message like this would engender trust which would soon get through to both sides. This has to be in HMRC’s best interests because it is so much easier seeking compliance from a standpoint of mutual trust (or at least something approaching it).
Everybody would understand the wish of Mr Hartnett to defend his officers; they have a seriously difficult job and receive inadequate public recognition. However, it is really important for him not to strain to defend the indefensible—or to support a position which most people would consider wrong or unfair. That only makes matters worse.
Trust demands that where something has gone wrong, individually in a particular case, or collectively when HMRC make a bad judgment, Mr Hartnett should acknowledge the fault and be seen to be trying to do the right thing. I do not suggest that taxpayers are not at fault sometimes—indeed, far more frequently than HMRC; but that is not the point. They are not public servants, and there is an extensive system of tax penalties for defaulting taxpayers.
Consequences
HMRC seem not to have grasped that going to court to prove that they are being fair and reasonable is a disaster. It is almost a contradiction in terms and it puts them in the wrong, even if they win. They forfeit all credibility by arguing for days in court that the taxpayer does not have an arguable case. Similarly, they lose a great deal by taking a stance which the entire profession believes to be wrong.
It would be much better for HMRC to pause and reflect whether they are really acting reasonably, rather than saying that everyone is out of step except us. Or worse, to take the stance which is so often implied; we have the muscle so you had better agree.
Some recent announcements provide an illustration. HMRC are rightly keen that everybody should pay their fair share of tax. But HMRC do not determine what is a fair share; that is the job of Parliament. So, taking their lead from the legal principles, HMRC say that in determining a person’s tax liability, one should have regard to the evident intention of Parliament.
That must be right—but who decides. HMRC think they should decide—but they are wrong. Of course they are entitled to their view, just as the taxpayer is entitled to his view, and it is the job of the courts to determine what the intention of Parliament was.
That is called the Rule of Law. Once we get to the position where the law means what HMRC says it means and anybody who disagrees with them will be sorry, we will be in a quicksand from which there is no escape.
It is frequently the case that where a taxpayer conducts himself contrary to the evident intention of Parliament, his arrangements fail. Anybody who reads the report of tax cases will know this to be true. One might have thought that HMRC would be content to leave that decision to the courts and seek changes in the law when appropriate, but this result obviously does not occur as often as they would like. However there is a reason for this.
In those cases where the HMRC challenge has not prevailed before the courts, it is because their view was wrong. It is a hopelessly bankrupt stance and unbelievably corrosive of trust for HMRC to say to the taxpayer: you are wrong, the courts will agree with us and you must pay the tax which we demand. But if the courts find in your favour, they are wrong, we are still right and you must still pay the tax. Such a stance robs HMRC of any respect—and the taxpayer will not be fooled by any attempts at justification.
One might contrast this approach with the recent case of Jefferies v HMRC TC235 where HMRC advanced arguments relating to taper relief for business assets which were demonstrably contrary to the evident intention of Parliament.
Their arguments in this case have all the hallmarks of the conduct they are criticising and the irony of them pursuing these arguments at the same time as they are insisting that taxpayers should have regard to the evident intention of Parliament, is overwhelming. Unfortunately there are a number of other examples which seriously undermine the very trust which Mr Hartnett seeks.
Fresh approach
The new Taxpayers Charter provides an excellent framework for a fresh approach. It is not expressed in quite the same way in the original 1986 Charter (I suppose bullet points are the fashion these days) but the meaning is surely the same. HMRC will act fairly and even handedly; taxpayers will be assumed to be telling the truth and more of the same. Who could want more than that.
Mr Hartnett’s quest for trust complements these principles and I earnestly hope that he means it. Trust is not a one-way process, it has to be earned, and HMRC must act, and manifestly be seen to act, in a manner which inspires (and which is deserving of) trust.
It cannot be denied that taxpayers come in all shapes and sizes—and some of them are rude and aggressive and behave extremely badly. One might say that it is a strength of our free society that people are able to be objectionable. Bad behaviour is extremely regrettable—but that is all.
However public servants are not permitted to be aggressive, rude and unpleasant and fortunately we are blessed with a public service who take pride in not being any of those things. I therefore look forward to the New Dawn ushered in by the Taxpayers Charter and by Mr Hartnett’s fine words, where taxpayers will be treated with respect, regarded as honest and with an acceptance by HMRC that the vast majority of taxpayers are doing their level best to deal with their tax affairs properly under the law.
Similarly, that Inspectors of Taxes are positively encouraged to act with genuine fairness in every case—and will find themselves under equally genuine criticism if they fail to do so. HMRC obviously need to be vigorous and uncompromising in dealing with those who do not abide by the rules—but they do need to treat the law-abiding majority with respect.
Fantasy into reality?
Am I dreaming when I say that I remember a time when it was like that? I am sure that some people will say this is all fantasy, and fine words will not make any difference. However, I would not agree. Fine words, sincerely expressed and followed up with appropriate action, could make all the difference in creating the trust of which Dave Hartnett speaks—and this could be just as self fulfilling as the reverse.
Peter Vaines, Squire Sanders & Dempsey
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