Is the UK tax system stuck in the slow lane?
Practitioners play a vital role in the tax system, so how well do they believe the system works, both for the public purse and for the taxpayer?
The CA magazine, in association with PFP, a leading provider of expert tax support and insurance, brought together a group of tax specialists to talk about how the tax system is faring.
Chairing the discussion was Kevin Igoe, Managing Director of PFP, and one of the UK’s leading experts on tax investigations. He started proceedings with the Making Tax Digital initiative, which requires all VAT returns to be submitted in digital format from April. Are agents and their clients ready?
Derek Hanlan, Associate Director with Martin Aitken & Co, said: “The profession is ready. The question is ready for what? And when is it coming? Whether clients are ready is a bigger question: some are and some aren’t.”
Mark Mitchell, Tax Partner with Thomson Cooper, was less optimistic. He said: “Some smaller firms are already beginning to struggle. There are lots of clients over the next six, seven months who will need to transition from manual records to digital.”
Stuart Thomson, Corporate Tax Director with Johnston Carmichael, was also concerned that, with much still unclear about the new system, many owner-managed businesses have a long way to go. As he put it: “It will involve a fundamental rethink of how they produce their accounting records. Without clarity on what the end game is it is quite difficult to help and educate clients.”
Without clarity on the end game it’s quite difficult to help clients
He pointed out that, in the event of a “no deal” Brexit, elements of the existing VAT form will become irrelevant.
“The problem is,” commented Hazel Gough, Partner with Chiene + Tait, “we’ve not had the opportunity to test the system, unless you were involved in the pilot. There will be very little time to test the software prior to it coming in on 1 April.”
She added: “Small businesses have not been able to distinguish between submitting their VAT returns electronically and submitting them digitally. They think they are one and the same.”
Mark Mitchell said: “With only 12% of businesses currently submitting VAT returns digitally, there is a false sense of security.”
Another big question is how ready will HM Revenue & Customs be? Kevin Meaney, Tax Partner with Anderson Anderson & Brown, and Partner in Charge of the firm’s Edinburgh office, said: “I don’t think HMRC is ready – I don’t think they’ve got the infrastructure and resources in place.”
The end of September, just before the discussion took place, was the deadline for UK taxpayers with overseas assets to put right any issues with their historic tax position: the so-called Requirement to Correct.
Liz Ritchie, Tax Partner with Mazars in Edinburgh, and UK Head of Private Clients, said: “The letters issued to clients don’t appear to have any basis in statute, and it’s not clear what the penalties are for not responding to these letters.”
Shirley McIntosh, Tax Partner with RSM, added: “We’ve seen clients looking to put in ‘protective disclosures’ right up to the deadline, so that if penalties are imposed they will be under the old regime and not the new, penal one. There are some very small amounts of interest involved out there. It’s scaring some clients and I think a de minimis threshold would have been helpful.”
Kevin Meaney agreed that the initiative had created work for advisers: “A lot of people have had their head in the sand and this has been the final wake-up call … but I don’t think HMRC has the resources to cope with the amount of information that they, undoubtedly, already have in their possession.”
Kevin Igoe said the wording of the letters was aimed at putting psychological pressure on taxpayers, and he noted: “The letters I’ve seen have been sent to clients who have already disclosed offshore earnings.”
He compared the letters to those that had been sent out regarding non-domiciled (“non-dom” status), which had taken what could be seen as a threatening tone.
Another recent HMRC initiative has targeted “disguised remuneration”. Shirley McIntosh noted, however, that the creation of an action group – the Loan Charge Action Group – to fight the HMRC position had led some taxpayers to put off settling the sum demanded while waiting to see what happens.
Kevin Meaney noted: “At the time the Rangers [football club] ruling came out there were apparently 5,000 outstanding EBT [employee benefit trust] cases waiting to be settled. It will take HMRC 10 years or more to work through these retrospective cases.”
The HMRC service is deteriorating. It is extremely difficult to speak to anyone with any technical knowledge
In fact, across the board the panel felt that HMRC’s ongoing reorganisation is creating difficulties for taxpayers and their advisers.
Hazel Gough said: “The service is deteriorating. It is extremely difficult to speak to anyone with any technical knowledge.”
She noted that in some cases her firm had assisted clients in obtaining compensation from HMRC for the cost of dealing with delays and errors on the part of tax officials.
Shirley McIntosh added that frequent moves of staff and reorganisation also created problems: “When they are moving teams, things just seem to disappear into a black hole.”
The panel agreed that both morale and technical expertise in HMRC are generally low, but there are areas of expertise and excellence, particularly in some specialisms.
Meanwhile, HMRC’s Tax Agent Strategy appears to be focused on identifying agents that are either less competent or less reputable.
As Hazel Gough pointed out: “One of the issues that we have is that the tax profession, as a whole, is not regulated.”
One problem, it was agreed, is that the professional relationship between individual advisers and inspectors has been eroded, because there is less continuity and communication.
Jamie Allatt, Business Development Manager with PFP, said: “You are quite lucky if you have the same inspector at the end of an enquiry as at the start of it. We hear agents say that you’ll typically find someone goes off ill or moves, and somebody else takes over, and you can’t really get a response from that person. I’ve got one client who’s had nine enquiries open for 18 months or more, and has had no response for a year or more on any of them.”
Is the current penalty regime working?
Hazel Gough noted that, following a recent ruling on this issue, HMRC now appears more willing to consider suspended penalties where appropriate. In general, however, panel members felt that taxpayers are not aware of how HMRC penalties operate until they are directly affected.
Stuart Thomson said: “I haven’t seen clients express concern about the penalty regime. They want to get it right, generally.”
He added that one exception, where he had seen behaviour influenced, was the £5,000 personal penalty for which a company’s senior accounting officer (SAO) can be held liable.
When people start asking ‘what does this mean?’ that’s when it’s going to hit home to everyone.
Shirley McIntosh noted one exception to this – some clients are aware of the £100 penalty for the late filing of a self-assessment return but choose to file late and incur this penalty anyway.
Hazel Gough said: “I don’t think penalties influence behaviour; most taxpayers are unaware of the penalty regime. But with those penalties that have been charged due to carelessness, the taxpayers will think twice and perhaps take more care next time.”
Kevin Igoe said that, although HMRC does not officially set targets for imposing penalties, anecdotally many officers would admit that they have been set individual targets.
Scottish taxes and Brexit
The panel also discussed devolved taxes in Scotland, particularly the Scottish Rate of Income Tax (SRIT).
Derek Hanlan said that the impact of the changes would really only be felt when taxpayers started to look at the returns for the current tax year.
He said: “When people start asking ‘what does this mean?’ that’s when it’s going to hit home to everyone.”
As Hazel Gough pointed out, there are now up to 13 separate tax rates for Scottish taxpayers, including SRIT, income tax on investment income, and capital gains tax.
The new 19% tax rate has meant a benefit of just £20 to many taxpayers in Scotland. Shirley McIntosh commented, however: “It’s a starting point. Now we have got the five bands and people have accepted them. The next step is to start broadening those bands and the gaps between them.”
The present degree of change and complexity in the tax system is not helped, the panel felt, by the uncertainty that exists with regard to Brexit.
As well as VAT, Brexit affects a wide range of technical issues including tax matters for expatriates (EU and UK), cross-border inheritance tax and the business environment generally.
In conclusion, is the UK’s tax system going forwards or backwards? The consensus was that, while there has been some progress in terms of tax policy at a high level, in terms of its operation and service delivery in the last few years the tax regime has deteriorated, not improved.