HMRC attracted a lot of attention, and a lot of criticism, in and after 2011. This note seeks to explain the reasons for this.
The Inland Revenue and HM Customs used to be two quite separate and low-profile departments. The first department collected income taxes etc from the better-off and generally (but not always) compliant part of the community. The second department patrolled the UK's borders so as to collect import duties, deter smuggling, and arrest those seeking to import drugs, firearms etc. The two Non-Ministerial Government Departments inevitably had two quite different cultures, each appropriate for their particular challenges. Each implemented 'black letter law' (i.e. Acts of Parliament) without fear or favour and without any political interference.
This model began to break down when HM Customs were asked to administer Value Added Tax (VAT) and so now (like the Revenue) had to begin to deal with a large number of small and medium sized businesses rather than the small number of large businesses that used to have to collect Purchase Tax, which VAT replaced. And then politicians, inevitably attracted by the suggestions that 'big is beautiful' and 'big is efficient', engineered the merger of the two departments in 2005. This created a monster HMRC that was getting near-impossible to manage, especially given the two quite different cultures of the two constituent departments. (Click here to read more about over-large regulators.) Ministers next decided to replace various social security benefits with tax credits thus introducing a third set of clients; a set who by definition and on average were less affluent and less able to cope with bureaucracy than either of the Revenue's or Customs' previous client groups. And then came the 'efficiency savings':- The department's budget was cut from £4.4bn in 2005 to £3.2bn in 2015, and the number of its employees fell from 100,000 in 2004 to 60,000 by 2016, with plans to reduce the number further to below 50,000 in the early 2020s.
The result of all these changes was little short of disastrous, whether from the point of view of HMRC's three client groups or HMRC's professional staff. There were very long delays in dealing with correspondence and answering phone calls, so annoying the better-off and greatly distressing those depending on receiving tax credits to fund their basic expenditure. And the department was increasingly led by general managers rather than by experienced taxmen/women and customs officers. And those managers had for some years come under pressure to 'get the money in' rather than spend too much time and money establishing absolutely correct tax liabilities in borderline cases.
One seminal development was the 2001 Review of Links with Business by Dave Hartnett (on whom see much comment further below). This was warmly welcomed by Chancellor (and later PM) Gordon Brown and his two advisers Ed Miliband and Ed Balls. Its recommendations looked fairly innocuous but there was an undercurrent which would inevitably lead to a change of culture in which the tax authorities became increasingly concerned that the UK should appear to welcoming to internationally mobile business. The report noted with approval, for instance that 'Some companies have achieved a relationship with the Revenue which provides transparency and trust. Such relationships are also typified by a culture of openness and a mutual understanding of objectives.' Older Revenue hands no doubt snorted at the naivety of this statement.
Then, in 2005, Gordon Brown told the Confederation of British Industry that he approved of regulation with 'not just a light touch, but a limited touch', and this applied to both 'the regulation of financial services and indeed the administration of tax'.
Subsequent Conservative governments may have made matters worse by looking mainly to senior private sector tax avoidance specialists for policy advice. Then, in 2012, they appointed KPMG's Ian Barlow as Chair of HMRC. One comment summed up much outside reaction:-
After the scandals surrounding HMRC during the Hartnett era you'd think a new culture was needed in the organisation. One that was strongly pro-tax, against abuse and tax avoidance and that indicated a new, straight talking, down the line approach to big business with not a hint of cosiness or chumminess attached. So who has just been appointed as the new chair of HMRC? Ian Barlow. Who's he, I hear you say. He's the former senior partner of KPMG, London. Yes, that's the KPMG present in every major tax haven in the world. The KPMG who signed off a bank's accounts as true and fair in 2008 knowing it was bust, as they admitted to the House of Lords. The KPMG who were fined $455 million in US a few years back for selling abusive tax schemes. The KPMG who along with other such firms likes to sell "effective supply chain management services" - otherwise known as shifting profit into tax havens. You couldn't make it up.
Mr Barlow was supported by Chief Executive Lin Homer who did not pretend to be a tax expert, and whose previous career had been chequered, to say the least. She had been accused of catastrophic leadership failure at the Home Office, and of partial responsibility for subsequent policy failing at the Department of Transport. But it was hardly her fault that she was appointed to a job for which she appeared unqualified.
Mr Barlow's 2016 successor was ex-City Lawyer Edward Troup whose appointment also raised eyebrows, but it is fair to say that he was had previously spent long spells working in the Treasury and might therefore have been a good choice.
Vodafone & Goldman Sachs
This in turn led to a somewhat different approach to establishing the Corporation Tax liability of large companies, exemplified by dealings with Vodafone and Goldman Sachs. Experienced tax officials would previously assess the amount that they thought should be paid and, if the company did not agree, and could not persuade the tax inspectors to change their minds, then the dispute would be taken on appeal to the Tax Commissioners and then the Courts. There was seldom any question of negotiation or compromise. But the new HMRC senior team thought it better to negotiate the payment of some tax, rather than risk not getting any at all. The compromises reached with Vodafone and Goldman Sachs (which some reports suggest cost HMG up to £7 billion) inevitably led to internal dissent which quickly found its way to the pages of Private Eye and The Guardian. It was particularly telling that HMRC's Chairman Dave Hartnett's emails recorded that, before the compromise deals, Goldman's UK tax director 'went off the deep end' in response to one provisional HMRC decision, and that Mr Hartnett feared 'major embarrassment to the [Chancellor of the Exchequer]'.
The concerns about the appropriateness of the compromise deals were reinforced by the disclosure that Mr Hartnett had lunched with the senior management of both companies. The basic civil service ethical rule is that "there are absolutely no circumstances in which you can accept any hospitality more substantial than a working lunch, from a company which might materially benefit from decisions with which you might be involved". It was therefore embarrassing that Mr Hartnett was named by City University London in July 2010 as the most "wined and dined" civil servant in Britain, having been treated to corporate hospitality 107 times over a period of three years. He also said that his approach to tax disputes with large corporations involved "handling disputes in a non-confrontational way and collaborating with customers wherever possible". But he argued (somewhat implausibly) that he was not involved in negotiating the companies' tax liabilities - so these were not working lunches - which caused (unanswered) questions to be asked about the reasons for the lunches and/or the true role of the Chairman.
Intense criticism led to a review by the National Audit Office who in turn reported to the Public Accounts Committee who published a highly critical report in December 2011. The PAC's Chairman said that "First of all it astounded us that only one of the four people who are so called tax commissioners - those are the top executives in HMRC - has knowledge of tax affairs. So again it's your David and Goliath, you've got the companies well advised, HMRC not well-advised". Mr Hartnett announced at around the same time that he intended to retire a few months later.
But the NAO's Auditor-General Amyas Morse was in turn reported by Mr Hartnett as assuring him that he (Mr Morse) had told his subordinates that his expectation was that nothing of substance would be found in the further review which followed that PAC's criticism. This may have been Mr Hartnett's over-optimistic reading of his private conversation with Mr Morse, but it is worth noting that Mr Morse had himself previously served as Global Managing Partner at PwC, famous for its tax avoidance expertise - see further below. Interestingly, but perhaps not surprisingly, Mr Hartnett subsequently took a well-remunerated post-retirement position with accountants Deloittes.
UK Uncut tried but failed to get HMRC's Goldman Sachs decision overturned in the High Court. The judge was not, however, impressed by HMRC's behaviour. The Times reported that 'the judge said that the settlement "was not a glorious episode in the history of the Revenue." The Revenue officials who negotiated it had not been briefed by the lawyers who were litigating against Goldman Sachs, he said. The officials overlooked the need for approval from an internal review board for any agreement over £100 million. "HMRC now accepts that they should have appreciated this," the judge said in his ruling. The Revenue had also failed to make a contemporaneous note of the agreement which allowed for uncertainty as to what had actually been agreed, the judge said. Finally Dave Hartnett, then permanent secretary for tax who agreed the deal in November 2010, had taken account of the "potential embarrassment to the Chancellor of the Exchequer" if Goldman Sachs had - as it threatened - withdrawn from the Government's new code of practice for the banks. "That was an irrelevant consideration and should not have featured in his decision-making process," the judge said'.
Mr Hartnett's reputation was brought into further question when it was learned that he had breached taxpayer confidentiality by talking to journalists about the tax liability of Ingenious Media, a film-financing company involved in tax avoidance. The Supreme Court ruled in October 2016 that his behaviour had been quite wrong.
The Gig Economy
HMRC were accused - from around 2016 - of being too slow to tackle strenuous efforts to classify many staff as self-employed rather than employed, and so permitting considerable loss of tax as well as loss of employment rights. (See also Emerging Issues - The Gig Economy).
In an interesting twist on this issue, a 2017 crowd-funded legal action sought to demonstrate that HMRC should require Uber to pay VAT. The FT reported as follows:
Jo Maugham ... said that an employment tribunal case last year ruled that Uber supplied transport services and, if that were the case, it should charge VAT at 20 per cent on its fares and pay that money to HM Revenue & Customs. ... Mr Maugham wants the High Court to order Uber to provide him with a VAT receipt for a journey from his office to meet a client last week. He claims that the law gives him a right to a VAT receipt for that journey and that Uber cannot give him the receipt without accepting it is liable to charge VAT. ... “People are sceptical — and with some justification — that HMRC applies the same rules to the big boys as it does to you and me,” he said. “This scepticism is hugely damaging to public confidence in what we call the Establishment. I believe it drives seismic political changes like Brexit. “But the government shows no signs of wanting to address it — indeed, our law and practice is tending towards less rather than more public scrutiny of private deals between the taxman and the rich and powerful.” Uber said: “Drivers who use the Uber app are subject to the same VAT laws as any other transportation provider in the UK.” Uber’s position is that it is not a transport provider and that it does not own any cars or employ drivers. It is the driver who provides the transport service, while Uber simply facilitates it.
HMRC was subject to separate criticism in February 2012 when (in conjunction with the City of London Police) they did spend over £1m prosecuting a very popular football manager, Harry Redknapp, for evading tax by having money paid into an overseas bank account in the name of his dog, Rosie. Mr Redknapp was acquitted. Those with longish memories recalled the failed 1989 prosecution of equally popular comedian Ken Dodd, who subsequently incorporated the experience in his routine: "They sent me a self-assessment form the other day. To me! I invented self-assessment." Both these prosecutions appeared to demonstrate that juries are unlikely to convict popular celebrities, whatever the weight of the evidence. The prosecutions were intended to have a deterrent effect on others, but it is equally possible that they made tax dodging a little more socially acceptable amongst those who thought that Mr Redknapp had been lucky to have got away with it. If 'arry thinks it's OK to do it ....!
HSBC and International Tax Evasion
There was another flurry of criticism in early 2015 when it became clear that, although HMRC had been given a list of c.3000 HSBC customers who had deposited funds in their Swiss subsidiary - many of whom had presumably not declared the interest to the taxman - they had only prosecuted one of them. And they hadn't taken any substantial steps to prosecute HSBC for 'aiding and abetting' tax evasion.
I suspect there were good answers to these questions. There was uncertainty about when the original data had been received, it may well have been inaccurate and/or incomplete, and it will certainly need to have been checked pretty carefully. Many of the depositors will have been non-domiciled in the UK, so their income may not have been taxable here. Others will have paid tax on the interest. HMRC said that maybe two-thirds of the 3000 fell into these two categories. As for the 1000 or so 'evaders', it has always been HMRC's (and the Inland Revenue's) practice to collect the evaded tax, interest and a penalty rather than prosecute those who fail to include bank interest etc. in their tax return. This is for the good reason that fraud is very hard to prove, and juries are reluctant to convict (see Harry Redknapp, above). Imagine how you would feel if you genuinely forgot to mention that interest that was added to a bond that didn't mature until next year? Pay the tax? Obviously! And interest? OK. And a penalty? If I have to. But a criminal record ...!
And I suspect it would be very difficult to prove that HSBC had broken a criminal law. Conniving in tax evasion is not a crime - or else those of us who pay builder in cash would be guilty of it. At one point does it become 'aiding and abetting' and so a criminal offence?
But HMRC's Permanent Secretary Lin Homer was not persuasive when she appeared before the Public Accounts Committee in February 2015, and did not give the impression that she was angry with HSBC or its clients, even if she couldn't prosecute them. One reason for this may have been that she was not by temperament a regulator, and she was certainly not a long-term HMRC employee, having arrived from another department only a couple of years previously. And of course Ministers and Cabinet Secretaries may have preferred to appoint to such positions those such as Hartnett and Homer who could be trusted not to take too hard a line with Ministers' chums in big corporations.
There is also the resources question. The Revenue will certainly prosecute salesmen who claim a tax deduction for the cost of driving 25,000 miles a year, but foolishly submit car service receipts showing a 15,000 annual mileage. The claim is clearly fraudulent and a guilty verdict easy to obtain. But people with serious money - such as HSBC's Swiss customers - will pay a fortune to fight a criminal charge, so HMRC would have to fork out similar sums on lawyers etc. Look how much it cost to prosecute Mr Redknapp. Of course it's not fair but ... whoever said life was fair?
It was reported in April 2017 that the EU was seriously concerned about HMRC's failure to tackle large criminal gangs who were systematically undervaluing goods imported into the UK (often from China) and then re-exporting elsewhere in the Union. The total weight of such goods was estimated to be 407 million kg in 201, leading to what the EU described as "massive" loss of VAT, part of which should have been paid over as part of the UK's contribution to the EU. The EU believed that the UK's "continuous negligence" had led to the loss of €2 billion of EU funds.
This undoubtedly contributed to the EU's sceptical response to the UK's suggestions that it might be allowed to collect EU customs etc. duties after Brexit.
Failure to Prosecute
It is unfortunately much easier to prosecute small fry - those who over-claim vehicle mileage for instance - because the dishonesty can easily be proved, and because they don't have the resources needed to mount effective defences. But HMRC - and its predecessor Inland Revenue - have always found it difficult, bordering on impossible, to prove fraud against large companies or senior business people, who will if necessary spend millions in their defence and who will rely on the cases and accounting concepts being too complex for most jurors. And if in doubt, who will every support the taxman? - see, for instance, Harry Redknapp's experience, above.
There are frequent and regular campaigns in the media for something to be done to bring more white collar criminals - and celebrities - to court, but nothing can change because HMRC will never be given the necessary resources. They instead concentrate, very sensibly, on extracting the largest possible financial penalties - though it is unlikely that these are in practice adequate.