11.00am - 14.00pm 2/39, 1 Horse Guards Road
Advisory Board Attendees: Teresa Graham (TG), Andrew Hubbard (AH), Roger Southam (RS), Ian Dewar (ID), Julie Kenny (JK), Francesca Lagerberg (FL), Karen Thomson (KT), Simon Sweetman (SSw), John Whiting (JW), Paul Aplin (PA), Russel Griggs (RG)
Apologies: Steve Sharrat, Martin Jones
HMRC Attendees: Melanie Dawes (MD), Stephen Banyard (SB), Simon Woodside (SW), Sally Beggs (SBe), Ian Stewart (IS), Peter Faherty (PF), Naomi Ferguson (NF), Mike Brown (MB), Simon Norris (SN), David Richardson (DR), John Neale (JN)
HMT Attendees: Katherine Green (KG), Simon Bor (SBo), Jenny Pescod (JP)
Secretariat: Jon Sherman (JS), Paul Oakes (PO)
TG welcomed everyone to the third meeting of the Board for 2008. The minutes of the meeting on 30 April 2008 were agreed. The action points had been discharged, were in hand or were on the current agenda.
On AP7, the Board agreed that the annual letter to HMRC discussed at the April meeting, should be written during April or May - this would ensure visibility and allow the Board to respond to HMRCs annual update on its progress in reducing admin burdens. On AP8, JS confirmed that his team were looking at the scope for Board members either to deputise for the chair or attend as observers. This would be considered for the autumn season of panels on a panel-by-panel basis. On AP9, the FST had confirmed that she would like to attend a future board meeting.
Naomi Ferguson (NF), HMRCs Director of Local Compliance, introduced paper 2008/07 and summarised the work that was being done to make HMRCs approach to compliance work more effective and more customer-focused, thereby reducing burdens particularly on compliant businesses. This work was focusing on:
These improvements were underpinned by the new legislative framework and in particular the new penalty regime which was more closely tied to customer behaviour. NF recognised that cultural change was at the heart of what they were trying to achieve. This was being taken forward through a major programme of workshops designed to get our staff to see the intervention process from a customer perspective, and also through the work that was being done to improve written communications around the intervention process. The Board had already had a presentation on this work.
Board members commented that they saw this agenda as a very positive development. SS thought the new approaches could really make a difference and take away many of the problems he had previously experienced with enquiries - for example, the requirement to produce bank statements regardless of whether there was any justification for the request. He hoped very much that this sort of practice would cease within the new process.
JK emphasised the importance of the way HMRC communicated - for example, messages about 100 per cent penalties in cases where this would never apply can unnecessarily leave the taxpayer with sleepless nights. HMRC should set up effective feedback mechanisms, for example by surveying customers at the end of an intervention. JK had seen what could be achieved by HMRC changing the way it operated - for example, the experience of claiming R&D credits had been radically improved by the creation of the R&D specialist units.
AH felt that HMRC should be looking to go further than the 15 per cent reduction in time auditing and inspecting businesses found to owe less than £1,000. Enquiries should not be taking place involving such small amounts and so a much larger reduction should be sought (or a higher threshold).
FL suggested that HMRC and representatives from small business get together for training on the new processes - this would be an effective way to change mind sets. NF and the project teams agreed that some joint training would be good and they will look at this. NF added that HMRC recognise the importance of 'emotional burdens' and training therefore included putting staff in the shoes of small firms. There would also be training for HMRC staff on the new penalties regime which came into force on 1 April 2009 and was more closely geared to customer behaviour.
ID emphasised the need for culture change within HMRC and RG pointed to the importance of judgement and flexibility - there were times when HMRC staff appeared to follow a set process when, if they exercised their own judgement, they would conclude that no further enquiries were needed. JW said that the enquiry window had always been seen as a major safeguard - but he wondered whether it was now becoming a barrier to improvements to the compliance process.
KT said that she was impressed with the work carried out so far. She suggested it was important that we try to measure how far it is actually reducing admin burdens. An ABAB survey would be an effective way of doing this and it would also raise the Board's profile.
MD recognised the importance of getting the targets and measurement right. HMRC had a good strategy but her view was that we needed to be able to show more by way of delivery and success stories before we started to communicate this agenda more actively.
RS said he had already seen the benefit of the new approaches and that HMRC should be actively communicating that now - otherwise we would always be at the mercy of people who wanted to exploit taxpayers anxieties. RS cited what he saw as the hard sell that was given to investigation fee protection insurance as an example of this. PA made the point that most accountancy firms took a responsible position on this, only offering policies where it was justified. He took the view that it would be better to deliver some real successes before seeking to communicate actively on this agenda - there were still problems with compliance work that needed to be sorted out.
FL suggested that HMRC use tax representative bodies to help educate small business and to gather feedback. AH felt the new framework was excellent and emphasised the need for joint work and training with the profession over the next five years. HMRC should be looking for ways to throw the challenge back to the profession - they both needed to work together to improve the process. HMRC could give more thought to whether it ought to respond to debates such as on Accounting Web.
FL and JW both thought that the new suspended penalties (for customers who fail to take reasonable care but agree to work with HMRC to put things right) were a great idea. If HMRC could get these working quickly, that would be a good early success story to communicate. FL and AH said it was important that HMRC could show that they were giving taxpayers the benefit of the doubt where appropriate and that the new regime was not being used to bring in more revenue.
RG saw the new approach as a real step forward. But in order to ensure that business got the full benefit, there needed to be a reduction in the fees charged by advisors. There was a need for culture change on the part of the profession as well as HMRC. FL was sceptical about the scope for fees to be reduced because they are already relatively low for compliance work.
TG summed up the discussion, complimenting the tone and feel of the paper and the new approaches it set out. She urged HMRC to think about communicating the benefits effectively when the time was right. In response to a suggestion by JK, the Board agreed to comment on how implementation was going in their annual letter to HMRC.
KG summarised what work had been going on since the Budget. The focus was on finding an approach that would tackle income shifting while keeping additional admin burdens as low as possible.
TG mentioned some of the ideas that had been suggested in the various discussions she had with representative bodies and others: for example, the Government should put the ball in business and the profession's court to sort this out with the 'threat' of legislation in reserve; other suggestions to address the unfairness the Government was concerned about were for a principles-based approach and to amend the existing (settlements) legislation rather than trying to devise a wholly new set of rules.
JW thought that if the Government was determined to address this, they should go for an 80/20 solution rather than one that sought to impose the 'right result' in every circumstance. RG emphasised the need for proportionality - he felt the emotional burden was a more significant factor here than the pure admin burden. He was also concerned that the Government's stance seemed to go against the grain of other law such as that on divorce.
FL said the Government needed to do more than just tinker with the previous draft legislation to narrow it down a bit. It was already almost too late to implement anything next year and the Government should consider a further deferral. In order to make this work the Government would need to adopt some relatively crude guidelines as to what will and won't be acceptable (eg in respect of dividend levels). This would be far from ideal but might be effective. AH agreed that some mechanical rules or checklist would be needed that took the elements of judgement out of it. This would be an 80/20 solution. JW thought a principles-based approach might be worth exploring.
ID and RG understood why the Government was concerned but saw no way of achieving a solution that would be fair. RS said he could not understand what the Government was aiming to achieve.
KG agreed that it was important to find a solution that was proportionate and kept admin burdens down. MD reiterated that the Government's aim was to address the unfairness that arose as a result of income shifting. HMT and HMRC were working together to find a solution that tackled this unfairness which arose from tax driven behaviour which had become a standard feature of the advice given to small businesses. Some Board members made it clear that they did not accept this analysis.
PF updated the Board on the progress that had been made. Stakeholders had been supportive of the aims of the review, while arguing that the Government should be aiming for substantial simplification rather than tinkering at the margins. In particular, there was interest in co-ordination with accounting requirements. PF outlined early thinking on two possible approaches, though he stressed that these had not yet been considered by Ministers, including allowing small companies to prepare accounts in line with tax rules (thereby eliminating the need for separate tax computations) and a new cash accounting regime based on taxing net business cash flow before interest payments, instead of accrued trading profits. (Though cash accounts could only be allowed for Companies Act purposes if changes were made at EU level).
TG thought there was a real opportunity to simplify the accounts for companies turning over less than £750,000. She thought that cash accounting would be a big step forward and would gain a lot of support across the small business community. Even if it needed action at EU level, the European Small Business Act and other developments meant the time was right to push this within Europe.
Board members were generally supportive of the idea of cash accounting. Fair value accounting requirements did not fit small businesses - cash accounting would be a real improvement. So this type of radical approach was very welcome. SSw expressed concern at some aspects of the type of cash accounting regime being considered. JW thought this need not be a major problem - particularly if cash accounting was optional. ID added that it might be an idea to look through the company and tax the individual owners (along the lines of US S corporations).
JN provided the Board with an update on Gift Aid and the work that was taking place to improve administration and reduce burdens following the 2007 consultation. JN said that there were still a large number of charities (almost half) that did not register for gift aid and HMRC would continue to work with the sector on this. It was also the case that around £200m of higher rate relief went unclaimed.
There were a number of complex issues that had been raised in the consultation which would need to be looked at over the longer term. There were also differing views within the sector on the approach to higher rate tax relief. There would continue to be a need for a clear line of sight between the tax relief to the charity and individual donations - otherwise the likelihood was that gift aid would become a public expenditure scheme rather than a tax relief.
JW thanked JN for the update; it was important that those who had contributed to the 2007 consultation were kept in touch with Government thinking on gift aid. He felt that the 'line of sight' issue was an unnecessary blockage to further reform. TG agreed and thought this needed to be challenged.
RG complimented HMRC on what he saw as its helpful approach to administering gift aid. RS added that the new facility to aggregate small donations was potentially very helpful - but the £10 limit was far too low. JN accepted that there might be scope to increase this limit and HMRC would be discussing this further with the sector.
AH raised the issue of employees using their own cars and the complications arising when the amount paid is increased. KS responded by saying that there is no political will to change these rules. AH pointed out that this being the case the admin burden in such cases is horrendous.
Next meeting: Arranged for 22 October 2008 at 100 Parliament Street.
