Minutes of Local Compliance Accountants Forum Meeting

21 September 2007

Held in Room 327, 22 Kingsway at 10:30 - 13:00

Attendees - Accountants

Tony Spillett (BDO)
Alistair Cliff (Deloitte & Touche)
Lakshmi Narain (Baker Tilly)
Ian Walker (PWC)
Andrew Tall (Mazars)
Alan Kennedy (KPMG)

HMRC

Naomi Ferguson
Keith Cartwright
Richard Steele
Ian Young
Tracey Cottis
Jane Webb
Andy Coe
Glenn Stanley
Claire Williamson
Angela Brown
Steve Coad
Matthew Powell

1. Introduction

1.1 Naomi Ferguson welcomed those present and thanked them for attending. She advised that there had been some useful exchanges at the previous forum.

2. Update of Review of Links with Large Business (RRLB)

2.1 Angela Brown provided an overview of RLLB, summarising the origins, the themes and proposals that had arisen from the review and HMRC’s commitment to delivering them. She advised that HMRC was on target to deliver on time, expecting implementation of all the underlying processes by budget 2008.

2.2 Angela recounted the frustration she had perceived from the business community when her work on RLLB started in March 2006. She sensed that the atmosphere was changing. She recognised the importance of the role of HMRC staff in successfully delivering the proposals, and that many of these staff were used to working in traditional ways.

HMRC sees that it is not just the mechanics of the review that need to be delivered, but the spirit also, and in order to achieve this, we need to take the hearts and minds of our staff with us.

2.3 Angela then provided an overview of progress in respect of each of the four themes: Greater certainty, Efficient risk based approach, Speedy resolution of issues and Clarity through consultation.

2.4 Certainty: consultation in relation to clearance processes has recently closed, with encouraging responses. HMRC would be publishing these responses shortly. Jane Webb would be providing an update on this later. We were also looking at developing guidance proposals, with planned updates to guidance and a process to run alongside the Budget/PBR process.

2.5 Efficient risk-based approach. Andy Coe would have something to say on risk later. In relation to employer interventions, these were much more risk-based, with the removal of programmed cyclical reviews, the withdrawal of questionnaires and replacement with a less prescriptive aide-memoir for employer compliance staff.

2.6 Speedy resolution of issues. Plans for the introduction of Customer Managers (CMs) for businesses within Local Compliance (LC) are well underway. Tracy Cottis would be talking about these later. Clear escalation routes were also being devised and implemented. It was also hoped to have agreed action plans in place for cases, from as early as December, and that these plans would be devised with the business and their advisers, focusing on what was relevant and incorporating key dates.

2.7 Clarity through consultation: HMRC is increasingly involving business and advisers in informal consultation. There will also be a total of 27 formal consultations through 2007-2008, the majority running for 12 weeks.

2.8 Underpinning delivery of the themes, HMRC also needs to develop the professional skills and commercial understanding of staff. Progress on this issue would be addressed later by Claire Williamson.

2.9 Ian Young then gave a brief overview on the LC focus of the RLLB proposals – in particular relating to timing:

• Risk – there was ongoing development of strategy, and we could expect to see rollout from January 2008.
• Transfer pricing – a consultation document had been published and we had changed guidance as a result of the responses. On specific issues, International Issues Managers (IIMs) had been appointed throughout LC, and it was hoped that action plans would be in place for all transfer pricing issues by 31 December.
• Active management of enquiries – good progress had been made, with a programmed review of older enquiries and plans for the introduction of action plans.
• CMs – good progress had been made on role definition. LC is currently piloting training for CMs and we expect to have them in place from January.
• Shared workspace – again, good progress has been made with this system which was expected to give much of the management information and communication needs of RLLB. Systems were being tested and piloted.

2.10 In summary, Ian advised that much is coming to fruition with a significant spike on rollout projected for January to March 2008.

2.11 Angela Brown asked members of the perception of agents and clients of RLLB. One suggested that the issues were currently largely invisible to many of their clients, and there was a debate about whether HMRC should be doing more regarding this. Another commented that it was good in theory, but that it was necessary to ensure practical backup. He gave the example of transfer pricing, where he suggested that there was a need for HMRC to be more constructive in its approach.

2.12 Discussion then moved on to the link between the spirit of RLLB and the need for HMRC to develop better commercial understanding, with members identifying this as a current cause of much frustration with clients, leading to effort being needed to address issues which were disproportionate to the risk. The difficulty of HMRC acquiring this understanding was recognised. The debate recognised that there are cultural issues here. A member indicated that HMRC needed to change the view that if there is no documentation, something did not happen. Very often there was no documentation for significant commercial issues, and the Department needed to stand back and consider what commercially the business was trying to do.

2.13 It was confirmed that the litigation and settlements strategy was not part of RLLB but had direct links to it.

3. Professionalism

3.1 Claire Williamson spoke on RLLB Proposal 13. Professionalism underpins the delivery of all other RLLB proposals. Attendees’ attention was drawn to an overview paper entitled 'Raising the bar on Tax Professionalism', and Claire talked through the various themes that were detailed therein.

3.2 On qualifications, she emphasised the diverse range of qualifications held by HMRC tax professionals, the differing historic approaches of the two former Departments and the need to consolidate. A framework had been developed for a new modular set of tax qualifications that would be externally accredited.

3.3 She explained that the need for clear career paths and Continuing Professional Development (CPD) was recognised, and a commitment to both had been in place since April 2007, with (for example) 5 days CPD being mandatory for HMRC tax professionals. With regard to that CPD, HMRC was still considering how this should best be delivered and how much needed to be structured. As examples, Claire advised that we are running six national conferences and encouraging attendance at events run by Lexis Nexis. With 10,000 tax professionals and tight budgets, though, there were cost pressures applying and it was not feasible to deliver all CPD by attendance at formal events. We were encouraging people to cascade their experiences to their colleagues.

3.4 Claire advised that commercial awareness was a common thread through all development needs, and it was something that the accountancy profession could support on. HMRC would be grateful to have experiences to build into its training material. Glenn Stanley advised that HMRC had been talking to the accountancy profession on this, and has sought the private sector’s help in delivering and enhancing what we do. HMRC has been trying to get a list of topics to cover, and to get people to come in to talk about them. Glenn said that he hoped that this would be part of a two way exchange.

3.5 Glenn said that, apart from training, a big part of developing commercial awareness is getting experience. HMRC wondered how this might be enhanced, particularly through partnership with the private sector. Possibilities included secondment opportunities, 'week in business' opportunities, ie - getting ‘exposure to’ rather than ‘working in’ opportunities, and the development of a mentoring network. There was general agreement from attendees that this was a worthwhile objective, although somebody suggested that client perceptions might need to change before HMRC would be invited to work in some of their businesses.

3.6 Reverting to the issue of training, one member questioned whether HMRC might publish the availability of its training modules so that accountants could attend. Glenn advised that HMRC is considering joint training on some issues, such as analysis tools and relationship management. Keith Cartwright said that he was keen to explore the extent to which joint training between HMRC and the accountancy profession could be developed. A member advised that there is already joint training within the accountancy profession between various professional bodies.

3.7 A member highlighted an issue of concern with regard to HMRC’s knowledge database, giving as examples the conflicting guidance on R & D tax credits and the lack of updated guidance on SDLT. His view was that without an adequate knowledge database, training could not hope to get the right result. Keith Cartwright said that HMRC acknowledged the need to improve its guidance, and this was addressed at RLLB proposal ten. He also highlighted the link of this issue to the issues of clearances - proposals one and two – in as much that improved guidance should cut out the need for many clearances and requests for advice, and also that it would improve consistency in the clearances and advice given.

3.8 Naomi Ferguson said that it was an issue for both sides to prioritise what guidance needs attention.

3.9 There was some debate about the difficulties in addressing areas of uncertainty in relation to guidance, following which members asked whether there could be a single point of contact for guidance issues. The HMRC team agreed that this was something that ought to be considered.

4. EU Large businesses

4.1 Ian Young provided an update on the LBS/LC population boundary. He started by setting some context, detailing key aims that underpinned the population project:

• the largest businesses in the UK would be in LBS
• the location of a business would be the same for all tax regimes, eg - if CT was dealt with in LBS, then so would VAT, Employer Compliance and Excise
• There would be a clear and transparent boundary, based on structural criteria.

4.2 Ian then outlined the benefits that HMRC saw arising from this. By working across all taxes, it should lead to a strengthened working relationship, greater transparency and certainty and better informed risk assessment.

4.3 In relation to the boundary itself, HMRC has decided that this will be principally on the basis of business turnover and asset criteria. It had been considered that the need for clarity meant that there should be a very limited number of criteria. However, there were also to be some limited specialist criteria in respect of some sectors where special considerations applied, for example banking, insurance and oil & gas. Other specialist criteria were still being considered. There would also be a process to review those cases where the result of applying the general criteria appeared wrong.

4.4 It had also been decided that all public bodies would be dealt with by a new Customer Group within LC. This would see the move out of LBS of a number of CT, VAT and Employer Compliance cases.

4.5 The turnover/assets thresholds for the boundary were being set at a level designed to produce the minimum relative impact in terms of net overall movements. It would have a very low impact on relative staffing, and HMRC would be looking to minimise the business impact. Although the precise thresholds had yet to be agreed, it was clear that we could expect:

• a very small net movement of CT work
• the movement of VAT and Employer Compliance from LBS to LC

4.6 As far as the timing of the moves was concerned, this was constrained by a number of dependencies. Key among these is a geographic review currently being undertaken by LBS. It clearly makes sense to conclude this prior to the moves. There was also a need to consider where the cases into LC would go and to allocate and train CMs in respect of those cases that would need them. It was expected that a few cases would transfer before Christmas, but that most would be early in the New Year - January to March.

4.7 Naomi Ferguson asked the accountants views on the issue of timing. The response was that this was dependent upon the level of expected business input – January was often quite a busy time for businesses and accountants alike. Ian Young advised that the period from January was the start and it was anticipated that most of the involvement of business would come later – after, for instance, new Customer Managers had had an opportunity to develop their understanding. A member expressed his view that clients would particularly welcome the single point of contact and the CM/CRM role, but that they would be less interested in the timing of the change.

4.8 Ian Young said that HMRC is aware of a potential issue regarding businesses close to the boundary, and wants to avoid businesses bouncing back and forth between LBS and LC. HMRC therefore planned, in general, to keep businesses in their location for at least three years after any transfer. Keith Cartwright said that although the administrative issues of this were recognised, HMRC was looking to give similar businesses a universal experience anyway, so location within HMRC should be less of an issue. Ian Young gave as an example of this the development of a common risk assessment framework between LBS and LC.

4.9 Ian Young asked the members whether there were any particular issues on population that they thought should be considered by the project board.

4.10 One member highlighted that there had often been a lot of investment with certain individuals – particularly LBS CRMs, and knowledge transfer was very important. Support needed to be provided to the importer, not just the transfer of the file. Ian recognised that this was an important issue. He advised that HMRC was instigating plans for joint risk assessments in appropriate cases, and were considering ways to support the smooth movement of enquiries. Discussion then followed on the opportunities that arose from the transfer process to clear loose ends, and it was recognised that it would present an opportunity to stand back from cases and look at what was worth pursuing. Keith Cartwright recognised the need to proactively review enquiry resolution. Links to RLLB proposal eight on the active management of enquiries were recognised.

4.11 A member asked the extent to which sectorisation was being considered within LC – in particular, how would LC deal with cases coming from LBS that had previously been in a LBS sector? Keith Cartwright said that LC was giving consideration to the location of businesses to build links with LBS sectors but there was no final outcome on this issue at this stage.

5. Clearances

5.1 Jane Webb provided an update on developments towards implementing new clearances procedures. She advised that HMRC design workshops were underway, and that external consultation had closed on Wednesday 12 September. The responses to the consultation had yet to be fully reviewed. It was clear that the proposed changes were generally welcomed, but that there were some concerns.

5.2 Commercial significance test
With regard to the proposed commercial significance test, the consultation responses had recognised why HMRC would need this, but there were some concerns regarding how the test would be applied. Jane advised that HMRC would want applicant businesses to clearly set out the commercial context.

5.3 Checklist
Consultation responses had generally welcomed the production of a process checklist, but many thought that the proposed checklist was too prescriptive. Members expressed some concerns about what was meant by genuine uncertainty, for instance whether uncertainty regarding application of the law rather than the law itself constitutes genuine uncertainty. This was an area where members thought that HMRC needed to give greater certainty, and it linked to an area that had already been discussed regarding the need for better guidance and clarification of when that guidance can be relied upon.

5.4 Case studies
There was a mixed response regarding the use of case studies as illustrative examples, with some considering them potentially useful while others saw them of very limited benefit.

5.5 Response times
Members indicated that the important things for business were not the stated response times per se, but:

• business wants consistency
• there is a need for whatever response times that are targeted to be achievable by HMRC
• there is a need for a fast-track process in instances where the stated response times would cause commercial difficulty

5.6 Jane asked in what areas members thought that clearances processes would be most beneficial. Particular issues that were identified were business asset taper relief, SSE, SDLT and corporate deductions for pensions. Other issues that were mentioned were the admissibility of capital allowances and the application of s.419 ICTA 1988 to upstream loans. One member said that the process would be desirable in respect of any area that influences a choice of options. Keith Cartwright said that this was a direction that HMRC wanted to go in.

5.7 Jane also sought views on experience with the SSE pilot. Two members advised that they had had direct experience, both advising that they had got the right answer within the promised timescale, and both content with their experience of the process.

5.8 Ian Young said that he would like to focus attention for a moment on the LC perspective of this. In particular, he was keen to try to establish perceptions of the likely demand for the clearance process. A member responded by advising that this would very much depend upon the progress that was made on improving guidance, the better the guidance, the fewer applications might be expected.

5.9 Jane Webb said that an external Guidance Steering Group was being set up, and anybody interested in sitting on it should let her know.

5.10 Keith Cartwright said that HMRC really did not know the numbers of applications to expect, with wildly differing views coming forward. There were handling issues the Department would need to consider if it was bombarded. Andy Coe said that there was perhaps a lack of sufficient appreciation within HMRC of the effect of PI insurance, and this might be something that could predicate a rush of applications. A member advised that the cost of seeking a clearance should generally deter trivial applications.

5.11 Jane Webb said that HMRC would not handle vexatious or frivolous applications, or applications where there was no genuine uncertainty. It was recognised, however, that the Department needs to give better guidance on identifying the vexatious or frivolous applications and that HMRC needs to reduce uncertainty by improving its guidance. It was recognised that the Department needs to be more transparent in some of its processes.

6. Customer Management

6.1 Tracy Cottis gave the meeting an update on developments regarding the CM role within LC. It was envisaged that:

• approximately 2,000 customers within LC would be allocated a CM, out of a EU Large population of approximately 14,000 businesses
• training on the new CM role would be delivered through November and December
• CMs will be in place from January for the LBS exports and for the rest of the qualifying businesses by the end of June 2008

6.2 Guidance is to be issued towards the end of the year on the types of businesses to get CMs. This was not expected to be prescriptive, and LC would welcome the views of accountants and business in this regard.

6.3 Tracy advised that the email trial had now been launched and will run for nine months. It is allowing a range of selected agents access to a dedicated HMRC email address. The trial will allow various factors to be considered including security, timing, content and potential for reduction of other communication methods.

6.4 Richard Steele highlighted that there will be a range of business needs across the population, and it was not envisaged that the experience of similar businesses with and without a CM would necessarily be that different, but that two businesses with a CM might have differing needs. There would be no cliff-edge between CM and non CM cases.

6.5 Members asked how the decision on who would get a CM would be decided, and were advised that initially these would be local decisions based on experience. LC wanted scope to put the CMs where they were likely to be the most effective. There would be a wide range of criteria used. Guidance would be issued that would prescribe a balanced view and the exercise of judgement.

6.6 Naomi Ferguson said that something that LC would want to explore over time was the development of the CM/CRM role on the accountants’ side.

6.7 One member asked of the prospects for businesses wishing to opt in to have a CM allocated. Naomi Ferguson advised that there should be some scope for representation. Richard Steele said that matters could ultimately be pursued if necessary through the escalation route for matters of disagreement, being developed as a result of RLLB proposal seven.

7. Risk Management

7.1 Andy Coe led a discussion on the difficulties facing LC in determining the risk status of the businesses it deals with. He explained that HMRC is seeking to establish a common risk framework between LBS and LC. Central to the intended intervention approach was the concept that we would direct more of our activity at tackling high risk businesses, with low risk businesses being able to expect a much softer touch.

7.2 Within LBS, there is a good understanding of the risk status of the businesses dealt with. For LC, however, HMRC needs to accept that the working knowledge of many EU Large businesses is less than complete. This is perhaps the case with as many of 12,000 of the 14,000 large businesses to be dealt with in LC. Clearly categorising the risk status is necessary in order to decide whether or not a business should receive a ‘lighter touch’.

7.3 Varney had suggested that one possible approach was that there should be a ‘presumption of innocence’ and HMRC might assume that the 12,000 businesses are low risk unless and until we have evidence to the contrary. While this might be a position to start, though, HMRC has a duty to inform itself of the risk status of businesses. Exercising this duty would be burdensome in itself, though, and would divert resource away other activity. It might also involve low risk businesses in burdens simply to demonstrate their risk status to HMRC.

7.4 Andy said that HMRC was also aware that the differentiated approach to high/low risk businesses might create a market in ‘low risk status’. For example, a UK subsidiary wanting to acquire low risk status for the purpose of proving low tax risk to a foreign parent.

7.5 The issue of determining risk status is one about which HMRC needs to think very carefully. Some early consultation had raised the concept that HMRC might permit companies to 'elect into' low risk status, subject to certain requirements. The forum discussed some early thoughts in relation to this concept. Andy said that we are aware that there would inevitably be consequences which had not yet been foreseen. HMRC wanted the members’ views in relation to the issues raised.

7.6 One member advised that he understood the problem, and he understood the concept that was being proposed. He was unsure how HMRC would ever become comfortable with it. Naomi Ferguson advised that, if ever we did go this way, it would be slowly and together, piece by piece.

7.7 A member said that it raised a number of interesting issues about the respective roles of HMRC and agents. A discussion followed in which the need for cultural changes was identified, as well as the potential danger of a ‘tick-box mentality’ developing regarding risk status determination.

8. Enquiry window changes and large groups

8.1 Steve Coad said that he wanted to talk a little about enquiry periods in relation to groups. Members would probably be aware that there were changes in Finance Act 2007 regarding enquiry windows in respect of returns that were filed early, but that these changes did not apply in respect of companies that are members of large groups. He wanted to explain some of the issues that led to the change and the exclusion for large groups, and also to invite the views of members, either by comment today, or by subsequent email to: Steve Coad.

8.2 Steve advised that there was a caveat that needed to be born in mind with regard to everything he was about to say. Under the HMRC review of powers, the department is currently consulting in relation to compliance interventions. One of the proposals under that consultation is to dispense with the formal enquiry altogether. If this was adopted, enquiry windows would become irrelevant. Nevertheless, Steve said that unless and until a decision was made on that basis, he thought it necessary to proceed on the basis that it would not be.

8.3 The objectives of the changes to the enquiry window date were to try to give businesses earlier certainty and finality, and to remove discouragement of early filing. Lord Carter had recognised that the link between the filing date and the enquiry window acted as a disincentive to early filing, and was in nobody’s interest, and he proposed that the link be broken.

8.4 In November 2005, HMRC had consulted on the possibility of joint filing between HMRC and Companies House. Those proposals included advancing the statutory filing date for the company tax return to align with that for delivering accounts to the Registrar. The responses to that consultation had not supported mandatory joint filing or advancing the statutory filing date, and HMRC had decided to adopt a voluntary approach. However, HMRC was still interested in the prospect of voluntary joint filing, and where early filing arose as a consequence, in breaking the link with the filing date.

8.5 Section 96 Finance Act 2007 brought in the break of the link between the filing date and the enquiry window where returns are filed early, but section 96(4) excludes its application to companies within large groups - under the Companies Act definition. The principal reason for this was to protect scope for group based risk appraisal for HMRC in cases where some companies in a group file early but others don’t. Responses to the 1995 consultation suggested that most large businesses did not see much scope for early filing.

8.6 The possibility of a group rule for the legislation had been considered, but there were a couple of key obstacles to this. In the first place there were issues of legislative complexity – in particular regarding matters such as mergers and acquisitions. Secondly, there were issues around the HMRC knowledge base of group structures that would have been likely to have lead to administrative problems. Consequently, a group rule was not included in the legislation.

8.7 Steve advised that HMRC is now looking at what can be offered by way of an administrative practice. There is a synergy between these proposals and RLLB, hence the raising of this subject at this forum.

8.8 Steve suggested a possible framework for the administrative practice might be that:

• groups would flag up where they intended to file early on a group basis
• dialogue would then start and HMRC and the business would seek to agree a timetable linked to the dates the returns were filed rather than the statutory filing dates

8.9 Steve said that HMRC would be looking to offer this initially in LBS and in LC CM cases. The Department recognised that it would be a little more difficult to do so straight away in non RLLB cases because of problems with HMRC co-ordination.

8.10 Keith Cartwright said that he sees the administration of this within the LC large customer group as entirely feasible. He was not certain of the position in respect of the medium customer group.

8.11 A member wondered whether the process could be administered on a basis similar to existing group payment arrangements, and it was agreed that this was something worth exploring. The members generally commented that they would welcome any incentive that could be offered to their clients for earlier completion of accounts.

9. AOB

9.1 Naomi Ferguson said that she was conscious that the agenda for today’s forum had been determined by HMRC, and she wanted a process to enable future agenda items to be proposed by the accountants. Ian Young said that he would build in a mechanism for this in respect of subsequent meetings.

9.2 Ian Young advised that the electronic Shared Workspace (SW) project was developing well and he would be sending participants of the forum a link to the electronic pages to enable them to sign up. [To follow]

9.3 A member asked about dates for the next meeting. After brief discussion, it was agreed that HMRC will need to set a date for early December (specific date to be advised).

Matthew Powell
Local Compliance RLLB Project Team
10 October 2007