Minutes of Local Compliance Accountants Forum Meeting

31 May 2007

Attendees - Accountants

Alan Kennedy - KPMG
Nauka Patel - Moore Stephens
Andrew Tall - Mazars
John Bowes - Bentley Jennison
Trevor Shaw - Bentley Jennison
Simon Massey - Menzies
Chris Sanger - EAY
Peter Penneycard - PKF
Giovanni Bracco - PWC
David Hadley - Kingston Smith
Simon Baines - Deloitte & Touche
Lakshmi Narain - Baker Tilly
Nick Parker - Tenon
Maurice Von Bertele - Grant Thornton

HMRC

Naomi Ferguson
Keith Cartwright
Richard Steele
Ian Young
Peter Wharrad
Pauline Chelmsford
Robin MacLachan
Martin Clarke
Andy Coe
Sarah Heath
Jane Webb
Roy Warden
Graham Bradshaw

Introductions and opening remarks

Keith Cartwright opened the meeting as Naomi Ferguson had been delayed. He warmly welcomed all the members who then introduced themselves individually.

Keith outlined the major restructuring of Local Compliance (LC) in November 2006, with the emphasis now on customer groups and customer focus. On top of this, LC was working very closely with the Large Business Service (LBS) to implement the proposals contained in Sir David Varney’s Review of Links with Large Business (RLLB). This was very important because, although LBS handles the largest UK businesses, LC was responsible for a much greater number of large and complex businesses (approximately 14,000).

Keith said that Richard Steele was heading a very a strong team in LC to drive through the RLLB proposals, working closely with LBS and business representatives. He saw today’s forum as a great opportunity to work with accountants and business on a basis of trust, in the move towards a customer focused organisation in Local Compliance.

Naomi Ferguson echoed these comments on her arrival, adding that she hoped the forum would address a gap in the consultation process in Local Compliance. LBS had a large corporate forum but there was no equivalent in LC. It was felt that there should be a similar forum to represent this large and complex customer base. Naomi said that the forum would play an important role in ensuring that HMRC’s proposals for implementing RLLB were realistic and achievable and, above all, workable.

Richard Steele referred to the various draft papers that had been issued in advance of the meeting. He appreciated that not everyone would have been able to study these in detail but he hoped that they would help to update the emerging thinking on major topics in the project and kick off the dialogue. He added that the Forum was being set up on a trial basis and its effectiveness would be reviewed after the first few meetings.

Agenda item 3 - Terms of Reference

Ian Young provided copies of the Terms of Reference for the forum and lead a brief discussion on them. It was agreed that HMRC would chair the meetings and they would be conducted under Chatham House rules whereby comments could be expressed freely and taken back to others but on a non attributable basis only. Minutes of the meetings would be prepared by HMRC and circulated to all attendees. This would be done initially by e-mail but over time it was hoped to use a Shared Workspace on the HMRC website, into which the minutes and other documents would be posted. This could be used as a secure Chat Room to share ideas and comments. The Forum would cover RLLB matters and items of common interest.

Ian gave his email address so that people could contact him to obtain access to the Shared Workspace in due course. Also, he will circulate at an early date the proposed dates for the next meetings in September and December.

Ian said that a second forum would be created to consider the views of Tax Managers in businesses. He was asked if there would be any interchange between the two forums and, indeed was a second forum necessary. Ian said that they would be independent as it was thought that not every business wanted to express its view solely through professional agents and accountants. The second forum was being created though contact with the CBI.

Agenda item 4 - Client Management

Pauline Chelmsford introduced a discussion paper dealing with RLLB Proposal 7. She said that LC would be publishing a document by 30 June 2007 detailing thoughts on how contentious issues could be resolved and on Client Management in Local Compliance. Today’s paper was intended to kick off discussion on the emerging thinking on implementation.

There was a range of comments on this topic, largely linked to the role of Client Relationship Manager. One member said that it was important to have a level of consistency of advice between different head of tax so that LBS do not advise on one head and LC on another. Keith Cartwright said that the speaker may be referring to present arrangements, known as “partials”, whereby businesses could be dealt with in LBS perhaps for CT purposes but in LC for employer compliance purposes. He said that this was under review. He did not want to see a wholesale transfer of cases but it was hoped that “partials” would disappear so that businesses were dealt with for all tax purposes in either LBS or LC, not both. Another member said that there was already an inconsistency in the advice given by LBS. Quite often the LBS Inspector was only able to advise on one head of tax and knew little about other heads of tax. Clients wanted LC and LBS to know what the other was doing, for example whether or not a case was listed for Special Commissioners hearing.

One member suggested that there might be a case for having a different CRM for different heads of tax. Some businesses were concerned about the amount of time and effort that went into apprising the CRM of the client’s business only for the CRM to move on without adding any value to the process. Another member thought that CRMs must not only be experienced but also have the powers to make decisions in their own right without repeated reference to other specialists.

Several members said that most clients simply wanted a single point of contact for advice. Overall, it was their view that CRMs were only as good as the calibre of person involved. Naomi Ferguson agreed that there was a serious training issue here, as evidenced by the training and guidance proposals in RLLB. These would be addressed as fully as possible when the proposals were implemented.

Agenda item 5 – Risk Management

Richard Steele introduced a discussion paper on RLLB Proposal 4. The new Risk framework published at the Budget called for a better understanding by HMRC of how businesses managed their tax risk. It envisaged a ‘light touch’ for low risk businesses and more intensive scrutiny for higher risk businesses. The discussion paper started with a description of low risk characteristics and asked if these were realistic. It then discussed the benefits that a low risk business might expect to see and asked how HMRC and Business could work towards creating an atmosphere of mutual trust. Other areas where HMRC was looking to engage in a dialogue with business and agents included how HMRC might respond in an appropriate and proportionate way to the risks presented, and how best to achieve assurance on the tax governance of a business and delivery capability of its systems.

The following points were made in discussion:

-Some clients were offended that they were classified as any form of risk, or even 'low risk', when they believed that they always tried to get things right;

- a ‘light touch’ might still require ongoing engagement to deal with areas of tax uncertainty;

- the largest and most complex businesses should have access to low risk status and a light touch approach;

- CRMs were reluctant to amend the risk score for a business even where there was evidence to support this, or else they delayed doing so for several months.

-Customers needed to know the criteria that they had to achieve in order to be 'low risk' so that they could take steps to meet those criteria;

-HMRC should be transparent about the standard that people can aspire to at a practical level;

-There must be concrete benefits to businesses who attempt to change their behaviour in order to get a lower risk score;

-There was a need for co-ordinated visits and enquiries across the range of taxes rather than the piece meal approach that sometimes occurs;

- aggressive behaviour by HMRC only served to provoke the customer into 'digging his heels in';

- there is a perception that some HMRC staff prolonged enquiries simply to obtain 'a result' and justify their efforts no matter how much it costs the client.

One member asked if customers who actively engaged with HMRC with the intention of achieving a low risk score would be better off than those who were simply deemed to be low risk by HMRC, but did not engage. Keith Cartwright said that businesses that actively engage would have the advantage of more certainty that no further enquires might be made, and he stressed that it was not the intention to create a lot of activity around businesses that were getting it right.

HMRC acknowledged that in order to achieve a culture of mutual trust it would be necessary to change the way in which success is measured, perhaps moving towards targets based on behavioural change. For its part, HMRC did not underestimate the scale of the task ahead.

Agenda item 6 – Active management of enquiries

Introducing this discussion paper and draft action plan, Graham Bradshaw gave the background to RLLB Proposal 8 on the resolution of unsettled enquires. He said that HMRC wanted resolution through collaboration rather than aggression or confrontation. It was thought that the best way forward would be to agree a detailed action plan at the outset of every enquiry. The action plan would not be prescriptive but designed to cover all taxes and be shared with accountants. It was hoped to bring specialist help into the action plan at an early date, e.g. on valuation issues and those requiring input from Head Office specialists.

Several members questioned the language used in the draft action plan highlighting the importance of language in setting the tone for engagement. One said that it seemed to imply guilt on the part of the customer through the use of the word settlement. HMRC pointed out that this would cover ‘nil’ settlements but accepted that another word might be better such as closure or completion.

Another member said that there should be transparency from the outset. Inspectors should say what it was that they were really looking at rather than simply setting out a set of stock questions or embarking on “a fishing expedition”. There should be flexibility over the time allowed to provide information, which quite often could not simply be “delivered inside 30days”.

Overall, it was thought that agreement of an action plan was a good idea. It was not clear if this always needed to be done at an early meeting or sometimes by telephone. It would depend on the number and complexity of risks to be discussed. A member offered to share a template used by his firm for recording and monitoring cases. He said he would send it to the Project Team.

Agenda item 7 – Transfer Pricing

Roy Warden led a discussion on this topic, which is covered in RLLB Proposal 5. He said that HMRC would be issuing a formal consultation document by 30 June 2007. The document will show various pros and cons of the proposals to achieve greater certainty in transfer pricing enquires. In addition, it will say how it is proposed to address the issue of documentation and evidence. HMRC wanted to get away from poor practices such as opening an unfocused enquiry just before the enquiry window closes. There needed to be more transparency and a better relationship between HMRC and businesses and their advisers through use of agreed action plans. He thought that we may be moving towards a system where TP enquiries in LBS and LC are dealt with by TP specialists.

Roy said that the department was fully aware of the concerns of business over the costs of administration of TP. He was looking forward to an interesting debate during the consultation.

Agenda item 8 – a New Clearance Procedure

Robin MacLachlan introduced this topic, which arises from RLLB Proposals 1-3. He said that there had been a number of informal consultations with businesses and advisors over the last few months and HMRC would be issuing a formal consultation document within the next month. At present the aim is to provide greater certainty in corporate reconstructions by way of advice from existing CRMs. For inward investment, HMRC want to establish a specialist unit to provide a one stop service for new businesses coming into UK. This will be offered to significant inward investments only, in the first instance, due to the high level of resources required.

Jane Webb said that there would be an announcement on the HMRC Internet concerning the implementation of RLLB proposal 2. This would confirm the start of a pilot programme on Substantial Shareholding Exemption (SSE), as announced at Budget 2007. Proposals on the extension of clearance procedures beyond four Finance Acts would be covered by the formal consultation document. She said that she would welcome feedback on HMRC’s proposals to streamline the procedures; and how to define “significant commercial issues” for a clearance application.

The members thought that there would a big take up from businesses when a simplified clearance procedure was introduced. All clients want greater certainty at an earlier stage. Ideally they would want a shift towards effective real time clearances rather than post return enquiries.

Agenda item 9 – AOB and closing remarks

There was a short discussion on training issues. All those present acknowledged the huge implications for HMRC. Keith Cartwright said that the implementation of the RLLB proposals presented a huge challenge to both LBS and LC. There would have to be an important shift of emphasis in order to create a culture of trust both in HMRC and Business. There were huge resource and training issues to be faced and success would not happen overnight.

In her closing remarks, Naomi Ferguson thanked everyone for taking the time to attend and for their contributions to the debate. She hoped that the forum would be a source of genuine dialogue between HMRC and accountants. She said that the RLLB project would appreciate any feedback that the members wished to make.

The date of the next Forum meeting will be circulated as soon as possible.

Martin Clarke
RLLB Project Team