2006 Review of Links with Large Business

Summary note of CBI/HMRC meeting 14 July 2006

The following is a summary of the views expressed by representatives of business, professional advisers and CBI tax committee members at a meeting on 14 July 2006 with the core HMRC team leading the Varney Review of Links with Business.

The meeting focused on discussion in three areas with a view to clarifying business concerns and obtaining input on potential outcomes:

Effectiveness of consultation with business and operation of consultative forums
Appropriateness of HMRC guidance material
Administrative burdens on large business arising from compliance with the requirements of the tax system

In addition a number of other issues were raised and discussed (see below).

1. Consultation and consultative forums

Business perspective is that to facilitate the development of effective tax policies, which meet mutual needs of business and Government and contribute to competitiveness of the UK, business should be involved as early as possible in the development process. Business would like there to be a joint HMT/HMRC approach to consulting with business on desired outcomes at an early stage in the development process.
Potential for an overarching strategic forum involving HMT and HMRC to contribute to this. Some current consultative forums do not have a remit for considering policy – even Business Tax Forum. Suggestion that the forum might want to focus on considering matters relating to larger business tax or issues arising for larger employers. It was felt that VAT did not need to be included in the Better Regulation Consultative Committee (BRCC) as it is probably sufficiently covered by the Joint VAT and Customs Consultative Committee.
View was that a large part of the role of the CBI is to collate and represent the views of business on a range of policy issues and attendees felt that the CBI is able to successfully filter these views. Attendees confirmed they believe the CBI has representative membership and the mechanisms in place to filter views and represent these.
Concerns were raised as to the direction of effective management and co-ordination of initiatives such as Carter, the Powers Review, the Integrated Management Act – these concerns were noted by HMRC and there was some discussion as to current status.
Suggestion that HMRC ‘policy’ teams should consult internally (particularly with LBS and Customer Unit) to ensure that best use is made of knowledge and understanding within HMRC to inform direction before seeking the views of business and to avoid multiple separate but overlapping survey/enquiries on the same subject-matter.

Positives and negative examples of consultation to date:

Positive:

CIS postponement – praise for willingness of HMRC (Doug Tweddle) to recognise and acknowledge the problems and taking the decision to ‘freeze’ implementation and take stock given the concerns expressed.
Schedule 10 VAT Act consultation – started early in process with discussion about what HMRC seeking to achieve.
Extension of disclosure regime – iterative process, reverting back to participants to keep them up to date with developments, progress and direction.
R&D tax credit – consultation around extension to large companies - willing to listen and adapt position.

Negative:

Policy changes labelled as “anti-avoidance” and hence not susceptible to consultation. Poorly structured and too many people involved in early stages - consultation lacked clear direction and unable to have constructive discussion in a large forum (e.g. CIS consultation).
Often start with pre-determined view of the solution, sometimes even with draft legislation, and as a result difficult to changes e.g. arbitrage.
Powers Review – appears to be ‘cloaked in secrecy’ and limited consultation or issuance of papers for consideration.
Lack of consultation on HMRC Website improvements.
Changes to North Sea and insurance regimes.
Changes to trusts regime.
Alignment of tax and company accounts

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2. Guidance

Guidance should not be used to fill holes in defective legislation.
Benefits for business and HMRC if guidance outlines HMRC view on application of ‘old legislation’ to modern commercial arrangements and structures and so it needs to be regularly reviewed and updated.
Businesses need to understand what their obligations are and guidance needs to be up to date. Example given of recent changes in pensions legislation - positive comment initially but has not since been updated or amended to apply to commonly raised queries.
Positive examples - guidance on EU Savings Directive and Booklet 490 – employees travelling expenses.
VAT guidance is regarded as reasonably good and preference is to have guidance even if it is not fully comprehensive as this can form the basis for a discussion and challenge where necessary.
Recent CIS guidance “current interpretation and information” guidance is excellent – it is timely, concise and to the point.
Guidance from Stamp Office is regarded as poor – patchy and poorly drafted.
Guidance regarding application of complex tax and NIC provisions to Expats is another area where the current guidance is regarded as poor.

Proposals:

HMRC should use practical experience of resolving cases to enhance their guidance – anonymise cases and include examples within the guidance. Would give clearer view on application of legislation to specific circumstances.
HMRC should maintain a database of outcomes / responses (anonymised) on specific cases – this database could be accessible by staff and business alike.
Explanatory notes accompanying legislation should be improved such that they are not a repetition of the legislation and should make clear the purpose of the legislation / policy intention. Current FB notes add little if anything to understanding. Suggestion of potential to make greater use of the Instructions to Parliamentary Counsel when drafting guidance.
Guidance should start off at the simplest level building up to more complex cases – keep in mind that that guidance is read by different audiences. Better use of appendices.
Guidance to be linked to connected material on the HMRC website to make further research easier and hyperlinked whenever possible.
Guidance to include feedback mechanisms so that users could highlight areas where it is unclear, where more guidance would be welcome and any other comments.

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Admin Burdens

Link between policy and admin burdens – sometimes it appears that policy changes are made without full recognition of the admin burdens they will place on business. BRCC has a valuable role to play.
Desire for joined-up government – 16 taxes for which HMRC collect data – ONS and Companies House impose similar information requirements – desire for greater sharing of data across Government departments to reduce burdens on business.
Discussion on IT improvements including XBRL formats – these developments might be expensive for both Government and business – need to explore whether business would be willing to bear these costs if this could ultimately lead to reduction in current costs incurred in responding to Government information requirements. But starting point should always be how business does things in commercial practice.
Concerns that in certain areas businesses are ‘unpaid tax collectors’ and yet feel they are penalised retrospectively for not getting things right even where they have tried to comply with complex rules and have worked with HMRC to get it right. Some discussion as to the merits of incentivising as opposed to penalising business but no suggestions as to how this could be achieved in a practical way. Powers Review should consider this.
Requirements to gather information to comply with requirements for Double Tax Relief (DTR) are particularly onerous.
INTRASTAT information collection is also a burden – all of this information is already collected elsewhere. Some businesses feel that completion of the EC sales lists is a waste of time.

Other areas discussed included:

Relationship – transparency and trust

Some discussion as to the relevance of any Code of Practice in building greater trust. Discussions around whether this should take the form of a new Taxpayers’ Charter and that the principles in the LBS Operating Model would need to be reflected and a note of caution against a mission statement – this would not be seen as useful.
Greater clarity and certainty
Clarity helps certainty. Business understands that there will be winners and losers but this should not prevent HMRC listening to what business says it needs.

Skills, competencies and standards

Noted that there are concerns about the differences in commercial awareness and technical competencies in LBS versus Local Compliance given practical experience.
Agreed that involving businesses in training of staff should have benefits for HMRC and business.
Noted that a better understanding of the concepts of materiality and better application of such concepts is important, particularly to large businesses, and that business view is that there is scope for improvement in this area. Vital to understand how businesses operate when considering proportionality and penalties.
Succession planning for key HMRC staff should be improved.

Operational issues – LBS Operating Model

Concerns remain as to lack of clarity over the scope and remit of CRM and a need for recognition that building relationships and trust take time.
Suggestion that the role could reflect that of engagement partner in professional services firms.

Operational issues – specific tax provisions

Some discussion around administrative practices of the Stamp Office and concerns that they are not commercially aware.
Why can’t someone publish guidelines on transfer pricing – e.g. how to prove that transaction is at arm’s length – what do HMRC expect is a reasonable mark-up?

General

Revamping of the HMRC website is a must – it is difficult to navigate – should be done in consultation with users like CBI.