One of my concerns about the Liberal Democrats is that we resemble myself as student. We are rather better at spending money than working out where its coming from. Although we made some sensible tax proposals in our manifesto, we still ended relying upon the need to reduce tax avoidance and evasion and ‘resource HMRC accordingly’.
I have few problems with this position. Not least is the fact that every opposition party in my lifetime has argued it. Our record in coalition on avoidance was excellent; we forced through the General Anti Avoidance Rule (GAAR) which Labour had resisted. My perception is that this has reduced avoidance – certainly a lot of the tax boutiques that devised the more outrageous schemes have seen their businesses decline.
My real problem is that it is not just the complex stuff like arguing GAAR cases that HMRC has problems with and needs resourcing, but the basics. I currently work as a tax advisor dealing with the complexities of voluntary sector VAT, but previously worked in HMRC and its predecessor both in a local office and then for VAT Policy. I am still very much in contact with staff at all levels in HMRC. Unfortunately in a 40 year career I have never known HMRC in such a mess and as incapable of dealing with even the basics. I mainly cover VAT as its my area, but direct tax colleagues make similar points.
With VAT there are huge service failings. The public enquiry line takes hours to get through. I have clients waiting over a year for answers on basic VAT registration queries and as for complex questions such as approval for special VAT recovery methods, you can be talking 4 years – or never. In some cases the HMRC response to service delivery problems has been dramatic. New VAT registration forms causing a spike in calls to the registration helpline – answer: shut the helpline. In direct tax you should get your self assessment return in early but resource constraints mean the helpline only opens nearer the filing deadline. Is it really surprising that taxpayers make mistakes or take a lackadaisical approach to their tax compliance when they receive a service like this?
But the problem is not just administrative failure. There has been a reduction in the standard of technical knowledge at both an outfield and policy level. Many officers do not understand the basics of the tax. This is clearly evidenced from some of the bizarre arguments that have got as far as the VAT Tribunal before being summarily dismissed. These are arguments that theoretically have gone through local reviews and HMRC Solicitors Office before reaching the Court.
But what you don’t see of course in these appeals are the situations where the officers have adopted positions that lose the Government tax. In some cases this is because HMRC has not got the technical resources and exceeds the one or 2 year time limit from receipt of information to asses. Every advisor I know can provide examples of having submitted error corrections that HMRC were unable to process them for this reason. As for Policy – the recent responses by all the professional bodies to the technical consultation on the planned education VAT change shows things are not good. To be fair, I realised that things were no good many years ago at a meeting in the Treasury when I found ex-colleagues working cross legged in the corridors as office space reductions meant there weren’t enough desks.
There are number of reasons why HMRC is broken, but inappropriate cost saving is the main one. Mergers between large organisations cost money in the short term in order to save money in the long. In the case of the HMCE and Inland Revenue merger one gets the impression that Gordon Brown wanted immediate savings. Work such as public enquires was downgraded. You then had to make big savings in estates. Tax offices were merged and merged so there are now very few. Live in Truro – your office is in Bristol. This has not only led to a reduction in service for the public – in VAT it has effectively caused trader visits to almost cease – it has also led to an exodus of skilled staff.
Why has something not been done? Well firstly HMRC is not a Department directly managed by a Minister. There are good reason for this but it does, I think, lead to a certain amount of wool being pulled over eyes both in terms of policy and how bad things have got. Then there is the issue that there are very few tax experts in Parliament. Tax administration is also rather boring and even though all the professional bodies have been raising similar points for years they have not gained political traction.
But something needs to be done. Telling HMRC to tackle more complex avoidance at the moment is rather like telling someone to improve their dressage when they can’t even get on a horse. It’s not the fault of the staff. They are being asked to do the impossible. HMRC needs more better trained and better paid staff. The morale of the organisation is poor and the central management needs changing. I would support something like the recent Darzi NHS review to investigate whether HMRC is fit for purpose, benchmarking it against tax authorities in other counties.
We need to ensure we raise all the tax under the existing rules before trying to introduce more complexities that HMRC can’t cope with.
* Peter Ladanyi is a tax advisor and Chair of Croydon Lib Dems
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18 Comments
> “I currently work as a tax advisor dealing with the complexities of voluntary sector VAT”
Good luck – “complexities” is possibly an understatement when it come to charity sector vat… Just spent this summer getting my head around de minimise…
An interesting article and nice to get a sense of the problems from someone with inside experience.
It is somewhat ironic though that, having pointed out the LibDems have a problem of too often wanting to spend more money, your proposed solution to HMRC’s problems seems to be … to spend more money! 🙂 While that may well be necessary to some extent, I wonder if there are other solutions. For example, can we simplify our massively complex tax rules, so people don’t need as much training to understand them? Since you mention the problems of VAT quite a bit, would there be any mileage in scrapping VAT and replacing with a sales tax, if that would be simpler to administer?
@Simon R: A Sales tax can be even more complex than VAT. Conceptually VAT is quite robust and there are simplifications that would help. The problem is that any change creates winners and losers. Where there are winners, the exchequer loses and where there are losers they are much louder than the winners. If HMRC has few staff who have mastered the current static system, expect the handling of a changing one to be disastrous.
Might it help if H M G were to spend enough money to motivate, educate and employ enough people to make our necessary infrastructures, such as HMRC, function effectively and, usually, cheerfully?
Similarly, it needs to invest in and/or achieve structures and set ups which result in our society being effective, equitable and basically benign to all its citizens and their children – not least water supply and sewage management.
To the shame of the present and recent governments, this is not, and has not been the case, despite our country being reported as the sixth wealthiest in the world!
And the money? HMG just creates it as it did c. 2008 and at Covid time.
P.S. It also matters that our tax set up is made transparent to all, horizontally and vertically equitable, and flexible, which might also assist with inflation management.
The other side of the argument is that self-assessment has been successfully digitalized. Is AI the solution to VAT complexity?
Thanks, Peter – an interesting article. I had heard that the Inland Revenue and Custome & Excise merger had not gone well, but that was several years ago and I had assumed it was just some of my friends grumbling about change.
Please could you tell me, if the resources given to HMRC were to be increased, where do you think they should be deployed? As a taxpayer I would want to see an increase in the tax raised if more money was to be spent raising it, so where would be the best place to target? I suspect that PAYE works pretty well most of the time; VAT is an issue for some, particularly with international trade, so it might be there. Corporation Tax is complicated, but is usually calculated by highly paid experts who ought to be getting it right – should the resources be spent there? Or on IHT? In all my years I never saw an IHT return queried by the Revenue – it’s very complicated to calculate, and very few people pay it, so maybe it’s not worth deploying more staff there?
I genuinely don’t know how best to deploy any new HMRC staff, systems and training to raise more tax – what do you think?
>>One of my concerns about the Liberal Democrats is that we resemble myself as student.<<
I remember when you WERE a student. Excellent article, lots I didn’t know but of a piece with the hollowing out of public services, not just numbers but expertise, that was started so ferociously under austerity. Labour look bewildered as to how to tackle such a huge mountain to climb back, and not surprisingly.
1. “Why has something not been done? Well firstly HMRC is not a Department directly managed by a Minister. There are good reason for this….”
Shouldn’t HMRC be managed by a Treasury minister?
2. “HMRC needs more better trained and better paid staff. The morale of the organisation is poor and the central management needs changing.”
We’ve gone through a lengthy spell during which governments seem to be averse to taxes (however essential they may be) and despise public sector workers (however important those people may be) so this isn’t surprising,
3. “HMRC needs more better trained and better paid staff. The morale of the organisation is poor and the central management needs changing.”
Same response as 2. above
I see Steve has found the magic money tree, with the comment, “And the money? HMG just creates it as it did c. 2008 and at Covid time.“. Steve, since I know you’re passionate about eliminating poverty, you might want to consider that one of the contributors to poverty over the last few years has been the high inflation that directly resulted in large part from the high Government borrowing (or to use your words, creating money) during Covid.
@ Simon R.
You’re right to point out that high inflation can result if the Govt creates and spends too much money. Eqally, Steve is also perfectly correct to say that Govt creates whatever money it decides to spend. As far as the Govt is concerned, the issuing of money is like the Royal Mail issuing stamps or a supermarket issuing vouchers. They are created and destroyed as required. The £ is essentially a tax voucher.
So, for the Govt to say it is running out of its own issued vouchers, or that its vouchers have somehow fallen into a ‘black hole’ is patently nonsensical
But, it wouldn’t be nonsense if Rachel Reeves said that govt was worried about the inflation problem and therefore cuts in spending had to be made.
If that’s what she does mean she should say so.
To get back directly to the point of the OP no Economist would deny the need to have a well functioning and effective taxation system. It’s a matter of simple observation around the world that those countries which don’t are the ones which have the most problems with their currency. So any government should do what it takes to make HMRC effective. Not to do so is simply false economy.
However, the question often arises that if currency issuing Governments can simply create whatever money they need why should they bother? Maybe it does require a little lateral thinking but the answer is simple enough. It’s to stop us spending it. Sometimes it’s to stop us spending it in particular ways such as on harmful products like tobacco and alcohol. More usually it is just to stop us spending it on anything at all. It’s to reduce aggregate demand.
https://www.nakedcapitalism.com/2014/05/randy-wray-taxes-mmt-approach.html
“Central bankers on their ability to create money out of thin air”
https://www.taxresearch.org.uk/Blog/2024/01/06/central-bankers-on-the-ability-of-banks-to-create-money-out-of-thin-air/#:~:text=The%20deposit%20%E2%80%93%20the%20money%20%E2%80%93%20is,%3A%20fiat%20%E2%80%93%20let%20it%20become.
@Steve; No-one is claiming banks can’t create money out of nothing. But the point is that there are consequences of doing so, and if the Government does it too much, those consequences tend to be very bad.
When private companies or individuals borrow, it’s generally for a fixed or temporary period, with the expectation they’ll pay the money back. That means that money created by new loans is generally balanced by money destroyed as previous loans end. And the loans are usually to fund investment that creates new wealth. That’s completely unlike what is often proposed for the Government in these discussions: A company is not going to suddenly borrow £tens of billions in order to spend on day-to-day spending that has no long term investment value, and on the basis that you can keep forever increasing your debt by borrowing more!
@ Simon R @ Steve ,
Both governments/central banks and commercial banks can create money from nothing but there is a difference. Commercial banks create money by lending. The government/central banks create money, mainly, by spending. Commercial banks do tend to want their money back so the nature of the macroeconomic effects in each case is somewhat different.
As Simon is keen to tell us, if the Government overdoes the spending adverse consequences can arise in the form of higher than desirable inflation. Simon seems less keen to tell us that equally adverse consequences can arise if the Government underdoes it. We get recession and high levels of unemployment.
Similar high inflation can result if banks lend too much and create a credit boom. To make matters worse a bust can follow when the extra spending power runs out and everyone who did borrow during the boom time ends up with less spending power than they would have had because they are repaying those loans.
Running the economy shouldn’t be that difficult. Like baby bear’s porridge, the economy should be kept neither to be too hot nor too cold.
>Peter Davies
“A Sales tax can be even more complex than VAT. Conceptually VAT is quite robust and there are simplifications that would help.”
I would agree, one example: HMRC would be well advised to simply implement what the Charity Tax Group recommends, making VAT for charities something the average person can work out (*) and know they are within the law. As things stand, I suspect the majority of charities are non-compliant (but probably adhering to Charity Tax Group interpretations of VAT and observations on HMRC capabilities), however, because they claim less than the de minimis amount, HMRC ignores them, focusing on the more profitable targets.
(*) Charities don’t tend to have well-paid professional accountants and tax advisors and few accountancy practices are on top of the tax rules for charities.
@Peter: Your comment “Simon seems less keen to tell us that equally adverse consequences can arise if the Government underdoes it” but can be accounted for by that (a) we don’t appear currently to be at risk of recession or high unemployment and (b) no-one here is really arguing for the kinds of drastic cutbacks in expenditure that could lead plausibly to that – so there’s little need to argue the case against it. On the other hand, plenty of contributors to LDV seem to repeatedly argue for the Government to borrow/create/spend loads more money without any thought for the consequences.
@ Simon,
I was referring to how things work in general, rather than what we should do right now. However, you are making a valid point. I can’t see that there is much wrong with MMT, if you go to the right sources, but there are lots of people on the fringes who can give it a bad name. They don’t quite get past arguing that a currency issuing government can never run out of money, taxation doesn’t fund spending etc; and, therefore lots of things can be afforded without having to raise taxation. This isn’t correct at all. See Bill Mitchell’s take, in the link below, on what this government should be doing.
There are still plenty of valid criticisms to be made about the nonsensical nature of Rachel Reeves’ “fiscal rules” though. She seems fixated on the extent of Government debt but is quite oblivious to the dangers of high private debt. It’s the latter which can cause sudden crashes in the economy. If interest rates stay high for much longer this is a real danger.
https://billmitchell.org/blog/?p=60987
While optimising tax collection is important it’s not going to build our economy. We need to go all out to grow our economy using green measures and investing in new technology. Being outside the eu means trade is even more important to thrive in a challenging environment.