I asked Jim to begin by describing his role in his own words, and to set out what his key priorities are. Jim’s formal title is second permanent secretary, but his job is threefold: he is the deputy chief executive to Jon Thompson; he is the tax assurance commissioner and HMRC’s head of the profession for tax (which brings with it governance responsibilities); and he is also responsible for all the department’s planning and delivery on Brexit.
Jim explained that Brexit is currently his key priority. The department has been doing everything it can to help inform ministers and support the negotiations in Brussels. This includes planning and preparation, and where possible execution, so as to be ready as soon as possible. Engaging with stakeholders has, until now, generally been with the major industry bodies and ports, but will increasingly be directly with customers. Jim acknowledged that Brexit currently consumes a lot of his time – much more than he had envisaged. It is a top priority and it is difficult to delegate much of the load.
Where is the practical impact falling within HMRC? So far it has been relatively contained to central teams, Jim said, although it has had an impact on the transformation programme. Some projects have had to be put on hold (as reported to the Public Accounts Committee on 30 April, see bit.ly/2KQk4l9). Of these, Jim was most rueful about slowing down the digital journey for personal taxpayers, although he agreed that it was important to use that pause to good effect.
Brexit is stretching the subject matter expertise in some of the policy teams, particularly in customs and VAT. The people doing the day to day work with taxpayers have largely been protected from impact so far, but this is likely to change rapidly as HMRC moves into a phase where front line operations will be increasingly visibly affected. There are job offers out to around 2,000 people to take up operational jobs, many of whom are then going to be trained ready for Brexit to manage the increased volumes of work expected. Some existing, experienced staff will be deployed; most of those recruited will generally not have any customs background and so will have to be trained from scratch.
We discussed the challenges of maintaining customs clearances with significantly increased volumes. Currently, the vast bulk of goods are cleared automatically within seconds; then others are subject to remote online checks from HMRC’s hub, where the new workforce will initially be deployed. The proportion which is actually subject to physical checks is tiny. In the event of ‘no deal’ from March 2019, there will be real challenges when the volume of declarations goes up, in particular helping customers who have never had to deal with customs obligations before.
I referred back to Sam Mitha’s interview with Edward Troup last year (Tax Journal, 20 October 2017) where they briefly discussed the new customs declaration service (CDS). This is due to go live in January 2019, which sounds to me to be a very tight deadline. Jim accepted that there were real challenges to deliver that. While there was a high level of confidence in the first release (which went live over the summer), there is less confidence in the later releases and Jim accepted that there was no room for slippage. However, he reassured me that there is an excellent contingency plan, with additional resource added to the existing CHIEF system so that it can deal with a large number of additional declarations. If necessary, CHIEF and CDS will run in parallel, perhaps for slightly longer than originally intended.
The main focus when liaising with business has been to work with intermediaries and with the ports and the logistics industry. However, Jim noted that there are a large number of ‘EU only’ traders who currently have no dealings with customs and no familiarity with what they will have to do. If the government is able to negotiate a new facilitated customs arrangement (the preferred arrangement), then broadly speaking little will change for these traders. But in the event of ‘no deal’, HMRC will have to make those traders aware that they will need to take action. This may well be a challenge for the tax profession, Jim said, since many traders will initially get in touch with the adviser who does their VAT return – and many of those advisers may themselves not be particularly familiar with customs processes.
I asked Jim whether he was concerned about the impact on tax receipts, and whether in the short term the level of error and evasion was likely to go up. He accepted that, in the event of ‘no deal’, some of the new arrangements will not be the way he would want them to be in the longer term, and that will bring heightened compliance risks. Whilst HMRC is committed to having a functioning regime in place on day one, it is not promising that the regime will be working in the way everyone wants it to work or that compliance levels will be what everyone would want to see.
In relation to tax (rather than customs), some important technical issues and some VAT issues need to be resolved, but generally these are less time critical and taxpayers are more familiar with the taxes involved.
Taking the discussion wider, I asked Jim whether HMRC was involved in advising ministers of the risk to overall tax receipts as a result of the impacts of Brexit. Jim said that HMRC itself does not produce economic forecasts, but its analytic function – the knowledge, analysis and intelligence (KAI) directorate – has access to a lot of data and supports the Office for Budget Responsibility (OBR) with a lot of analysis.
Standing back from the detail of Brexit, Jim said that HMRC is not generally thought of as one of the departments of state in Whitehall. However, on Brexit, he felt HMRC was ‘playing an excellent game’ and was in the room in Whitehall being listened to and informing the process.
The second topic I discussed with Jim was the relationship between HMRC’s large business service (LBS) and its customers.
The relationship that HMRC wants to have with large business serves two purposes, Jim said. One is to make sure large business pays all their tax, but the other is to make sure that the UK tax system, which the government has set to be a competitive tax system, is competitive for the UK and delivers that result.
The relationship with large business has an established approach, which started in 2006 and has been refreshed from time to time but fundamentally has not changed. He commented that the levels of satisfaction from large businesses remain very high, and the work that LBS does to manage the compliance yield shows great results from HMRC’s perspective as well.
There is currently some work going on in relation to the customer compliance manager improvement plan. There is increasingly a younger workforce in LBS, compared to the past, with a lot of trainees and recently-qualified people. HMRC needs to keep consolidating its learning and making sure that it thoroughly understands its large business customers and has got real commercial awareness. HMRC is working with large businesses to improve this.
Could the profession do more to help with that challenge? As someone who has worked in industry, the profession and HMRC, I am passionate about ensuring that we all learn from each other. Jim said that all help was welcome, and he acknowledged the strength of the profession in understanding the wider aspects of business and why transactions are undertaken from a commercial point of view. It saves time being wasted if HMRC can also understand this business perspective.
A few years ago, HMRC merged the top end of the large and complex team with LBS. Had this been a positive move? Jim thought the change had gone very well. It helped HMRC to deploy its resources in a more efficient manner, matching resource to risk, though HMRC will want to keep reviewing that borderline. The LBS is high cost from HMRC’s point of view, so it needs to ensure the borderline is in the right place in order to make the most efficient use of resources.
What about the level of HMRC service for those businesses which, although not small, are not large enough to qualify for the LBS? HMRC is working on services for this in-between group, Jim said, to make sure that during major events in their business cycle, they get the concentrated resources they need. This is very relevant to my entrepreneurial client base. I appreciate that there needs to be a boundary but it can be frustrating not to be able to access rapid help when it is needed. I gave the example of a client who needed a certificate of taxpayer compliance in order to bid on a non-EU government contract, and how difficult it had been, in the absence of a CRM, to speak to someone urgently.
Jim wants HMRC to be able to be flexible. An adviser should be able to contact the department and explain that they have a client who, for a period of time, needs the LBS level of service for a legitimate reason, and Jim hopes that the department would be able to respond to that. This sounds promising, and I hope HMRC and the profession can discuss this in more detail to ensure it works in practice.
The third area we discussed was dispute resolution, and we looked at some of the areas which had been highlighted in Jim’s recent assurance commissioner’s report (included in HMRC’s Annual report and accounts 2017/18, see bit.ly/2LeHIut).
When I joined HMRC, the biggest culture shock to me was the difference in the decision making process compared to industry or the profession. It struck me just how deep the culture is of what I would call consensus-driven decision making.
Jim thought this was a fair reflection of the culture of the department more generally, not just in tax disputes. It is a big organisation, with decisions made in a very consensual way, which has implications for speed. Ultimately, there are ways of making decisions in tax disputes, even if consensus cannot be reached within HMRC, but the department can find that quite challenging.
I appreciated the need to deal with cases fairly and in a consistent and even-handed manner, but I wondered whether HMRC could challenge itself more on the effectiveness of the decision making. Resources need to be allocated to important decisions, rather than HMRC getting hung up on some of the smaller stuff.
The average elapsed time for a large business dispute has not really lengthened, according to Jim. There is an turnaround target of 18-months, which is largely met. Even if that was not always the perception, that is what the statistics are showing. I did not doubt this, but asked why, if the initial target was a turnaround time of 18 months when it was set five years ago, why hasn’t it come down to six months by now?
Jim accepted that this was a fair challenge. He said that the other thing he would like to see more often is an agreed project plan – this is a discipline within the high risk corporate programme (HRCP), and it needs to be applied more widely. Where a dispute arises, both sides want to resolve it by agreement if possible, so it is good to set out the expectations of both parties, in terms of providing information on the taxpayer side, and analysing it on HMRC’s part. Then there will be something which each can hold the other to account on.
In the final stages of the governance, the department quite rightly takes a lot of care and is very thorough, but Jim does not want it to build in a lot of extra time. Cases coming through today should have been started after 2012 when these governance arrangements were put in place, so both caseworkers and taxpayers should be working to producing outputs which satisfy that process. Jim made no apology for the standards of the governance that is required, but accepts that it needs to fit with an efficient dispute resolution process.
The HRCP process is an interesting example. I was involved with a number of those cases at HMRC, and in this area you could see a very clear objective to reach a decision point on the project. Has HMRC done enough to embed that culture more generally across the department? Ultimately, it saves resources for both HMRC and the taxpayer if the decision point can be reached as efficiently as possible, whether that decision is a settlement or an acknowledgment that litigation is necessary.
Jim said that he thought the approach was increasingly embedded, particularly in LBS, but it is more debatable whether it has been adopted sufficiently by all areas of compliance work. Whatever the dispute, having clarity at the outset about how it is going to run and the expectations of each side will help to manage it.
We turned to some specific points from Jim’s report. He had mentioned alternative dispute resolution (ADR) referrals and how positive the feedback had been on that. I was quite shocked that almost half of the cases where someone applies for ADR are rejected, and asked whether people are applying for the wrong sort of issues, or whether HMRC is not getting the message across as to what is suitable for ADR?
Although the numbers involved are quite small, Jim agreed. There is a set of criteria and some cases are being presented where it is clear that they do not meet the criteria. The board wants to use ADR as much as it can, but the criteria have been designed to reflect what HMRC think will ultimately mean ADR can be a success. As a costly and time-consuming process, it should be used where it is going to make a big enough difference.
One question I had in relation to the tax disputes resolution board (TDRB) was whether there are too many layers of governance. Of the 38 referrals that came to TDRB, 29 went up to the commissioners and only six had a decision taken by TDRB itself. That suggests to me that there is a lot of overlap between TDRB and the commissioners – I asked Jim if he agreed.
Jim said that he wanted TDRB to be a decision-making body. Because of where the financial limits have been set (all cases over £100m must be referred to the commissioners), a lot of the cases exceed the financial limits. In such cases, TDRB thoroughly reviews the case and makes a recommendation to the commissioners. The limits in the governance are kept under review, but Jim has been quite reluctant to change them because of the need to instil confidence that decision making in large disputes is properly governed.
I also mentioned diverted profits tax (DPT), thinking that the report was a bit vague on that. It says that the DPT board met 21 times, considered 16 proposals, referred two and sent four on to the commissioners. It does not say what happened to the other ten cases. Jim subsequently confirmed that resolution proposals for the other ten cases were agreed by the DPT board.
The cases coming through on DPT are increasingly being applied to new risks that have not previously been under enquiry, said Jim. Some of the timelines for progressing a DPT case are challenging. Referring to our earlier discussion, he thinks it is good that DPT has got some timelines in it, but obviously it is important that both sides of the dispute are able to do a thorough job.
I was interested to see that HMRC had accelerated its review of settled cases, which seems to be a positive move. Jim thinks that the process of reviewing settlements is very good, but previously the review stage had looked at the previous year’s settlements. So if something systemic needed to be fixed, a lot of water would already have passed under the bridge. By looking at the previous quarter rather than the last year, it will be possible to get results more quickly. If there is a need to intervene (perhaps by issuing guidance or changing a training programme) that will be possible nearer to real time than in the past.
The new governance processes were introduced in response to the exchanges between HMRC and the Public Accounts Committee (PAC) which started in 2011, and the Park Report in 2012. I asked Jim whether he thought that the PAC and the Treasury Select Committee were now generally happy with the level of assurance and independence in HMRC’s governance.
Jim said that it was always open to government to ask further questions, but noted that the National Audit Office (NAO) has full access to HMRC’s settlement details, and also sits on HMRC’s Audit and Risk Committee. The heat has gone out of HMRC’s governance of large disputes, he feels, so while there is still (quite rightly) a lot of public debate about whether multinationals are taxed effectively, there is less and less about what HMRC does at an administrative level.
As tax assurance commissioner, Jim wants to make sure that he is assuring the whole of the dispute process from end to end. At the start, why is HMRC getting into this dispute? As the dispute is being conducted, is it being conducted effectively? And, at the end of a dispute, are the right decisions being made, whether that is to concede, to settle or to litigate?
Some disputes inevitably end up in the tribunal, and I thought the way that Jim explained the tribunal statistics in his report was quite interesting. He pointed out the number of cases which are stood over and lead cases, highlighting that the headline number of 25,000 appeals is probably a misleading one.
Jim said that around 16,000 cases are ‘follower’ cases, where it has been agreed with the other party that HMRC will not actively pursue the case in the tribunal until a decision has been made in another case. This reduces the headline number in terms of what is the actual backlog of cases waiting to be heard.
I appreciate that the timing of tribunal cases is not entirely within HMRC’s control, or the taxpayer’s, in that the whole court system causes some delays. But I asked whether HMRC monitors how old cases are when they get to the tribunal, and as part of Jim’s review, whether that could be improved at all?
An internal review is currently being carried out in relation to the litigation strategy, Jim said. This is not the litigation and settlement strategy (LSS) but the policy for when HMRC litigates and when it does not, asking how effectively the litigation process is being used to achieve its aims. Those aims are not only to resolve a particular case but also to manage the tax gap as a whole, and that includes whether cases are being progressed as fast as possible and whether all the stages are being used effectively. While that is constantly under review, a specific project is being run by the solicitor’s department at present.
I asked whether that review was looking more widely at whether HMRC is selecting the right cases to litigate, and Jim confirmed that it is. The starting point is to ask whether HMRC is leading with the right cases, and then whether the litigation process is being used effectively to resolve that case and any others which may be behind it. It also includes the speed of what HMRC does. Jim thinks that HMRC uses litigation effectively, and is proud of its results in litigation in terms of how many cases it wins, for example. He accepts, though, that it is a slow way of resolving something. When a lot of cases are waiting on the outcome of an appeal, and then following a judgment it goes on to the next stage, it is a long game and not one to be done unless it is really necessary.
The review has so far been entirely internal. The outputs will be taken to the various forums where HMRC engages with the large law and accounting firms and businesses.
In terms of HMRC’s success rate in litigation, my perception is that many of the avoidance cases that we have seen over the last few years reflect behaviour from probably ten years or more ago. I would be surprised if that level of cases is going to continue, and I asked Jim whether he shared that view.
Jim very much hopes that the level will not continue, as the whole aim of HMRC’s counter avoidance strategy is not only to manage today’s caseload but also to stop people behaving in such a way in the future. If you look at avoidance, he said, 50% of a tax avoider’s strategy is to come up with a clever artificial ‘wheeze’, but 50% is tactics to try and prevent HMRC from getting to the bottom of it and sorting it out, for as long as possible. And Jim thinks that a number of the powers HMRC has taken in recent years have been about tackling the tactics as much as the underlying avoidance, and changing the economics to the point where taxpayers receive the message that it is really not wise to get involved in this.
It is important to understand today’s behaviours, and that HMRC does not take powers to address something which was happening ten years ago but is not happening today. It was probably incumbent on both the private profession and HMRC to do more than just claim that avoidance is dead, Jim thinks, and to actually prove it.
I wondered whether an inevitable consequence of the avoidance cases dropping off is that HMRC’s success rate in litigation may fall a bit. If HMRC is taking a case on a highly artificial scheme and it has won the last six cases, then frankly it has probably got a good chance of winning the next one. But if disputes are about technical matters, such as capital allowances or whether something is wholly and exclusively for trading purposes, then those issues may be more finely balanced. Could that lead to a bit of a dip?
Jim feels pretty confident that HMRC will maintain a good litigation success rate, but agrees that it needed to be constantly monitored. If it changes, HMRC should constantly ask whether or not the issue should have been litigated. However, Jim has no reason to believe that HMRC will see a significant change in its litigation success, while acknowledging that litigation is a high-risk game. There is no ‘dead cert’ in any case: the evidence or the arguments, or both, can go against you. But to date, Jim feels that the results show that HMRC is not bringing cases inappropriately: it is bringing the right issues to the court and is a very effective litigator when it does so.
I said that there were still some small cases that make tax professionals ask: why on earth was it worth the resources of that going to the tribunal? What can HMRC do about the £1,200 penalty cases, for example?
Penalties are a particular issue, Jim said, and in his assurance commissioner’s report he has tried to strip those out from more substantive disputes. When it comes to late filing and late payment penalties, it’s not ideal that the first point at which you can establish that there was a reasonable excuse is at the review or appeal stage. Effectively, you are in a dispute with a taxpayer before having gathered all the facts. Hopefully, the reforms being made to the penalty system, moving to a more points-based approach, will help. Under the current rules, once the decision has been made to issue a penalty HMRC is not going to forego it just because it is a small amount: there has to be a proper basis for either sticking by it or changing it. But Jim would like to reach a basis of a penalty regime which produces fewer disputes.
I wondered whether this leads back into the conflict between wanting consistency and yet being efficient. Is there an argument that an officer should have more discretion to accept what seems to him to be a reasonable excuse, even if that means occasionally letting somebody off £500 when he shouldn’t?
Jim feels, personally, that in small cases HMRC should err on the side of generosity, rather than meanness, and he would hope that the review officers do have the right discretion. In any case where ‘this could fall either way’, he hopes that officers would use their discretion to give the benefit of the doubt. Because generally speaking, he is not interested in collecting £1,200 of penalties; he wants people to file their returns on time and pay the right amount of tax.
As I mentioned earlier, I’ve worked in the profession, industry and HMRC, and I am a passionate advocate for us all better understanding different points of view. What did Jim think that HMRC could learn from the profession, and what we could learn from HMRC?
While HMRC aspires to have what they call customer focus, Jim said, a key thing that it could learn from the profession is their ‘amazing client focus’. The closeness to what a client is doing in a non-tax sense adds to the richness of the service that the adviser can give, and Jim thinks HMRC can learn from that.
Jim’s wish for the profession was that it showed it cared about the tax gap as much as he does. Frankly, he said, we are all in the compliance business: we are all here to help taxpayers to comply with their obligations and get their entitlements. When HMRC is setting strategies and deploying its resources, it is living and breathing that tax gap and trying to bring it down, and he would love the private profession to show that it cares as much as HMRC does.
And my final questions to Jim: what is the one thing you are most proud of at HMRC? And if you could change one thing, what would it be?
Jim started with what he would change, and acknowledged that having worked there for 34 years I might ask why he hadn’t changed it yet. HMRC is of course a big bureaucracy, and that means that when you want to change things it happens more slowly than you would like. So the one thing he would like to change is to get slicker and faster at making and implementing HMRC’s decisions, whether they concern tax cases or the way HMRC changes its services.
And finally, Jim said that he thinks HMRC is highly professional as a tax authority. It is one of the best tax authorities in the world and many of its customers who deal with more than one tax authority tell them that it is one of the best. That means that HMRC is bringing in the maximum revenues it can for the country, but also helping the country be as competitive as it possibly can. Jim is most proud of that professionalism.
The interview took place on 26 July 2018.
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