A charm offensive from the taxman

No businessman enjoys paying tax. But over the past couple of years, complaints about the British tax regime have reached new intensity.

As other countries im­proved the competitiveness of their systems, UK tax rates – once attractive – began to look expensive. As well as criticisms of the overall tax burden, there have been vociferous complaints about the aggression and lack of proportion in the way HM Revenue & Customs went about its business.

Recently the CBI complained that HMRC was attacking “regular business procedures”, creating unacceptable uncertainty.

The Varney review has been hailed by businesses and officials as a genuine attempt to put this relationship on a new footing. Sir David Varney, the former HMRC chairman who chaired it, believes it will “fundamentally improve” the way the two sides deal with each other.

Companies that participated are optimistic that the review will herald a more mature relationship. It promises a new approach to inquiries that will resolve contentious issues efficiently and quickly. A company deemed “low risk” in tax matters is likely to be subject to an inquiry only once every three years.

The review also promises a more efficient, less confrontational approach to disputes. Senior management will take responsibility for resolving inquiries that are unsettled after 18 months.

In particular, inquiries relating to transfer pricing – which concern transactions between subsidiaries of multinationals – should be cleared up within 18 months, much faster than now.

But the most striking proposal is the introduction of a system of advance rulings. These binding rulings will enable companies to know the tax consequences of investments and corporate reconstructions. HMRC has not stipulated the size of deal that will qualify, but it is likely to affect 100 transactions a year valued at about £100m or more.

Chris Sanger, head of tax policy at Ernst & Young, said this proposal would “provide absolute certainty for businesses considering major investment in the UK as opposed to the considerable uncertainty that they have now”.

Sue Bonney, head of UK tax at KPMG, said the proposals would go a long way towards improving the UK’s competitiveness, if they could be delivered. “It is easy to underestimate how big the challenge will be to get it adopted on the ground. It will need a change in mindset.”

Difficulties of implementing the new approach are likely to be accentuated by the budget cuts and organisational change under way at HMRC.

The government’s clampdown on tax avoidance has caused resentment because it produced large amounts of highly complex legislation, introduced without consultation. Despite a reduction in the marketing of avoidance schemes, some companies are likely to continue to use tax planning aggressively, which will prompt more legislation.

There is also scepticism about HMRC’s building better relationships with business while maximising its tax take. Chas Roy-Chowdhury of the Association of Chartered Certified Accountants said: “The Revenue will have a problem squaring the government’s goal of filling the tax gap with its own charm offensive. It is in a lose-lose situation.”

Moreover, some businesses believe a more aggressive culture has taken root in the tax authority after last year’s merger of the Inland Revenue with Customs & Excise, which has traditionally taken a tougher approach to enforcement.

The Revenue does not dispute the scale of the implementation challenge. But it insists that it is serious about tackling it. According to Sir David, there is “both the desire and the commitment” to do so.

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