Since getting married I say this less and less, but I know I’ll regret this in the morning. Nevertheless, here’s my exchange with a PhD student who wrote to me on the Direct Recovery of Debts. I’ve called him Adrian.

—–Original Message—–
From: [Adrian]
Sent: 11 July 2014 08:51
To: Jolyon Maugham
Subject: Some questions about Wednesday evening

Dear Jolyon,

I attended your discussion at the RSA on Wednesday evening. I am interested in the position you put forward as I am currently working on a PhD in Tax Policy and Jurisprudence at [DELETED].

If I understood your point correctly, you had identified a problem, namely a cost to HMRC in the recovery of “undisputed” debts. I use quotation marks as there appears to be some dispute over whether, in fact those debts are indeed disputed. Your put to the audience several times that if not direct access to bank accounts then what alternative?

In addition, you were of the view that the real question was not whether the administration ought to be able to take direct action against individuals in respect to the seizing of assets without necessary recourse to the courts, but rather, are there sufficient safeguards. You also suggested that the condoc implied some sort of court procedure in granting consent for this process.

Dealing with each of these points in turn.

1. Very often in practice, it appears that there are many instances of HMRC acting in error. The court procedure would, if applied correctly, eliminate or at least mitigate errors of HMRC prior to any attempt to seize assets. Whilst there can be little doubt that this procedure is more expensive to HMRC, isn’t the point of the court procedure to protect individuals from HMRC error making?

If it turns out that HMRC are correct in their assessment, those costs are recoverable through the county court procedure and therefore the costs are recovered or mitigated. I don’t believe you answered Keith Gordon’s assertion that it is only when HMRC make errors that the costs consequences are incurred, but if HMRC incur costs in those instances, it is correct that the taxpayer is protected.

2. Safeguards within the administration of government can only really go so far. They are applied by the administration themselves and therefore subject to a degree of assessment which, by its very nature, is coloured by the relationship between the assessor and their paymasters. My specific research looks at the GAAR, and in the case of the Panel, there are some real questions over the degree of independence given the direct recruitment of those individuals by HMRC itself.

Isn’t it the case that our legal system, providing an independent forum for the resolution of disputes between individuals and government provides the best possible safeguard against error or bias judgement? I wondered why you believed that an individual or group of individuals whose livelihoods or recruitment depended on one side of the dispute could possibly provide the same sort of protection than a court?

3. My final point relates to the cost or efficiency of solving problems.
There can be little doubt that direct access to individuals bank accounts would invariable reduce the perceived “gap” between the amounts of money HMRC believe they are owed and the sums of money they are able to recover. It does seem, however, that there are many ways in which the “problem” can be resolved but all of them must operate to preserve basic rights and protect the system of law.

The real point of the evening was to assess whether HMRC were going too far, not whether there was a problem – which it seems to me was widely acknowledged. There are many problems in society that could be addressed by a more interventionist government taking more aggressive steps to eliminate its perceived ills for society. We could, for example execute criminals because prison numbers are too high, we could engage in euthanasia because the elderly are expensive and a drain on NHS resources. Isn’t the whole point of discussions such as Wednesday to debate the holding back gray men in suits from exercising too much power, using the apparatus of the state, threatening people with seizure of property or imprisonment?

I am seriously concerned that the powers currently being proposed for HMRC, in addition to the ones they already have will erode basic freedoms within our country. I don’t believe that, for example the GAAR, permits anything other than a discretion for the administration to ignore Parliament – albeit they would need to convince a court of such a course of action (probably the reason why there are no cases at the moment).

I wondered how much faith you really had in the arguments you were putting forward when considering all that stands between us and creeping totalitarianism is the rule of law and a legal system that has until now been intolerant to demands from increasing discretionary power?

Best,

[Adrian]

—–Original Message—–
From: Jolyon Maugham
Sent: 11 July 2014 09:41
To: [Adrian]
Subject: RE: Some questions about Wednesday evening

Hi [Adrian],

It’s absolutely my view that DRD is – with one or two modest adjustments to safeguards – a policy that we will look back on a decade hence with a degree of bafflement at the views many of us held about it on its proposal. I don’t accept much of your characterisation of DRD or how it operates but I guess there’s a prior difference between us. You seem to see the world in terms of absolutes and I, absolutely, see it in terms of policy choices.

I am not quite sure what you are suggesting about my views when you talk of executing prisoners to ease overcrowding or killing the elderly to ease pressure on the NHS. But to close your eyes to the effects on the NHS of narrowing the £4.4bn tax gap (of monies lost to the fisc through non-payment of tax debts) seems to me a rather odd way of looking at the world.

Jolyon

Jim Harra, HMRC’s Director General of Business Tax, speaking last night before what one couldn’t politely call a lynch mob, at the joint CIOT/IFS event ‘HMRC Powers – Going too Far?’ observed:

Where we think it’s proper and effective that taxpayer information be disclosed we seek powers to do so.

The language of “proper” and “effective” is, of course, the studied language of a career civil servant. But that fact doesn’t – and nor do I imagine it was intended to – obscure Jim’s recognition of the need for HMRC to engage in a meaningful way with the public it serves.

Organisationally, HMRC get this. Kind of. That Jim Harra was prepared to appear last night to defend the (bafflingly unpopular) Direct Recovery of Debt provisions demonstrates some recognition that Public Engagement is a Thing That Must Be Done. Like Health & Safety. But as to whether it understands what real public engagement looks like on the ground? Of that I am less sure.

We will all remember Dave Hartnett’s disastrous appearances before the Public Accounts Committee and the damaging allegations that he “stonewalled” in such a way as to thwart the PAC’s legitimate interest in whether HMRC was doing ‘sweetheart’ deals with Goldman Sachs. However, perhaps a clearer illustration of its lack of clarity of thought can be found in the Panorama “taxposé” (a word borrowed with thanks from Tim Montgomerie) of Bernie Ecclestone (still available on iPlayer if anyone wants to watch it).

Panorama’s thesis was that Bernie had a $2 billion tax liability – but HMRC had accepted only £10m in settlement of it. And the notion that Bernie had a $2bn liability was a serious one: it was supported by his own evidence, under oath, suggesting he had been told by his advisers that he had such a liability.

So Panorama had serious grounds for suggesting a loss of tax to the public purse of $1.98bn. That’s a big sum: about a quarter of all monies lost to avoidance last year, according to HMRC calculations; more than twice the amount of tax the subject of the Liberty scheme, which has occupied multiple pages of The Times over successive days; more than ten times the projected yield from the direct recovery of debt provisions (the subject of yesterday’s debate); and more than a hundred times the value of the interest wrongly waived by Hartnett in Goldman Sach’s favour. In other words, a sum of a size to be a matter of enormous public interest. And such was reflected in the story being wallpapered across newstands throughout the UK – and the rest of the world.

What did HMRC do in the face of this public interest? Did they act to assuage public fears of an enormous tax loss? They did not. They issued a short press release which stated:

We do not discuss the confidential tax affairs of identifiable individuals or businesses.

The settlement of all disputes is governed by HMRC’s published litigation and settlement strategy, which ensures that we only settle for the tax that is owed and which would otherwise be achieved through litigation.

The way in which HMRC settles and assures tax disputes has been completely overhauled in recent years, making the process more transparent. The effectiveness and propriety of such settlements is overseen by a Tax Assurance Commissioner, who publishes an annual report covering all large settlement cases.

Move on folks, there’s nothing to see here. You can trust us. Even if we have every reason to tell you that.

That HMRC should have done more is beyond serious argument. But could they? Or is there some statutory gag smothering their ability to engage in public debate?

These questions were the subject of a recent Judicial Review action brought by Ingenious Media Holdings and Patrick McKenna against HMRC in respect of an interview given by Mr Hartnett to the journalist who’s been making all the running on tax avoidance matters since, well, forever: Alexi Mostrous of The Times. In that action, the claimants sought to challenge as unlawful disclosures made in an ‘off-the-record’ briefing Mr Hartnett had given to Mr Mostrous in which the former had suggested Mr McKenna was involved in putting together “scams for scumbags”.

The statutory gag in question – one which the claimants were contending Mr Hartnett had unlawfully spat out – is to be found in the Commissioners for Revenue and Customs Act 2005 at section 18 which provides:

(1) Revenue and Customs officials may not disclose information which is held by the Revenue and Customs in connection with a function of the Revenue and Customs.

(2) But subsection (1) does not apply to a disclosure –

(a) which –

(i) is made for the purposes of a function of the Revenue and Customs, and

(ii) does not contravene any restriction imposed by the Commissioners …”

This is not the place for a detailed analysis of what that provision means. All I need do is note the words of Mr Justice Philip Sales. He observed:

In general, it is legitimate for HMRC to seek to maintain good and co-operative relations with the press. The efficient and effective collection of tax which is due is a matter of obvious public interest and concern. Coverage in the press about such matters is vital as a way of informing public debate about them, which is strongly in the public interest in a well-functioning democracy. HMRC have limited resources to devote to the many aspects of their tax collection work, and it is legitimate and appropriate for them to seek to maintain relations with the press and through them with the public to inform public debate about the tax regime and the use of HMRC’s resources. It is also relevant to the exercise of HMRC’s functions to provide proper and accurate information to correct mis-apprehensions or captious criticism regarding the exercise of their functions (such as any misplaced suggestion that they had engaged in unduly lenient “cosy deals” with certain taxpayers), in order to maintain public confidence in the tax system. If such confidence were undermined, the efficient collection of taxes could be jeopardised, as disaffected taxpayers might withhold co-operation from the tax authorities. These considerations provided good objective grounds for Mr Hartnett’s decision to participate in the briefing and to seek to foster the spirit of co-operation with the journalists to which I have referred.

Could this reasoning apply to Bernie’s case? Might HMRC have responded to the suggestion made by Bernie on the day of the Panorama interview that he had not, after all, settled his tax bill? Could HMRC have prayed in aid the damage that would otherwise be done to public confidence in the administration of the tax system and given some assurance that they would look again at any deal done with Bernie?

The answers to these questions, I think, are yes. A court would not have criticised HMRC for engaging in a “proper” and “effective” way with a story run by the nation’s public service broadcaster that raised a serious suspicion of a massive loss of tax.

The rise of tax to the top of the political agenda; the public demand in times of hardship for everyone to pay their share; and the suspicion of two tax systems – one for the wealthy with access to the best technical minds and one for the rest who must with their bills make up the tax underpaid by the wealthy: these things demand a closer and more responsive public engagement from HMRC.

[The following was my contribution to the ICAEW’s Wyman Debate on the Direct Recovery of Debts]

We mostly remember Anthony Burgess for The Clockwork Orange. But his best work of fiction – if you exclude his autobiography – is Earthly Powers. It begins:

“It was the afternoon of my eighty-first birthday, and I was in bed with my catamite when Ali announced that the archbishop had come to see me.”

Several paragraphs later he says:

“I retired twelve years ago from the profession of novelist. Nevertheless you will be constrained to consider… that I have lost none of my old cunning in the contrivance of what is known as an arresting opening.”

I begin with that not because I want to show off my knowledge of English literature (or not just because of that) but because I too have an arresting opening.

It’s this. Most of the arguments against DRD boil down on analysis to: it’s a good policy and it should be easier to collect underpaid tax but HMRC are so hopeless that they can’t be trusted with it.

I propose to begin by looking at the ‘so hopeless’ issue, then at whether it’s a policy worth pursuing, then whether the safeguards are adequate and finally whether there’s some important constitutional issue engaged.

Are HMRC so hopeless that they can’t be trusted with DRD?

Let’s look at the data.

In 2012/13 some 75% of agents (up from 65% three years previously) were overall satisfied with HMRC. For SMEs the equivalent figure is 85% (and has been for the last five years). For individuals and personal tax it’s 75% (and again it’s broadly static).

Given the business HMRC is in – that business is not handing out sweeties to children, it is forcibly extracting money from you (a kind of ‘fiscal dentistry’) – these are pretty respectable numbers.

You might also be interested in what the Ombudsman has to say. I was. She received 1,200 odd complaints about HMRC in 2012. But she only investigated 13 (and upheld 57% of those). Not quite sure what you can read into those figures other than that the Ombudsman doesn’t investigate many complaints.

Even leaving aside the numbers and approaching the matter as one of principle, we don’t say – because social workers sometimes fail to pick up cases of neglect we shouldn’t have social workers. What we do say is – social workers exist for a good reason, they do an awful lot of good, and they sometimes get stuff wrong. So we should put in place safeguards to ensure they get stuff wrong as infrequently as possible.

So I say the starting point is, could these measures do real good? If they can, then the debate should be about the safeguards.

Could these measures do real good?

I begin by pointing out that these measures only concern tax which is due, which is payable and which the taxpayer hasn’t paid. Tax we need to provide public services. Oh, and service our enormous national debt.

Some £48bn a year has to be pursued from can’t pay/won’t pay taxpayers. That’s a huge number: about 10% of all the tax that’s collected.

According to the latest Tax Gap calculations some £4.4bn is lost each year through non-payment. That’s more than the figure for avoidance – which is the only thing we ever talk about. Obviously a lot of that £4.4 is lost through insolvency – but if HMRC were as aggressive as commercial creditors you would expect that £4.4bn figure to reduce significantly.

Of those who don’t pay over 20% have in excess of £50k in their bank accounts. They are likely just taking advantage of the fact that HMRC can (in effect) be played as a cheap and accommodative overdraft facility. They shouldn’t.

The yield from DRD is expected to be £90m a year. And the costs of it are £160k a year – materially, nothing. So it’s an incredibly efficient policy.

It’s also a much more efficient way for taxpayers to pay (compared with the alternative – distraint). Once a taxpayer’s £500 Plasma is seized, transported, valued and auctioned for its second hand price, he’s unlikely to realise much from it. Assuming you’d get £50 for it, after costs you’d need to distraint 1.8m Plasmas a year to generate a yield of £90m). For any economists out there, that’s assuming completely inelastic demand for second hand Plasmas.

Those are the reasons I think it’s a good policy. Now let’s look at the safeguards.
Are the safeguards adequate?

As proposed, you’ve got two sets of safeguards – ‘before the money is taken’ safeguards and ‘after the money is taken’ safeguards.

The main ‘before’ safeguards are these:

• A taxpayer will have been contacted a minimum of four times about his tax debt (HMRC say nine times on average).
• The measures will only be available where in excess of £1,000 of tax is due and unpaid.
• The measures will never be utilised in such a way as to leave a taxpayer will less than £5,000 in his bank accounts.
• Regard will always be had to his regular pattern of expenditure over the previous 12 month period in considering whether taking the money would cause hardship.

The main ‘after’ safeguards are:

• for a period of 14 calendar days from the date of application of the measures, HMRC will not actually be given access to the monies. Instead, during that period, the monies will, in effect, be blocked and the taxpayer (or the other joint account holder) will be able to make representations to the effect that either a transfer of the money to HMRC would cause hardship or the tax debt is not due. If those representations are not accepted, the monies will be transferred to HMRC.
• If the taxpayer still contends that the monies ought not to have been transferred (his representations having been rejected by HMRC) he can judicially review HMRC’s actions; he can appeal to the independent Adjudicator; and, with the support of his MP, he has a further right of ‘appeal’ against the decision of the Adjudicator to the Parliamentary Ombudsman.

They are not perfect but they’re not bad.

Finally, is it a step change?

If, tomorrow, HMRC issue a closure notice amending my tax return I have 30 days within which to pay any excess tax due or to appeal. If I appeal and satisfy HMRC or the Tribunal that I have reasonable grounds for my appeal, I don’t have to pay the tax pending the outcome at first instance. If I don’t appeal, or I don’t satisfy the Tribunal then I have a tax debt to which these measures can apply.

What happens at the moment if I don’t cough up? The Collector can, without court supervision, demand the tax and, if I don’t pay it, can exercise distraint. He can take my Plasma. So I’m afraid I just don’t understand the argument that there is some major constitutional issue at stake.

Jolyon Maugham
2 July 2014

Devereux Chambers