One of the many quips in the Chancellor’s entertaining Budget presentation concerned the ‘spend to save’ initiative when he said: ‘In short, we intend to do more about companies being “economical with their tax“.’
Whether large corporates will see the funny side of this initiative which sees an immediate increase of 1,000 inspectors and other staff engaged in investigation work, more than double the number currently employed in the Special Compliance Office, is a moot point.
But first, what does this initiative mean?
The Inland Revenue tells us that it will raise an additional u2bn over the next three years by inquiry into the tax liabilities of large companies, investigating international transactions, dealing with tax avoidance and suspected serious fraud, and increased measures on the Black Economy.
The Treasury press release places the emphasis on corporate technical review and avoidance measures. The implication that serious fraud is prevalent in the large corporates is disturbing and, in my experience, unfounded, while the juxtaposition of technical review and avoidance with fraud suggests a further attempt to blur the distinction between legal tax avoidance measures and illegal tax evasion.
In the past, this distinction has been generally accepted, even though the Government may have regarded tax avoidance as undesirable. But now we seem to have a renewed attack on legitimate tax planning. With this comes the danger of bureaucratic discretion replacing tax law.
The trigger for the Chancellor’s actions seems to be unexpectedly low tax receipts, particularly VAT, where tax avoidance appears to have been made the scapegoat for consistent undershooting of revenue estimates over a number of years.
The evidence here is contradictory. On the corporation tax side, large corporates can be very productive; the Report of the Board of Inland Revenue for 1995 referred to one single large adjustment of u1.6bn. On the other hand, the Special Compliance Office, the elite investigating agency, raised less tax in 1996 than it did in 1992.
The aggregate result of all Inland Revenue investigation activity has remained roughly constant at u1.7bn since 1992, which suggests that it will prove very difficult to produce an additional 40% per year over the next three years, particularly as the new initiative will take time to get rolling. Staff will have to be recruited and trained and large investigations take time to be concluded.
However, we cannot underestimate the seriousness of the proposed approach.
The initiative has been given a very high profile, there is considerable investment by the Inland Revenue (u190m), a very specific target of u2bn over the next three years. The final confirmation, if it were needed, is that it intends to recruit more accountants.
The same issues arise on the Customs & Excise component of the ‘spend to save’ proposals. Its press releases last week bracketed criminal gangs with tax planning and avoidance, and suggested that tax avoidance creates unfair or illegal competition between corporates.
The key point is that VAT is now a mature tax. In reality, VAT revenues have fallen short of targets not primarily because of tax planning but largely because VAT is coming of age. Traders have become more knowledgeable in taking advantage of reliefs to which they are entitled and robust in not automatically accepting Customs’ interpretation of legislation or the conformance of UK legislation with the EU directives that it implements.
It may even be argued that the penalty regime introduced in 1985 to encourage compliance has focused traders’ minds on the issue including the possibility that they are overpaying.
There is no question that the revenue departments have a clear obligation to ensure that the right amount of tax is paid and ensure compliance by all taxpayers. My concern with the ‘spend to save’ initiative is that it will create disappointment and frustration. Disappointment for the Government when its revenue raising targets are not met, despite the extra resources applied; frustration for corporate taxpayers who will suffer the cost and disruption of additional examination of already well perused tax returns.
The most likely corporate targets of ‘spend to save’ will be large companies with low effective rates of tax, companies with considerable cross border activity and companies thought to pursue adventurous tax planning.
Our experience suggests that these and other companies must expect more frequent and intrusive Revenue and Customs investigations which will go beyond debate on technical merits to detailed review of the execution of transactions and the integrity of the information supplied in their tax returns.
In this climate, companies should ensure that they are well prepared in advance. A thorough review now of the principles underlying their tax returns and of the information systems supplying the constituent information will best prepare them for their forthcoming examination.
This initiative will increase still further the burden of tax compliance which is already widely considered to be excessive. It is inevitable with investigation activity that not all lines of inquiry will prove fruitful and many corporates may find that in order to prove that they have not been ‘economical with their tax’ they will have to ‘spend to save’.
Ian Barlow is UK head of tax at KPMG.