SUMMARY

  1.  Overall, we believe that the interests of both Government and taxpayers are best served by an understanding approach which avoids complexity and uncertainty and keeps compliance burdens to a mimimum.

  2.  The Keith Committee advocated a proper balance between protection of taxpayers and administrative needs. We endorse that and believe it is better to have a system which optimises the smooth running of relations between administrators and taxpayers and their advisers than one that causes or is perceived as causing undue rancour. Good taxpayer relations are important for tax collection and for the attractiveness of the UK as an investment location.

INTRODUCTION

  3.  The CBI is an independent, non-party political organisation funded entirely by its Members in industry and commerce. It exists primarily to voice the views of its Members to ensure that the Government of the day—and the wider community—understand both the needs of British business and the contribution it makes to the well-being of UK society.

  4.  The CBI—with a direct membership employing over four million and a trade association membership representing over six million of the workforce—is the premier organisation speaking for business in the UK.

  5.  The CBI's objective is to enhance the competitiveness of British business. The size of the taxation burden on business is a vital factor in our ability to compete in the increasingly global marketplace. Compliance burdens are an important component of the overall tax burden but they often attract less attention than they ought because of the understandable tendency of the political debate to focus on the design of policy rather than the detailed problems of implementation.

  6.  The CBI has long advocated attention to the mechanics of implementation of tax policy. As long ago as the early 1980s we sent out at length our views on the relationship between taxpayers and the Revenue Departments in our evidence to the Keith Committee on the Enforcement Powers of the Revenue Departments, and in response to its Report and subsequent Government Consultative Documents. We have since welcomed initiatives by successive governments to address some of the issues by way of the "Deregulation" and "Better Regulation" programmes and by the introduction of compliance cost assessments.

  7.  Given that VAT is a European tax based on European law, the scope for VAT simplification at the UK level is obviously limited. However, it is important that the principle of subsidiarity is adhered to so that as much flexibility is retained as possible.

 ENCOURAGING AND ENFORCING COMPLIANCE

  8.  The Department's Public Service Agreement published in December 1998 includes a specific performance target to collect the forecast UK revenue yield from indirect taxes, subject to external factors outside the department's control. A few years ago the department undershot its collection target for VAT by several billions of pounds. By way of explanation it suggested that this was in part due to increased tax avoidance activity, but no hard evidence was obtained to support this suggestion. In subsequent years where revenue yield has exceeded the target, the Department has not suggested that avoidance activity has decreased.

  9.  The original apparent shortfall has led the Department to become excessively concerned about avoidance being pursued by a minority of taxpayers, and therefore too ready to consider increasingly complex legislation which is burdensome for all businesses. In particular, the use of mini-General Anti-Avoidance Rules would create substantial uncertainty and additional compliance burdens for all taxpayers. As only a minority of taxpayers pursue agressive tax avoidance schemes, the use of mini-GAARs would be a disproportionate response. The specific anti-avoidance measures which have been introduced in areas such as VAT groups and property and construction where tax leakage was thought to be occurring are widely regarded as effective, and this view is supported by the outcome of recent court decisions in avoidance cases.

  10.  The Public Service Agreement's first objective is to secure the revenue yield from indirect taxes while minimising cost to business. This could better be achieved by seeking simplification through removal of the blocks and exemptions in the current VAT system and allowing the tax to flow through to the final consumer. This would remove many of the incentives for avoidance and allow the department's staff to focus their efforts on the shadow economy and fraud and evasion generally.

  11.  As already mentioned, one of the department's objectives is minimising cost to business. In fact, some of its activities have precisely the opposite effect. Last year the department issued a consultative document entitled "Restriction of VAT groups to fully taxable corporate bodies". The wording of the main proposal in paragraph 7 of the document managed to convey the impression that a decision had already been taken. Many traders then spent considerable time and effort making representations to show that adopting this approach would impose a substantial additional compliance burden, which would be disproportionate to the revenue raised after taking Corporation Tax relief into account. Officials subsequently admitted that because they had no reliable current data they had no idea of the potential effect of the proposal, and were looking to the consultation exercise to supply them with good quality data at taxpayers' expense.

  12.  A further consultation has recently taken place on a different proposal which would also add to the burdens on business. This is an apparently innocuous proposal to add an extra box on the VAT return to record exempt input tax. This is justified by the unsubstantiated assertion that it will provide better focus for customs officers and will benefit business. The CBI rejects the assertion that business will benefit and questions the assertion of provision of a better focus for Customs officers. A compliance cost assessment has been made which underestimates the work required to adapt accounting systems and uses totally unrealistic figures for the volume of transactions giving rise to exempt input tax and the rates of pay of the accounting and IT staff involved.

  13.  By these exercises the Department demonstrates that it is failing to meet its objective of minimising cost to business—indeed in these cases it is doing the opposite—and is not efficiently securing the revenue yield from indirect taxes.

  14.  In the meantime, there is nothing to demonstrate that the shadow economy has been tackled successfully. By definition the shadow economy concerns fringe traders, often offering services rather than goods, and is largely cash-based. It is this section of the trading community which needs maximum effort from Customs. Any significant reduction in the extent of the shadow economy would need the application of more resources before it can be achieved.

  15.  For customs duties, compliance and the shadow economy are not such major issues. However, a significant number of cases of non-compliance can be traced to misunderstandings or disputes as to the correct interpretation and application of EU law and to ignorance, especially on the part of smaller companies, as to what the law requires. The CBI has frequently drawn the Department's attention to the need for:

—  Better training for Advice Centre staff so that they can adequately and correctly answer simple questions and, just as important, identify the appropriate operational or policy teams to handle the more complex issues;

—  The need for businesses to have direct access to Centres of Operational Expertise or the appropriate policy teams in cases of complex or contentious legal or procedural issues;

—  More continuity of local Customs staff dealing with specific traders—a good understanding of the business by the local officer makes for improved compliance at less cost to both sides.

IMPACT OF NON-COMPLIANCE

  16.  The CBI has included concerns about the impact of the high excise duty regimes on the alcohol and tobacco industry in previous submissions to Government. This question raises important points about the need to consider the competitive impact of tax changes and the damage being done due to the fact that high UK taxes are encouraging a rapid growth in cross-border trading, both legal and illegal. A major concern which all sectors share is how the UK duty regimes could be made more effective.

  17.  In addition, there is significant distortion of the market place for road fuel. The policy of annual real terms increases in fuel duties—which has resulted, among other things, in duty rates and pump prices for diesel significantly higher than our near neighbours on the Continent and in Northern Ireland—has led to a situation where fuel duties are failing to meet all the criteria of an efficient tax. The Exchequer is now suffering significant leakage of revenue—£415 million per annum from Great Britain, according to the Freight Transport Association, and possible £150 million per annum from Northern Ireland. This is due both to the legal filling of tanks across our international borders and to fuel smuggling.

  18.  In the case of Northern Ireland, for example, this has led to a marked downturn in legitimate trade in the affected areas, with illegal operations being set up to dispense fuels at prices which clearly indicate that UK excise duty has not been paid. Although Customs is attempting to combat the growing levels of illegal trade, legitimate traders believe that there is unlikely to be any significant reduction in illegal activity whilst rate differentials remain as high as they are. Legitimate traders are increasingly having to consider whether they should pull out of the affected areas as receipts decline.

CLOSER WORKING AND MERGER WITH INLAND REVENUE

  19.  Before considering the potential for closer working and merger with the Inland Revenue it is necessary to consider whether Customs should improve its own working practices. A trade can have a problem handled by at least three parts of Customs & Excise in certain circumstances. Firstly there is the local office which handles the trader on a regular basis. Secondly there can be a Centre of Professional Expertise which wishes to pronounce on specific issues. Finally there are specialist policy sections in the head office.

  20.  The external perception is that there is no clear line of authority if the three factions cannot agree. The view of business is that the head office policy makers should be able to ensure an even interpretation and treatment by being the final internal decision-maker. In practice that does not happen. There are also instances where it has taken months to get a detailed response on points from the specialist policy section in head office. This can affect trade compliance, especially if the submission of a correct tax return depends upon resolution of a detailed technical point.

  21.  The Centres of Professional Expertise need to be seen to add real value to the tax collection process. Unfortunately they have on occasions failed in this objective, even in one instance reported to us going so far as to deny measurement science without having taken any scientific advice.

  22.  As an example of inconsistent application of policy, one partly exempt business was able to agree with its local office the use of a fixed percentage recovery rate for input VAT on expenses, but another business seeking the same simplification from a different office was denied it on the grounds that Policy Division do not favour this approach.

  23.  Moving to the specific question posed by the Sub-committee there may well be areas in which there is potential for closer working between Customs & Excise and the Revenue. For example, in the customs duty area the common interest in international transfer pricing is the most obvious opportunity for closer co-operation. There is no obvious disadvantage to business and indeed it could be beneficial if it involves only one set of procedures to be followed instead of two.

  24.  However the skills of the two departments are not totally similar and are not easily transferable. The focus of the Revenue is largely on taxing income, profit and gains whereas Customs focus on individual transactions or even, when handling import and excise duties, levying tax at a specific location without the goods involved necessarily being subject to a transaction.

  25.  It may be relevant to consider how trade operates, as business will usually be driven to operate in the most effective manner to maximise profit. Small and medium sized firms will usually not employ specialist tax staff, but they will rely upon professional advice. Professional firms of any size will run separate corporate tax, VAT and customs duty department. Naturally all departments will co-operate when advisisng clients but will nevertheless be independent entities within the firms with a very limited transfer of staff from one department to another. Each department will usually be separately managed.

  26.  Larger traders will also adopt a similar method of operating although usually all tax specialisms will be managed within a single department.

  27.  This perhaps points the way for the two revenue departments. The current experiment of closer co-operation between the departments is interesting but probably needs greater focus, which can only be provided by merging the top management of the two departments. However, because of the different nature of the tax bases and rules such co-operation or merger can only be of limited extent. Customs duties are trade policy measures, not taxes. Since these are rapidly declining in significance, the main thrust of Customs' freight activity is increasingly concerned with controls and statistics rather than the collection of duty. It might make more sense for Customs' import/export control activities and its residual responsibilities for duties to be transferred to the Department of Trade and Industry.

  28.  At a more detailed level it is possible to see the tax collection mechanisms of the two departments being merged and possibly also the legal department, at least in basic matters such as winding up procedures.

OTHER ISSUES

  29.  Customs has made much of its "right tax, right time" slogan in recent years. Whilst it has been preaching this message it has been aware that its own computer system is unable to calculate correctly interest due from traders on late payment of VAT. In fact the system is seriously deficient as it can demand too much interest from them. This has drawn comments from VAT and Duty Tribunals, but the Department does not seem to have a plan for compensating those who have overpaid, or even advertising its inability to calculate correctly. By allowing this situation to continue the Department is not fostering a climate that will promote good taxpayer relations.

  30.  The consultation on the proposed climate change levy has also raised a number of concerns. First, the consultation has been limited to details concerning the implementation of the levy. However, the CBI and others have expressed serious reservations about some of the fundamental principles of the levy, which had already been set by the Treasury, and which we believe will significantly reduce the ability of the levy to deliver its aims relating to competitiveness and the environment. To some extent the fault does not lie with Customs, but the process has not facilitated debate about how best to fashion the levy.

  31.  Second, there has been some frustration at the apparent inability of the Department fully to appreciate that the aims of the levy are primarily environmental and not fiscal. For example, the CBI and others have argued that the levy should be shown separately on invoices. Officials respond that such a requirement would represent a departure from convention since no similar requirement exists for other taxes, and so have not been supportive of the proposal. However, the CBI believes that without separate billing, there will be less incentive to business users of energy to improve their efficiency, which is the central aim of the levy.

October 1999