The parameters of tax in the UK

January 9, 2013

Dave Hartnett, the Permanent Secretary for Tax at HM Revenue and Customs until his July 2012 retirement, speaks about the key shifts in UK tax policy.

T Magazine: Looking back over the past decade, what would you say have been the most important changes in tax policy?

Dave Hartnett: I think the introduction of tax disclosure rules in the UK in 2004 has proved very significant. The new tax disclosure rules enabled HMRC to stop tax avoidance schemes and arrangements involving billions of pounds.

The introduction of the senior accounting officer (SAO) rules was another significant change. These rules make the SAO in a large company responsible for its tax computations. I think many professionals felt these rules were very oppressive when they were introduced. But today, I would say that there are very few tax directors in business who don’t have a good word to say about them.

The reform of the controlled foreign companies (CFC) legislation has also been an important change in tax policy. This legislation and, to an extent, the way HMRC applied it, was a real disincentive to some multinational businesses. Over the past year or so, the changes in the CFC legislation have given companies confidence that the UK is serious about being competitive.

Finally, I think the decision to reduce the top personal tax rate to 45% was an important one. The introduction of the 50% rate was a huge disincentive to some individuals and many left the country as a result. The lower rate will encourage many wealth creators who have left the UK to return.

Many tax administrations around the world are now paying unprecedented attention to the tax gap – the difference between a country’s actual tax receipts and what it should receive. How important is the tax gap?

The tax gap is very important. Around the world, there seem to be two ways in which tax administrations think about the tax gap. Some, and here I would include the UK and the US, think it’s really important to measure the tax gap.

Other countries, and Australia is a good example here, do not want to measure the tax gap because they have concerns that it is just too crude a measure, and that politicians might use that measure as a stick to beat the tax administration.

I’ve always been a fan of tax gap measurement because it gives an insight, not only into the performance of the tax administration, but also into how it can focus resources to be more effective. But it’s important to bear in mind that there is not a lot of precision here.

Increasingly, tax administrations are using risk management to manage and prioritize their casework. How well would you say the UK has performed on this front?

The tax administration in the UK is much more focused on larger tax risks. If you look at what the Large Business Service has managed to do, and particularly in the past year or two, it has reduced by a very significant degree the number of small enquiries it has with big business and concentrated its resources on the important stuff that really matters.

In a recent interview, Jeffrey Owens [the former Director of the Center for Tax Policy and Administration at the OECD] noted that tax commissioners are talking about moving from cooperation to coordination. How well do you think tax authorities are doing in terms of cooperation and coordination?

There is a huge benefit in tax administrations cooperating with each other. Coordination between tax administrations is much more in its infancy. The OECD study on joint audits viewed them as a really effective compliance tool.

The UK and Dutch revenue authorities, for example, have done some joint audits where the two tax administrations worked very closely together, in some cases with one authority effectively carrying out the work for both with the full involvement of the corporate.

Over recent years, tax has clearly become a more important boardroom question, as boards and audit committees have taken a firmer oversight of tax issues. Have you felt this transition happening from within HMRC?

For most large corporates in the UK, and for many mid-sized ones, tax is now firmly on the boardroom agenda. The tax director is now expected to know a great deal more about the business: how it’s run.

And the tax director and the CFO are expected to be able to brief the board on major tax issues. In many corporates today, the CFO knows that, if there is a big tax surprise, they may not be as secure in their job as perhaps they once thought.

More than 20 multinationals have recently announced plans to move their regional or global headquarters to the UK over the next year. How would you assess the competitiveness of the UK’s tax regime?

Clearly, there are tax policy factors that have helped to improve the UK’s competitiveness, such as reducing the headline rate of corporate tax or the changes to the CFC rules. Companies want a tax administration that can be quite commercial in its outlook and that focuses on the things that really matter, rather than the trivial issues. I think that the UK tax administration scores a lot higher on this now.

The fact that companies can engage with the UK tax administration is another strength. I don’t mean that companies get a soft touch, but rather that they can talk through important tax issues.

Looking forward, what other important developments do you see internationally in terms of tax policy and administration?

I think one of the biggest changes we will see is how we address risks posed by low tax and secrecy jurisdictions. The UK was the first country to approach Switzerland to see whether it could negotiate an agreement and, in 2011, the Swiss Government agreed to tax undeclared Swiss bank accounts by British taxpayers.

Now, there are three agreements and a number of others under consideration. I think the approach is changing, with countries more likely to work together. So, instead of one country doing it on its own, we will perhaps see five countries working together.

About Dave Hartnett

Since first joining HMRC in 1976, Hartnett has held a diverse range of tax positions. In 2004, he became HMRC’s Director General for Customer Contact and Compliance Strategy and then Director General for Business. Most recently, he was the Permanent Secretary for Tax, and served as a member of HRMC’s formal governing board from its creation in 2005 until his retirement.

About HM Treasury

Located at 1 Horse Guards Road in Whitehall, at the center of government, the Treasury is at the core of the UK’s efforts to restore its public finances. One of the Treasury’s key units in this regard is Her Majesty’s Revenue & Customs (HMRC), employing about 80,000 people to handle the £450b in taxes and duties it collects each year.

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