Why the Revenue needs Chinese walls

When Peter Mandelson bought his new flat last month, there was press comment about the stamp duty he paid. He might have taken care to keep below the £250,000 threshold. Some called on chancellor Gordon Brown to get the Revenue to investigate. The chancellor will do no such thing, and I am very glad that he will not.

The chancellor cannot get the Revenue to investigate. The Revenue is a statutory board, semi-detached from ministers. Ministers cannot tell it how to deal with individual taxpayers. This is a vital safeguard, without which the Revenue would long ago have been abused as an instrument of political favouritism and vendettas.

It is right that the integrity of our tax system is protected. But there are disadvantages. If a particularly difficult case comes before the Revenue, it cannot ask the chancellor for guidance on how to proceed. Revenue staff regularly have to make tough decisions on how to apply the law.

The problem is not that they cannot decide: they can, and they have a vast wealth of expertise and experience to draw on. The problem is that they are unelected officials who have to fill in the gaps where parliament has not given them clear guidance. They are doing that work with no political mandate.

In theory this does not matter because they do not have the final say. If you don’t like their decision, you go to court. But going to court costs time and money. In practice, the Revenue’s power to decide on the tax treatment of transactions is a weighty one.

This is demonstrated by its decision to concede the two cases of Herbert Smith v Honour and Jenners v CIR. Both were about provisions in the accounts. The taxpayers will not be complaining – they got what they wanted. I also think the Revenue made the right decision.

These cases concerned specific taxpayers, so the Revenue must have decided to concede without any input from ministers. But in conceding, the Revenue made major changes to the relationship between accounting profits and taxable profits. That is the sort of thing that ministers, accountable to parliament, should decide.

So should we have new constitutional rules governing the relationship between the Revenue and Treasury ministers? I do not think we need to be so radical. And I would not want to see the Revenue lose its independence of ministers when dealing with specific taxpayers.

But some Chinese walls might be a good idea.

The first wall would screen the officials handling individual cases from any policy decision that was not already public. Thus if ministers had been thinking of edging towards accounting profits, and becoming more generous in allowing provisions, officials handling the Herbert Smith and Jenners cases should not have known about those thoughts until there had been a press release or parliamentary statement.

The second wall would prevent ministers, and the officials giving policy advice, from knowing about individual cases unless they had already become public because of a hearing before the Special Commissioners or the courts.

There would then be no suspicion of policies being tailored to suit specific taxpayers.

There would, however, be a price to pay for building these walls. The first wall would lead one part of the Revenue to pursue in specific cases a line at odds with where policy was going. Taxpayers who were subjected to an old policy would be very annoyed if, just after settling up with the Revenue, they found that policy had changed and that change had been in the pipeline for months.

The second wall would cut off a vital source of information to policymakers. Policy changes in response to problems that have come to light in specific cases, so the sooner the policymakers find out about those problems, the better.

They also need to know how many problem cases there are, and how much money is at stake, in order to make sensible decisions.

In any case, not everyone believes that Chinese walls work. So there are no easy answers. But if press comment on Peter Mandelson’s flat gets a discussion going on the status of the Revenue, it will have done some good.

Richard Baron is deputy head of the policy unit at the Institute of Directors.

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