Varney review: let’s be friends

tax services cover

Even in the heat of business, collaboration happens. Sworn enemies will put
aside rivalries to work together on projects, putting up Chinese walls in every
other sense. But working alongside the tax authorities never seems to come
naturally to business.

A series of tax battles between UK companies and HM Revenue & Customs has
seen relationships turn frosty. But there are signs of a thaw ahead. In the
final throes of Sir David Varney’s time as chairman of HMRC, he undertook a
review of HMRC’s relationship with the UK’s biggest corporations. On top of
improving its relationship with corporates, the tax body’s needs to target tax
avoidance more effectively, as its resources are increasingly stretched by
efficiency drives.

The review, which began last September and was completed in November, has
been accepted in its entirety by chancellor Gordon Brown.

Sir David called for a fundamental, risk driven, change in the relationship
between HMRC and business. Processes will be put in place to improve dialogue
between the parties, bring about quicker resolution of differences, and provide
more guidance on companies’ tax treatment.

It sounds good in principle. But concerns have already been voiced about
whether HMRC can meet the ambitious targets over an 18-month timeframe.

Others have questioned why HMRC is focusing on the top end of the tree. Smith
&Williamson head of tax Richard Mannion says the review was ‘music to his
ears’ until he realised that the changes mooted were really intended for the
biggest of big businesses.

‘It all sounds like a good deal but it’s not really for our clients, who will
end up dealing with a call centre,’ Mannion says. His only comfort is that he
believes the closer contact HMRC intends for the top companies will eventually
filter down to the vast majority of businesses.

Depending on your point of view, HMRC will use its new risk-based approach to
target businesses that it deems to be at high risk of tax avoidance. Categories
to define risk could include the tax complexity of the sector the business
operates in, and the company’s attitude to compliance.

Despite what sounds like a combative attitude, in keeping with its
reputation, HMRC insists it will look to address issues quickly, while providing
support to help lower the risk for specific companies.

‘If you’re tax-compliant, then you’re low risk,’ says KPMG’s head of tax Sue
Bonney. ‘But it’s not a very sophisticated assessment at the moment. If you’re
assessing a multinational, then you’ll require specific measures, and the proof
of the pudding is in the eating. There needs to be a cultural mind-shift.’

She warns that, as with many of HMRC’s plans, it is not yet well formed. The
plans include a key tranche of the Varney review: certainty.

Sir David recommended a system where business received earlier certainty
about the tax treatment of transactions, including advance rulings and the
extension of tax clearances, with HMRC giving binding views on significant
issues within 28 days. Extending clearances in particular will be
resource-intensive, say advisers.

Heather Self, tax partner at Grant Thornton, says extending clearances is‘a
step forward’, but, like Bonney, she questioned the resource-intensive nature of
providing clearance.

‘Will they get overwhelmed?’ Self asks. Another of Sir David recommendations
is to push HMRC to resolve contentious tax issues within 18 months.

Litigation is uncertain and expensive, Self says, and trying to resolve
issues earlier will require HMRC taking amore commercial approach to the

‘They’ve often said they won’t compromise,’ she says. ‘But open and
constructive discussion was needed.’

The focus on how these and other aspects of the review will be accomplished
during the next 12 to 18 months lay heavily on the large business advisory
board, which consists of the great and good of the business and tax communities
(see below).

Formed at the turn of the year, the board will oversee the delivery of the
review, and have responsibility for individual proposals passed down to HMRC
directors. The ability to push the review down through the department is seen as
absolutely crucial. Self believes the seeds of change have already been sown,
with business already benefiting to some extent in recent months. ‘We’ve already
noticed improvements on some consultations,’ she says.

Self cites the controversial introduction of a tax penalty regime that is
more structured and less open to interpretation, affecting both personal and
corporate tax affairs. While many parties will not get what they wanted,
consultation on that topic has been strong, which Self believes was a direct
result of the beginning of Sir David’s review.

With the review rolling out over the next 18 months, measuring its success
will be difficult. The Treasury has not suggested an increased yield from the
relationship-building exercise, which would be a monumental task with fewer
resources, advisers believe.

On top of those reasons for the review, measuring its effect on the lure of
the UK as a tax-friendly place for business will probably only be based on
sentiment. Self concludes: ‘The review is in response to increasing concerns
that relations were becoming more confrontational. They’ve tried to listen and
make some progress, but lots of what they have to do is soft and nebulous. It’s
hard to measure behavioural change.

Can they deliver consistently with the resources they have?’

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Paul Gray, HMRC chairman

Finally ensconced in the permanent role of HM Revenue &Customs chairman,
ironically vacated by Sir David Varney, Gray has little time to decide on office
decoration as he is faced with a rapidly changing department. Revenue and
Customs have barely settled down together before chancellor Gordon Brown insists
on tens of thousands of job cuts and efficiency savings at 100 Parliament
Street. Well-respected and thought of as reasonable, Gray will still find the
buck stops with him if the Public Accounts Committee decides to slate his
performance. Being more choosy about litigation against corporates should
ultimately prove efficient if relations between HMRC and business improves, but
only time will tell.

Dave Hartnett, HMRC director general

Effectively Gray’s right-hand man, Hartnett is the public face of HMRC’s
attempts to crack down on tax avoidance. With responsibility for the business
customer unit and large business service, he will be the first to let the world
know if he feels corporates are playing around under the new regime. If things
are going well, Hartnett is just as likely to talk about that. On a day-to-day
basis, Hartnett’s business customer unit will attempt to tie all the review’s
recommendations together.

Melanie Dawes, HMRC director, large business service

After 15 years in the Treasury, Dawes has taken over the large business hot
seat left by David Garlick. Her appointment was flagged as ‘surprising to some’,
and could be a sign that the Treasury is looking for someone to deal with
business sensitively. Garlick had spent some time putting together risk profiles
of businesses, which will be used as HMRC concentrates on high tax-risk
enterprises. Let’s hope he did his sums right.
In a recent business tax forum Dawes revealed a steely side, saying that HMRC
staff’s buy-in to the proposed changes to culture and processes was
‘non-negotiable’. She added that her team was committed to change, and this
would flow down to client relationship managers, who will have a key role in
communicating with businesses in the future.

Peter Wharrad, HMRC (large business advisory board acting

An unfamiliar name, but one cited by industry experts as key over the next 18
months of the review’s implementation. Wharrad is sitting on the large business
advisory board as secretariat and is also HMRC’s new business customer unit
assistant director. He has vast experience in corporate taxation, including a
spell at Vodafone. In other words, he has worked on both sides of the fence. He
is in charge of the implementation process for the review, and his interaction
with the FDs overlooking HMRC’s efforts will be interesting to say the least.

Jon Symonds, AstraZeneca FD

Symonds is no stranger to sticking up for major business over regulation,
having been the unofficial spokesman for FDs over the implementation of
international financial reporting standards as chairman of the Hundred Group of
Finance Directors. He joins other heavyweights, including Douglas Flint and Ken
Lever the FD’s of HSBC and Tomkins, in representing top businesses’ needs from
the review.

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