Merger faces culture clash

‘This merger has been on and off for the last 200 years,’ said Johnvenue have yet to be overcome. Whiting, head of tax at Price Waterhouse, offering a much-needed perspective on this latest bout of merger fever.

Sure, the government has commissioned a paper on the potential for a unified Revenue and Customs & Excise. Sure, one minister – Dawn Primarolo – has been put in charge of both departments. And it is widely acknowledged that the chancellor would like to reform the tax collection and benefit distribution businesses. But in practical terms there have always been a number of major obstacles to a merger, and they’re not going to disappear just because Gordon Brown wants them to.

That is not to say that a merger is not a popular idea. Ian Barlow, head of tax at KPMG, spoke for many senior tax advisers when he said: ‘This is definitely worth looking at. Administering taxes is unproductive, anything we can do to improve the system is worthwhile. Especially if it takes the burden off the individual or the business.’ The City has long protested that the separation of income and sales taxes leads to duplication and poor co-ordination.

But the same people who commend the theory behind a merger also see huge obstacles in practice. Most fundamentally perhaps, they point to the fact that the two departments have very different roles and cultures. The Inland Revenue looks at profits and wages, generally on an annual basis, whereas Customs & Excise is an enforcement agency, collecting sales taxes, but also, in its own words, ‘protecting society from drugs and pornography’.

‘This merger is just a gleam in someone’s eye,’ said Andrew Foster, president of the Chartered Institute of Taxation (CIoT). ‘There are enormous problems with it. Can you imagine the Revenue handling drug smuggling? It is impractical.’ One answer, according to Maurice Fitzpatrick of Chantrey Vellacott, would be to merge the tax-collecting duties of Customs & Excise with the Revenue, leaving C&E to ‘do the kicking in doors stuff’.

However, even a merger of the two departments’ tax collection duties is fraught with problems. ‘The two taxes have different legislative and historical backgrounds,’ said Simon McKie, head of tax at Robson Rhodes.

‘VAT is based on European law, whereas income tax is a matter for the government. Of course, there is a huge crossover in terms of business transactions, and people have talked about harmonising the taxes. A considerable amount of information could be shared by the two departments. But a single tax on business is impossible, you’d have to make income tax the same as VAT, which is not going to happen.’

In addition the merger of taxes is a political mine-field. ‘The government has not even been able to merge National Insurance and Income Tax, although they have much more in common than VAT and Income Tax,’ said McKie. ‘It creates too many winners and losers.’

Opponents of the government have already picked up on this. Andrew Havery, chairman of the Society of Conservative Accountants, said: ‘I would not wish to see the Draconian VAT regime being introduced for other taxpayers as well. And as far as NICs are concerned, I would ask if there is a hidden agenda to enable a Labour government to break their promise not to increase income tax by the back door.’ Shadow Treasury chief secretary David Heathcote-Amory agreed: ‘This could be a smoke screen,’ he said.

Brown’s opponents may also make some political mileage from the potential for a merger to create a self-defeating bureaucracy. ‘Whenever I speak to Customs it pooh-poohs the merger,’ said Peter Jenkins, head of VAT at Ernst & Young. ‘It would simply create a mega-department with few obvious benefits.’

Doug Cowan, spokesman for the Public Sector Tax and Commerce Union (PTC), agreed: ‘We are not in favour of over-centralising these operations. There has been a degree of centralisation recently, and there is a feeling that it is detrimental to service quality. You lose local knowledge, and you lose the contact with the public.’

Even if the chancellor can negotiate this political minefield, and find a way of melding two culturally diverse operations, there will be other problems. Both departments are already struggling to keep up with an increasingly rapid pace of change.

Cowan, said: ‘At the moment our attention is focused on Government Direct, the new electronic method of tax collection.’ Customs & Excise is also working hard on simplifying its own tax-gathering operation: ‘It’s a major task which could take four years,’ said a spokesman.

And for the Revenue there is the little matter of self-assessment.

Are these departments ready for merger?

A merger may simply prove impractical. What’s more it may be unnecessary.

Government Direct, a Green Paper published last year, outlined a brave new world of super-efficient tax collection in which tax payers would have only one form to fill in, and a number of user-friendly ways of paying.

If this eases the burden of compliance as expected, then the raison d’etre for a merged Revenue and Customs is significantly weakened. And the 200-year-old merger debate may finally become obsolete.