NEWS ANALYSIS - Working together?

It seemed to be the case of the unstoppable force and the immovable object as calls for the merger of the Inland Revenue and Customs & Excise gathered pace late last year. As the Commons Treasury committee inquiry into the workings of Customs progressed, the clamour reached fever pitch. So far the two Whitehall behemoths have resisted, but all the time attempting to placate their critics by pledging instead to work more closely together. Away from the public eye, however, the twin taxmen appear to be doing anything but aligning their working practices – especially in the way they conduct investigations into taxpayers. In a nutshell the Revenue is stepping up investigations into compliance among personal and business taxpayers while Customs is scaling back the number of investigations it conducts into VAT-payers. Instead Customs is concentrating on a smaller number of higher-value businesses. The Revenue’s approach is part of a £200m spend-to-save initiative, launched in April 1996, which it hopes will raise an extra £2bn in revenue. During the 1998/99 tax year the Revenue estimated it had carried out 725,000 investigations and said that figure would be increased for the 1999/2000 tax year. It now plans to raise the number to 750,000 per year. That figure includes both aspect enquiries – investigations into a single aspect of a return – and full enquiries, which question the validity of the return as a whole. The latter alone will rise from 100,000 to 150,000. Over at Customs, things are very different. It has taken a radical strategy in trying to recoup more unpaid VAT by reducing staff numbers and cutting the number of audits it conducts. Staff numbers are down from 4,548 in 1992/93 to 4,179 in 1998/99, while the number of Audits per annum has fallen from 350,000 to 180,000. But Customs is now targeting high and exceptional-risk traders: get those, it argues, and the public purse will soon feel the benefits. The strategy appears to be paying off. Net additional revenue generated has already increased from £5.98 per £1 spent to £7.48. Or in big figures from £862m to £992m. Sums not to be dismissed. With such diametrically opposing approaches, the situation raises the question why Customs and the Revenue should even consider a merger. The Commons Treasury committee, which recently grilled Dame Valerie Strachan, the outgoing chairman of the Customs Board of Commissioners, has been investigating the possibility and has travelled as far as Canada to see how two separate tax collecting departments can be merged. Sir Michael Spicer, the committee’s chairman, says: ‘They have made significant savings but more importantly the whole collection of revenue has become more effective and efficient.’ Customs’ argument against a Canadian model revolves around Britain’s island status and the implications that has for VAT collection. Stephen Coleclough, of the Chartered Institute of Taxation, disagrees. He can think of no reason why Customs and the Revenue should not merge services when there are only efficiency savings to be made. ‘We can see real benefits from it because it would cut down on the number of visits,’ he says. Customs and the Revenue, when it comes to collecting VAT and corporation tax, have the ‘same client base, the same cash collection processes’, and they are collecting ultimately for the same master. ‘If you were running a business you wouldn’t have two departments doing that.’ Commercial rationalisation not withstanding Customs hangs on to the fact that while it does have some functions in common with the Revenue, which have produced a close working relationship, it also works in areas alien to Somerset House. As one official asked: ‘Does the Revenue know how to stop drug smugglers?’ ‘We are working extremely closely together to get the benefits of merger without having to merge,’ says a Customs spokesman. The fact is Customs has to work closely with other government departments and agencies too. This may seem like the end of the argument, but it might just be the start of another. According to one MP it may simply mean taking tax collection away from Customs – whose new head, Richard Broadbent, joins in February – and bringing it all under the roof of a dedicated collection body. Whatever the outcome – merger, closer working or the status quo – tax advisers and taxpayers alike should be wary. If the two departments do merge, a number of accountants should start ‘panicking’ due to the greater powers Customs carries, argues BDO Stoy Hayward tax partner Mark Lee. ‘Traditionally the Revenue tends to negotiate while Customs is more physical,’ he argues. Lee also fears accountants are being complacent in ignoring the promise of the Revenue to step up its investigations further. ‘The Revenue is going to catch out a number of accountants when it really steps up the focus on investigations,’ he adds. ‘A number of accountants are going to be caught out for not disclosing adequate information.’ Maurice Fitzpatrick, tax partner at Chantrey Vellacott, is emphatic in assessing the chances of a merger. ‘The two are not likely to come together as they have vast cultural differences which are rooted in history,’ he says. But recent history is peppered with examples where efficiency has been a more compelling argument for change in government than cultural difference has been for maintaining the status quo. Whatever the outcome it should be quite a spectacle.