Finance: Our infernal Revenue

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The Independent Online
FOR ALL its attempts to give itself a cuddly image with the cartoon tax inspector Hector in the run-up to last year's start of self-assessment, the Inland Revenue seems destined never to make itself lovable. Consequently, it is hardly surprising that certain sections of the tax advice community have been keen to characterise various developments over the summer as evidence of the organisation's bungling.

Tax experts at some of the leading accountancy firms appear to have had the Revenue in their sights, at least since the announcement in this year's Budget of a crackdown on personal service companies. The move is clearly aimed at the "Monday to Friday" situation, where individuals finish working for an organisation one week and the next carry on doing the same work ostensibly as freelance contractors operating through their own companies. But what one specialist described as one of the biggest tax furores was created when it was realised that the proposals would ensnare many other individuals, notably information technology and oil industry contractors, who avoid paying National Insurance contributions by working on a self- employed basis through such companies.

The Revenue maintains it always intended to consult over the introduction of the measure. But the advisers suggest that until the break-out of a row fuelled by interested groups communicating over the Internet the tax authorities were only looking for comments on the detail implementation. According to Anne Redston, a tax adviser with Ernst & Young, it is an example of "an ivory tower solution dreamed up by people who have no idea of how business works".

While that dispute simmered on, the Revenue then ran into difficulties in an attempt to crack down on another problem area, the construction industry. New rules designed as a further check on tax leaks in a sector perceived as a key component of the "black economy" came in at the beginning of this month. Essentially, the authorities were attempting to ensure the right taxes were paid by ruling that after 31 July contractors would not be able to pay sub-contractors unless they had the required Revenue documentation. Previous attempts to crack down in this area had apparently been undermined by the ease of obtaining exemption from the regular tax arrangements.

Tax advisers say they had repeatedly warned officials that confusion would reign if there were not transition arrangements in place. But it was not until it became clear that insufficient numbers of forms had gone out by the middle of July that the Revenue backed down and put in place a plan to ease the passage of the changes.

Iain Stewart, tax partner with accountants KPMG, believes it is unfair to lambaste the Revenue for what was largely an administrative problem. But others see it as evidence of a perception on the part of the authorities and their political masters that tax avoidance is so widespread all means should be used to combat it. As one tax expert put it, while "exemption certificates were as available as Guinness beer mats in Kilburn", the desire to stop this needed to be countered by taking a balanced view.

Ms Redston feels the way to make this happen is to insist all tax measures pass a "commonsense test" before they are introduced. Tax officials and government ministers should have to follow something like the children's road safety code and "stop, look and listen" before they do anything in this area. Mr Stewart, in contrast, believes the Revenue should be given greater credit for its approach. The decision, also in July, not to appeal against court rulings in favour of the law firm Herbert Smith and the retailer Jenners that tax could be deducted for provisions against future rents and repairs was, he says, evidence of a pragmatic view by the Revenue.

He thinks the Revenue could not be criticised for trying to make the collection of tax more effective. It was fair if most people were paying what they should and on time, and those who failed to follow suit should be penalised. A Revenue spokesman denies they have become obsessed with tax avoidance, saying it is only natural the Revenue should take a close interest in anything that might raise extra tax. The organisation also points out there will always be battles with advisers over tax-avoidance measures because of the constant effort to find fresh loopholes. But it is committed to consultation and - through the ongoing Tax Law Rewrite Unit - making tax law more accessible to the general public.

Some tax experts see the battle against avoidance as contributing to the increasing complexity of tax law. John Whiting, tax partner with PricewaterhouseCoopers and a senior member of the Chartered Institute of Taxation, says the Government and the Revenue have ceased to differentiate between evasion and avoidance or planning. "It's all leakage, and it's all got to be stopped," he says of their approach.

The problem with such an attitude, he adds, is that while the tax take may be raised, measures designed to do it can increase the burden on business, even to driving people in certain sectors overseas.