What Would Mr Pitt Have Thought -Out of the Box

What would Mr Pitt have thought?

“Out of the box”

BILETA 2004 Annual Conference

CollingwoodCollege, University of Durham, 25th – 26th March 2004

Introduction

Tax is rarely simply expressed. At the end of the eighteenth century, William Pitt discovered that drafting a tax upon income was not simple, and at the beginning of the twenty-first century that difficulty remains. So it comes as no surprise that it takes 872 words in section 135, Finance Act 2002 to give the Inland Revenue the power to require e-filing of tax returns. From 2010, employers may be compelled to lodge returns electronically under threat of a penalty of £3,000. Expressing reservations about this provision, one commentator has remarked “The Revenue has succeeded in the past through pragmatism not by over-dependence on the intellectual correctness of their analysis.”[1] However, the present author considers that the importance of the section lies in the Inland Revenue’s confidence in realising its information technology programme, and in its ability to convince taxpayers - now termed “customers”[2], and their accountant agents, of the facility and ease of e-filing.

With the objective of reducing the estimated £12bn pa evasion, and following an efficiency review of the taxation departments under Gus O’Donnell[3], in his 2004 Budget, the Chancellor of the Exchequer announced[4] anticipated annual savings of £20bn in a timed reduction of 10,500 posts by 2008 through the achieved combination of Customs and Excise and Inland Revenue, linking it with greater use of technology-

“a single tax service, which because of the investment we have made in new technology, can make large savings in back office costs”

although the ambitious merger would necessarily involve “a complete change in working practices and fundamental changes to the compliance regime”[5] which would impact on both internal information management delivery and external customer services. However, the timing coincides with the departments’ having to update their information management systems as

“the Revenue also has several computer systems that do not even talk to each other very well”[6].

In his Budget Speech, the Chancellor of the Exchequer expanded:

“We asked Sir Peter Gershon to work with us to identify how new technology, changing work practices and better procurement could free up resources in departmental budgets that we can allocate in the years ahead to front line services. Alongside the workforce reforms – in which the cooperation of public servants has been much appreciated - we are investing more than £6bn in modern technology – creating the potential for greater economies in back-office and transactional services” and

“as a result of the O’Donnell review, we will merge Her Majesty’s Customs and Excise and the Inland Revenue. Whereas in the past, business had to deal with both the Revenue and Customs, business will now deal with a single tax service, which, because of the investment we have made in new technology, can make large savings in back-office costs”.[7]

But the Revenue’s recent experience with large-scale computer systems has been mixed. In particular, the introduction of the Tax Credits system was “nothing short of disastrous” with errors[8] and delayed payments because the department’s computers failed to handle the work involved. As a consequence, in late April 2004, the Commons Public Accounts Committee called for a detailed analysis to improve future schemes. Moreover, previous recent efforts to offer an on-line service encountered problems (such as breaches of security), which resulted in the system being off line for a month. Taxpayers submitting forms in 2003 received a letter[9] inviting them to file the Tax Return online (and e-pay) with the carrots including automatic calculation and an earlier tax repayment and an assurance that filing online is “easier and quicker than completing the paper form”[10]. Significantly, the letter implicitly admits the difficulties with the earlier system as

“we have improved the service to make it easier to use, following feedback from our customers”.

The accompanying leaflet targeted taxpayers under the self assessment regime and offered an 8 step guide to establish a user ID and Password[11]: it is paradoxical that the Inland Revenue[12] use two postal confirmation letters to confirm User ID and Activation PIN.[13] Once access has been accorded, the Taxpayer is invited to login (via the Inland Revenue Login/Register page) and use the Activation PIN which should then be destroyed. The software should directs the Tax payer to the Self Assessment page File your Tax Return which either leads to the Inland Revenue’s free online Tax Return services or allows the use of a commercial software package. Whilst this may expedite submission and aid calculations, it does not relieve the taxpayer from the need to marshal and categorise a significant amount of information.

Although s.135 Finance Act 2002 will impact most heavily upon accountants, lawyers have not been spared, particularly in the neighbouring context of contentious tax appeals. The Tax Appeals System centres upon two tax appeal tribunals – two separate bodies of Commissioners: the General and Special Commissioners; and over the last decade, there have been continuing procedural reforms. For some years, the Office of the Special Commissioners has maintained a website and recently an extensive (and useful) General Commissioners website has been launched. This paper locates some of the current issues within the historical development of the tax appeal system, explains the recent reviews, policies and influences (including those induced by the Human Rights Act), and contextualises the respective websites in the developing rôles of the tax appeal tribunals. It concludes by describing the two current websites (and the information offered) and seeks methodologies to examine the extent to which they have facilitated “customer” access to relevant legal information.

Part 1 – The Background

The Context

In 1798, England was enjoying the results of growing national prosperity[14]reflecting, in part, the underlying economic wealth of the growing merchant classes, but there was a fear of a French invasion which could attract disorder similar to that reported in France[15]. Nevertheless, the country responded positively to George III’s announcement for the need for additional taxation, as a “temporary” imposition” to finance the war with France[16]; but there was no consensus on the methods of taxation[17] nor on acceptable methods of identifying and quantifying the irregular income of the increasingly powerful merchants. In particular, there was a general unwillingness to disclose their trading profits often for commercial reasons, since such information might be

used to good effect by a competitor[18]. Pitt pragmatically adapted the existing method of assessment used for the Land Tax.[19]

The eighteenth century Land Tax[20] had been based upon voluntary disclosure and declaration by the taxpayer, and assumed an annual income of six per cent of the capital value of land (rather than upon the income actually produced by goods and personal property). It had provided for separate, and mutually exclusive, liability in respect of moveables and land, so that those taxpayers assessable to the tax on moveables were not assessable to tax on land, and vice versa. Subject only to oversight by Surveyors appointed by the Treasury, the administration of the tax had been entrusted to Commissioners, appointed by the Lord Chancellor, Lord Treasurer and other great officers of the Crown. Because of the property qualification, Land Tax Commissioners were commonly local gentry and Justices of the Peace - “the general administrators of the land, although in form they continued to exercise [their] administrative functions according to their accustomed judicial procedure.”[21] The lack of any effective method of external verification had nurtured under-declaration, but section XXI the Land Tax Act, allowed a taxpayer to appeal to the Commissioners ”without further Trouble, or Suit in the Law"[22].

Aware that political compromise might be required to secure his new tax on income, Pitt had eschewed unnecessary administrative complexity, and left blanks in the bill (although, in the event, only four additions were made at the end of the first reading).[23] Moreover, he recognised that he should not rely on,

"loose statements made by the Parties themselves and from the Commissioners appointed to act under the Bill not being possessed of any certain power by which they might have been enabled to institute investigation."[24]

When presenting the Bill to Parliament, he admitted:

"I did everything in my power to take that which could afford the best criterion to attain that end. I thought it incumbent on me to adopt that which appeared most practicable. I thought it material to have some visible criterion according to which property might be ascertained rather than incur the necessity of investigations into the property of the different classes of the community".[25]

As had previously obtained with the Land Tax, the Commissioners appointed assessors and collectors to assist them in their functions, and a clerk to undertake work of a routine or subordinate nature.[26]

Pitt recognised that:

"[i]t is our duty to prevent persons from taking unfair and scandalous advantage of false statements for while the road to fraud is open we have a crying grievance to

contend with"[27], but

Adam Smith M.P. argued against a man having to

“show his books, which is the only way in which we can know how much he is worth."[28]

To allay fears of undue disclosure of confidential information[29], each Commissioner had to take an oath to exercise the powers entrusted to him under the Act only

"as shall appear to be necessary for the due Execution of the same .....and that [he] will not disclose any particular contained in any Schedule of Income or any Evidence or Answer...except in such Cases.... where it shall be necessary to disclose the same for the Purposes of this Act." [30]

Thus the only way in which the quantum of the assessment might be revealed publicly was through proceedings for recovery of the amount due following the taxpayer’s failure to pay.

As regards the mechanics of assessment, Pitt emphasised the lack of any compulsion upon the taxpayer to answer questions or to produce his books before the Commissioners. George Tierney M.P. accepted that this guaranteed secrecy but he questioned, given that voluntary disclosure had previously failed, how evasion of tax would be avoided in the absence of any power to ensure the correctness of the declaration. He suggested that disclosure was inevitable, but that it was,

"one of the most dangerous events that could ever take place in a commercial

country. Under what conditions was a man now to escape a disclosure? Under that of a penalty being inflicted on him by a set of Commissioners if he objected to disclosure; and that Penalty to take place on the authority of a common spy or informer."[31]

Pitt reassured him that

"no disclosure of books or papers is to take place in any stage of the business, unless at the option of the persons concerned”.[32]

Adam Smith M.P. attacked the power of the assessors:

"the assessment depends on the humour of the assessors, and, without this would become an inquisition more intolerable than the tax itself,"[33]

and argued strongly for secrecy to protect merchants and those engaged in commerce against

having

"the form of their credit, the relicts of their independence polluted and proffered by a band of assessors marshalled in the form of a prodigal administration."[34]

In the division of 14th December 1798, the Bill was supported by a majority of 166[35], but the issue of disclosure continued to incite resistance[36]. Nevertheless, the bill was reported on 22nd December 1798 and despite further debates, informal discussions,[37] and objections[38], it received its Royal Assent on 9th January 1799[39].

The 1799 Act and the Appeals System

Under the 1799 Act, the assessors called upon the inhabitants of a division for their declaration of liability to pay tax

"together with a Statement in writing signed by him or her, of the Sum which he or she means to pay under this Act as his or her Contribution ..as being not less than the just rate or Proportion of his or her Annual Income .... also a like Statement or Account in Writing, signed by him or her, of the Sum which he or she proofs should be contributed....."[40]

The assessors transmitted all returns[41] to the Commissioners who signed the assessments; but a

taxpayer did not have to disclose the quantum of his income.[42] To minimise evasion, Treasury appointed surveyors were to ascertain the accuracy of the taxpayer's declaration of liability, and to communicate doubts to the Commissioners who could call for further explanation from the taxpayer concerned.[43] The taxpayer had a right of appeal to another panel of Commissioners having a higher property qualification[44] but the whole process was conducted in secret.

To meet further concerns over “commercial” secrecy for traders in the City of London there were to be Commercial Commissioners[45] to judge the accuracy of the declaration against the amount of reputed income.[46] The assessment was ‘entered in a book by them to be privately kept’ and an alphabetical letter was allocated to the assessment, and the identity of the taxpayer through this letter would then be transmitted to the Exchequer. The assessment subsequently signed by the Commissioners (and the payment thereof) was to be made directly to the Exchequer by reference to that letter, so that no local official would know the taxpayer’s affairs.

Thus the declaration, assessment, and agreement of tax liability were conducted in secret. Of course, exceptionally, the Inland Revenue could initiate proceedings in the public courts against a taxpayer either to recover the assessed tax, or to prosecute for a criminal offence.[47] In their Report of 1870, the Commissioners of Inland Revenue recognised the deterrent value of such publicity:

"It would greatly strengthen our hand if proceedings [in surcharge cases] could be taken in the local tribunals either at the Sessions of the Justices or in the County Court.... and..... conducted throughout with publicity."[48]

However, the granting of the right to appeal from the Commissioners to a judicial hearing in open court (although only by case stated[49]), created a conflict between the principles of secrecy of a taxpayer’s affairs before the Commissioners and the openness of judicial proceedings in public. Tax appeals heard in the High Court were no exception to the general rule propounded by Lord Haldane:

“the administration of justice [is] to take place in open Court”[50]

- a view subsequently echoed by Lord Hewart’s aphorism in R v. Sussex Justices:[51]

"Justice should not only be done, but should manifestly and undoubtedly be seen to be

done."

Hearings before the Commissioners

Given the publicity accorded by proceedings, there were mixed views on the merits of retaining privacy before the appeal Commissioners. The 1920 Royal Commission had recommended the publication of decisions of the Special Commissioners on points of principle, although the 1955 Royal Commission feared that it would create an “immoderate appetite for precedent.”[52]

Subsequently, within the broad principles of “openness,fairness, and impartiality”, Franks propounded “publicity of proceedings” and “knowledge of the essential reasoning underlying the decisions” but specifically excepted those “occasions on which.... justice may be better done, and the interests of the citizen better served, by privacy” such as public security, intimate personal or financial circumstances, and cases involving professional capacity or reputation[53]. Thus, in respect of tax appeals, Franks concluded:

“Few people would doubt the wisdom of the practice whereby hearings before the

General and Special Commissioners of Income Tax are held in private in order that

details of taxpayers’ affairs shall not become public knowledge.”[54]

The continuing debate has focused on the publication of the decisions of the Special Commissioners and centred on balancing “openness fairness and impartiality” against confidentiality for the taxpayer.[55] Clause 46 in the 1977 Finance Bill had proposed the reporting of decisions of hearings before the Special Commissioners, but was withdrawn in favour of undertaking a wider review which was ultimately published as the report of the Keith Commission in 1986. In 1980, Stephen Oliver[56] argued that secrecy was ‘an anomalous constraint’ and that the reporting of the Special Commissioners’ decisions would encourage consistency, and redress the imbalance of knowledge between the Inland Revenue and the taxpayer.[57] He proposed further that secrecy could be maintained by the reports setting out only the key relevant facts (albeit to an extent greater than that required for a stated case) and by ‘obliterating’ the taxpayer’s name.[58]

Although the Keith Commission noted that a high proportion of ‘contentious cases’ proceeded from the Special Commissioners to the High Court, it recommended both the retention of privacy for hearings before both bodies of Commissioners, as “the Appeal Commissioners can be considering a taxpayer’s personal affairs”[59] and also publishing, in an anonymised form, selected decisions of the Special Commissioners (and exceptionally the General Commissioners).[60]