Contractors, it’s not the top taxman’s knighthood you should decry

It’s New Year which despite meaning many things to contractors, not least that the 2019 Loan Charge is just around the corner, also means it’s honours season.

And this season, there’s one knighthood related to taxation – that of HMRC’s CEO John Thompson, that’s obscuring another honour related to taxation that’s much, much more concerning, writes Tom Wallace, head of tax at HMRC dispute specialists WTT Consulting.

The honours system has always been a way for the civil service to recognise its employees in a way that perhaps a commercial organisation cannot. They are allegedly bestowed for achievements in public life, or for serving and helping Britain, with each Whitehall department responsible for nominating to the Cabinet Office the staff they consider fit for such an award with the citation being approved by a nominations committee.

Typically those nominated will be senior civil servants, director-level and above nominated for their work achievements, with a sprinkling of relatively junior staff usually nominated for outside activities such as charity work. We can of course debate which of those merit the recognition more, but what is not in dispute is that they are employees of the department.  However, New Year honours list 2019 contains an entry that raised more than a few eyebrows -- and concerns, in the tax profession:

Patrick Michael MEARS                                        

External Consultant, HM Revenue and Customs. For services to Preventing Abusive Tax Avoidance.

On the face of it, it’s an innocuous citation easy to overlook, and probably will mean very little to most. To those who deal with clients who find themselves caught up in failed alleged tax avoidance however, it will be a name that’s likely to be familiar. 

And while most contractors and their advisers are preferring right now to focus on Mr Thompson, who as HMRC Chief Executive (‘Permanent Secretary’ in old-civil-service-speak) received a knighthood in the same honours list, they perhaps ought to save their outrage for Mr Mears instead.

In reality, such an award for Mr Thompson should not be a surprise -- it is almost part of the remuneration package. You need to go back to Paul Gray, who held the post between February and November 2007 before “resigning” over the loss of a CD containing 25 million child benefit records, to find a holder of the post not to have been made a Sir or Dame.

For those that do not know the name, Mr Mears is the chair of the General Anti-Abuse Rule (GAAR) panel.

As a general background for the purposes of this op-ed, GAAR was enacted in 2013 to consider any arrangements that HMRC believes to be abusive. HMRC refers the arrangement to the panel for an opinion on whether they consider them abusive, and if the panel decides entering the arrangements cannot reasonable be regarded as a reasonable course of action (“the double reasonableness test”), then HMRC can issue a counteraction notice for the taxpayer to correct their tax position. Failure to do so means facing a penalty of 60% should the arrangement be defeated in litigation.

The panel is described on the HMRC website as “independent”, and they play an important role in protecting the taxpayer from HMRC simply labelling anything they dislike as ‘abusive.’ Given that their opinion cannot be appealed against, it is important that the taxpayer is able to have confidence that it will act without undue influence from HMRC. This is why the nomination by HMRC for an OBE for the chair, Mr Mears, is so troubling, because it quite simply calls into question the independence which is critical to its credibility.

Firstly, the citation describes Mr Mears as an ‘External Consultant’. Generally the term ‘consultant’ means that there is an engagement for services (paid or overwise), with the engager clearly setting out the requirements and what it wants to achieve. Is this consultancy work undertaken for the GAAR panel or is Mr Mears engaged by HMRC to provide other services? The legislation says that HMRC appoints the chair of the panel but does not say they “engage” them. 

Secondly, why is HMRC nominating someone not employed by the department? While the nomination guidelines do not prevent such a citation, it is certainly unusual and I can find no recent examples of HMRC nominating accountants, insolvency practitioners or barristers who engage with them on a far more regular basis than the GAAR panel. So, by nominating Mr Mears does HMRC believe that he is in public service and effectively a civil servant?  This would again undermine the independence of the panel.

Last but not least, the GAAR panel is there as a protection for the taxpayer. Without them, HMRC could rule any arrangement they wish as abusive and subject to counteraction. For the taxpayer to have faith and confidence in the panel as their last line of defence against HMRC’s increasingly aggressive powers, it simply must have no obligation, perceived or overwise to HMRC. This includes to not be remunerated by them or rewarded in any other way for performing their statutory duties. 

However, the citation is very clear, the honour has been conveyed for preventing aggressive tax avoidance. Preventing tax avoidance (aggressive or not) is not actually the GAAR panel’s role. The panel’s role is to apply the double reasonableness test and give an opinion on whether the arrangements meet or fail such a test. It should have no interest in the outcome of that test and should be indifferent to the result. The panel have to date been asked to consider nine arrangements, of which all nine have been considered abusive. The question now being asked in professional tax circles  is whether this citation is reward for finding in favour of HMRC each and every time it has been asked to give a GAAR opinion. Can every future panel chair expect such an honour if they continue to side with HMRC, and therefore have a vested interest in the opinions issued?

As a former Inspector of Taxes, I was taught from the very beginning of my civil service career that it was not enough to simply be impartial, you had to ensure that your impartiality was beyond question. It’s therefore a shame that HMRC did not postpone such a nomination until after Mr Mears tenure as chair of the panel was over, rather than cast a cloud of suspicion on all past and future panel decisions going forward. Regrettable and worrying, in equal measure.