The kinds of negotiations and deals made between HMRC and large firms, which have been the subject of much attention lately, are essentially undesirable, especially when one compares this to the treatment of SMEs and individuals by HMRC.
However, they are inevitable given the kind of tax code we have. If we had a proper tax system that was simple and transparent then it would be pretty clear how much a company (or individual) owed and there would be no need for these negotiations. Given the total mess of a system that we have, negotiations of this kind are inevitable and better than the alternative.
This is because the system is so complicated that in many cases neither side can be sure what the true tax liability is - both are engaged in a ‘best guess’ exercise. Given that these are large firms, the sums involved are considerable.
A company advised by its lawyers that a tax estimate from HMRC was questionable would be failing in its legal duty if it did not seek to address this.
It is not possible to simply give the HMRC the power to set a tax bill that would simply stand without question because the opacity of the system we have means that estimates of this kind would have an arbitrary and uncertain quality which is very bad for business – firms would rather have high but certain taxes than unpredictable and inexplicable ones.
Moreover the real current alternative to negotiations is expensive and destabilising litigation, which will benefit neither the companies nor the Revenue.
Secretive negotiations of this kind undermine the rule of law and give large firms an advantage over small and medium sized ones. Large firms will quite honestly try to negotiate to establish their liability when the tax system is so unclear that nobody can act with any certainty. So we need to eliminate the need for these negotiations by reforming and simplifying the tax system.
This article was written for LondonLovesBusiness and can be read here.