Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 1 - 19)

MONDAY 22 OCTOBER 2001

SIR NICHOLAS MONTAGU KCB, MR DAVID HARTNETT AND MR STEPHEN BANYARD

Chairman

  1. Welcome to the Committee and welcome, Sir Nicholas. Thank you for bringing your team. As you know, we are discussing the Comptroller and Auditor's General Report on Income Tax Self Assessment this afternoon. Before we start could you introduce your team?

  (Sir Nicholas Montagu) Yes, thank you, Chairman. On my left is Dave Hartnett, who is a member of my board and is Director General for Policy and Technical issues. On my right is Stephen Banyard, who is our Director of Local Services. Before we start might I take the liberty of welcoming you as Chairman and your new colleagues and say that I look forward to the same constructive dialogue that I enjoyed with your predecessors.

  2. Thank you very much, we are very grateful. Perhaps I can start off with a couple of questions on identifying taxpayers. Paragraph 11 of the Executive Summary says that you identified £21.8 million additional yield in 1999-2000 from your intelligence work, which aims to identify undeclared taxable income or gains. What is your estimate of the overall tax at risk from the hidden economy?
  (Sir Nicholas Montagu) It is almost impossible to estimate, Chairman. As the Comptroller and Auditor General's Report mentions, Lord Grabiner concluded that it would be impractical to arrive at a precise and meaningful figure for the scale of the hidden economy. It is almost like the old children's puzzle about what is wrong with the statement that the amount of undetected crime rose last year. Because it is hidden there is almost by definition no precise method of estimating either its size or, in consequence, the tax risk.

  3. That is a very honest answer, but if your Department does not know how much tax is at risk from the hidden economy, how can you be satisfied that you are using your resources effectively to target non-compliance?
  (Sir Nicholas Montagu) That, I think, is where particularly the random enquiries that are allowed under self assessment come in. What we are constantly doing is trying to refine our indicators of risk. We do this in a number of ways. We marry up data from different sources by means of the data warehouse and in particular, as the NAO Report notes, we have now got in all our areas risk, intelligence and analysis teams and their specific job is iteratively to identify where the highest risks lie so that we can target our activities more effectively.

  4. Thank you. So you are telling us that you can target areas of high risk with an appropriate level of resource?
  (Sir Nicholas Montagu) Yes.

  5. Paragraph 11 notes that there are no quality assurance arrangements or performance targets for the Department's intelligence work. In these circumstances, how do you know whether this important work is being carried out effectively?
  (Sir Nicholas Montagu) Again, I think that what the report brings out is that there are gaps in our management information. This was a deliberate decision in the sense that obviously we could not do everything with self assessment at once. What we are trying to do now with the system bedded in, and I will ask Stephen to amplify on the issue of quality in a moment, is to improve, to identify the information gap and, where appropriate, to introduce new targets so that, for example, the risk, intelligence and analysis teams that I mentioned will now have specific targets for the number of ghosts, people previously unknown to us, and moonlighters, people with undisclosed extra sources of income for their identification. Stephen, would you like to add on quality?
  (Mr Banyard) What we are trying to do is to build up a better knowledge of how we can find cases that are at risk and spot them, how we can match and use third party data to check cases which may be more at risk and to allow us to leave alone those people who have declared their income and then to add in local knowledge and in this way we can build up a better idea of what cases are at risk. In terms of targeting the work, what we are looking at doing for the hidden economy, the ghosts, is to move from targeting yield to targeting individual people because what we are concerned about is to bring people into the formal economy. This may mean that they will pay more tax but it may mean they are entitled to Working Families Tax Credit or it may mean that they are entitled to state benefits if they pay their NIC. It is a whole job. Our aim is, therefore, not necessarily to target yield on this work but to target the number of people we bring into the formal economy.[1]

  6. Would it be fair criticism of you to say that whilst you are historically very committed to quality assurance in other areas, perhaps in this area you might not have been as committed as you might have been?
  (Sir Nicholas Montagu) I do not think it would be entirely fair, Chairman, because, again as the report notes, this is a further area of activity to which our Compliance Quality Initiative, which I have discussed with previous Committees, applies. That does provide a way of checking up on the quality of work done by our people.

  7. May I ask you a question now on getting the tax returns in, which is obviously a matter of great interest to the general public. If I refer you to paragraphs 3.7 to 3.10, they indicate that the Department have very little information about the use and effectiveness of the various measures available to encourage the submission of late returns. What are you doing to improve the position?
  (Sir Nicholas Montagu) What we are doing is that we are having a real blitz on returns that are long outstanding, where we have a demanding target of clearing 40 per cent of really old cases by next year. So far as getting more recent returns in is concerned, we are doing a number of things. First of all, we found the Comptroller and Auditor General's remarks on daily penalties extremely helpful, and since the report we have staged a trial which confirms what Sir John found on the effectiveness of daily penalties, and we will expect to be using them more. In addition, we are getting in direct touch with people who have not submitted returns. We set up a new receivables management business stream this year to focus our recovery activities in all ways. In March of this year our computer automatically generated 600,000 letters to people from whom we would have expected to receive a return and had not at the time that the relevant information came in. As a result of this, by the end of April this year we had received an additional 150,000 returns and an additional £230 million in tax.

  8. Are you satisfied that you have got enough information on how successful different measures are?
  (Sir Nicholas Montagu) No, I am not satisfied because, as I said, I think that this is an area where we do need to do more. I am satisfied that we are improving our systems and that we are doing more to target risk and more in particular to target those people who have not sent in returns where we would expect them to do so.

  9. On that particular point, would you like to talk about particular groups of people, perhaps pensioners, who may have great difficulty? These are not people who may be trying to avoid paying tax but just find it difficult to get the returns in.
  (Sir Nicholas Montagu) Yes, I would indeed. It is inevitable, given the nature of self-assessment as designed and passed in the relevant legislation by Parliament, that some pensioners will be in self assessment. We have taken 400,000 of them out of self assessment as a result of recent changes to the threshold for investment income which requires a return. What we are also doing is laying much more emphasis on the Revenue as an enabling as well as a regulating department, and that means as a department devoting much more conscious effort to helping people get it right. A pensioner or anyone else who is in difficulty can ring our helpline, can call in at the local office. We have a range of different sources of help and also the whole time we are trying to improve the written guidance that goes out with the tax return form to people.

  10. Thank you. I am sure other Members will want to come in on getting the returns in. Can I ask you a couple of questions on enquiring into tax returns. In paragraph 4.6 it states that £1.8 billion tax was at risk from non-compliance, yet according to figure 13 on page 19 you identified only around £0.3 billion of this £1.8 billion. What are you doing to tackle the £1.5 billion tax gap?
  (Sir Nicholas Montagu) Again, this goes back to what I was saying about refining our indicators of risk. The more that we can identify the groups and individuals most likely to owe us tax, the more we will be able to get in more money than the £300 million mentioned in the report. Basically we are tackling the work in two ways. First, risk assessment, which I have mentioned and, second, the other aspect of our work, which I have also mentioned, of enabling, managing down the tax risk by helping people to get their returns in accurately and on time. Very, very importantly, it is a theme which runs explicitly and implicitly through the report, once we have identified people through the risk, intelligence and analysis team, that is not the end of the story because we then put in our right track teams to make sure that they stay within the legitimate economy and that we get continued tax yield from people who might otherwise have a history of evasion. Also, of course, raising the profile of our compliance work generally, prosecuting and publicising prosecutions and tackling the most resistant groups through the programme of enquiries which you, Chairman, have mentioned.

  11. You will appreciate it is still a large gap. Can I just ask you what level of compliance you would be happy with?
  (Sir Nicholas Montagu) I suppose as Accounting Officer I would have to say 100 per cent because I suspect that anything short—

  12. Realistically.
  (Sir Nicholas Montagu) Realistically, it is not really a percentage that I can put a realistic figure on. As I have indicated, there are intrinsic difficulties in identifying exactly how much tax is at risk because it goes to the size of the hidden economy. Again, it cuts two ways. If an enquiry does not come up with any tax at risk is it because we have got our risk indicators wrong or because more people are complying? That is an intrinsic difficulty in the analysis.

  13. Do you think we should put more resources in?
  (Sir Nicholas Montagu) Any Accounting Officer, I think, Chairman, if offered the lure of more resources would say yes, of course we could use them. Equally, what we have to do in any given year is to balance our resources between the different aspects of our activity.

  14. Paragraph 1.6 says that you expect to secure administrative savings of £500 million from self assessment.
  (Sir Nicholas Montagu) Yes.

  15. Just following on from that last question. What scope is there for using these resources to identify and collect a greater proportion of the tax at risk?
  (Sir Nicholas Montagu) Again, I have to make the obvious point that any keeping of resources has to be with the agreement of Treasury and Treasury ministers. We accept the constraints which all Government departments are under. It was implicit in the assumption about savings that we would not keep them all. As the report notes, and as you pointed out, Chairman, we will achieve the savings. We have deployed something of the order of over 500 people saved from the introduction of self assessment into compliance and customer service work. It follows from what I have said about enabling as well as regulating that I would not distinguish the two. We have given up the equivalent of about 3,800 people.

  16. It still begs the question about how—I return to an earlier question I asked—you know that you are allocating enough resources to this problem if you do not know the tax at risk?
  (Sir Nicholas Montagu) We have in any given year to allocate resources on the basis of several factors: keeping the basic system functioning, helping tax payers to meet their obligations and to claim their rights—important points since we are responsible for tax credits as well—protect the tax system from abuse and recover lost tax. There is no simple mathematical formula for allocating resources. Our resources are finite and we have to make judgments about the relative priority of work. Again, Stephen can, if you wish, go into greater detail on this but what we have to do is to balance between enabling and regulating in any given year.

  17. Perhaps other Members will want to come in on that. Could I ask you a couple of other questions finally about some other issues. We have got the summary in Appendix 3 of the approach adopted by other countries, other countries which use self assessment. Can you tell us something of the lessons which you have learned from the international comparisons because certainly this Committee in this Parliament is particularly keen with all our witnesses to look at international comparisons and benchmarking targets.
  (Sir Nicholas Montagu) Certainly, Chairman. Again you will forgive me if I start with a reservation which is that no two countries are going to have exactly the same system so you have to qualify any inference. The Committee will have noted that although the National Audit Office have cleared the appendix which you mentioned with the countries concerned, it is not a chapter to which I formally as Accounting Officer assented. That is a bureaucratic point. The main point is that I am extremely keen on learning from other countries. I was in Australia and Singapore myself two months ago. I have instituted as part of the peer review of business planning systems that has been brought in under the Modernising Government initiative instead of getting another organisation in this country to do it, I have got the Canada Customs and Revenue Agency; because I regard them as the world leaders on that. We have a model of compliance on customer service which we have lifted directly from the Australians. A lot of the ideas that I have put into effect on the marketing and communication side of the Revenue again owe a lot to the Australians. I am a member with six other tax commissioners of the steering group of the Organisation for Economic Co-operation and Development's Strategic Management Forum and I have initiated there discussions on a lot of different management issues. We are introducing, like a lot of Government departments, the balanced scorecard approach. My strategic planners have been directly influenced by what they found in the United States and Canada. One final example. I mentioned that we have adopted the approach that we regard as private sector best practice of a separate receivables management stream. This was developed as part of a joint study with Australia, New Zealand, the United States, Canada and Japan. We also have a lot to do with the Netherlands.

  18. Would it be a fair criticism that whilst you have made a lot of progress on this recently, certainly subsequent to this report being published, perhaps you were not putting enough effort into this area as you should have been before?
  (Sir Nicholas Montagu) I do not think so, Chairman. I can only speak for my time and I have made that a very high personal priority. Within a year of arriving at the Revenue I had visited my opposite numbers, again Japan, Australia, United States and New Zealand. I have mentioned our contribution to OECD. In addition, the Head of my International Division chairs the Council for Fiscal Affairs of the OECD. We chaired the Electronic Commerce Specialist Group under OECD auspices. I think you could certainly say that we are stepping it up. I think it is right that we should step it up because with the globalisation of the economy and the various implications of more electronic commerce it is becoming ever more important to know what other fiscal authorities are doing and to co-operate with them.

  19. Last question. Appendix 5 sets out a number of difficulties which arose during the implementation of self assessment, for example the complexity of the tax calculation guide and the layout of statements of account. What areas are still causing concern to taxpayers and their agents and what are you doing about them?
  (Sir Nicholas Montagu) If I am honest, I have to say that I think the statement of account still is. It is not user friendly. There is a limit to the extent to which it can be completely user friendly simply because of the links that it has got directly with the system. I think the greatest area of concern is the understanding of self assessment forms and guidance. We have done a lot to improve these since self assessment was introduced, drawing on what taxpayers tell us. The most important outputs are the tax return pack, which includes the tax return, the tax return guide, on which again we have taken account of things said, and the tax calculation guide which we have simplified a lot, splitting it so there is now a complex one for people with complex affairs and a simpler version for those with relatively simple affairs. The statement of account we have simplified and we are looking to simplify it further. In particular, the use of dynamic format design has enabled us to customise it more and the tax calculation. We work constantly both with the representatives of taxpayers and, very importantly, with tax agents and their representatives, to try and get it better. I think those are the main areas that worry taxpayers still.


1   Note by witness: The Department does not target yield as such. We are moving away from only taking up cases where there is likely to be a yield and more towards moving people into the legitimate economy. See Q84. Back


 
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