Examination of Witnesses (Questions 60
MONDAY 22 OCTOBER 2001
MONTAGU KCB, MR
60. Thank you very much, that was a very full
answer. Can I ask you about fixed penalty notices. You issue 4.9
of them each year but according to the National Audit Office Report
you have not monitored hitherto the success of these penalties
in encouraging tax returns. Has that changed at all? You said
you are constantly trying to refine your methods of risk assessment
earlier but do you now monitor the success of fixed penalty notices?
(Sir Nicholas Montagu) No, not as such.
Again, Stephen can confirm this. It will form part of our study
of taxpayer behaviour to the extent that we are aware that a penalty
has been levied and we will see how it then influences taxpayer
behaviour. It is perfectly true, as Sir John's Report notes, that
we do not have routine management information on the collection
of fixed automatic penalties because we regard it as part of the
overall self assessment debt. We have a target to collect 72.9
per cent of outstanding debt during the year to April of next
year. I think we will either meet or possibly slightly exceed
that. EDS, our strategic IT partner, carried out a special run
for us to extract information from the self assessment system
and we, in fact, raised in 1999-2000 just under £118.5 million
in fixed penalties.
61. Can I ask you about telephone pursuit. You
mentioned in your earlier evidence that 600,000 letters were resulting
in an extra 150,000 returns and another £230 million. The
report mentions that telephone pursuit produced a 20 per cent
return but said you had not had a chance to assess the impact
on tax yields. I am just wondering have you had a chance to do
further work on what that has done to tax yields?
(Sir Nicholas Montagu) Again, I think it is probably
a bit early. Stephen tells me it is 23 per cent effective.
62. Were you surprised by the low level? When
I read that number I was surprised that telephone pursuit did
not produce a higher figure. If you are getting 25 per cent from
letters and only 23 per cent from phone calls, would that not
be rather lower than you would have expected given the personal
contact of someone actually phoning up?
(Mr Banyard) What we are finding generally with debt
collection is that from people who we have trained, and we have
trained our people now using a private sector firm called The
Lidbury Partnership, who are debt collection specialists, we are
getting very good results now in getting money and returns in
by using telephone calls. I think it is early days to be able
to put an analysis on it and say "this method at this particular
point is the best". What we need to do is to use the range
of methods that we have got at our disposal.
63. Could I return to the question of complexity
and costs and savings because the aim is to save something like
£500 million over a period of 15 years.
(Sir Nicholas Montagu) Which we will do, yes.
64. Which you are planning to do. While you
are at it could you say exactly what steps you have in place to
assess how well those savings are going? How do you know that
you are on track?
(Sir Nicholas Montagu) Because we constantly and iteratively
monitor the state of the savings. We are undertaking a tracking
exercise and all the indications are that we will get payback
by 2005. We had an independent post implementation review which
said "Inland Revenue's robust approach to the staff savings,
3,800 of them have been realised as cash . . ." which I mentioned
earlier ". . . has protected the financial viability of the
business case". So this is something we keep track of the
65. Do you have a concern that actually what
you are doing is you are saving money but you are transferring
the cost and the administrative burden effectively to the private
sector and to members of the Chartered Institute of Taxation and
to ACCA and effectively their clients are paying? It is not making
things simpler, you are saving money yourselves and costing others
(Sir Nicholas Montagu) As I indicated, Mr Bacon, we
are here to implement the policy of the Government and the legislation
that Parliament has passed. What we do try to do, as I have also
indicated, is to make it as simple as possible through things
like working with individual taxpayers, the Working Together Initiative
and so on for the tax agents and individuals to meet their obligations.
We do have targets for reducing compliance costs. These are published
targets in our Public Service Agreement and our Service Delivery
Agreement. Again, if I may, I would quote Sir John, "self
assessment has improved the administration of income and capital
66. One final question. I was very interested
in what you were saying about the marketing and communications
department of the Inland Revenue and how things have been progressing
and taken forward there. Can you just say a little more about
that and if there is not enough time in what remains of my questioning
time perhaps you would let the Committee have a note on it.
(Sir Nicholas Montagu) Yes, I will try to be very
brief, if I can, Mr Bacon, I could happily take the whole of the
rest of the Committee's time. Marketing and communications, it
is about substance not spin. It is about finding out what our
customers think of us, what they see as being their key needs,
how they think they fall into segments, not how we do. It is not
bureaucrats as the starting point. Students would be an obvious
example of a group with particular needs. It is then about how
we set out to meet those needs, it is about using techniques of
customer relationship management. It is also about what are people's
perceptions of tax. I think it was Mr Davies who mentioned that
almost everybody has paid cash to a small tradesman and it is
a sort of nudge, nudge, wink, wink operation.
67. Except me.
(Sir Nicholas Montagu) All except Mr Davies. What
I want is the person who does that being seen not as really rather
clever but as not having paid their share of the special care
baby unit that the hospital so desperately needs. So we are working
with consultants to find out what would raise people's perceptions
of tax paying, what would the drivers be and critically, at the
same time, to work with our own people. We selected the consultants
competitively who showed that they recognise the need for internal
as well as external communications. So it is about improving our
effectiveness by a better recognition of our customers' needs,
a better recognition of what we need to do to raise the profile
and the perception of tax and the drivers for paying it and to
raise our own people's understanding of the business that we are
68. Sir Nick, could I say to start off, may
I pass my thanks through you to all the staff who work in this
system, whenever I have dealt with them I have found them very
courteous and very helpful.
(Sir Nicholas Montagu) Thank you very much indeed,
Mr Jenkins. I will see that is passed on.
69. One of the things that I did do, and have
done continually since it was introduced, and you must remind
us who introduced this system, I have found the cost was transferred
from your officers on to me or, if I was in need, paying an accountant
something like £400 a year. I would much rather pay an additional
£100 a year tax, save £300 and let you work it out but
it is self assessment so I have done it religiously from day one.
(Sir Nicholas Montagu) I am delighted to hear it.
70. If we cannot do it how do we expect people
out there to do it. I find it difficult at times.
(Sir Nicholas Montagu) We can of course do it for
you, Mr Jenkins, if you get it to us by 30th September.
71. If I can get the paperwork sorted out and
in one place by 30th September, I will. What does surprise me,
and maybe I have missed this along the way so remind me, we do
not seem to have a figure for tax yield we would normally expect
for an economy of our size. While we have got figures for savings
in this country I should have thought that we would have a more
accurate assessment as to what collection we would get as a nation?
(Sir Nicholas Montagu) Again, this really goes back
to the Lord Grabiner point. Without knowing what the size of the
hidden economy is it is very difficult to know what the tax yield
ought to be.
72. Would not the money spent and savings in
this country give us an indication of how large the hidden economy
(Sir Nicholas Montagu) I am not sure that it would,
Mr Jenkins. I am very far from being an economist but the size
of the hidden economy has for a long time been the subject of
pretty vocal academic debate and vocal disagreement. I think that
if there were any simple formula of that sort there would be a
greater measure of agreement than I think there is. What we are
trying to do the whole time is a bottom up analysis of tax risk
in the various sectors in the way that I have described. It is
also, of course, true that not all the hidden economy is taxable.
I think it is interesting that the OECD are on record as saying
that they regard the size of the hidden economy as unmeasurable.
73. I notice you have been very good at measuring
things like the economy from restaurants. I notice on page 11,
paragraph 8, you took up 41 cases and you have finalised 13 and
the extra tax is £700,000. I think it works out at about
£53,800 per establishment.
(Sir Nicholas Montagu) Yes. It is a very good example
of identifying a sector in which tax is at risk. We obviously
work on our intelligence activities very closely with Customs
and Excise on the VAT side and we set up, I think it was, five
pilot joint shadow economy teams with them which were so successful
that we have now rolled it out to a total of 20 from April of
this year. What they are doing is they are identifying exactly
the sort of businesses you draw attention to, Mr Jenkins, it is
the small cash businesses where a lot of transactions can take
place off the books. Going into the businesses is one source of
intelligence, collecting other sorts of local intelligence, looking
at what advertisements there are in the paper is another. If I
may say so, I think you have identified a really good example
of exactly the sort of approach that I have been trying to outline,
bottom up feelers for where the risk lies.
74. It is a big risk for us of course and it
is a small risk for them because in essence most of these businesses
can afford the tax and the fine. Do you ever recommend that someone
found not to comply with legal duties is not a fit and proper
person to have a business?
(Sir Nicholas Montagu) I do not think we have that
power. What we can of course do is to prosecute and in the serious
cases we do prosecute. I think it is likely that we will be prosecuting
more. We try to get publicity for the prosecutions but not invariably
with success. When Mr Allen, and I do not often mention names
in this Committee for obvious reasons but this is a matter of
public record, went down for seven years with a confiscation order
running into millions and the alternative of many years more,
Mr Allen was a professional man and a professional tax fraud,
we put out a press notice and it was carried as a minor item in
a local paper. We are trying to get that publicity. We are trying
to get over to people that the game is not worth the candle. I
should of course point out that while what you say is true in
the sense that if you are dodging tax and I come along and say
"Come on, Mr Jenkins, game's up, let's have it", that
might be the end of the story but in culpable cases we can actually
take penalties up to 100 per cent of the tax due. In addition,
of course we will charge interest on tax due. Dave, do you want
to add to that?
(Mr Hartnett) Just one thing, Mr Jenkins. It is very
difficult and probably impossible for us to argue that someone
running a business that is not incorporated is not a fit and proper
person. What we have been doing over the last couple of years,
where we prosecute, is also to seek confiscation of assets as
well. That is relatively new but it is proving to be a very important
tool in our armoury against tax fraud.
75. I have seen advertising on the television,
the fact that if I do not have a television licence they will
come and find me and take my television away. It is a lot easier
to identify a building than people within a building, I accept
that. I have seen benefit fraud advertising trying to change the
public's thinking but I have never seen any on income tax evasion.
(Sir Nicholas Montagu) We advertise not so much on
the income tax evasion side. What we do is we advertise to try
to make people aware of their obligations to get the tax return
in to make them aware that they will be liable to a penalty if
they do not file on time. Hector, vile though he was in many ways,
and I retired him without compunction, was very effective at getting
home to people the due dates and the fact of the penalty for people
who did not file, as indeed is Mrs Doyle in the current campaign.
76. So if we have got a list, and we do have
a list, of taxpayers, albeit it maybe late and maybe difficult
to follow through what the liabilities are, we still have a situation
where there are a number of people who to all extents and purposes
do not exist until you go and find them.
(Sir Nicholas Montagu) Exactly.
77. The ghosts, as it were. We have got international
comparisons and in particular New Zealand, which I like very much,
it is on page 25, paragraph ten, itemises five different strategies,
whistle blowers being one. Do we have a system for rewarding people
who inform on others who are avoiding tax?
(Mr Hartnett) There is statutory provision for rewards
for informers but only in relation to criminal fraud.
78. So to give an example of another agency
which tries to collect money, if I have got someone who does not
live a million miles from me who has rather a large house and
a new car in the drive but according to the CSA not enough income
to keep a pet cat because his accountant shows his company has
no profit, where do we come to an arrangement with regard to an
obvious situation where the person's standard of living is far
above his recorded income?
(Sir Nicholas Montagu) Again, I have mentioned the
risk, intelligence and analysis teams that we have, I repeat,
in every area, so covering the entire United Kingdom. These are
exactly the sorts of things that they would keep an eye open for.
That is the great advantage of having a local team because they
can keep their eyes and ears open, they can look at discrepancies
between reported income and what looks to be evidence of much
greater income. I should point out perhaps, Mr Jenkins, the examples
that are listed in the annex, the international examples, paragraph
ten on page 25 of the report, ghosts and moonlighters in New Zealand,
we do all of that. Ghosts were one of the particular issues that
I was talking about with our Australian colleagues in the small
business district in St Leonard's in Sydney a couple of months
ago. A lot of data is being swapped there.
(Mr Hartnett) If I could just perhaps add that out
of Lord Grabiner's proposals came a new statutory offence of knowingly
failing to meet basic tax obligations, which is triable in the
magistrate's court. That is another new weapon in our armoury
which I think will be very effective.
79. Since you have got local intelligence have
you envisaged conducting a pilot scheme where you totally cover
a set location so you can actually determine in that location
exactly the number of people who live there, the number who are
registered as taxpayers, the tax intake, try to establish the
black economy? If you are looking for an area to do this may I
suggest a constituency like Croydon, and I know my colleague is
exceptionally keen on this sort of approach, establishing the
scale of the problem before you roll it out.
(Sir Nicholas Montagu) Again, I will bring Dave in
on this if I may and Stephen may want to add. I gather Mr Davies
would support Croydon. He and I were present together at an admirable
and very outward facing event staged a couple of weeks ago by
our new South London area.
2 Note by witness: This figure is the cumulative
total of penalty notices issued since the start of Self Assessment. Back
Note by witness: Correction-final figures are not yet
Note by witness: Letters are sent first, then followed
up with telephone calls when no response is received. So the clearance
figures are not comparable, because we are phoning people who
have already resisted our written reminder. Back
Note by witness: A reward may be paid to any person who
informs the Board of any offence against any Act relating to the
Inland Revenue. Back
Note by witness: The precise nature of the statutory offence
is being knowingly concerned in the fraudulent evasion of income