Select Committee on Public Accounts Appendices to the Minutes of Evidence


Memorandum submitted by the Inland Revenue

Question 95

  The Revenue has access to details of housing benefit payments under section 18A Taxes Management Act 1970. The tax office must serve a notice on a local authority to supply the information but some local authorities dispute the Revenue's entitlement to all details. We do not know how many local authorities are currently in dispute because these issues are usually resolved quickly by the local tax office, and only the most persistent cases are referred to Head Office for advice. No local authority has refused to comply with a notice once we have fully explained the Revenue's legal entitlements.

  In order to overcome local discrepancies in obtaining information we are working towards a system for issuing standard notices to local authorities and handling the information details received centrally. This is a long-term project because local authorities hold their information in many different formats, often across different computer systems, and they need time to put suitable IT in place to meet a standardised request for information.

Question 191

  Around 350,000 people filed late for the last two years running. We are acting to reduce the number of repeat late filers by reminding everyone who filed late last year about the approaching filing date, by telephone wherever possible. And we will be making more, and quicker, use of powers such as determinations and daily penalties to bring in long outstanding returns.

Questions 203-206

  Random enquiries form only a small part of the total enquiry programme. Taxpayers are much more likely to face an enquiry on the basis of a risk assessment. Failure to file a return on time is one of the factors which may be taken into account in assessing the risk, so the outwardly compliant taxpayer referred to in paragraphs 203-206 does in fact face a slightly reduced possibility of enquiry, other things being equal.

  The random enquiry programme by its nature would be invalidated were exceptions to be made. But the design of the scheme is the responsibility of the Inland Revenue and not of Parliament, as this answer implies.

Question 220

  The Inland Revenue relies in the main on a regime of civil settlements to counter tax evasion, but it also has a selective prosecutions policy. It will consider each case for prosecution on its merits against a set of published criteria. These include, for example, forgery, collusion, repeat offences and the status of the individual, such as a professional adviser.

  The size of the alleged fraud is not of itself the determining factor in considering prosecution. However, the Revenue Board's view is that the more extensive and substantial the alleged fraud, the more likely it is that they will wish to prosecute.

  This policy applies to all types of tax fraud, including those in the construction industry. This means that monetary amounts will have some bearing on the decision to prosecute, but other factors will have a very significant influence too. So a relatively small tax fraud in monetary terms can still result in prosecution action if the aggravating features are especially serious. And a larger scale fraud in monetary terms may result in a civil settlement, if there are no aggravating features and full co-operation is given.

  Some recent examples highlight these broader and more specific points. Case A involved a property owner who did not disclose rental income and created false invoices in his hotel business. The tax loss was £300,000 and following prosecution he received a three year custodial sentence. Case B involved a multiple identity fraud and the purchase of shares in utility companies. False claims to tax credits on the annual dividends generated tax repayments which were not due. A suspended custodial sentence resulted.

  We consider any concerted attack on Revenue systems to be a serious matter. This includes the Construction Industry Scheme and we are especially concerned about those who sell or buy documents issued and owned by the Inland Revenue. We will prosecute relatively small cases of this kind, because of the serious nature of this type of fraud.

  Some further examples demonstrate the point. In case C we prosecuted a contractor who sold his vouchers to sub-contractors. These vouchers enabled the sub-contractors to receive tax-free payments. Although his personal gain was only £30,000 we believed these acts to be serious enough to warrant criminal prosecution. He received a 21 month custodial sentence. In case D an accountant orchestrated a much larger fraud, whereby his client contractors were encouraged to generate fictitious tax exemption certificates for the accountant's client sub-contractors. The tax defrauded was split between the three groups involved and was in excess of £1 million. We prosecuted the accountant and the contractors involved and they received a range of custodial sentences up to seven years. There was insufficient evidence to prosecute the sub-contractors and they gave evidence against the accountant.

Question 237

  For the year to 31 March 2000 we settled enquiries into the returns of 505 restaurant businesses for a total tax yield (duties, interests and penalties in addition to the duties returned) of £3.44 million.

Question 275

  1.  Where free or cheap living accommodation is provided to an employee (or a director or office holder) by reason of his or her employment, it will be an employment benefit chargeable to tax on the beneficiary. The term "living accommodation" covers residences of all kinds, and includes holiday homes. (But it does not include accommodation in a hotel room or where board and lodging are provided, for example, in the employer's home or in a bed and breakfast; these benefits are subject to tax under the general benefits charging provisions.

  2.  The tax charge is on the annual value of the accommodation provided (see "Valuation and calculation of charge" below) or, if the amount of rent paid by the employer for the accommodation is higher, or that higher amount. If the employee pays any rent or other contribution towards the cost of the accommodation, this is offset against the amount of which he or she is chargeable.

  3.  There are statutory exemptions from charge where the accommodation is:

    —  necessary for the proper performance of the employees duties—notable examples being agricultural workers living in tied housing on farms, or caretakers living on the premises; or

    —  provided for the better performance of the employees duties and it is customary to provide accommodation for that type of employment. A number of employee categories may qualify under this exemption, for example the armed forces, the clergy; or

    —  provided as part of special security arrangements. This is a very tightly drawn exemption and requires there to be a special threat to the physical security of a particular employee because of his or her employment.

  4.  Directors who own a substantial share of the company which provides them with accommodation are excluded from both the necessary and the better performance and customary exemptions.

  5.  Some employees exempt under earlier rules (replaced by statutory provisions in 1977) as "representative occupiers" (broadly, required by contract to reside in a provided property for "more effectual" performance of their duties) also retain exemption for so long as the circumstances relating to the provision of the property do not change.


  6.  Where accommodation is within the statutory exemptions outlined above, exemption also extends to any tax charge that would otherwise arise in respect of council tax reimbursed to, or paid on behalf of, the employee by the employer.


  7.  Directors, and employees and office holders earning £8,500 or more, also face a tax charge on other benefits provided in connection with living accommodation—such as heating, lighting, cleaning, maintenance and provision of furniture. The charge is on the amount which the employer has to meet to provide these benefits. However where the accommodation is itself exempt under one of the exemptions referred to at paragraph 3 above, the tax charge on the associated benefits is restricted to 10 per cent of the employees income (after pension contributions and allowable expenses) from the employment to which the accommodation relates.


  8.  Generally, the "annual value" for the purposes of the provided accommodation charge is measured by reference to the (former) gross rating valuation. But, as noted above, where the employer pays a higher rent, that rent will be the amount chargeable.


  A property whose gross rating value equivalent is calculated at £1,500, is provided by a company to one of its executives. The Employer does not own the property but pays a rent to the owner of £20,000 a year.

  The amount on which the executive is chargeable in respect of the property will therefore be £20,000 per annum.


  9.  In addition to the ordinary charge on annual value or rent paid, an additional charge on provided accommodation was introduced in 1983 for more expensive property. This additional charge applies where the cost to the employer of acquiring the property was more than £75,000. In these cases the excess over £75,000 is treated as if it were an interest free loan advanced by the employer to the employee. The amount chargeable is then calculated by multiplying that excess by the rate of interest which applies for the purposes of measuring the benefit to an employee of a loan from his employer at a low (or no) rate of interest—called the "official" rate. The official rate is currently 6.25 per cent.


  A company buys a property for £250,000 and allows the finance director to occupy it rent free. The gross rating value equivalent of the property is £2,000. So the ordinary provided accommodation charge is on £2,000.

  The excess over £75,000 is £175,000, so the amount subject to the additional charge, at the rate of 6.25 per cent is £10,937.

  The total amount chargeable on the director will therefore be £12,937 per annum.


  10.  For self-employed people there is no general benefit rule within the tax system that will cover the situation where someone is paid in kind rather than in cash. In essence a person is chargeable for income tax under Schedule D, as well s under Schedule E, not on what he saves his pocket, but on what goes into his pocket. The key issue is valuation.

  11.  If a trader's pre-determined price is met by the provision of an asset the position is that the value brought into his tax computation is the pre-determined price.

  12.  Should this not be the case then the rule is that where there is no cash receipt by the trader as a result of a trading transaction the quantum to be assessed is the second hand value or market value of the receipt. If there is no second hand value, because for example the recipient is not allowed to transfer the asset (say a trader being paid with a holiday that only they are allowed to take) then nothing is brought into account. However, such situations are rare and the rules are kept under review in case of abuse.

  13.  Should a trader occupy private accommodation connected to business premises, for example a trader living over a shop, then the trader is only allowed to deduct from their taxable income those revenue expenses that have been incurred wholly and exclusively for the purposes of the business. Any expenditure relating to the private living accommodation would not be allowed.


  14.  There is one other (fairly unusual) situation in which provided accommodation would have tax consequences. This occurs where a close company incurs expense in providing accommodation to one of its shareholders. ("Close company" is a technical term covering companies controlled by a limited number of persons, often small family businesses). If that shareholder does not receive the benefit of that accommodation as an employee or director, the expenditure will be treated as a distribution. Under tax law, a distribution is any passing of value from a company to a shareholder. The most common type of distribution is a cash dividend—but distributions may take a number of different forms (such as this kind of benefit).

  15.  A distribution is treated as taxable income in the hands of the shareholder. So, for tax purposes, a shareholder in this situation would be treated as if he or she had received income directly from the company. The calculation of the amount of income mirrors the Schedule E rules, set out above, However, the tax charge on a shareholder's distribution income is generally mitigated by a tax credit. The tax credit reflects the fact that the company will be liable to corporation tax on the profits out of which the distribution is made —and so mitigates the potential double charge to tax on the distributed sum.

Question 276

  The Inland Revenue can provide forms and leaflets in the following languages:

    —  Welsh;

    —  Bengali;

    —  Cantonese;

    —  Greek;

    —  Gujurati;

    —  Hindi;

    —  Punjabi;

    —  Urdu;

    —  Vietnamese; and

    —  Turkish.

Questions 285-287

  Note by witness. If the tax liability is less than £100, the penalty is capped at the level of the liability, but remains in addition to the tax. So the taxpayer does not get the full £100 penalty refunded if his tax liability is £99. The penalty is reduced to £99, the tax is also chargeable, and the taxpayer has to pay £198 altogether. If the tax liability is £101, the penalty is the full £100, payable in addition to the £101 tax. If no tax is due, or if tax has been overpaid, the penalty is reduced to nil and any overpayment refunded.

Inland Revenue

November 2001

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