Memorandum submitted by the Inland Revenue
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.
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.
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.
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
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
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
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.
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 dutiesnotable 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
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
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 accommodationsuch 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
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
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
interestcalled 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.
SCHEDULE D ASPECTS
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
dividendbut 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
The Inland Revenue can provide forms and leaflets
in the following languages:
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.