Memorandum submitted by the Chartered
Institute of Taxation
The Chartered Institute of Taxation (CIOT) understands
that the Public Accounts Committee is considering the National
Audit Office report on Income Tax Self Assessment (published in
June this year) at its meeting on 22 October and would like to
submit a number of observations on the subject. By way of background,
the CIOT has some 11,600 tax professionals as members, the majority
of whom are in practice as Chartered Tax Advisers and many of
whom have daily contact with the workings of the Self Assessment
1. The Institute broadly welcomes the report
and agrees that the introduction of self-assessment has generally
improved the administration of income and capital gains tax. The
Institute has been involved, through consultations and working
groups, with self-assessment from the start and has always viewed
it as a necessary modernisation of the tax system.
2. We do, however, believe that the additional
burdens that self assessment has placed on taxpayers and advisers
has been ignored. We believe that now is the time to start making
the system work more efficiently. We see the existing and now
well-established joint Inland Revenue and professional bodies'
Working Together project as a key way forward.
3. We generally support the NAO report findings
but feel it could have gone further, particularly in the area
of late filing of tax returns. We note from the report that the
Revenue are now carrying out research into pattern so taxpayer
behaviour and the reasons why returns are not filed on time. We
have long asked for such research and look forward to the results
with interest. We particularly endorse the recommendation of the
NAO that the Revenue develop:
"their management information to monitor
the use of fixed and daily penalties, and tax determinations,
and their effectiveness in ensuring that tax returns are filed.
Without this information, the Inland Revenue cannot assess whether
these incentives are effective or that local offices are using
the arrangements properly" (page 3).
In short, we think it is important to find out
more about the reasons for missed filing deadlines as that in
turn will help define courses of curative actions.
4. In part 2 of the report, on identifying
compliant taxpayers, we note at paragraph 2.5 the words:
"Individuals have a legal obligation to
notify the Inland Revenue of their chargeability to income tax
or capital gains tax. For the newly self-employed, the arrangements
were simplified and strengthened in January 2001 and individuals
can now telephone the Department to register, with the risk of
a £100 penalty if they do not do so within three months."
We are a little disturbed to see the new penalty
for failure to register for Class 2 National Insurance being described
as a strengthening and simplification of an income tax obligation.
The latter remains as an obligation due six months after the end
of the first tax year of liability by virtue of section 7 of the
Taxes Management Act 1970. We consider the Class 2 penalty unfair
and disproportionate to the Class 2 charge (currently £2
per week). We enclose a copy of our representations on this matter
when the penalty was first announced in October last year.
5. We note that at Appendix 2 to the NAO
report there is a reference to "processing errors" leading
to gross errors of the order of £100 million. We would like
to know how effective the Revenue are at correcting such errors.
Whilst we understand the Revenue's "process now, check later"
principle, we have found in practice that this can lead to processing
errors. Whilst we can understand and accept why these occurthe
complexity of the tax system being one reasonsuch errors
take taxpayers and their advisers time and effort to sort out.
We wonder, also, how many unrepresented taxpayers remain subject
to uncorrected, unnoticed errors.
6. The report refers to the joint research
carried out by the Institute and the Revenue into enquiries under
self-assessment. We would also refer the Committee to research
report we published in April 1999 "Self Assessment: Working
Towards Best Practice" a copy of which is enclosed.
7. We believe that more progress could be
made in the streamlining of self assessment if simplification
of the tax system could be achieved. Whilst we have no direct
evidence we suspect that one reason for non-compliance is the
complexity of the forms. We enclose our recent paper on "Quick
wins" detailing some changes that could bring about a shortening
of the return form.
8. We also believe it is necessary to reduce
the impact of self assessment on certain sectors of society such
as the elderly. Our Low Incomes Tax Reform Group has long advocated
removal from self assessment for those on the lowest incomes.
It seems a farce to send such a form to an 85-year-old widow with
two sources of income totalling £7,000 per annum, but this
is what happens if you have "the wrong sort of income".
Additionally, a simpler return form for this group should now
be devised. The development of such a return could be linked with
the returns that will be necessary for the forthcoming, and increasing,
group of New Tax Credit applicants in 2003.
9. Finally, we continue to support the e-enabling
of the self assessment process. The Electronic Lodgment Service
has not been an entirely happy episode and Filing By Internet
unfortunately had a bad start. We hope that more positive progress
can be made in the future. We consider the encouragement of active
involvement by all taxpayers' agents, including Chartered Tax
Advisers, is an essential ingredient to success.
We would be pleased to supply further details
to amplify any of the points or papers we have referred to, or
to give oral evidence to the Committee if that is appropriate.
President, Chartered Institute of Taxation
5 October 2001
THE CHARTERED INSTITUTE OF TAXATION
ATTACKING COMPLEXITY: QUICK WINS FOR TAX
SIMPLIFICATION PERSONAL TAX QUICK WINS
The Chartered Institute of Taxation has been
concerned for some time about the seemingly inexorable and exponential
increasing complexity of the tax system, especially insofar as
it affects ordinary people and their tax returns, and small businesses.
This is illustrated by the fact that the comprehensive tax calculation
guide for 2000-01, which the Revenue produces to help people to
complete their self assessments, runs to 32 pages. Even the standard
guide runs to 15 pages and requires the taxpayer to consider 167
boxes in order to calculate his or her tax liability.
This is the first of a series of papers, which
will set out relatively simple changes to the tax system that
would really contribute to simplification. Our aim in so doing
is not to solve in one step the problem of complexity. That would
be impossible. Rather we want to challenge the Government and
the tax authorities to acknowledge the problem of complexity by
committing to make annual changes to the tax system aimed solely
at simplification. This paper concentrates on personal tax issues.
We begin by outlining 10 "quick wins".
These have been chosen on the basis that they have little or no
revenue cost. If there is a loss of tax, we feel the costs of
collection probably outweigh the receipts.
The first three would result in the shortening
of the standard tax calculation guide for 2000-01 for nearly all
elderly citizens, reducing the number of boxes to 132, and the
number of pages to 12. The fifth would prevent many of those making
Government encouraged pension contributions having to repeat a
substantial part of the tax calculation guide. The last five would
result in easier tax return completion, either by clarifying or
simplifying tax return entries or by taking common items outside
the self assessment net through the updating of outdated reliefs.
We deliberately choose possible changes that
range from (in effect) administrative simplifications through
minor technical changes to involved technical issues. All, we
submit, deserve serious consideration and, preferably, quick action.
In a paper on "Quick Wins" it would
be inappropriate to detail longer-term projects. At the same time,
it would be equally wrong not to point to some wider areas where
it seems to us that some work on simplification would pay dividends.
Some areas that we think are worthy of study
Pensionsis there scope for
streamlining the three current "personal" schemes?
Social Security Benefitscould
there be a simpler taxable/non-taxable divide?
Definitions of incomecould
the income definitions for income tax, National Insurance and
benefits be harmonised?
Capital Gains Taxis it still
necessary to have the rules in the system for 1965 and 1982?
Income Tax ratesthis is of
course a very political area but the scope for eliminating complexity
and confusion for ordinary taxpayers by combining tax rates cannot
We may well commission further research on some
of these items; we would be equally pleased to contribute to work
being carried out elsewhere on these or other projects.
It is often claimed that fairness in a tax system
leads automatically to more complexity. Consequently a drive for
simplification runs the risk of creating unfairnessor of
eliminating designed-in complexity that, for example, gives a
particular allowance or benefit to the low paid.
We feel this argument has validity up to a point.
But it is superficial in that it ignores the administrative cost
(to taxpayers and tax authorities) of the additional complexity.
Simplification could lead to savings of general benefit. It also
ignores the loss of intended benefits when those targeted fail
to understand what is available (as seems to be happening with
the Working Families Tax Credit or Disabled Person's Tax Credit
where take up is lower than anticipated). Complexity can produce
We are not trying to argue for the elimination
of all allowances and special charges in the tax system. We accept
that the tax system will always be used for social policy purposes.
But it is important that the hidden cost of such inclusionthe
cost of complexityis carefully considered.
In short, any change to the tax system should
always be questioned along the lines of:
can the objective be achieved more
efficiently by another route (for example by a social security
benefit rather than a tax allowance);
is the change really worth it (would
more be achieved by simple tax rate reductions).
OUR 10 "QUICK
1. Simplify age allowances.
2. Age related MCA fully transferable.
3. Abolish restriction of MCA in year of
4. Abolish the Accrued Income Schemeor
at least raise substantially the threshold.
5. Carry back of losses and pension contributions
to be included in self assessment for year of relief.
6. Adjust limit where minor's income deemed
to be that of parent.
7. Adjust limit for relocation expenses.
8. Identify Children's Tax Credit and the
new Baby Tax Credit by their tax savings £520 and £1,040
rather than the £5,200 gross figure and MCA.
9. Call chargeable events on non-qualifying
life assurance policies "income events".
10. Back-date the FA 2000 taper relief rule
changes for Capital Gains Tax to 5 April 1998.
Our comments on the 10 items are as follows:
Currently, there are two higher personal allowances:
one for the over 65s and one for the over 75s, together with different
married couples allowances, with progressive tapering off provisions
for incomes over £17,600 (s 257 TA 1988). The result is a
plethora of income limits and a higher marginal tax rate for older
people on middle incomes (the "age allowance trap").
It is perhaps worth noting that the current
difference in tax between the two age-related married couple's
allowances is only £7 per annum. The personal allowances
normally differ in effect by £60 per annum.
Our proposals are at various levels:
our quickest win would be to harmonise
the married couples allowance at the 75+ level; whilst there is
an Exchequer cost this would be small and well justified;
the next stage would be to work towards
harmonising the personal allowances; the different rates cause
confusion and are not always claimed; and
ideally the clawback would be eliminatedsomething
that causes great confusion and difficulty. This is a longer term
win, in that it would most obviously benefit the better off, but
it is surely worth consideration, particularly as the subject
of the integration of tax and benefits will be brought sharply
into focus with the new integrated Pensioners' Credit.
Adoption of these measures would save 22 boxes
on the tax calculation guide and simplify notices of coding for
2. AGE RELATED
Whilst this quick win does not save so many
boxes on the tax return, it rectifies what is really an historical
anomaly. Now that there is no standard married couple's allowance,
it is confusing to read on the tax return that you can allocate
half or all of the allowance to your husband or wife, only to
find when you do the tax calculation that you can only enter £1,000
or £2,000 respectively. The situation is exacerbated if the
taxpayer marries during the tax yearthe transfer figure
becomes a fraction of these two unexplained amounts.
Since there is now no tax advantage (though
there can be cash flow advantages) to be had by transferring the
married couple's allowance (the whole relief is given at 10 per
cent), and if the allowance proves to be surplus to requirements
it can be transferred anyway, there seems little point in retaining
There is no loss to the Exchequer in enacting
3. ABOLISH RESTRICTION
There cannot be many tax paying couples marrying
with one aged 66 or over so we do not see this involving much
tax loss to the Exchequer. By way of comparison, the new children's
tax credit does not have any in-year restriction. This change
would bring the remaining age-related married couple's allowance
in line. The full allowance is given in the year in which a marriage
ends. It seems a little unnecessary to retain the quite complex
restriction on page 14 of the standard tax calculation guide.
4. ACCRUED INCOME
The Accrued Income Scheme is, we submit, over
complex and little understood by taxpayers. The Inland Revenue
is not immune from getting the rules wrong.
Whilst we understand that anti-avoidance rationale
for the AIS, we would question whether the rules still serve to
prevent significant avoidance. Ideally, the AIS should be abolished.
We accept that this would require some study to see if a simpler
mechanism can be devised to prevent any avoidance that the Revenue
were concerned about.
At a minimum, the £5,000 de minimus limit
needs to be raised substantially. To put this into context, at
today's interest rates, this amount produces tax of £60 over
a half year for apportionment. A limit of £100,000 is indicated.
On the surface, there would be an Exchequer
cost to raising the AIS threshold. We suggest that in practice
this would be minimal, given the amounts involved at today's interest
rates, the regularity at which the issue is missed and the saving
in administrative costs. As noted, we can accept that complete
abolition would require further study.
5. CARRY BACK
Under current rules, a premium paid by 31 January
following the end of the tax year or a loss established by the
time the return is submitted, can be carried back to the year
of the return but must be dealt with outside the return-year self
assessment. Thus the taxpayer is required to rework the self assessment
calculations, including the carried back relief, deducting the
revised figure from the original figure to arrive at the "repayment".
This is then deducted from the tax due for the year but has the
effect of not reducing the payments on account. This causes a
considerable amount of confusion, gives a lot of extra work to
the taxpayer (and/or the Revenue), and produces only a minimal
cash-flow benefit to the Exchequer.
For pension contributions the reason the payment
is made after the tax year is usually that it is only by then
that the taxpayer knows for certain his or her net relevant earnings.
By making the carry back claim he is establishing that the pension
contribution is for that year. He will probably repeat the exercise
the following year. There seems little logic in not allowing him
to include the relief in the self assessment for the year of the
return. We are aware that there was a problem with the interaction
of this relief with self assessment in 1996-97 and the transition
to the new payment on account rules but now that self assessment
is established and ongoing we believe the matter should be revisited
and the rules changed to reflect the reality of most taxpayers'
For losses, the taxpayer is using the relief
to minimise his tax bill at a time when his income is low. The
fact that a claim processed with the self assessment will produce
a reduction in his payments on account is perfectly logical because
if he has made a loss in the current year, the payments on account
should be smaller anyway. He or she could make a separate claim
to reduce his payments on account. It is interesting to note that
in the recent Special Edition of Tax Bulletin for Foot and Mouth
Disease (page 4, paragraph 3), the anticipation of loss relief
is recognised with relief to be given in a PAYE code but not,
it appears, by reducing the payments on account.
This change would not reduce the normal length
of the tax guide by much (half a page of explanation and one box)
but it would prevent a complete reworking of nine pages of the
guide and remove an area of considerable confusion and inequity.
The £100 limit under s660B(5) TA 1988 should
be increased to £500. The £100 limit has applied since
1991-92 (the previous £5 limit admittedly lasted from 1936)
and is in need of updating. The proposed increase would ensure,
inter alia, that income arising in ISAs held by minors
and funded by parents is not deemed to be the income of the parents.
Raising this limit could have an Exchequer cost.
However, we feel any cost will be small, will be balanced by administrative
savings and will avoid the oddity of a Government-encouraged move
(ISAs for 16 and 17 year olds) creating an unlooked-for tax problem.
The present limit of £8,000 in Schedule
11A paragraph 24(9) TA 1988 for tax free relocation expenses should
be increased significantly to reflect current costs of relocation.
The £8,000 limit was enacted FA 93 when the rate of stamp
duty on houses costing over £250,000 was only 1 per cent.
The stamp duty element of the relocation costs on purchase of
a house of this cost was thus only £2,500. Recent rises in
Stamp Duty mean that this element of the relocation package for
a relatively modest house in London or South East England could
be in the order of £7,500, taking up most, if not all, of
the tax free limit.
If it is not possible to have a simple significant
increase in the tax-free amount, reimbursement of stamp duty costs
should be in addition to the £8,000 limit. Although this
change does have an Exchequer cost, we see no justification for
imposing a tax change on, in effect, the mobility of labour. Being
moved by an employer is something employees rarely welcome; it
is perverse to make it into a tax-charging occasion.
If the Revenue has concerns that a higher limit
would be open to abuse we would be pleased to discuss how these
could be met whilst allowing a general higher allowance.
The Revenue leaflet CTCR/1 begins by describing
Children's Tax Credit as a reduction in income tax of £520.
We suggest that this way of identifying the tax relief is retained
for all purposes and for the new Baby Tax Credit as well (the
figure being in that case £1,040). Continuing to refer to
these "credits" as "allowances at 10 per cent"
is only a source of confusion and will inevitably result in more
calculation boxes on the tax return for 2001-02 and 2002-03. The
higher rate restriction can easily be expressed as £1 for
every £15 rather than £2 for every £3 (as in the
Revenue's own leaflet) and adopting a common form of expression
could make the relief easier to understand. In calling the relief
a "Tax Credit" there is already tacit recognition that
it is not like the personal allowance.
In the same way the Married Couples Allowance
would be better expressed as a Married Couples Tax Credit.
In helping people complete their tax returns
we see much confusion arising from the fact that profits on non-qualifying
policies such as single premium investment bonds are referred
to as "chargeable events", or "gains". We
have even seen an instance where the insurance company (on the
chargeable event certificate) suggests that the taxpayer put the
amount in his or her tax return under the heading "capital
gains"! We suggest that these amounts are re-termed "income
events" or "insurance policy profits" making their
tax treatment clearer to all (including the fact that they count
as income for the purpose of income-related reliefs).
This change could be incorporated as part of
the current discussions with the insurance industry on revised
chargeable events certificates.
10. FA 2000 TAPER
TO 5 APRIL
It is well documented that having two taper
regimes for business asset causes complication and anomalies.
We do not think that there would be so much loss to the Exchequer
if all taper relief calculations were brought within the new Finance
Act 2000 rules. This would reduce complexity and the compliance
burden for many taxpayers, particularly those with shares in their
employers. Such individuals assume that they would, for example,
achieve full business asset taper on shares held in their employers
for the period April 1998 to April 2002. The fact this is not
the case comes as an unpleasant surprise and is not, we submit,
in line with the Chancellor's intention.
Chartered Institute of Taxation