Select Committee on Public Accounts Appendices to the Minutes of Evidence


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 system.

  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 occur—the complexity of the tax system being one reason—such 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.

John Whiting

President, Chartered Institute of Taxation

5 October 2001



  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 are:

    —  Pensions—is there scope for streamlining the three current "personal" schemes?

    —  Social Security Benefits—could there be a simpler taxable/non-taxable divide?

    —  Definitions of income—could the income definitions for income tax, National Insurance and benefits be harmonised?

    —  Capital Gains Tax—is it still necessary to have the rules in the system for 1965 and 1982?

    —  Income Tax rates—this is of course a very political area but the scope for eliminating complexity and confusion for ordinary taxpayers by combining tax rates cannot be ignored!

  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 unfairness—or 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 unfairness.

  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 inclusion—the cost of complexity—is 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).



  1.  Simplify age allowances.

  2.  Age related MCA fully transferable.

  3.  Abolish restriction of MCA in year of marriage.

  4.  Abolish the Accrued Income Scheme—or 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 eliminated—something 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 older people.


  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 year—the 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 this restriction.

  There is no loss to the Exchequer in enacting this change.


  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.


  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.


  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' situations.

  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.


  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

June 2001

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