Memorandum submitted by the Institute
of Chartered Accountants
PUBLIC ACCOUNTS COMMITTEE HEARING ON SELF
ASSESSMENT22 OCTOBER 2001
We understand that the Public Accounts Committee
is considering the National Audit Office report on Income Tax
Self Assessment (July 2001) at a meeting on 22 October 2001.
The Tax Faculty of the Institute of Chartered
Accountants in England and Wales held discussions with the National
Audit Office (NAO) during the preparation of the report and we
would like to add some comments.
The Tax Faculty is the centre for excellence
within the Institute of Chartered Accountants in England and Wales.
We represent the Institute on tax matters and have over 10,000
tax professionals as members as well as speaking for the Institute's
nearly 120,000 members on tax matters.
We welcome the main findings that self assessment
has improved the administration of income and capital gains tax
and allowed a more focused approach to compliance work. A great
deal of effort was put into setting up the technical details relating
to self assessment by both the Revenue and the representative
However, what the NAO Report does not bring
out is that the more focussed approach of self assessment has
given rise to many operational issues. Some of these arise from
the increasing complexity of the UK tax system and the Tax Faculty,
like many others, has been actively campaigning for simplification
(as part of our "Towards a better tax system campaign")
for many years. Other issues arise due to the way in which the
implementation of self assessment has been handled. These are
dealt with more specifically below where comments are made on
the numbered paragraphs in the Report.
The Report is overall rather disappointing in
that it appears to have accepted without critical analysis comments
received from the Inland Revenue.
As a general comment self assessment has meant
that taxpayers have to spend far more time than previously in
completing a tax return. Many have opted to pay professional advisers
to complete their returns, whereas previously they felt competent
to do this themselves. One might argue that a body of tax professionals
would welcome the extra work but the reality is that it is to
no-one's advantage to force those with simple tax affairs being
driven into requiring professional advice.
1. Paragraph 8 of the Executive Summary
refers to £350 million of extra tax being collected as a
result of self assessment compliance work. Whilst not to be underestimated
this is surprisingly low especially when viewed in the context
of paragraph 13 which suggests that almost as much could be collected
simply by doing something about late returns. Later in the Report,
the NAO estimates that the Revenue make processing errors of £100,000
2. Paragraph 12 of the Executive Summary
refers to the Revenue's intelligence work. When self assessment
was introduced the Revenue made strenuous efforts to show that
the legislation sought to achieve a balance between the Revenue's
powers and taxpayers' rights. It is, therefore, disappointing
that there is nothing at all in the Report about taxpayers' rights.
In particular whilst Parliament has required some third parties
to provide specific information to the Inland Revenue it has not
required others to do so.
3. It is of some concern to seem, for example,
that the Report should mention, without comment, that the Revenue
is seeking to obtain information on landlords from local authorities.
That may or may not be a good thing, but it raises the question
of whether this is an appropriate course of action without seeking
authority from Parliament to do so.
4. Paragraph 13 of the Executive Summary
states that the potential tax at risk associated with late returns
could be between £150 and £300 million a year. However,
the Report does not say what is meant by "at risk".
The definition of this is crucial. The courts have held that tax
paid late is tax at risk in tax terms. However, tax paid late
is less of a cause for concern, when coupled with commercial rates
of interest, than tax not collected at all. This is a point which
5. Paragraph 14 welcomes the Revenue carrying
out further work to assess the likely tax at risk and the reasons
why returns are not filed on time. We would welcome such discussions
but believe that the professional bodies should be consulted before
systems are altered to try to improve the situation.
6. We were surprised at the suggestion in
paragraph 16 that random enquiries have in themselves suggested
that substantial sums may be at risk for non-compliance. We would
like to see some further evidence to support this suggestion.
7. Paragraphs 4.5 and 4.6 of the Report
suggest that random enquiries of themselves suggest that uncollected
tax is somewhere between £1.8 and £3 billion. In the
context that targeted compliance work has identified only £350
million of additional tax in a year, the obvious conclusion ought
to be to abandon targeting enquiries completely and concentrate
the Revenue's resources on significantly increasing the number
of random enquiries. It is odd that neither the Revenue nor the
NAO suggest this which suggests that the figures may be somewhat
8. Paragraph 17 suggests the need for an
increased use of third party information. Given the human rights
issues involved we would suggest this is an issue which should
be debated by Parliament.
9. Paragraph 1.3 does not coincide with
the evidence we see from our members who act for higher rate taxpayers.
We believe many of these taxpayers have noticed many changes in
the handling of their tax affairs and in particular an increase
in the burdens placed upon them.
10. We were interested to see in paragraph
2.9 that the Inland Revenue is using details obtained from bank
and building society interest. This conflict with anecdotal comments
from Inland Revenue staff, which suggests that whilst this information
was used frequently in the past this rarely happens now.
11. We find it worrying that in paragraph
2.9 the NAO reports without comment (at figure 8) the use of visits
to restaurants to draw conclusions that these collect an "extra
tax yield" of £700,000. It would have been fair to also
say that to date that the only case where the Special Commissioners
have awarded costs against the Inland Revenue was in the Farthings
Steak House case. In this decision the Special Commissioners
were scathing about the use of such exercises where there is no
intrinsic evidence in the records to suggest that anything was
12. It is of vital importance to collect
the right amount of tax, no more and no less. However, the operation
of investigations can leave the taxpayer having to argue on the
balance of probability that a guess made on limited observations
was incorrect. The related stress and strain on a taxpayer of
investigations can undoubtedly lead to taxpayers "throwing
in the towel" to bring a case to an end. We believe the Report
should have made some concession to the fact that "extra
tax yield" should be determined by safeguards to ensure that
the yield is tax that Parliament required the taxpayer to pay.
13. We are concerned about the conclusions
of paragraph 3.8 where the NAO encourages the use of daily penalties
of £60 per day when it has already been made clear in paragraphs
13 and 14 that the Revenue does not have firm ideas why returns
are filed late. We believe that research ought to be done before
heavier penalties are imposed to ensure that any new approach
is properly targeted.
14. Balance is also required when considering
the point raised at paragraph 3.10. There is a risk that where
the Revenue makes a determination its figures may be too low.
However, in our experience in the past of estimated assessments
this risk is extremely low. This ought to be balanced by the likelihood
that many, if not most, determinations are issued against people
on very low income who are frightened by the complexity of a tax
return. Such people pay the tax on a determination even though
it is frequently far in excess of the amount that is actually
due because they fear that terrible things will happen to them
if they do not pay tax demanded.
15. It is disappointing to find in paragraph
4.13 that the NAO do not appear to have looked at to what extent
the Inland Revenue staff actually follow the detailed guidance
on the conduct of enquiries. The information we have from our
own members suggest either that there is widespread ignorance
of these procedures amongst Revenue staff or a disregard of much
of the guidance.
16. The Revenue joint review of how enquiries
have been handled mentioned in paragraph 4.15) has given rise
to many discussions on the treatment of Revenue enquiries. The
review did not in itself give rise to the main options for change
and, in fact, some of the conclusions mentioned in paragraph 4.15
do not meet with universal approval from tax professionals eg
the abolition of Faster Working. It was our understanding that
many of these issues were still subject to discussion and the
Tax Faculty is involved in working parties on such issues which
makes it all the more surprising to see the NAO report suggesting
that the work of this group has been pre-empted.
17. We have some misgivings about the validity
of comparisons with other countries as set out in Appendix 3,
many of which are in a more developed stage of self assessment
than the UK. As a result of a different taxpayer culture it is
unrealistic to suppose that things that work in other countries
which have a different tax system can easily be overlaid onto
the UK system. However, lessons can be learnt from overseas. For
example, in the USA the Internal Revenue Service (IRS) was given
so many powers to combat avoidance, and used those powers in such
an aggressive manner, that about four years ago Congress called
a halt to the procedure and insisted that IRS's powers were balanced
by far greater taxpayer protections. Parliament should be wary
of taking the UK along the same path by concentrating too much
on tax collection and ignoring the significant intrusiveness into
taxpayer's affairs that flow from this.
18. It goes without saying that the Tax
Faculty is highly supportive of the Revenue's efforts to collect
the right amount of tax that is properly due. We would simply
also like to see proper regard given to taxpayers' rights as part
of that process.
19. Appendix 5 of the Report gives the impression
that there are few if any outstanding issues relating to self
assessment. We would like to emphasise this is not the case and
we still receive innumerable complaints about the operation of
self assessment from our members.
We would be happy to provide any further information
you may require on the issues we have raised above or to give
oral evidence to the Committee if that is appropriate.
Institute of Chartered Accountants
9 October 2001