Select Committee on Public Accounts Appendices to the Minutes of Evidence


APPENDIX 3

Memorandum submitted by the Institute of Chartered Accountants

PUBLIC ACCOUNTS COMMITTEE HEARING ON SELF ASSESSMENT—22 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.

WHO WE ARE

  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.

GENERAL OBSERVATIONS

  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 bodies.

  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.

SPECIFIC COMMENTS ON THE REPORT

  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 per annum.

  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 needs clarification.

  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 suspect.

  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 wrong.

  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.

Francesca Lagerberg
Senior Consultant
Institute of Chartered Accountants

9 October 2001


 
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