Memorandum submitted by The Institute
of Chartered Accountants in England and Wales
1. The Tax Faculty is the focus within the
Institute of Chartered Accountants in England and Wales for those
Chartered Accountants working in the area of tax. It is a centre
of excellence and the authoritative voice for the 120,000 members
of the Institute on taxation matters. The Tax Faculty makes representations
to Government and other authorities, and public pronouncements
on major tax issues.
2. Whilst self-assessment is not a tax system
but a method of administration, it is hard to differentiate the
administration of a complex system from the system itself. Three
years ago, the Tax Faculty began a campaign to simplify the UK
tax system. As part of this campaign, we published "Towards
a better tax system". This set out 10 principles (the 10
tenets) that we think should underlie all tax legislation. Simplification
of the UK tax system is needed urgently and self-assessment needs
to be judged within this context.
Self-assessment for individuals
3. Self-assessment is a big advance on the
previous system where the Inland Revenue issued estimated liabilities
and months, or even years, later the taxpayer substituted the
correct figures for the Revenue's original estimates. It is a
much more efficient and coherent system, at least in theory, although
it has created major practical problems.
4. There was very extensive consultation
on the structure of the system and the detail of the legislation.
Unfortunately, there was then virtually no consultation on the
operational procedures to be adopted by the Revenue to administer
it. We think that many of the practical problems derive from this.
We also believe that the practical operation of the system has
resulted in significant additional costs for taxpayers and their
Self-assessment for companies
5. Pay and File, introduced in 1993, was
a form of self-assessment. We think it unfortunate that when self-assessment
for individuals was introduced, the Revenue started afresh. The
result is that when in 1998 they extended self-assessment to companies,
the Revenue were faced with a dilemma as to what extent they should
follow the by then familiar rules for Pay and File and to what
extent those for self-assessment. We think that they made the
correct decision to follow Pay and File in areas of conflict.
But it is unfortunate that as a result instead of having a single
self-assessment system, we have two separate systems; one for
individuals and another for companies, with some of the rules
identical and others not. This obviously makes the tax system
harder for the small business to understand.
6. Difficulties remain, even for companies,
with the system of process now, check later, arising inevitably
from the plethora and complexity of UK tax law and accounting
practice. In many cases, subjective opinion can leave a company
open to high interest charges after the deadline for paying its
tax has passed, because the Revenue have taken a different view
on, for example, a transfer pricing issue or the application of
accounting standards. The same issues can also arise in respect
of self-assessment for individuals, but the problems are exacerbated
for companies because the figures are of far greater magnitude.
Objectives of self-assessment
7. As far as we are aware, the then Government
did not publish the objectives for self-assessment and it is therefore
difficult to comment on whether they have been achieved. However,
they did publish in 1991 their objectives for the simplification
of the tax system. Self-assessment was a development of that proposal.
We therefore assume that the objectives stated in the 1991 consultation
document were the objectives behind self assessment. These were
stated as being to:
make the system easier for taxpayers
make the system simpler and more
efficient for both taxpayers and the Revenue to administer;
make it possible for the Revenue
normally to accept the return without further correspondence;
make it possible for taxpayers normally
to pay the right amount of tax at the right time without Revenue
open up the way for further reforms
to simplify, unify and improve the system of personal taxation.
8. In order to achieve these objectives,
the document recognised that the system for taxing the self-employed
needed to be aligned more closely with the system for collecting
tax from employees. The new system was originally referred to
as "simplified assessing" but this ideal was later dropped
in favour of what has turned out to be the somewhat misleading
nomenclature of "self-assessment".
9. The extent to which the above objectives
have been met varies considerably. Each is considered in detail
Has self-assessment made the system easier for
taxpayers to understand?
10. Self-assessment made the administration
of the tax system easier to understand than the previous system
of meaningless estimated assessments. However, change in the administration
of the system cannot of itself make the system more comprehensible.
The tax system is as complex as ever, although certain administrative
procedures are now easier to follow. It would be unfortunate if
the administrative improvements were to be misunderstood as indicating
that the tax system is in anyway more straightforward than it
was before the changes introduced in 1997.
11. An indication of the administrative
problems is that the then Government chose 1996-97 as the year
to introduce simultaneously the two greatest changes to the UK
tax system affecting the taxation of individuals for many years.
The first of these was the current year basis for taxing the profits
of self-employed individuals and partnerships; the second was
the process of self-assessment. As these two changes both appeared
under the self-assessment banner, there was considerable confusion
between them for many taxpayers. Furthermore taxpayers had to
cope with the transitional rules for the change to the current
year basis at the same time as becoming familiar with self-assessment.
12. The current year basis is undoubtedly
much easier for taxpayers to understand than the preceding year
basis. This change did represent a simplification of the tax system.
Indeed it was a prerequisite of a self-assessment tax system.
It is, however, quite separate from the introduction of the new
obligations imposed on taxpayers.
13. The term "self-assessment"
is fast becoming a misnomer. When self-assessment was introduced
the Revenue accepted that some taxpayers would be incapable of
coping with it and they would have to compute the assessment for
that category themselves. In recent years their advertising budget
has been directed towards encouraging taxpayers not to self-assess
but to submit their tax returns by 30 September, leaving the Revenue
to make the assessment. It may be that the time has come for the
Government to make up its mind as to whether or not it wants taxpayers
to self-assess. If it does, it creates the wrong message for the
Revenue to discourage this. If it does not, the first and third
of the objectives will need to be abandoned. We suspect that if
the personal tax system were to be reformed today the Revenue
would advise against self-assessment as such, but would want to
keep the remaining elements of the new system.
14. Having a tax system which is understandable
to the intelligent layman should have been regarded as a pre-requisite
for introducing self-assessment. Taxpayers are more likely to
file their tax returns and make tax payments on time if they can
easily complete the forms and understand the basis for the tax
that they have to pay.
Has self-assessment made the system simpler and
more efficient for both taxpayers and the Revenue to administer?
15. Few taxpayers appreciate that their
tax return is no longer "checked" by the Inland Revenue.
We believe that there is a common misconception that the Inland
Revenue have "agreed" a taxpayer's return, until such
time as an enquiry notice is received. Where, as is normally the
case, no such notice is received, taxpayers assume that their
tax affairs are in order. In fact, most are susceptible to a "discovery"
assessment in future years even after the deadline for an enquiry
notice for the year in question has passed.
16. A significant benefit promised to taxpayers
under self-assessment was the concept of finality. Unfortunately,
many taxpayers do not appreciate that they have received this
benefit. A taxpayer has to wait until the anniversary of the filing
deadline for the enquiry window to close, and this disguises the
benefit of finality.
17. In practice, in the vast majority of
cases, the Revenue do not take anything like 12 months to identify
enquiry cases. We suggest that the enquiry window should be reduced
to six or even three months. We do not think that would damage
the Revenue's ability to identify enquiry cases but would emphasise
to taxpayers the benefit of having achieved finality of their
18. To the extent that a single tax district
now deals with a taxpayer's affairs, the administration of the
self-assessment system ought to be both simpler and more efficient.
Unfortunately, this has not happened in practice, as is set out
in paragraph 27 onwards.
Has self-assessment made it possible for the Revenue
normally to accept the return without further correspondence?
19. The vast majority of tax returns are
processed on receipt, to be checked later without any need for
further correspondence. The number of returns submitted on a timely
basis enables the Inland Revenue to use statistics to decide which
returns are most at risk of error and to target its resources
20. The question ought to be asked though
whether it is a laudable aim for the Revenue to accept tax returns
without further correspondence. We do not know if test checking
under self-assessment results in loss of tax that would not have
been picked up under the previous system, under which there were
far more enquiries but mainly of a less searchingand in
some ways more targetednature. This is something that the
National Audit Office might usefully look at.
Has self-assessment made it possible for taxpayers
normally to pay the right amount of tax at the right time without
21. The short answer to this question is
"Yes, in theory". The Revenue's computer always computes
a taxpayer's liability even if that taxpayer has done it himself
and inserted a figure on his return. However, the experience of
our members is that there is a very large number of processing
errors. We are obviously concerned that, if our members are picking
up a lot of processing errors, then logically there are likely
to be a similar amount of errors in the Revenue's calculation
for unrepresented taxpayers. Many of these will not be picked
up due to the taxpayer's lack of expertise. One welcome development
is that, at last, the computer has stopped highlighting minor
computational differences over a few pence.
22. The self-assessment process allows a
taxpayer to choose between calculating his own tax liability (to
be checked by the Revenue) or asking the Inland Revenue to perform
the calculation. We doubt that a taxpayer who is forced to work
through a 27 page booklet in order to calculate the tax payable
is confident that he is paying the right amount of tax. It is
difficult to imagine that this was the result envisaged by the
23. Whilst it is right to encourage filing
of returns over the Internet, the system cannot cope with all
types of returns. We doubt that it is much encouragement to taxpayers
to file electronically, if, half-way through the return, the taxpayer
realises that it cannot cope with his position and has to start
again manually. If the Government wishes to encourage electronic
filing, the system must be able to cope with the most complicated
type of return. We are in favour of electronic filing as it does
at least enable taxpayers to identify the right amount of tax
to pay without the need for any Revenue intervention. It is, however,
vital that taxpayers are encouraged and not compelled to file
tax returns electronically. We are very concerned that the Government
appears to have accepted the Carter proposals in respect of payroll/PAYE
without question. These include a requirement that, from 2007,
even an individual who employs a nanny will have to file all PAYE
24. Five years after the introduction of
self assessment, there is still a significant number of taxpayers
who do not file on time. Although we suspect that many of these
do not have tax liabilities, some of them will do so, which contributes
to tax not being paid on time.
Has self-assessment opened up the way for further
reforms to simplify, unify and improve the system of personal
25. In principle, the answer is "yes".
The move to a current year basis of assessment was an invaluable
step in the right direction. However, much more needs to be done.
Indeed, the introduction of the starting rate and the dividend
rate have done more to complicate the system than self assessment
did to simplify it. As mentioned, in paragraph 2 above, three
years ago the Tax Faculty published our "10 tenets",
against which all tax changes and new legislation should be judged.
We were the first tax body to call publicly for simplification
of the tax system, although we are pleased to note that other
bodies (and indeed political parties) have taken up this theme.
The important point to note is that tax simplification means more
than merely rewriting the existing legislation in language which
is easier to understand.
26. Further reform of the tax system as
a whole can only work as part of a significant programme of simplification
of the rules for identifying and computing taxable income, reliefs
Operation of self-assessment
27. Self-assessment is a system overlaid
on to the existing tax rules for determining taxable income and
expenditure. This makes it difficult to look at self-assessment
in isolation, and to differentiate those changes which are a direct
result of self-assessment from those which have been brought about
by the method chosen by the Inland Revenue to implement self-assessment.
Many of the administrative changes introduced in recent years
are not integral to self-assessment. Self-assessment has been
used as an opportunity to make further changes to the administration
of the tax system, building on the changing attitudes to compliance
that self-assessment sought to bring about.
28. The introduction of self-assessment
has given rise to a significant deterioration in the relationships
between the Inland Revenue, taxpayers and their advisers. However,
we doubt that this is a necessary effect of self assessment, but
rather derives from the operational decisions which were made
at the time of its introduction. In addition, good relations have
not been helped by the rigid application of time limits, together
with the accompanying penalty regime. However, these are not the
29. The recurrent theme that comes to us
in complaints is that there is no longer a specified individual
within the Inland Revenue with responsibility for a particular
case. As a result, taxpayers and their agents do not know whom
to approach and considerable amounts of time are wasted re-re-explaining
details of particular cases to a succession of Revenue staff.
The growth in the use of telephony, and in particular call centres,
has contributed to this problem. Staff do not have access to files
and cannot deal with queries. Too often, the only way to contact
a Tax Office is through such a centre.
30. Since the introduction of self assessment,
the Revenue has published most of its internal manuals. This obviously
helps to improve relationships but too often Head Office instructions
are not followed correctly, resulting in more time wasted by taxpayers
and agents. The operation of the enquiry process is a good example.
The Revenue's manual says that the Revenue should not normally
intrude into the taxpayers personal affairs in the opening letter
and, if they think it essential to do so in a particular case,
they should explain why it is necessary. In practice, they invariably
ask for personal information in the opening letter and rarely
explain why they regard this as relevant. We understand that the
Revenue is re-emphasising their instructions to staff on this
Design of forms
31. It is our understanding that the Inland
Revenue's self-assessment computer system was programmed before
the supporting forms were designed. The result is that the design
of many of the forms is to support the computer system rather
than to make the form readily understandable. We think that this
was an unfortunate decision. We also cannot understand why a form
cannot be designed independently of the computer, with the computer
reordering the information to reflect the way it has been programmed.
As a result, the forms continue to cause widespread confusion
and waste considerable time for taxpayers, agents and Inland Revenue
staff. Insufficient resources have subsequently been made available
for adequate improvement. Because of the very high cost of redesigning
forms, it appears that major redesigns have been ruled out as
impractical. We think, however, that money ought to be found to
enable this to be done. For example, the tax return form requires
dividends received to be split into five or six categories. It
could be radically simplified by abolishing the split as following
the abolition of repayable tax credits there is no longer any
major difference between the tax treatment of these different
types of dividends.
32. It is a fact of human nature that individuals
put off doing tasks that are difficult or unpalatable. Collecting
together the necessary information and then completing a tax return
falls into this category. The Inland Revenue is supplied with
a considerable amount of data about an individual's taxable income
long before the tax return needs to be issued, for example employment
income, benefits, bank interest and so on. Issuing a tax return
which already has this data filled in would help the taxpayer
by reducing his need to provide information. Furthermore, the
Inland Revenue would not need to re-key the data, reducing the
potential for error. This would require the issue of returns to
be delayed until perhaps September but that would still leave
ample time for a return to be completed by the following 31 January.
Statements of account
33. It is disappointing that every high
street bank, energy supplier and credit card statement is set
out in a more comprehensible form than the taxpayer statement
of account, particularly following the Revenue's early publicity
that the statement would be like a credit card statement. It has
always been the case that taxpayers will pay bills that they understand
more readily than those which they do not understand. The format
of the statement of account should be radically changed, not merely
reviewed, as a matter of urgency.
34. We realise that a particular problem
is that interest on overdue tax is simple interest whereas on
credit cards it is compounded. However, with the current state
of computer technology, we would not have thought it necessary
for the layout of the statement to replicate the computer processes.
It is clear from our members' queries that the allocation by the
Revenue of payments against specific tax, interest and surcharge
liabilities causes recurring problems, which appear to be getting
worse. This is compounded by the fact that the computer sets payments
against the earliest outstanding liabilities, some of which may
be incorrect, even where a payment is specifically stated to be
in respect of a specific liability.
35. One of the major problem areas is with
Revenue enquiries. The Revenue frequently do not explain what
concerns them but require the submission of a great deal of information,
much of which is often not readily available. Even where the reason
for the Revenue's concern becomes apparent in the course of the
enquiry, and the agent can identify a cheaper way to satisfy that
concern, the Revenue are unwilling to consider that alternative.
Pre self-assessment, the Revenue practice was to inform agents
of the reasons for their concerns and discuss these with the agents
so that an efficient method of alleviating those concerns could
be mutually agreed. We think it disappointing that the Revenue
scrapped this system. We do not see any compelling reason why
that previous system could not have continued under self-assessment.
36. The Inland Revenue appear to favour
a concept of coercion rather than co-operation. A good illustration
is "Faster Working". This was an Inland Revenue concept
to agree with the main Professional Bodies dealing with tax a
method of dealing with enquiries. The process had two objectives:
to ensure continued co-operation between professional advisers
and Inland Revenue staff and to speed up handling of enquiry cases.
It was supposed to be offered in all enquiry cases.
37. In practice, "Faster Working"
was offered in very few cases. The procedure has now been formally
withdrawn by the Revenue and replaced by a different procedure.
Happily the new procedure retains most of the co-operative elements
of working together. This suggests that the change reflects a
resistance by many within the Revenue to working with the Professional
Bodies, although there was an acceptance that the agreed procedure
itself was desirable in principle.
38. There remains widespread confusion as
to the difference between full and aspect enquiries. We think
the time has come to differentiate between the two. We do, however,
recognise that there are problems with this. We would not want
an aspect enquiry to be used as a fishing expedition as a precursor
to opening a full enquiry but at the same time we accept that
circumstances can occur when an aspect enquiry will need to develop
into a full enquiry.
39. Self-assessment has had many successes:
Speeding up the submission of tax
For most taxpayers, quicker finalisation
of the tax payable for a tax year;
Allowing all of an individual's tax
affairs to be dealt with by one tax office;
Faster collection of tax.
40. There are some further areas which are
Faster processing of repayments.
This is largely attributable to the Inland Revenue's system of
"repay now, check later". However, this has also resulted
in a large number of incorrect and inappropriate repayments.
A reduction in the number of Inland
Revenue staff needed to operate the tax system. However much of
this saving has been at the expense of switching work from the
Revenue to taxpayers, rather than eliminating the need for the
work to be done. Imposing this additional burden on taxpayers
has caused a great deal of resentment, particularly as it has
been reinforced by a system of penalising those who find it hard
to cope, and damaged further the relationships described earlier.
41. Self-assessment for companies was built
on the back of Pay and File, and much of the underlying rules
reflect that already established system. In addition, the Inland
Revenue have been prepared to allow greater flexibility for companies,
such as filing of group tax returns and group relief claims. Pay
and File has always been more successful than self-assessment
for individuals because companies have had to be more disciplined
because of the Companies Act requirements, so self-assessment
was relatively painless for companies because it built on what
they had to do already for the Companies Act.
42. To a greater extent than for individuals,
the system of self-assessment for companies has enabled them to
pay their tax on time. However, as noted further in paragraph
45 below, this becomes more difficult where a company is required
to pay its tax by quarterly instalments. It is impossible to judge
what this should be with certainty, and interest will always be
43. The operation of corporation tax self-assessment
will always be hindered by the complexity of the underlying tax
44. A particular problem is an increasing
propensity on the part of the Revenue to challenge accounting
principles. Such challenges almost inevitably are timing differences
that over time will not increase the tax yield, but increase the
problems of self-assessment as the Revenue is in effect challenging
the underlying principles upon which the assessment is based.
There is a serious risk that the system will break down if self-assessment
means that companies become vulnerable to penalties because they
take a different view on matters of opinion than the Revenue do
when they look at the position a year later.
45. Large companies are required to pay
their corporation tax in quarterly instalments. As the first two
of these are due before the company's accounting period has ended
these must be based on estimates, so interest will always be in
point. This is an unnecessary complication, which could be avoided
if instalments were based on, for example, the previous year's
figures with a balancing payment at the end to reflect the final
liability for the year. The position is complicated by the fact
that, unlike with interim payments for individuals, companies
are expected to include capital gains in their estimates even
though by their nature capital gains are both non-recurrent (and
therefore very hard to estimate) and in most cases substantial
in comparison with income.
The Chartered Institute of Accountants for England
22 February 2002