Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 340 - 359)



  340. When you say "we" do you mean the whole of the system is being developed internally in the Inland Revenue or is there a consultant, a partner?
  (Dawn Primarolo) This is the Revenue.

  341. There is no external body of experience being brought into this; it is entirely internal?
  (Dawn Primarolo) Yes. We are drawing on external experience, but the development is in partnership with staff who are employed inside the Revenue. We are not doing it in isolation; we are drawing very heavily on the experience of others and experience of other countries and how they are developing it. It is quite difficult to describe. It would be very helpful for the Committee if you were able to go to Somerset House and have the officials demonstrate to you how it can be used and the design on computers which we have there.

Mr Cousins

  342. In the States where they have 50 or 60 per cent electronic filing of tax returns, people buy software packages commercially which are designed to slot into the American Government system and which are adapted each year as the tax system changes, which people can try out for themselves on their own PCs and there is a guaranteed standard of accuracy about the performance of the software. I just wondered whether this would be a sensible kind of partnership between the public and private sector.
  (Dawn Primarolo) Yes, that is what we are trying to do, working with the software developers. I missed that point. We are working with the software developers so that the products can be used on an interface with the Inland Revenue. We are trying to encourage that and I hope that we shall be able to give you some examples of that work as well, if you were able to go to Somerset House for this presentation. There will be the work we are doing on the self-assessment itself, the work on the corporation tax and a briefing on the work we are doing with software providers to get exactly that type of package which enables people to use it in that way. It has to come through an interface into our system and to make sure that we can recognise that, rather than us trying to develop a system which everybody has to use which then will not fit their needs or their systems.

Dr Palmer

  343. In my pre-1997 incarnation I ran an internet service, so I was very motivated to try this out. At that point two things stopped me. One was that some of the forms were not yet supported and I wanted to ask whether they are all supported now, specifically foreign investments or something like that. The other was simply that there did not seem to be any very strong positive incentives. Given that it saves the Inland Revenue at least a fair amount of clerical work, would it not be reasonable to reward the filer in terms of a significant discount?
  (Dawn Primarolo) Yes. If we look at the Carter review and the proposals in the Finance Bill and Carter recommendations on work with intermediaries and encouraging that at some considerable cost to the Revenue, that is a way forward where we are trying to encourage it. We are at a position where 50 per cent of taxpayers are doing it under their own steam. The really big incentive in this system is the September deadline whereby we would do the calculation. I must be perfectly frank with you. The problem of putting incentives into the system, although we have looked at it and we shall continue to, is the problem of what is called deadweight cost but also fairness to the taxpayer. If somebody is already doing it, they do not get the incentive and those are coming on for the first time too.

  344. I am not sure we are talking about the same thing. I meant incentive to submit via the internet so you would get £25 off your bill if you submitted via the internet instead of doing it on paper.
  (Dawn Primarolo) We can look at that, but when we have looked at it before, the expense and the deadweight costs do not lend themselves initially to this. I would go back to the point I made right at the beginning and which most people now make about the system which is that before we start putting incentives into the system, let us make sure that everybody who is in the system should really be there and it is as simple as possible. We are looking at the possibility but we already have quite strong incentives in terms of support and I have not seen anything yet which has convinced me that any more can be gained for the cost. In fairness I would say that we keep an open mind on this but it does not immediately appeal to us.

  345. Would you be pleased if we got to the American stage and 50 per cent of people sent in their forms by the internet? It would save the Inland Revenue a lot of work, would it not?
  (Dawn Primarolo) It certainly might help us with the data as well in being more accurate. The difference in the American system is that all taxpayers are in it and it is a different proposition from having a small proportion of taxpayers, relatively speaking, in self-assessment as opposed to 21 million in PAYE. There is a difficult balance to strike there in terms of incentives and being fair to everybody else. I would not rule it out, but I also think that we have to be quite sensitive to the differences between the American tax system, the obligations and its responsiveness in repaying overpayments and things like that before we start taking just one issue around the incentives.

  346. Are all forms now supported by the internet system or is that still to come?
  (Dawn Primarolo) Most. The answer is most.

  347. Do you have an idea when they might all be supported? Could you write to the Committee and say when you hope to have all forms supported or is that not possible?
  (Dawn Primarolo) I could certainly write to the Committee. Whether it would be illuminating at this stage I am not quite sure. May I take it away and send you a note?[3]

  348. Instead of giving people a discount, another way to incentivise it would be to give taxpayers and their agents access to the information on the system so they could check whether the information was there and so on.

  (Dawn Primarolo) That is what our corporation tax portal is designed to develop. You would be quite interested in that so they could see where they were on their payments or on assessments and that they could do that directly themselves. That is precisely the way that it is designed. We started around that principle on the corporate return and I think you will be quite interested to see how far we have got in trying to give that direct access into the information rather than having to go through anybody else.

  349. That sounds good. If that is successful, can you foresee that being expanded to the personal sector?
  (Dawn Primarolo) Yes. There are always security issues here which in terms of taxpayer confidentiality are very important and we need to make sure that is right. Yes, we started with the corporate portal. Having established it, we would hope to see that it would be extended there to self-assessment.

  Chairman: We want to move on now to the area of penalties, determinations and surcharges.

Kali Mountford

  350. We are seeing some quite mixed messages overall in returns, late returns in particular. On the one hand there are still some outstanding returns from 1996-97, but I understand that late returns have reduced in recent times. What impact do you think penalties have had on people making their returns in a timely way?
  (Dawn Primarolo) The penalties put pressure for the returns to be in, or appear to, even though we are past the deadline for those returns to come in and we reach 97 per cent[4] by July and we think that is the interaction of the penalty which is pushing people forward. Penalties and encouragements in the system are difficult to balance. For those who have complied with the system voluntarily it is really not fair that we do not then have a way of trying to push the remainder into the system. First we have to help and encourage, but where taxpayers resist our charms on that front, penalties traditionally are the way we move to 97 per cent in that period which has got to be good.

  351. What would you say to those people who think that penalties are merely punitive and some would even say that they are an arbitrary tax.
  (Dawn Primarolo) We have to address ourselves to the taxpayers who have complied with their obligations and fairness to those taxpayers and in order to maintain high compliance levels with the system we have to be seen to ensure that those taxpayers who have not discharged their obligations are then put under pressure to do so. To be honest, personally I think it is a question of fairness to those taxpayers who have got their returns in on time and therefore have a right to look to the Revenue and say "You are making sure you get the rest in, are you not? Why should they have an advantage over me?". What levels you set those penalties at and how that operates is a finely balanced issue. In looking at the total of outstanding tax which can occur, I have to say I am reasonably comfortable that it is proportionate and is responding on a basis which is fair to all taxpayers. That is the choice we have to make.

  352. What assessment has been made of those people who, for whatever reason, have not complied? I have a concern that some of them are possibly more vulnerable than others and have not really got to grips with the system as a whole and have their own problems and perhaps do not really understand not just their own obligation but how to deal with it.
  (Dawn Primarolo) This comes back to the points we were making at the beginning of our discussion this afternoon. It is about the obligations on the Revenue to make sure that people are clear about their obligations and that we are contacting them to remind them they have not put in their returns and equally contacting them before the next stage of penalty is incurred to try to find out why and whether or not we can pick that up in the system. We cannot not have a penalty system but how it applies and what the obligation is on the Revenue to find out why some people are not complying is very great. Some people just appear not to be able to get their return in on time, they are very busy and they appear to be prepared to make the choice between spending time doing that or finding the penalty applied and then some interest, and to take that as a result. I think you are talking about the people we might consider to be more vulnerable and who for other reasons have not complied. It goes back to the point about whether they should even have been in the system in the first place and if they are rightfully in the system that we are providing those supports and reminders at each stage before we go to the next level of penalties, which is what we try to do. Some people feel that getting phone calls from us is uncomfortable. Can members of the Committee explain to me how we can communicate with people in all honesty without making people go arrgh? They pick up the phone, "Hello, it's the Inland Revenue. We notice you have not put in your self-assessment return and we just wanted to talk to you about it" and put it down again.

Mr Ruffley

  353. Do you leave messages on their answerphones if they are not in?
  (Dawn Primarolo) I have no idea whether we do. If we do, I hope it is nice, "Don't worry. I'm here from the Inland Revenue to help you".

Kali Mountford

  354. I am not at all sure that people would welcome that. There is a clear dichotomy. You are making a valid point but for those people who do not find their relationship with the Revenue a comfortable one, not because they are recalcitrant and naughty people who simply do not want to comply, but because they are anxious and possibly even fearful, it may be that a phone call from the Revenue is the last thing they want and it would actually make the situation more difficult. What efforts are there to make sure that people do understand the penalty system which in itself is progressive? Each phone call might seem progressively more threatening.
  (Dawn Primarolo) We offer help at every stage, including, if they would prefer that, we visit them at home or they make an appointment to come in and discuss the matter with us[5]. We are trying at every stage. I really do not know how we could do anything further than at every stage to make contact and ask whether they are experiencing difficulties, whether they need clarification. On the other side of the equation what we find is that when people have then had contact with the Department they on the whole love our staff who they find very friendly and approachable and their fears are allayed. Some do not have that pleasant experience but most do. If the argument is that if you send out too much information to explain the whole issue that puts people off because it is too much information in the first place and it worries them, if we cannot take that approach, and our experience tells us we cannot, because there is too much and that can intimidate people who might be experiencing some difficulties, it seems to me that the only other way is to mix and match, sending the relevant information so they understand what needs to be done. Then at every point before the next stage we must try to make contact with them to ask them whether there is a difficulty, whether we can help them, do they want to come in to speak to us about it, we are past our deadlines or whatever and try to take it forward in that way. Unless you have a suggestion, which I am perfectly prepared to take on board, I do not really see that we could do much more than that without being considered to be excessive in our attention to some individuals.

  355. I am thinking about two examples. People know very little about what the maximum penalty can be and very often people who are experiencing indebtedness in general start to withdraw in on themselves because they just see something piling up. Perhaps if people understood their maximum liability, they would be less fearful about a growing problem.
  (Dawn Primarolo) Yes.

  356. Another thing which occurs to me is that the process of appeal is not very well understood and the sorts of circumstances where the Revenue might consider an appeal appropriate, that level of understanding and the fact that the Revenue is capable of being understanding might better enable people to come forward with information and be more compliant.
  (Dawn Primarolo) I agree. May I ask Stephen to deal specifically with the point about how we make sure people understand the interaction with the maximum penalties and being clearer and then the appeals procedure, what we do now and what possibly we could do better in the future.
  (Mr Banyard) There are three stages of penalty. There is the fixed penalty which comes out if you miss the January deadline. We have redesigned that this year and it has a clear notice that if you do not understand why you have it, ring up the tax office and find out. We have tried to do that. That penalty notice brings in another five to seven per cent of the returns. After that we want to make greater use of two powers we have: one is determinations. In that case we would have to determine the tax we think is due, we would write to the taxpayer, we would tell them about it and they have every opportunity to come in and talk to us about it. At all these stages we first of all say, "Oi, you haven't sent your return in. Is there a problem? Can we help you?".
  (Dawn Primarolo) We say, "Excuse me, I think you might have overlooked ...".
  (Mr Banyard) If we then get to the next stage beyond determinations, which is daily penalties, in most cases the evidence is that we do not actually need to use them. Simply writing to somebody and saying we intend to use them brings in most of the returns. We have to go to the General Commissioners to get the power to do it. When they have granted the power, then we write again. Almost all of the remaining returns which are overdue come in. We think that the powers we have and the explanations we make will actually bring in the returns without having to exercise those powers, which is what we want to do. It is worth saying that we are putting a lot of our emphasis now into pre-emptive work before the returns are due in, phoning people up and asking whether we can help and telling them they need to get their tax returns in.
  (Dawn Primarolo) The point you are making is that there are some vulnerable people who are caught in that system and even if they do in the end comply, it is a fraught and unpleasant experience for them and why do we put them through that and could we look more closely at trying early on to identify where those problems might occur without being too oppressive in the application of the rules?

Mr Ruffley

  357. Could you whip very quickly through the numbers of tax returns not sent in which should have been sent in for each of the years since 1996-97?
  (Dawn Primarolo) I do not actually have that figure right here. I think we have given it to the Committee before.

  358. Mr Banyard may be able to help us.
  (Dawn Primarolo) Yes, he may be able to, but I am happy to confirm it in writing as well[6].

  359. Just to get an idea of what the performance is. If we establish that, we can then try to understand how good or bad the penalty system is. In rough terms.
  (Mr Banyard) In rough terms 800,000, 9.4 per cent, did not come in at 31 January.

3   See Ev 100. Back

4   Note by witness: This has been checked subsequently and the correct figure is 95 per cent. Back

5   Note by witness: It might not be possible to visit every taxpayer at home, but we would offer to do so in appropriate cases. Back

6   See Ev 100. Back

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