Select Committee on Treasury Eighth Report


The Treasury Committee has agreed to the following Report:



1. The Treasury Committee established a Sub-committee in July 2001 to scrutinise the work of the various bodies for which Treasury Ministers are accountable. The Sub-committee announced, in January 2002, an inquiry into the Inland Revenue's Self Assessment systems for individuals and companies. We heard oral evidence from the Inland Revenue on 6 March 2002, from the Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales on 13 March 2002, from TaxAid, the Low Incomes Tax Reform Group, and the Federation of Small Businesses on 20 March 2002, and from Dawn Primarolo MP, the Paymaster General, on 22 May 2002.

2. We visited Dublin on 15 and 16 May 2002 to be briefed by the Revenue Commissioners, tax practitioners and others on the operation of Self Assessment in Ireland. We also received a number of written submissions, most of which we have published with this volume. We are grateful for all the evidence we received, written and oral, and for the help given by those who briefed us.


3. Self Assessment for Income Tax and Capital Gains Tax was introduced on 6 April 1996. It was the biggest change in tax administration since the introduction of Pay As You Earn (PAYE) over 50 years earlier, but it did not introduce any new liability to tax.[1] The key objectives of Income Tax Self Assessment are "to:

  • give taxpayers greater responsibility for their tax affairs;
  • establish a fixed timetable for returns and payment; and to
  • bring in a new inquiry process with clear procedures setting out the rights and responsibilities of taxpayers and the Revenue."[2]

The Income Tax Self Assessment Population

   4. Around 9 million people out of approximately 26 million taxpayers are required to fill in a tax return each year. These include the self employed; business partners; company directors; and others from whom the Inland Revenue needs additional information to collect the right amount of tax, typically PAYE higher rate taxpayers and some pensioners.[3]


5.   The Inland Revenue keeps the Income Tax Self Assessment population under regular review to make sure that only those people who in its opinion need to complete a tax return get one, and "the people who don't need one can have their tax affairs processed each year with the minimum amount of contact with [the Revenue] ...."[4] TaxAid, a charity working with unrepresented taxpayers, told us that "we find that some people are sent Self Assessment returns when there is no need for them to do one. Often clients have needed a Self Assessment return at some stage, for example when they were self-employed, but this income source has now ceased. ...Such taxpayers do not realise they could come out of Self Assessment, and because the system is automated, the Revenue do not necessarily review the need for a return before sending it out. One difficulty for the unrepresented taxpayer who thinks he does not need to do a Self Assessment return is that the return form does not explain why it has been sent. We would like to see a clear explanation, on the form itself or prominent in the notes, of the circumstances and individuals to which Self Assessment applies. Taxpayers would then understand why they have to fill in the return, or could challenge its issue and return it uncompleted ..."[5]

6. The Revenue told us that the legal position is that a taxpayer who is issued with a tax return must complete it and send it back. But where a return is issued in error, the taxpayer should contact the Revenue and discuss the position.[6] The Revenue also told us that it does not publish the criteria for issuing a Self Assessment tax return "because of the enormous number of situations which could, or not, bring people into Self Assessment, but we are looking at how we can provide greater transparency so that people have a clearer idea of whether they are in or not."[7] This is part of a review the Revenue is undertaking of ways of improving Self Assessment, which is examining, as one of its priorities, the types of people covered by the system with a view to removing from taxpayers wherever possible the obligation of Self Assessment.[8]

7. People receiving Self Assessment tax returns are not told why they are issued, even though once received they are obliged by law to complete and return them. The Inland Revenue does not publish the criteria for issuing Self Assessment tax returns because of the enormous number of situations in which a return is issued. We believe this to be an unsatisfactory state of affairs, which stems from the complexity of the tax system. We note that the Inland Revenue is examining how it can provide greater transparency so that people have a clearer idea of whether they are covered by Self Assessment or not. We wish to see the criteria for issuing Self Assessment returns published in the interests of fairness to taxpayers.

8. TaxAid noted that where the system has identified that someone is inappropriately within Self Assessment, and rectified it by ceasing to send them returns, the taxpayer is not routinely informed of this. "So one year they will get a return, and the next year not; but they do not realise that this is because they do not need to make a return. They then see the publicity about the obligation to make a return, and associated penalties [for failing to do so], and worry that they should be doing one. This is particularly true of older, poorer pensioners. If the Revenue decide not to issue a return because the taxpayer is outside the criteria for being in Self Assessment, they should inform the taxpayer and not simply stop sending returns without any explanation."[9]

9. We put this point to the Paymaster General who told us that "what is very important is that where somebody has been in the system and they are out of the system, we should be absolutely clear at that point with them - and we do not always manage that - that they will not get the form again and they should not get it ..."[10] The Paymaster General agreed that, as a minimum, when the Revenue identified people who should not be in Self Assessment, it should write to them thanking them for the returns they had completed and informing them that the Revenue would not be sending any more.[11]

10. We are concerned at the Revenue's failure to inform taxpayers who need no longer submit Self Assessment tax returns of this fact, causing unnecessary worry to taxpayers waiting for tax returns that will not arrive. We therefore welcome the Paymaster General's undertaking to the Committee that the Inland Revenue will now write to taxpayers when they are no longer required to submit a return to inform them of this fact.


11. The Inland Revenue estimates that some 1.2 million of the 9 million people required to fill in a Self Assessment tax return each year are pensioners.[12] The Low Incomes Tax Reform Group, which seeks to represent people on low incomes who cannot afford to pay for tax advice, noted that the Self Assessment system included pensioners who, by reference to some Government measures, would be described as being 'in poverty'.[13] The Group provided three examples of pensioners with incomes ranging from £6,048 to £8,250 who would receive Self Assessment returns and noted that "prior to the introduction of Self Assessment all three of these pensioners would have had a relatively straightforward time with their tax affairs and simple forms would have been used in conjunction with a simple assessing procedure. The computer generated letters and forms used by Self Assessment are not sympathetic to the needs of this group of Inland Revenue customers and generate unnecessary paperwork and worry."[14]

12. Both the Low Incomes Tax Reform Group and TaxAid suggested that one way of removing the burden of Self Assessment for many people, particularly pensioners, could be by raising the limit for coding out untaxed income from its current level of £2,500 to perhaps £5,000.[15] The Inland Revenue told us that "we are aware that there are groups of low income people, pensioners particularly, who at the moment are in Self Assessment. We very much want to help them, and other people with low income, either by taking them out of Self Assessment altogether or finding a way of making it much easier for them to assess. So we are working with the Low Income Tax Reform Group, and, through them, with Age Concern and Help the Aged and TaxAid, to see how we can do this. I have to tell you ... it is not easy, but I would want you to know that we do genuinely want to find a way forward."[16]

13. The Inland Revenue recognises that there are too many people with low incomes, particularly pensioners, in Self Assessment and is looking at ways of taking them out of the system altogether or of making it easier for them to assess. We support these aims and expect the Revenue to make real progress towards achieving them over the next year.

1   Ev 1, paras 3, 4 Back

2   Ev 1, para 6 Back

3   Ev 1, para 3  Back

4   Ev 2, para 8 Back

5   Ev 51, para 5.2 Back

6   Q315 Back

7   Q29 Back

8   QQ2, 310, 311 Back

9   Ev 51, para 5.3  Back

10   Q315 Back

11   Q316 Back

12   Q27 Back

13   Ev 57, paras 2-4 Back

14   Ev 58, paras 9, 10 Back

15   Ev 52, para 5.4, Ev 58, para 12  Back

16   Q34 Back

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Prepared 25 July 2002