36. The facility to file Income Tax Self Assessment tax returns
over the Internet was introduced on 3 July 2000. It allows most
individual taxpayers to send their own tax return to the Revenue
over the Internet. Electronic filing offers a number of advantages
over the traditional paper tax return:
- taxpayers get an on-line acknowledgement when their return
- there is automatic calculation of the tax as the return is
completed so that taxpayers do not have to self calculate;
- repayments of tax to taxpayers are dealt with more quickly;
- Internet returns are processed faster and there is no keying
of data by staff, eliminating the scope for keying errors.
37. The Revenue's Internet service has evolved in the light of
experience and technology developments. In the first year of the
service (2000-01) it required the issue of a CD-Rom which presented
some problems: any 'bugs' in the product could only be addressed
by sending updated CD-Roms, and some computers, for example Apple
Macs, could not be used. In the second year (2001-02) the service
was founded on an Internet-based form on-line, but restricted
to the three main schedules. It was extended in August 2001 so
that agents could file individual clients' returns on their behalf.
38. The service this year (2002-03) encompasses the main schedules
covering some 90 per cent of the Self Assessment population not
represented by agents. The service now includes:
- a question and answer approach so that only relevant questions
- a facility to store a part-completed return;
- on-line help including, for example, pop-up tables to record
interest from different accounts;
- automatic calculation; and
- item by item validation so that incorrect entries can be flagged
back to the taxpayer.
39. The Revenue informed us that 38,981 individuals filed their
tax returns over the Internet in the first filing period to 31
January 2001, and that this number increased by 94 per cent to
75,449 for the equivalent filing period to 31 January 2002.
This compared to projections of 315,000 and 200,000 respectively
for these periods.
The Revenue recognised that this was a slow start but considered
that "customer inertia is a phenomenon experienced by many
organisations in the early years of persuading customers to move
to conducting transactions electronically."
The Revenue told us that the take-up of Internet services was
notoriously difficult to predict and its projections of take-up
had been the best it could make. While a target for the next year
had not been finalised, the Revenue considered that a conservative
target would be some 150,000, double the existing take-up.
The Revenue also told us that it has a target of 50 per cent take-up
of its electronic services by 2005, which if achieved, would result
in savings of some 1,300 staff.
40. In the first year of Internet filing the Revenue gave individuals
a £10 incentive to use the Internet service. However, the
Revenue's customer research of users indicated that "their
priority was not for an incentive, they wanted a system that was
easier to use, and we have put our effort into doing that."
The Paymaster General noted that the Internet service was improving.
In the peak period of January 2002, around 80 per cent of attempts
to file on-line had succeeded.
41. The potential benefits from Internet filing to both taxpayers
and the Revenue are considerable. But take-up of the service in
the first two years has been very disappointing and much lower
than the Revenue had anticipated. The Revenue will only achieve
its ambitious target of 50 per cent take-up by 2005 if it offers
a reliable service that meets users' expectations. In this context
we are concerned that one in five attempts to file on-line fail
and we recommend a review to identify the causes of these failures
and remedies for those within the Revenue's control. We also recommend
that the Revenue examines what further steps it can take to make
its on-line service more attractive to potential users.
42. The Revenue's on-line service was withdrawn at the end of
May 2002 following a security incident when four people contacted
the Revenue to report seeing information on another person's tax
return while using the on-line Self Assessment service. People
could also add to or overwrite information on that other person's
return. Subsequently a further nine contacts were received from
people, making 13 in total. The Revenue told us that it "takes
taxpayer confidentiality very seriously and once the service was
withdrawn an immediate investigation was started, involving the
department's strategic partners EDS, the e-Envoy's Office, and
an independent specialist Internet company. It was quickly established
that the systems were not 'hacked' into."
43. The Revenue told us that the reason for the problem turned
out to be "very complex."
The investigation found that the Revenue's system had been vulnerable
to someone outside its control storing information which should
not have been stored. This had resulted in a situation whereby
two different people could share an on-line 'session' because
the system thought they were the same person, and as a result
of this, some people had been able to see another's information.
In nearly all cases, the problem had manifested itself through
customers of one Internet Service Provider. But as Internet Service
Providers out-source or subcontract many of their services including
information, the Revenue considered it would be unfair to single
out one for blame. Following a number of changes to the system
designed to ensure that this would not happen again, the Revenue's
on-line system was restored on 28 June 2002.
We intend to visit the Revenue to see the system in operation.
44. The Revenue took steps to establish how many people might
have had their details seen by someone else. According to the
Revenue, 27,967 taxpayers had used the system without their details
being seen by anyone else. There were 47 cases where the tax returns
could have been seen by someone else, and a further 665 cases
where the Revenue could not be certain that someone's tax return
had not been seen by another person, but there was no reason to
believe that it had been. The Revenue told us that it had written
to all the taxpayers who were or could have been affected, or
their representatives, and that the response from them had been
45. The Revenue noted that there were lessons to be drawn from
this incident, including wider issues of Internet security, and
that it was working with the e-Envoy's office to ensure that these
were shared more widely.
The Revenue also told us that since the service had been restored,
take-up volumes, shown in the figure below, were approaching the
peak levels experienced last September. The Revenue considered
that this was "an encouraging sign that the speed with which
the department reacted to the problem and the thoroughness of
its examination has paid dividends."
Figure 1: Take-up of the Internet filing for Self Assessment
Source: Inland Revenue (Ev 101)
46. We are very concerned that failings in the Revenue's Internet
filing service allowed taxpayer confidentiality to be breached
and that the service had to be withdrawn for more than a month
while remedial action was taken. We note the Revenue's admission
that there are lessons to be drawn from this extremely serious
incident, including wider issues of Internet security, and that
it is working with the e-Envoy's office to ensure that these are
shared more widely. We expect the Revenue and the e-Envoy to include
in their work a review of the procedures used to test the Revenue's
system before it was implemented, and to report on the outcome
of their deliberations on the lessons to be shared.
47. It is too soon to determine what impact this incident has
had on the level of Internet filing. We expect the Revenue to
monitor this closely, and to examine what additional steps it
can take to restore taxpayer confidence in the security of the
system should this be necessary.
48. TaxAid told us that "a substantial part of our advice
work is in relation to tax debt. Small self-employed businesses
struggle to keep money aside to pay their Self Assessment liabilities.
Often they have tried to save, and want to pay their tax in full
at the due date, but some more pressing need means that they cannot
do so. Currently, payments on account are required only six-monthly,
and the smallest businesses do not make them. A scheme for those
within Self Assessment to make more frequent and regular payments
on account throughout the year has been proposed in the past,
and is periodically revisited in discussions with the Revenue.
Little progress has been made in translating it into practice.
... The facility to make regular payments on a monthly or weekly
basis to the Revenue could enable many small self-employed taxpayers
to keep abreast of their tax liabilities."
49. Similarly, the Federation of Small Businesses told us that
"a major problem for business taxpayers is that at the second
31 January after commencement of business they have to find the
first year's tax in full plus the first instalment of the second
year, so paying 150 per cent of a year's tax all at once .. this
problem could be tempered by a facility to pay income tax by direct
debit in monthly instalments."
The Federation noted that "it would also be useful to have
alternative methods of payment, such as by credit card. This method
is not currently available even when paying over the Internet.
Given the Inland Revenue's enthusiasm for e-commerce one would
have expected them to look to the greater use of plastic."
50. The Inland Revenue told us that it had introduced a small
scale Budget Payment Plan three years ago to test whether Self
Assessment taxpayers found paying by direct debit attractive.
A sample of taxpayers around the Revenue's Newcastle office were
contacted and offered the choice of paying monthly instalments
towards their Self Assessment liability providing they had no
previous unpaid liabilities. More than 400 people joined the scheme,
paying nearly £100,000 each month.
The Revenue also told us that it was now taking forward recommendations
made in two reviews of payment methods "by establishing the
convenience and cost of the payment channels and payment methods
people use to pay us ... to identify preferred combinations that
are convenient for people in different circumstances to use and
are cost effective for us. Those are the combinations that we
will develop and promote."
51. The Revenue has a national facility for accepting Self Assessment
payments by debit card by telephone to its Debit Card Line, which
is charged at local rates.
The Paymaster General told us that the Revenue needed to ensure
that people can pay rapidly and conveniently in various ways.
The use of credit cards had not been ruled out, but "we need
to look very carefully at whether the extra cost is justified
in providing that facility .."
52. We note that the Revenue has been testing a scheme to allow
taxpayers to pay monthly instalments by direct debit towards their
Self Assessment liability. We believe that many taxpayers, particularly
the self-employed and those starting a new business, would find
such a facility useful. We are therefore concerned that this trial
appears to have reached no conclusions after three years. We recommend
that the Revenue evaluates and reports on the results of this
trial as a matter of urgency.
53. We agree with the Paymaster General that people should
be able to pay tax rapidly and conveniently in various ways, but
introducing new payment methods does not appear to be a matter
of priority to the Revenue. We recommend that the Revenue pursues
this matter with more urgency than hitherto displayed. We also
recommend that the cost to the Revenue of providing a facility
to pay by credit card be evaluated.
Ev 3, para 15, Ev5, para 31 Back
Qq35, 104 Back
Ev 29, para 4.4 Back
Ev 86, para 1.1 Back
Qq80,81, Ev 2, paras 11, 13, 14 Back
Ev 4, para 20 Back
Qq89-91, Ev 4, para 22 Back
Ev 5, paras 26, 27 Back
Ev 5, para 26, Ev 100, para 3 Back
Ev 100, para 3 Back
Ev 5, para 26 Back
E-Revenue, Report by the Comptroller and Auditor General,
HC 492, Session 2001-2002, para 2.6 Back
Ev 5, para 26 Back
Qq 53-55, 63, 64 Back
Qq61, 69 Back
Ev 101, paras 5, 6 Back
Ev 101, para 7 Back
Ev 101, paras 7, 8 Back
Ev 101, paras 9, 10 Back
Ev 102, para 11 Back
Ev 102, para 12 Back
Ev 54, para 8.5 Back
Ev 66, paras 3.2, 3.3 Back
Ev 66, para 3.4 Back
Ev 98, para 2 Back
Ev 98, para 3 Back
Ev 99, para 7 Back