WEDNESDAY 22 MAY 2002

__________

Members present:

Mr Michael Fallon, in the Chair
Mr Nigel Beard
Mr Jim Cousins
Mr John McFall
Kali Mountford
Dr Nick Palmer
Mr James Plaskitt
Mr David Ruffley
Mr Andrew Tyrie

__________

DAWN PRIMAROLO, a Member of the House, Paymaster General, HM Treasury, MR STEPHEN BANYARD, Director, Local Services and SUE PITHER, Assistant to the Director, Inland Revenue, examined.

Chairman

  1. Minister, may I welcome you and apologise on behalf of the Committee for keeping you waiting. We had a meeting of the main Committee and I am sorry you were delayed. It would be helpful if you would identify your two colleagues.
  2. (Dawn Primarolo) Please do not apologise. I know there was a vote and that you had very pressing business this afternoon so there was a slight delay. May I introduce Stephen Banyard who is the Director of Local Services and Sue Pither who is Assistant to the Director?

  3. We are coming to the end of an inquiry into self-assessment in which we have received a great deal of evidence and been exploring. A number of those submissions do refer to the difficulty and the complexity in understanding self-assessment. Mr Banyard himself, when he gave evidence, actually said to us that there was that particular difficulty. Would you accept that you have a duty to the taxpayers to make it as simple as possible?
  4. (Dawn Primarolo) Yes, I would entirely accept that proposition. The self-assessment as a whole is working very well, but the questions of who is in the self-assessment system, with particular focus on pensioners, and the information and support which we provide to taxpayers to make that process where they are in self-assessment as easy as possible is an obligation on the Government and the Inland Revenue which I do accept and we need to make some progress on.

  5. If it is an obligation and you simply need to make progress, are you doing enough to simplify the system? Mr Banyard told us there was no deadline, no formal report for the work which is ongoing on simplification. You presumably receive reports periodically.
  6. (Dawn Primarolo) This is referring to the review which I have asked for. Clearly the priority on the introduction of self-assessment was to get the system in and working. Through that period, where possible, we have tried by alteration to the system to reduce the complexity and ease the position for taxpayers. The review is not time limited in the sense that it cannot make proposals on what should be done until the end of the period. I expect to receive reports as the review progresses on how changes can be made and to bring those changes in when I can and as soon as I can. Although the review sat in February of this year, it is difficult to describe it as a review. Whilst it has an urgency about it now, picking up the point you made about the obligation to the taxpayer, it should be a function which runs forward constantly as we assess how the system operates, the changes we can learn from that operation and from others' experience and how we can improve that. To start with, I have asked the review to focus particularly on the issue of making the return shorter and precisely the type of information we now need and whether we can reduce the number of pages. That is the first priority. The second priority is to look at this difficult question of whether we really need as many people within self-assessment as we currently have. I know that the Committee is very interested in pensioners but there are other issues which we need to look at and whether we really need these people in the self-assessment system or whether we can remove them completely and allow them to be within the general system. That is the priority for the work now. Then it will need to move on to other areas which evidence to your Committee has identified that we need to address. I should be more than happy to keep the Committee fully involved in every sense in assisting through this process. There do not have to be any questions of secrecy here; this has to be about improving the functioning of the system. I am already very grateful for the work which organisations like TaxAid, the Low Income Tax Reform Group, the Working Together Group and the professional organisations are offering to the Revenue and how we can share that information.

  7. I am sure my colleagues will pick up on your hint about scope and pensioners. When Mr Gibbs came here to give evidence on the Budget he said that in the Budget itself there were no measures on self-assessment simplification. Why was that?
  8. (Dawn Primarolo) There were several changes in the Budget which assisted taxpayers in their returns, particularly the self-employed and in the area of company taxation. I would freely admit to the Committee that it is proving very difficult, for instance in the priority of wanting to remove taxpayers wherever possible from the obligation of self-assessment, to settle on a clear system which does not end up making it more complicated for them. I would share the views of the Committee that I would have hoped to have been further on, but we are not and we need to press forward as quickly as we can. I am more than happy if the Committee wish, for instance, to provide, perhaps on the return from the recess, a meeting early in October to give you a progress report on some of the projects we are working on now which we would hope to bring forward to give you an involvement and an idea on how we are trying to take it forward.

  9. That would be very helpful. The Chartered Institute of Taxation submitted to you a series of what they called Quick Wins on tax simplification. Mr Gibbs again told us in the Budget hearings, "I have to say that none of the specific proposals we have had have been terribly useful".
  10. (Dawn Primarolo) As a Treasury Minister there are many people who offer us advice and advance solutions which at different times we are not always able to proceed with. What I want to establish is a working relationship with all of these organisations where the priorities of Government can be understood alongside the priorities of these organisations and how we work through those to deliver the objective of simplification where that is possible and ensuring that the taxpayer gets the very best service. There is always a balance here in terms of fairness and certainty. Sometimes producing simplification in one area of tax can produce complications in another. If we are to promise people that it is to be easier for them, we need to make sure that an unforeseen problem does not arise somewhere else. That is really where we are now. What I should like, but I realise that it is very important not to raise expectations here, is some Quick Wins to put on the table frankly, to show a definite indication of the commitment that I am trying to stress here. For instance, making the application shorter would be a huge indication, a huge step forward, whilst making sure that we are fair to all taxpayers in how we proceed on that basis.

    Mr Plaskitt

  11. The self-assessment form does not carry with it an explanation as to why it has been sent to an individual taxpayer. When Mr Banyard was before us he said that he did not think there was any scope to provide that explanation because it was too complicated. Is that fair?
  12. (Dawn Primarolo) Wherever possible we should make every effort to explain to the taxpayer how the rules operate. As far as I am concerned, there can be no holds barred in ensuring that we try to move to transparency in providing the information but in a way which is usable. Information can be provided but if the way the information is provided is totally incomprehensible, it does not really take us any further forward. I think that the issue is how to take what are sometimes complicated explanations and convey them in a way which is accurate but does not transfer that complication to the taxpayer.

  13. Will you be able to help a pensioner who for a year or two receives the form, then the following year does not and yet sees all the commercials on the TV saying you must get your form in by so and so otherwise you are fined and gets into a panic about it? Can you do something with your transparency reforms which will help someone in that situation?
  14. (Dawn Primarolo) Yes, we have to do this. The complication is that we can and do provide access for enquiries. Many pensioners who are not even in the self-assessment system ask why they have not had a self-assessment return and it is very difficult to allay their fears. We can offer visits, we can make sure they get rapid response from the Department. Your point really goes to the heart of the matter, particularly with regard to pensioners, which is how we ensure that that anxiety does not develop in the first place. That is about whether they should be in the system in the first place. I am very conscious that with nine million people within the self-assessment system currently we really have to try very hard to focus on how we can remove them from the system entirely so that we do not get this concern because they had the tax return last year but not this year. It is reaching that point in a system which only became active in 1997 and was a huge change. Now it is bedded in, we really need - and that is what I want the review to go on to do - to ask ourselves what information we really need and what information we are collecting which we do not need to ask for. That is the sort of process we have to work through.

  15. There is that, but there is also the people moving in and out of the system. There are issues about what the system is like once you are in it; then there are also issues as to whether you are in it or not. There is a certain movement of people in and out of the system over time. What is the difficulty of simply having a statement incorporated on the form which says "You may come in and out of this system depending on various circumstances" so at least people know that their relationship to the system can change over time.
  16. (Dawn Primarolo) 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 and if by error they do, then there is a procedure they can follow and just ignore it. Pensioners particularly, although maybe other taxpayers as well, are not very comfortable with the idea of ignoring something which comes from the Inland Revenue and therefore the obligation is all the greater on us. One of the issues I found with designing forms is how much information is on the form and therefore lengthens the form, but if we cross-reference it to guidance notes, people find it difficult when they get to a question which says "See Guidance Note 11". One of the tests I tried - I know this is not terribly scientific - was to sit down and fill in the form myself and find how far through the form I could get before I was stopped in my tracks and needed to go away and get some other information or needed to refer to the guidance notes. There is a balance here. If we want to keep the form very short, which is certainly one of the points which has been made to us strongly, how much of the information on the form is really relevant. In explaining what might happen next, the priority has to be to say we should tell people that they cannot and should not get the form again and we have to sharpen up on that. We have then, in how the system operates, to be clearer with people when we are telling them that they are coming into the system. The obligation is on us rather than trying to guess. This is obviously a big programme. What I have said to the Revenue is first get everybody out of the system who does not need to be there. At the same time we can focus in on what information we need to provide in support for those who are still within self-assessment. I have to say it sounds much easier when I say it than it is in practice, but that clearly is the right thing to do and clearly has to be the dynamic. Delivering it is not quite that easy.

  17. When you go through that process of weeding the people out of the system who should not be in it, there is no reason why you should not, once having identified them, write to them and say thanks for the forms you have completed, we shall not be sending you any more. That is possible, is it not?
  18. (Dawn Primarolo) Absolutely; yes, as a minimum. Yes, I absolutely agree.

    Kali Mountford

  19. I was pleased to hear in part of your answer that you are already looking at reducing the size of the form and impressed that you tried to fill one in. I employ an accountant myself. Most of us, as well as the eminent organisations who have given evidence to you, are taking our evidence from our constituents and they do not all have the benefit of an accountant and find some of these forms extremely difficult to complete. Have you looked at the experience of the Department for Work and Pensions and their work on reducing the benefit claim form from 40 pages to just 10? As you are looking at reduction, have you looked at other Departments and what they have done?
  20. (Dawn Primarolo) Yes, we have. I hesitate to say how many pages might be relevant on a self-assessment form so I will just speculate here on a target and perhaps the Committee will accept it as that. If we could get the form down to four pages, we should be doing extremely well. If we get it down to fewer, that would be brilliant. The other thing about the people within self-assessment is that something like 50 per cent of them do not need an accountant. We see that in terms of the returns we get before the September deadline. It is a question of how we approach this problem and it is quite right, as has been identified both in evidence to you and what Members of Parliament themselves have said in debates on the floor of the House, that the first obligation is to make sure that we do not have people in the system whom we really do not need. The next step is to make sure that the system is transparent, that forms are reasonable, and that there are different ways in which to the convenience of the taxpayer, the taxpayers who are in the self-assessment system can then deal with us. That is the sort of process we need to go through because for some people I should quite like to know why we cannot code more people out of the system basically. When the design was made of self-assessment the decision was taken that all high rate taxpayers would be within the system? Do we absolutely need to say all high rate taxpayers are within the self-assessment system. These are the sort of fundamental questions we now have to ask because that would influence how form design, information, support systems would then dovetail in behind that. We have to look at lots of different ways of designing the forms once we are clear - and that has to be the priority - who is in the system.

  21. Am I to infer from that answer that one of the problems in form design is the breadth of population the form is currently aimed at if we are to get accurate and complete information from a wide group of people in different circumstances?
  22. (Dawn Primarolo) Certainly if you look at the form in many places it says "Ignore this page" and it is quite difficult. The point is that just receiving the form is daunting for some people. Yes, we have to tailor what we do to the specific groups we have within self-assessment and then what we have to do, as our experience is building up we are becoming more proficient at this, is to test the forms properly before we bring them into the system. We have gradually improved our expertise and ability to do that by model offices or using taxpayers who are prepared to volunteer to be involved in pilots which get the form design right by them filling it in and saying there was not enough information about whether that was relevant information. One of the things we find is that they give us a lot of information we might not need, but they give us everything because they are not clear about the form. That sometimes makes the logging of the information very difficult because we are doing it electronically, taking the forms through and the system will not do that. Yes, we have to do all the things you say.

  23. It sounds as though there is a prospect of self-assessment defeating its own objective if we are not careful. Is there a balance to be struck between use of Revenue staff time in having to answer questions about how to complete the self-assessment form and if we shorten the form and perhaps lose some clarity, may there be further dialogue because of the lack of information coming from the individual taxpayer?
  24. (Dawn Primarolo) That is exactly the balance to be struck. It would be counter-productive not to have enough information and to have to go back to the taxpayer. In a sense, much like our own tax forms as Members of Parliament, there can be a standard simple form for the majority in the system whose tax returns are straightforward, but there will be those taxpayers whose affairs are more complicated and therefore they still may require additional sheets to explain the information, collect the information which is relevant to them. What is necessary is that we understand better. Instead of sending everything to every taxpayer, we can send relevant information gathering to the taxpayers we need to.

  25. Just to clarify that point, are you saying that we may end up with new a self-assessment form which is different according to the class of taxpayer it is aimed at?
  26. (Dawn Primarolo) Yes, that would be possible. It would be like a standard form with an additional sheet for capital gains.

  27. Standard, standard plus one and standard plus two.
  28. (Dawn Primarolo) Yes. I am not suggesting for a minute that what we would end up with would be a standard form of four plus 20 pluses. The idea is to reduce the amount of information and we already do that to a certain extent with some taxpayers because we know from their previous returns that they will need to fill in particular sections. That is how it should work. The reason I hesitate is because I do not want to make it sound as though we would just replace it with different complexity. The pressure has to be that we personalise the forms where we can and get the information which is relevant from taxpayers. That means we have to have a better understanding ourselves of who those taxpayers are.

  29. Referring back to work which has been done in the Department for Work and Pensions, where once people have established a set of questions and answers, in this case to get money from benefits and in the case of taxation to pay some in or not, is there not some scope for looking, once you have established your basis of paying tax, at the same system, that the Revenue sends out a statement, this is what it is, clarify, yes or no and end it there? If it is the same as last year end of story.
  30. (Dawn Primarolo) Yes; for where taxpayers' affairs have not changed. If their affairs are so static, in the sense that the information does not particularly make a big difference, then why have them doing that at all? Why not remove them from the system? That is really what we need to try to get towards. We collect something like 17 billion through self-assessment returns; that is a lot of money. As we change the system, we do not want suddenly to have explain to the Chancellor that we have got a simpler system but we are a few billion down.

  31. That is out of how many taxpayers? Is it nine million?
  32. (Dawn Primarolo) Approximately nine million; it varies slightly.

    Dr Palmer

  33. I am a fan of the system, possibly the only fan of the system. I have always found it very flexible and I get exactly the forms I want magically. I did have one practical point. When people pay too much tax they have to write in specifically to say they want it back. Would it not be a nice procedure if it were automatically deducted in the tax code next year or they automatically received interest or simply automatically received a cheque?
  34. (Dawn Primarolo) We repay automatically. If I might just indulge in a little further speculation, I would consider it a huge step forward for the Revenue if, when a taxpayer contacted us for whatever reason, having answered their query, we could then say, would you like us just to check that you are entitled to all the reliefs you are getting or what reliefs you are entitled to and that you are paying the right amount of tax? We have a lot of work to do and it can start here in getting to the position where taxpayers feel confident enough to ask us to do that. At the moment they would be feeling that maybe we might find they owed us some tax, whereas it is the case that we should be able to offer that facility in the longer term. I hope with our call centres, with the contact points, with the way we provide for people to contact us that we will be able to do that, but wherever possible the repayment should be - should be - automatic.

  35. In my particular case I did have an overpayment which sat there for two years until I asked them about it and they said they would pay it back if I liked but I had to write a letter asking for it.
  36. (Dawn Primarolo) This is always the problem. It is like going to a party when people ask me what I do and I say I am a Minister. They ask which Department and I say Treasury and Inland Revenue and then they start asking me about their self-assessment return. We have 21 million on PAYE and nine million on self-assessment. I could not promise that we do not make errors. I am very sorry. We will try not to do it again. I am sure your file will be flagged to make sure we pay it immediately and yours as well, Chairman.

    Mr Tyrie

  37. I shall not ask you for any tax advice, Minister. I would point out, however, that Nick Palmer can no doubt fill in the forms without any trouble, but he does have a PhD in mathematics and maybe that helps. I am sure you have been asked this before at parties. Do you fill in your own form?
  38. (Dawn Primarolo) No, I do not.

  39. Do you think you could come close to doing it?
  40. (Dawn Primarolo) I should be able to do it. One of the things we need to work through is understanding why some people use agents and some do not. My personal preference, particularly as an MP, is to use one because the security of knowing somebody else has checked everything I have done is important to me. Yes, I should be able to do it myself. I would also admit, before you ask me, that trying to do it on the internet last year was not something that I succeeded with. That is of course a legitimate question and the acid test if I cannot do it myself. Fortunately for me something like 50 per cent of the taxpayers in self-assessment do manage to do it, so they obviously have PhDs in mathematics as well.

  41. When you are looking at Budget starters do you have a specific role in saying, "Hey, hang on a moment. This might be a very good idea but it is going to be a nightmare for the form filling?". In other words, how much is the compliance burden side of the whole tax-making function given weight in the decision-making process? I ask that because there is not a single person who knows anything about it who would say that life has got easier in terms of objective complexity of the tax system over the last five years. It is much more complicated and much more difficult to handle than it was five years ago. You mentioned a key area: CGT. You said you would have to send an extra form for CGT. CGT is now a nightmare.
  42. (Dawn Primarolo) It was not exactly easy on indexation, was it?

  43. It is worse now. In the battle between the people who want to reduce the compliance burden and those who have their pet schemes, who is winning?
  44. (Dawn Primarolo) I shall leave you to make your judgement. You may come to a slightly different judgement from me. Yes, of course and part of the process that we go through, through the starter process, is to look at compliance costs, fairness, whether there is truly simplification, whether it is in tax law rewriting or whether it is simplifying the system, certainty and the world becomes more complex. I was fortunate enough to have a few days' break in the US as they were beginning their run-up to their tax returns; every single person does a return there. Their cry as well was in every publication that the system was more complex, life was more complex, tax system was more complex. It is a balance between fairness - and we could discuss the CGT reforms - compliance and simplicity and that obviously cuts both ways, for the Inland Revenue and for the taxpayer.

  45. Is simplicity and ease of compliance top of the Chancellor's agenda?
  46. (Dawn Primarolo) They have to be balanced with fairness and the objectives of the system. It would be completely wrong for me to say that our first objective is simplicity. Our first objective is fairness, supported by simplicity and compliance.

  47. You have said you want to reduce this burden in two ways: you want to make the forms shorter and you want to get some people out of self-assessment who are in it at the moment. Do you think there are some advantages to having people in self-assessment in that they become more aware of the amount of tax they pay?
  48. (Dawn Primarolo) What is interesting about the self-assessment system is that when we were elected in 1997 all the decisions about the system had been taken and we were on the run-up to implementation. I do have to say that it has been very successful in bringing in the tax and that is a benefit. The obligation is that yes, of course people must see the tax that they are paying and why. So trying now, with the system which is basically working, to continue to improve it is a challenge, I would not deny that.

  49. The question is whether you think it is good that people should know how much tax they pay and do you think that self-assessment makes a contribution to that?
  50. (Dawn Primarolo) It does make a contribution for those taxpayers. It is writ large for them and the basic proposition is true for all taxpayers.

  51. So there would be a loss if you reduced those in self-assessment.
  52. (Dawn Primarolo) A loss?

  53. Of awareness.
  54. (Dawn Primarolo) This is about the explanations and the responsibilities, the information that Revenue provides and a balance. You are adding another criterion here to the balance between making sure that the taxpayer interacting with the system is fair and transparent but not over burdensome. We could write huge amounts to them, which they might not want, in terms of explaining the levels of tax. There is bound to be a trade-off here between how much information we require from people and therefore how they then connect that to their appreciation or not of how much tax they are paying.

    Mr Beard

  55. During the evidence we have been told that about 45 per cent of the returns are filed before the September deadline and about 45 per cent before the January deadline and then ten per cent drift on until July. It means the Inland Revenue has a work load which is in two big lumps, two big piles of returns, which internally cannot be the most efficient arrangement. What stops this being evened out during the year so we have people whose name begins with A and B during January and D and E in February and so on?
  56. (Dawn Primarolo) The obligation is within the fixed tax year. You are quite right that particularly coming up to the January deadline we see a huge surge into the system of returns. I cannot remember the exact figure but we get 1.5 million within about two weeks. Our obligation is to make sure that that is dealt with and the pressure that puts on the system is very great. One of the things I still feel we do not have enough information or understanding on is why more people do not use the advantage of submitting by the September date when the Revenue does all the work for them, that is a huge bonus in the system, and how we can try to increase that number. Up until then there is a flow, though there is a bit of a surge round the September date, and then why there is this slowing down until we really start approaching the January date. We won an award last year for our commercial reminders, not for the best of reasons: it was because they did not like it. They did not like Mrs Doyle going "Go on, go on", but everybody knew because they did not like it. How can we remind people? It is not the best of compliments, is it, but at least they know? One of the things we have looked at is telephoning people and that is delicate. We do not want to make it look as though we are pressurising them, but reminding them that we still have not had their return, that we are approaching deadlines, why do they not put it in now and discussions with agents will certainly help us understand that, where agents are putting in. The problem is that wherever you have a deadline there are always those who want to wait until they are close to the deadline and it puts pressure on the system. It comes back to the communication point. What is a sensitive balance of reminding people without making it look as though you are harassing them?

  57. You could always have a moving deadline: the deadline for the As and Bs in January could be one thing and the deadline for the Cs and Ds in February would be another.
  58. (Dawn Primarolo) That would be unfair to taxpayers because taxpayers have a tax liability which they are obligated for for a certain period and they have to have paid their tax by that period. If by some mechanism we allow some taxpayers to have a longer period to make their returns, the taxpayers who have a shorter period than that would quite rightly point to a fairness issue on that point. The other problem we have is that it is not just a question of people paying. People pay enough tax to have the tax paid deadline but do not submit their returns necessarily on time which is crucial for us to know whether or not they have paid the right amount of tax. The tax year and therefore the deadline, becomes immovable. What we need to do is look within that about how we can perhaps try to encourage people to not wait until the last minute, but in the end that is the taxpayer's choice and that is the deadline which is in the system.

  59. One of the things which induces people to file as late as possible is the fear that if they file early they are leaving more chance of being enquired into. All the evidence is that that is not true but what can be done to convince them otherwise?
  60. (Dawn Primarolo) It is not true but this raises all the areas around how our enquiry system works and the publicity which we can give running up to the deadlines to make it clear that it does not make any difference in terms of enquiries. Some of your witnesses certainly raise that as an issue. I shall not go into that now; maybe there will be other questions on the enquiry system. If we look at the work we are doing with the agents and as we develop that I hope that we will be able then to address the point you are making better. In the end I think we will still find ourselves with that peak as we reach the final deadline.

  61. One of the ways of simplifying things or helping filing has been the internet filing. The figures indicate that 39,000 people used the service in the first year and in the second year it was 75,000 out of nine million. Why is it so unpopular? Who is it designed for? Is it designed for agents to use or is it designed for individuals to use? Some of us had a session in Ireland last week. They are planning on 20 per cent use of the internet.
  62. (Dawn Primarolo) The internet is designed for the use of individuals and there is an electronic lodgement system through subscription with 350,000 on it. I agree the figures are -

    Chairman

  63. Miserable.
  64. (Dawn Primarolo) I was going to use more tactful language than that though disappointing would be fair. When we look at the Australian experience and when they started to move into this area, the initial years were as disappointing for them as ours were here. This year the figures are moving up but again it is well known - it is no good me pretending otherwise - that the development of the facility in terms of making it easier to use is something we need to continue to work on. Given that some members of the Committee have had the opportunity of looking at the Irish experience I should be more than happy to provide for the Committee a briefing and a demonstration of the type of products, how this system is being developed and how we see it evolving both in its attractiveness, user friendliness and, if the Committee would find that helpful, it would go some way towards showing what it is we are trying to address and over what time period we hope to do that. It is in the very early stages but we could demonstrate to the Committee our portal for corporation tax as well and the sort of ways we are trying to develop that system now so that you could have an early viewing and we should be delighted to receive your comments on that.

  65. 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?
  66. (Dawn Primarolo) This is the Revenue.

  67. There is no external body of experience being brought into this; it is entirely internal.
  68. (Dawn Primarolo) Yes. We are drawing on external experience, but the development is by 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

  69. 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.
  70. (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

  71. 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?
  72. (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.

  73. 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.
  74. (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.

  75. 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?
  76. (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.

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

  79. 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?
  80. (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?

  81. 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.
  82. (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.

  83. That sounds good. If that is successful, can you foresee that being expanded to the personal sector?
  84. (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

  85. 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?
  86. (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 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.

  87. 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.
  88. (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 finally 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.

  89. 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.
  90. (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

  91. Do you leave messages on their answerphones if they are not in?
  92. (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

  93. 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.
  94. (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 matters with us. 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.

  95. 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.
  96. (Dawn Primarolo) Yes.

  97. 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.
  98. (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

  99. 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?
  100. (Dawn Primarolo) I do not actually have that figure right here. I think we have given it to the Committee before.

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

  103. 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.
  104. (Mr Banyard) In rough terms 800,000, 9.4 per cent, did not come in at 31 January.

  105. That is the tax year just gone.
  106. (Mr Banyard) Yes.

  107. What was it the year before roughly?
  108. (Mr Banyard) Slightly worse.

  109. And the year before that?
  110. (Mr Banyard) Was slightly better.

  111. I appreciate that you do not have the numbers but it would be quite helpful if you could give us definitive numbers for each of the years from 1996 so we can establish a profile. What is your expectation - and this will only be an estimate obviously - of the percentage you will not get in the tax year we are in now, and the year after that and the year after that? Do you do estimates and have targets for how you want to raise your performance?
  112. (Dawn Primarolo) I have to agree that as a target with Revenue, which we have yet to settle, but I want to see some improvement on that. I think we have answered this in a PQ in terms of the performance over the years. As soon as we have settled the targets I shall be happy to inform the Committee of what we would like to see in future years and how we have been performing since 1997. It has been quite persistent around a small variation and one of the big challenges is to try to work out why there is this quite persistent number at the end. Comparing with the old system, which is not particularly easy to do, the system pre self-assessment, there were people who were persistent in that system as well. I am not sure that self-assessment has really cracked that particular problem, those who are compliant in the system and the amount of tax coming in, but those who continue to choose not to be compliant have not been addressed.

  113. Just to get a feel for it, have you any targets in your own mind for the reductions in that figure in the next three years as a Treasury target or something which might form the basis of public service agreements?
  114. (Dawn Primarolo) Firstly I have to consider and discuss with the Revenue the resources which will be available.

  115. You do not do it now for three years hence.
  116. (Dawn Primarolo) And then we shall call for year on year improvements and what we would expect.

  117. But would you publish the targets?
  118. (Dawn Primarolo) I believe they are published as part of the Inland Revenue PSA targets. I shall double check that. They are published and I shall certainly be happy to let the Committee know that.

  119. I only ask you to try to understand whether or not the penalty regime is adequate at the moment. I think when Mr Banyard came to see us in March he said, "... this is an area where we think we can do better", which was honest and open. In the course of trying to do better, have you looked at the Irish system of penalties at all? I was one of the four intrepid members of the Committee who had the privilege of speaking to the Revenue there and they had quite an interesting system. Is it something in the course of your work that you have looked at?
  120. (Dawn Primarolo) Yes, we are looking at the Irish system. They do not have the intermediate deadline which we do, where people can get the information to us by a certain date and we calculate it. Their initial attempts are much lower than ours: 75 per cent as opposed to our 90-whatever per cent. I understand that they resort to sending out a solicitor's letter as a reminder. Of course in understanding the differences, and particularly bearing in mind your visit and therefore that we should ensure that we have covered these issues, yes, in looking at the system and seeing where there are lessons to be learned they are not exactly comparable systems. I know that you have a lot of experience professionally on this. How tough penalties should be is a vexed question. I try to get the right balance but it is incredibly difficult when we are now trying to address those who persistently want to.

  121. On that point I have one specific question. I stress for anyone listening that I am not advocating this. In Ireland, which in very many ways is comparable to our own political system, it is a western, liberal, democratic, industrialised state, it is a member of the European Union, they actually has a system of naming and shaming. I think we were told that it is in the region of just over _12,000 in unpaid tax liability and after going through all the hoops and warnings and determinations you could end up named in a local newspaper, even a national newspaper. I just wondered, in the course of running an efficient tax system and I think we have heard a lot of empirical evidence that you as a Minister and your officials really do think through how the systems can be improved and all the evidence supports that you really are monitoring the operation of the British tax system closely, have you ever thought of that one? Have you considered it?
  122. (Dawn Primarolo) I have to say that I thought it was interesting. Like you, I am not advocating it for a minute. I am a little bit worried and I wonder on closer inspection whether the Irish system could become a bit of a badge of honour. The other thing is that when we prosecute people they get named, but we also take a lighter touch approach on the basis that some people make genuine errors, nonetheless they are in the penalty system. I was intrigued with this proposition that we might name and shame. I am not attracted to it, but the principle of putting pressure on is something that we can look at. It would probably be a bit expensive on advertising as well.

  123. That has not bothered your Government before now, has it?
  124. (Dawn Primarolo) Touché.

  125. There were differing views as to the efficacy of this system, the badge of honour point was also raised. I only mention it. If this were a system in Pinochet's Chile we would say of course it is ridiculous and we would never touch it. The fact that the Irish Government has operated it for in excess of 20 years or in that region made me just wonder whether it was something you were looking at. I stress that you do look at these issues and your officials are trying hard to look at new things and innovative things. Is this something you are looking at?
  126. (Dawn Primarolo) Certainly you could not look at the Irish system without looking at the issue of naming and shaming, but I have to say that I am not at all attracted to it because of naming and shaming incorrectly or the consequences and the balance with taxpayer confidentiality. We operate in a slightly different way. It works for the Irish and it might not work for us. It is an interesting point to look at.

  127. Fine. Your officials have not said, "This would be a brave decision, Minister".
  128. (Dawn Primarolo) No. I do not think they would even try to do that. I would consider it in the "This would be a very, very brave and courageous decision, Minister" category. "You're out of your tiny head" approach.

  129. Just going back to filing quickly, the National Audit Office said that in the case of the on-line filing four out of five attempts failed in the year 2000 and as many as three out of ten failed for the most recent tax year. It has been calculated that at this rate the target of getting 50 per cent of people submitting their assessment on-line by the year 2005 will be a target which is missed. I do not want to stoop to the level of the anecdotal, but on 21 May in the Daily Telegraph a Mr Charles Allis of Cobham Surrey said, "I have an MBA, designed several accounting systems and I filed US tax returns for several years, but the Inland Revenue software is simply terrible". I just wondered what your view was on those assessments, one anecdotal and one from the NAO, and what strategies you have put in place to tackle it. We all know that a software needs time to bed down. We would not expect it to be right in the first year obviously, but those are actually, even bearing that in mind, quite depressing statistics.
  130. (Dawn Primarolo) Ninety per cent filed first time. There appears to be a lot in January this year and certainly some people repeatedly failed to file. I could not possibly comment on the individual case. I would agree with the general thrust of the point you are making which is that we have to strive constantly to improve and understand where the difficulties are being experienced and try to remove them from the system. A high percentage said in January that 90 per cent managed to file first time. If I may, I take a little comfort in that it must be getting better, I hope, every month in terms of people being able to do that. There are still some people who are experiencing difficulty.

  131. We look forward to your teach-in with interest. I have certainly signed up already. I can hardly wait.
  132. (Dawn Primarolo) Excellent. Thank you. I look forward to it. Can I watch?

    Dr Palmer

  133. I am interested in the determination procedure. If I have a stable income for years and years and years and then suddenly receive 500,000 from some source or other and I do not fill in a tax return, after a while the Inland Revenue will determine my tax based on previous returns and will make a good guess, not allowing for this windfall. Am I then no longer liable to fill out a return or will you continue to pursue me for my return even though you have charged me the determination?
  134. (Dawn Primarolo) We shall continue to pursue you for your return, so do not do it.

    Chairman

  135. We have had evidence about enquiries. I quote Mr Robert Maas, the Chairman of the Technical Committee of the Institute of Chartered Accountants who said to us "... there is a growing feeling that they", the Revenue, "ask for information for the sake of asking for information, without any realisation that producing information is often very costly". Should taxpayers really have the right to know why they have been selected for an inquiry and what aspect of their return concerns the Revenue?
  136. (Dawn Primarolo) No, I do not think so. How the enquiries operate is on a profile and risk basis. I am not quite sure that I would agree with that proposition. It is very difficult to provide enough information in a system to make it clear as to the obligations but not provide so much information that you assist those who are trying not to fulfil their obligations. I still preferred the route of ensuring that the Revenue is better targeted at the information that it requires and is asking for information it requires rather than collecting information that it may not need. Part of the process of looking at forms, in looking at the taxpayers, in looking at who is in the system, will help us to develop that process and therefore develop the guidance we are providing to taxpayers in explaining how the system works. There is a difficult balance to strike there which we will do our best to have correct. It is not always possible to give all the information because it assists those inadvertently who are determined not to comply with the system.

    Mr Cousins

  137. May I first of all say that we are extremely grateful for Mr Banyard's supplementary note on this point of payment methods and payment systems? I am aware of the Newcastle experiment and its relative success with payment of tax by direct debit. What I am not clear about is whether it is the intention to extend this system gradually throughout the country.
  138. (Dawn Primarolo) The Newcastle experiment is quite small in terms of a pilot. It is providing very useful information and certainly in looking at how that could have wider application needs to be the next step in our consideration. We need to ensure, which is not the case at the moment, that people can pay us rapidly and conveniently in various methods, whether direct debit, over the internet, with credit cards. There are constraints for us on that in terms of expense to the Department in running those systems, particularly with credit cards. Yes, that is certainly something which I want to see us explore and develop to make it more convenient for the payments, so the taxpayer who does not quite get round to doing the payment but has done the return has a much simpler and quicker way of doing it and therefore does not find himself with penalties.

  139. You have mentioned these various payment options, credit cards and so on. The take-up of credit cards in this country is enormous now: 50 million credit cards. It does seem extraordinary that there is no ability to pay tax using these methods and that, despite the problems set out in Mr Banyard's note, there does not seem to be any timescale for their introduction.
  140. (Dawn Primarolo) The problem is that the credit card front is very expensive in the facilities which we as a Department have to pay for.

  141. Because of the transaction charges.
  142. (Dawn Primarolo) Yes. We need to look very carefully at whether that extra cost is justified in providing that additional facility. To go back to the beginning, it is really a question of what we should do first in working through these improvements to the system and therefore if there are savings elsewhere whether or not we can stand the cost. It is a very high cost for us, I am informed by the Department. It is not ruled out. It is just a question of what comes first.

  143. Your reference to high cost is obviously related to credit cards and one understands the transaction charges there, except that if you can pay your television licence by credit card it does not seem extraordinary that you should be able to pay tax by credit card. It does seem extraordinary that there is no timescale for introducing the other payment methods: direct debit, internet transfers.
  144. (Dawn Primarolo) You can pay into our St Austell office by your debit card and that is running. It comes back again to the points which were made earlier on as to whether it is well enough publicised that people can use it. You can pay on the internet by debit card, but some people may be reluctant to do that. A variety of payment methods is already open, but it seems to me that what we need to do is have a coherent package of credit/debit/internet/over-the-phone payments and putting those in place is not, for the size of what we are dealing with, as easy as it might seem on the face of it. It is a question of where we use our resources first. It is a question of priorities.

  145. It does seem a little extraordinary, if we are not to betray our earlier political lives completely, at this stage in the evolution of world capitalism that a limited number of people can pay tax by direct debit in Newcastle and by direct debit in St Austell. Great for St Austell, which is a fine place.
  146. (Dawn Primarolo) It is a fine place. Those are the receiving offices, it is not that you have to live in St Austell to do it. I am dreadfully sorry if I implied that.

    Chairman

  147. Can anybody pay in St Austell.?
  148. (Dawn Primarolo) Yes; that is my understanding. Would you like me to get you a note on St Austell?

    Mr Cousins

  149. It is a little inconsistent with Mr Banyard's note to the Committee.
  150. (Dawn Primarolo) Yes. I shall ensure that you have a note on that. The problem is having pilots running, investigating different methods, then having to develop those out into the system as a whole and that takes longer.

    Chairman

  151. Thank you very much. We are going to leave it there. We are hoping to make our report quite soon next month, so if there is any supplementary information and if we are to take up your kind invitation to visit the Revenue we would probably have to do that quite quickly. In the meantime, may I thank you and your officials very much for appearing today.

(Dawn Primarolo) Thank you very much. I very much welcome the dialogue we have been having this afternoon with the Committee. I am very relaxed. Whilst welcoming the participation of the external bodies in discussing this with the Revenue, I am more than happy that this Committee also take an interest in this. Where I possibly can be of assistance in facilitating that dialogue directly with the Revenue, I am more than happy to do that. It is for the benefit of the system as a whole and would be of great assistance. Thank you very much for the time you have spent this afternoon. I shall make sure we get this information to you and provide for the visit as well on the different aspects of our development work. Thank you.

Chairman: Much appreciated. Thank you.