Examination of Witnesses (Questions 1
MONDAY 22 OCTOBER 2001
MONTAGU KCB, MR
1. Welcome to the Committee and welcome, Sir
Nicholas. Thank you for bringing your team. As you know, we are
discussing the Comptroller and Auditor's General Report on Income
Tax Self Assessment this afternoon. Before we start could you
introduce your team?
(Sir Nicholas Montagu) Yes, thank you,
Chairman. On my left is Dave Hartnett, who is a member of my board
and is Director General for Policy and Technical issues. On my
right is Stephen Banyard, who is our Director of Local Services.
Before we start might I take the liberty of welcoming you as Chairman
and your new colleagues and say that I look forward to the same
constructive dialogue that I enjoyed with your predecessors.
2. Thank you very much, we are very grateful.
Perhaps I can start off with a couple of questions on identifying
taxpayers. Paragraph 11 of the Executive Summary says that you
identified £21.8 million additional yield in 1999-2000 from
your intelligence work, which aims to identify undeclared taxable
income or gains. What is your estimate of the overall tax at risk
from the hidden economy?
(Sir Nicholas Montagu) It is almost impossible to
estimate, Chairman. As the Comptroller and Auditor General's Report
mentions, Lord Grabiner concluded that it would be impractical
to arrive at a precise and meaningful figure for the scale of
the hidden economy. It is almost like the old children's puzzle
about what is wrong with the statement that the amount of undetected
crime rose last year. Because it is hidden there is almost by
definition no precise method of estimating either its size or,
in consequence, the tax risk.
3. That is a very honest answer, but if your
Department does not know how much tax is at risk from the hidden
economy, how can you be satisfied that you are using your resources
effectively to target non-compliance?
(Sir Nicholas Montagu) That, I think, is where particularly
the random enquiries that are allowed under self assessment come
in. What we are constantly doing is trying to refine our indicators
of risk. We do this in a number of ways. We marry up data from
different sources by means of the data warehouse and in particular,
as the NAO Report notes, we have now got in all our areas risk,
intelligence and analysis teams and their specific job is iteratively
to identify where the highest risks lie so that we can target
our activities more effectively.
4. Thank you. So you are telling us that you
can target areas of high risk with an appropriate level of resource?
(Sir Nicholas Montagu) Yes.
5. Paragraph 11 notes that there are no quality
assurance arrangements or performance targets for the Department's
intelligence work. In these circumstances, how do you know whether
this important work is being carried out effectively?
(Sir Nicholas Montagu) Again, I think that what the
report brings out is that there are gaps in our management information.
This was a deliberate decision in the sense that obviously we
could not do everything with self assessment at once. What we
are trying to do now with the system bedded in, and I will ask
Stephen to amplify on the issue of quality in a moment, is to
improve, to identify the information gap and, where appropriate,
to introduce new targets so that, for example, the risk, intelligence
and analysis teams that I mentioned will now have specific targets
for the number of ghosts, people previously unknown to us, and
moonlighters, people with undisclosed extra sources of income
for their identification. Stephen, would you like to add on quality?
(Mr Banyard) What we are trying to do is to build
up a better knowledge of how we can find cases that are at risk
and spot them, how we can match and use third party data to check
cases which may be more at risk and to allow us to leave alone
those people who have declared their income and then to add in
local knowledge and in this way we can build up a better idea
of what cases are at risk. In terms of targeting the work, what
we are looking at doing for the hidden economy, the ghosts, is
to move from targeting yield to targeting individual people because
what we are concerned about is to bring people into the formal
economy. This may mean that they will pay more tax but it may
mean they are entitled to Working Families Tax Credit or it may
mean that they are entitled to state benefits if they pay their
NIC. It is a whole job. Our aim is, therefore, not necessarily
to target yield on this work but to target the number of people
we bring into the formal economy.
6. Would it be fair criticism of you to say
that whilst you are historically very committed to quality assurance
in other areas, perhaps in this area you might not have been as
committed as you might have been?
(Sir Nicholas Montagu) I do not think it would be
entirely fair, Chairman, because, again as the report notes, this
is a further area of activity to which our Compliance Quality
Initiative, which I have discussed with previous Committees, applies.
That does provide a way of checking up on the quality of work
done by our people.
7. May I ask you a question now on getting the
tax returns in, which is obviously a matter of great interest
to the general public. If I refer you to paragraphs 3.7 to 3.10,
they indicate that the Department have very little information
about the use and effectiveness of the various measures available
to encourage the submission of late returns. What are you doing
to improve the position?
(Sir Nicholas Montagu) What we are doing is that we
are having a real blitz on returns that are long outstanding,
where we have a demanding target of clearing 40 per cent of really
old cases by next year. So far as getting more recent returns
in is concerned, we are doing a number of things. First of all,
we found the Comptroller and Auditor General's remarks on daily
penalties extremely helpful, and since the report we have staged
a trial which confirms what Sir John found on the effectiveness
of daily penalties, and we will expect to be using them more.
In addition, we are getting in direct touch with people who have
not submitted returns. We set up a new receivables management
business stream this year to focus our recovery activities in
all ways. In March of this year our computer automatically generated
600,000 letters to people from whom we would have expected to
receive a return and had not at the time that the relevant information
came in. As a result of this, by the end of April this year we
had received an additional 150,000 returns and an additional £230
million in tax.
8. Are you satisfied that you have got enough
information on how successful different measures are?
(Sir Nicholas Montagu) No, I am not satisfied because,
as I said, I think that this is an area where we do need to do
more. I am satisfied that we are improving our systems and that
we are doing more to target risk and more in particular to target
those people who have not sent in returns where we would expect
them to do so.
9. On that particular point, would you like
to talk about particular groups of people, perhaps pensioners,
who may have great difficulty? These are not people who may be
trying to avoid paying tax but just find it difficult to get the
(Sir Nicholas Montagu) Yes, I would indeed. It is
inevitable, given the nature of self-assessment as designed and
passed in the relevant legislation by Parliament, that some pensioners
will be in self assessment. We have taken 400,000 of them out
of self assessment as a result of recent changes to the threshold
for investment income which requires a return. What we are also
doing is laying much more emphasis on the Revenue as an enabling
as well as a regulating department, and that means as a department
devoting much more conscious effort to helping people get it right.
A pensioner or anyone else who is in difficulty can ring our helpline,
can call in at the local office. We have a range of different
sources of help and also the whole time we are trying to improve
the written guidance that goes out with the tax return form to
10. Thank you. I am sure other Members will
want to come in on getting the returns in. Can I ask you a couple
of questions on enquiring into tax returns. In paragraph 4.6 it
states that £1.8 billion tax was at risk from non-compliance,
yet according to figure 13 on page 19 you identified only around
£0.3 billion of this £1.8 billion. What are you doing
to tackle the £1.5 billion tax gap?
(Sir Nicholas Montagu) Again, this goes back to what
I was saying about refining our indicators of risk. The more that
we can identify the groups and individuals most likely to owe
us tax, the more we will be able to get in more money than the
£300 million mentioned in the report. Basically we are tackling
the work in two ways. First, risk assessment, which I have mentioned
and, second, the other aspect of our work, which I have also mentioned,
of enabling, managing down the tax risk by helping people to get
their returns in accurately and on time. Very, very importantly,
it is a theme which runs explicitly and implicitly through the
report, once we have identified people through the risk, intelligence
and analysis team, that is not the end of the story because we
then put in our right track teams to make sure that they stay
within the legitimate economy and that we get continued tax yield
from people who might otherwise have a history of evasion. Also,
of course, raising the profile of our compliance work generally,
prosecuting and publicising prosecutions and tackling the most
resistant groups through the programme of enquiries which you,
Chairman, have mentioned.
11. You will appreciate it is still a large
gap. Can I just ask you what level of compliance you would be
(Sir Nicholas Montagu) I suppose as Accounting Officer
I would have to say 100 per cent because I suspect that anything
(Sir Nicholas Montagu) Realistically, it is not really
a percentage that I can put a realistic figure on. As I have indicated,
there are intrinsic difficulties in identifying exactly how much
tax is at risk because it goes to the size of the hidden economy.
Again, it cuts two ways. If an enquiry does not come up with any
tax at risk is it because we have got our risk indicators wrong
or because more people are complying? That is an intrinsic difficulty
in the analysis.
13. Do you think we should put more resources
(Sir Nicholas Montagu) Any Accounting Officer, I think,
Chairman, if offered the lure of more resources would say yes,
of course we could use them. Equally, what we have to do in any
given year is to balance our resources between the different aspects
of our activity.
14. Paragraph 1.6 says that you expect to secure
administrative savings of £500 million from self assessment.
(Sir Nicholas Montagu) Yes.
15. Just following on from that last question.
What scope is there for using these resources to identify and
collect a greater proportion of the tax at risk?
(Sir Nicholas Montagu) Again, I have to make the obvious
point that any keeping of resources has to be with the agreement
of Treasury and Treasury ministers. We accept the constraints
which all Government departments are under. It was implicit in
the assumption about savings that we would not keep them all.
As the report notes, and as you pointed out, Chairman, we will
achieve the savings. We have deployed something of the order of
over 500 people saved from the introduction of self assessment
into compliance and customer service work. It follows from what
I have said about enabling as well as regulating that I would
not distinguish the two. We have given up the equivalent of about
16. It still begs the question about howI
return to an earlier question I askedyou know that you
are allocating enough resources to this problem if you do not
know the tax at risk?
(Sir Nicholas Montagu) We have in any given year to
allocate resources on the basis of several factors: keeping the
basic system functioning, helping tax payers to meet their obligations
and to claim their rightsimportant points since we are
responsible for tax credits as wellprotect the tax system
from abuse and recover lost tax. There is no simple mathematical
formula for allocating resources. Our resources are finite and
we have to make judgments about the relative priority of work.
Again, Stephen can, if you wish, go into greater detail on this
but what we have to do is to balance between enabling and regulating
in any given year.
17. Perhaps other Members will want to come
in on that. Could I ask you a couple of other questions finally
about some other issues. We have got the summary in Appendix 3
of the approach adopted by other countries, other countries which
use self assessment. Can you tell us something of the lessons
which you have learned from the international comparisons because
certainly this Committee in this Parliament is particularly keen
with all our witnesses to look at international comparisons and
(Sir Nicholas Montagu) Certainly, Chairman. Again
you will forgive me if I start with a reservation which is that
no two countries are going to have exactly the same system so
you have to qualify any inference. The Committee will have noted
that although the National Audit Office have cleared the appendix
which you mentioned with the countries concerned, it is not a
chapter to which I formally as Accounting Officer assented. That
is a bureaucratic point. The main point is that I am extremely
keen on learning from other countries. I was in Australia and
Singapore myself two months ago. I have instituted as part of
the peer review of business planning systems that has been brought
in under the Modernising Government initiative instead of getting
another organisation in this country to do it, I have got the
Canada Customs and Revenue Agency; because I regard them as the
world leaders on that. We have a model of compliance on customer
service which we have lifted directly from the Australians. A
lot of the ideas that I have put into effect on the marketing
and communication side of the Revenue again owe a lot to the Australians.
I am a member with six other tax commissioners of the steering
group of the Organisation for Economic Co-operation and Development's
Strategic Management Forum and I have initiated there discussions
on a lot of different management issues. We are introducing, like
a lot of Government departments, the balanced scorecard approach.
My strategic planners have been directly influenced by what they
found in the United States and Canada. One final example. I mentioned
that we have adopted the approach that we regard as private sector
best practice of a separate receivables management stream. This
was developed as part of a joint study with Australia, New Zealand,
the United States, Canada and Japan. We also have a lot to do
with the Netherlands.
18. Would it be a fair criticism that whilst
you have made a lot of progress on this recently, certainly subsequent
to this report being published, perhaps you were not putting enough
effort into this area as you should have been before?
(Sir Nicholas Montagu) I do not think so, Chairman.
I can only speak for my time and I have made that a very high
personal priority. Within a year of arriving at the Revenue I
had visited my opposite numbers, again Japan, Australia, United
States and New Zealand. I have mentioned our contribution to OECD.
In addition, the Head of my International Division chairs the
Council for Fiscal Affairs of the OECD. We chaired the Electronic
Commerce Specialist Group under OECD auspices. I think you could
certainly say that we are stepping it up. I think it is right
that we should step it up because with the globalisation of the
economy and the various implications of more electronic commerce
it is becoming ever more important to know what other fiscal authorities
are doing and to co-operate with them.
19. Last question. Appendix 5 sets out a number
of difficulties which arose during the implementation of self
assessment, for example the complexity of the tax calculation
guide and the layout of statements of account. What areas are
still causing concern to taxpayers and their agents and what are
you doing about them?
(Sir Nicholas Montagu) If I am honest, I have to say
that I think the statement of account still is. It is not user
friendly. There is a limit to the extent to which it can be completely
user friendly simply because of the links that it has got directly
with the system. I think the greatest area of concern is the understanding
of self assessment forms and guidance. We have done a lot to improve
these since self assessment was introduced, drawing on what taxpayers
tell us. The most important outputs are the tax return pack, which
includes the tax return, the tax return guide, on which again
we have taken account of things said, and the tax calculation
guide which we have simplified a lot, splitting it so there is
now a complex one for people with complex affairs and a simpler
version for those with relatively simple affairs. The statement
of account we have simplified and we are looking to simplify it
further. In particular, the use of dynamic format design has enabled
us to customise it more and the tax calculation. We work constantly
both with the representatives of taxpayers and, very importantly,
with tax agents and their representatives, to try and get it better.
I think those are the main areas that worry taxpayers still.
1 Note by witness: The Department does not
target yield as such. We are moving away from only taking up cases
where there is likely to be a yield and more towards moving people
into the legitimate economy. See Q84. Back