Memorandum submitted by Richard Mannion
I am a partner with Solomon Hare Chartered Accountants
and Chartered Tax Advisers Bristol specialising in the taxation
affairs of individuals and businesses. I was President of the
Chartered Institute of Taxation from May 2000 to May 2001. I was
a founder member of the Working Together Initiative, which is
now a fully fledged part of the Inland Revenue's working practice.
Because of my involvement with Working Together I believe I have
a unique insight into the operation of the self-assessment system.
The Chartered Institute of Taxation (CIOT) is
the senior professional body in the United Kingdom concerned solely
with all aspects of taxation. It is multi-disciplinary with a
membership broadly based across the professions and across occupations
in industry, commerce, the public sector and the taxation authorities.
The bond between members, whether they are salaried employees,
partners in large professional firms or sole traders is a common
interest in taxation. Members of the Institute have the practising
title of "Chartered Tax Adviser".
The views expressed in this submission are the
personal views of the author and do not necessarily reflect the
views of Working Together or the Chartered Institute of Taxation
or Solomon Hare.
2. WORKING TOGETHER
The teams of people from the Inland Revenue
and the professions who worked on the introduction of the self-assessment
system did an excellent job. But unfortunately the teams were
disbanded before the system had been fully tested in practice.
As with all significant changes in system it
was inevitable that problems would arise in practice. By the time
of the first filing date on 31 January 1998 there was evidence
of considerable frustration on all sides.
Those frustrations were borne out by a research
study on self assessment commissioned by the Chartered Institute
of Taxation in 1998 which made reference to cases of incorrect
processing, examples of poor communication and complex situations
that did not fit neatly into the new system.
The study identified the two most important
changes to help self assessment operate more efficiently as:
(1) "real liaison and consultation to
avoid badly thought out procedures; and
(2) open up communication links with the
Revenue. . . . pathways of communication must be developed more
than at present."
In November 1999 the CIOT and the Institute
of Chartered Accountants in England and Wales (ICAEW) submitted
a joint proposal to the Inland Revenue to build on and improve
the existing communication paths already in place and to put in
place a formal reporting structure so that:
procedural problems within local/regional
offices are identified early;
recurring problems are notified and
recognised for attention at senior level;
timely corrective action is taken;
results are monitored regularly;
all actions/resolutions are communicated
effectively back to those at local and regional level.
The formal Agreement was later announced formally
by the Chancellor of the Exchequer in the 2000 Budget Press Releases
(Rev 10) "Helping to get it right") published on 21
Subsequently the Association of Taxation Technicians,
Association of Chartered Certified Accountants, Institute of Chartered
Accountants in Scotland and the Northern Ireland CCAB have all
signed up to the formal agreement.
2.3 Register of Issues
All issues which are reported centrally to the
Inland Revenue Head Office, whether via area meetings, direct
from practitioners or from the Revenue network are placed on a
provisional register. These provisional issues are then reviewed
by the Working Together team.
In appropriate cases the issue will be logged
onto the main register of issues and allocated to a senior Inspector
for attention. When the Inspector's response is received it will
normally be communicated back down the line to the source of the
initial report and where the matter is of wider relevance, it
will be considered for inclusion in the next Working Together
The register appears in the Working Together
dedicated area of the Inland Revenue's web-site (www.inlandrevenue.gov.uk).
3.1 I consider that from a conceptual point
of view the self assessment system is a significant improvement
over the old system of estimated assessments, appeals, postponements
and appeal hearings. It is however unfortunate that the new system
was based on the old over-complex system of taxation originally
developed in the 19th century when the overriding objective was
that no one humble Inspector of Taxes should know all of the affairs
of the local gentleman, with the result that different types of
income were taxed under completely different codes.
3.2 It is a fundamental requirement of self
assessment that the ordinary member of the public is expected
to know and understand all of the tax law that applies to their
personal circumstances so they can not only return their taxable
income and gains correctly, but also self assess their own liability.
However for many years new provisions have been bolted onto existing
provisions without any regard as to whether the end result is
understandable to anyone other than the Parliamentary draftsman
who drafted it.
When I was President of CIOT I wrote to all
MP's inviting them to prepare their own tax return without professional
help and to let me know how they got on. Only one of the MP's
who responded said that he thought that the process was straightforward.
The general consensus was that anyone with moderately complicated
affairs would need to seek professional help.
I contend that there is something fundamentally
flawed about a system that even well educated members of the public
find too difficult to follow. In March 2001 I publicly invited
the Inland Revenue to work with the professions to try to find
ways to achieve real simplification (not just rewriting the complicated
legislation with simpler words). The Deputy Chairman of the Board
of Inland Revenue Ann Chant publicly accepted that invitation
on behalf of the Inland Revenue. So it is clear there is a real
desire for simplification on all sides, but I anticipate that
it will only be possible to make real progress if Parliament recognises
the urgent need for action and ensures that the necessary resources
are made available. Otherwise I fear that the rate of simplification
will never keep up with the rate of further complication as new
laws are bolted onto the existing structure.
3.3 Much of the effort of the Working Together
Committee goes on trying to find work-arounds where existing procedures
are unable to cope with day to day situations.
3.4 I enclose examples of the current issues
currently facing the Working Together Team (Appendix 1).
4. THE WAY
4.1 Action by the Inland Revenue
I set out below a summary of the action that
I consider is required urgently by the Inland Revenue both to
protect the existing system and also to improve it:
I have the impression that Inspectors of Taxes
are trained to believe that a return is either entirely right
or entirely wrong, which means that considerable amounts of effort
are wasted in arguments over relatively trivial amounts of tax.
Bearing in mind the scarce resources available on all sides in
this process I recommend that Inspectors should be encouraged
to exercise a degree of judgement and to consider whether the
items under consideration are material. In this connection I am
pleased to note that the Revenue's new performance measures for
compliance will focus more on quality of work rather than numerical
I applaud the Inland Revenue's decision to set
up Business Support Teams to help small business, but I feel there
is much more to be done in the area of education of taxpayers,
particularly if the Revenue is to fulfil its enabling/educating
role. The series of booklets SABK were excellent, but more needs
to be done. My own suggestion would be for a series of public
information television broadcasts or perhaps a Revenue sponsored
television drama profiling the conduct of a tax investigation.
Some years ago the Inland Revenue made its manuals
available to the general public and again I applaud that decision.
The Revenue need to make it clear whether the contents are guidelines
that the local Inspector can choose to follow or reject, or whether
they constitute the party line. At present there is too much inconsistency
between one Inspector and another and between one area office
and another, although I acknowledge that the new area management
structure is designed to shorten the lines of communication between
Head Office and the network.
I generally support the Inland Revenue's Change
Management Programme which resulted in 60 or so clusters of tax
offices rather than 550 individual districts. But my own observations
indicate that this programme has exposed significant under-resourcing
in certain areas with a consequent effect on customer service.
If the self assessment system is to survive and indeed be improved,
then I consider that the Inland Revenue will need more resource
not less. I also observe that the Revenue has suffered from ongoing
industrial relations problems which are holding back the desire
to move to a customer facing/enabling role. For example having
to shut local offices at 4.30pm on 31 January because of an overtime
ban did nothing for relations with taxpayers and agents.
4.2 Action by Government
(i) As indicated in paragraph 3.2 above the
Government must lead a programme designed to achieve real simplification
in the law and the system as a matter of urgency.
(ii) At present some 9 million taxpayers
are dealt with under the self-assessment system compared to some
25 million on PAYE and a number who are dealt with separately
as repayment cases. The self-assessment system is substantially
dependent on new entrants making themselves known to the Inland
I question whether it is sustainable to have
three separate systems running in parallel and I suggest that
in the long run the ultimate objective should be for the majority
of adults to be required to make a return of income and gains
on a regular basis under the self-assessment system. I am aware
that bodies like the Low Income Tax Reform Group are very concerned
about the impact of such a rule on the elderly, the infirm and
the poorly educated, but I would suggest that many of the anticipated
problems could be dealt with by (i) simplifying the legislation
and the system and (ii) having different types of return so that
individuals with simple affairs were asked to complete simple
Taking that a stage further, with the development
of technology it is possible to envisage a situation where the
Inland Revenue will be able to populate most of the entries on
a return for any given individual. For example a taxpayer whose
only sources of income were pay and benefits in kind would receive
a return which included details of the pay and benefits already
included and would just be asked to confirm that there were no
other sources to be declared. Similarly a taxpayer whose only
sources comprised state and other pension benefits would receive
a return which included those details.
(iii) Structural change is needed to the
system to encourage the filing of returns more evenly throughout
the filing window, to avoid the bunching of returns at 31 January
and also to increase the number of returns filed before the deadline.
1. FILING BEHAVIOUR
1.1 I am aware that the Inland Revenue are
looking at ways of encouraging taxpayers to file their tax returns
earlier to avoid the 31 January rush. I consider there is no one
magic solution to this problem and that this will only be resolved
with a bundle of carrots and sticks. In particular I am sure it
would help if the enquiry window was to run for 12 months from
the date the return was filed rather than 12 months from 31 January
because of the public perception that early filing increases the
risk of enquiry and lengthens the enquiry window.
1.2 The results of the Steedan case mean
that we have an extremely confusing set of deadlines for filing
tax returns. If a tax return is received in the tax office on
1 February it will not attract a late filing penalty, but the
enquiry window will be extended to 30 April 2003. A return found
in an office letterbox on the morning of 2 February will be deemed
to have been received on 1 February.
1.3 It is clear to me that filing by internet
(FBI) will help to solve a number of the current problems with
incorrect processing of returns, and consequently the Inland Revenue
should be given whatever resource is necessary to ensure that
FBI is able to cope with all taxpayer's returns (not just those
with simple affairs) and the system is robust and trustworthy.
2.1 The Inland Revenue have instituted a
quality control process which is supposed to involve a sanity
check to identify processing errors, but current indications are
that too many incorrect amendments are still being made.
2.2 I believe that a fundamental error was
made in devising the new system so far as carry-back claims were
concerned. If an individual paid a pension contribution between
6 April 2001 and 31 January 2002 he or she could elect to carry
that contribution back to the tax year 2000-01. However on making
that election the contribution is neither a relief of the year
2001-02 nor of the year 2000-01. It becomes a "dangling debit."
This is extremely confusing for all concerned
and for the first few years of self-assessment the Inland Revenue
computer was unable to cope with such a carry-back, which meant
it had to be the subject of manual intervention resulting in lengthy
delays and problems with the Revenue's receivables management
staff trying to collect tax that was not due.
I suggest that a change in the law is required
here so that if a claim to relief is carried back to the previous
year then it should be deemed to have arisen in that previous
year for all tax purposes. Where the return for the previous year
has already been filed this would mean that an amendment would
need to be submitted, but this should not involve any additional
time compared to the present system and would result in greater
certainty for all concerned.
3. TAX RETURNS
3.1 In the body of this submission I mentioned
the possibility of the tax return being wholly or partly populated
before being issued to the taxpayer for checking eg state pension.
3.2 I am concerned to hear that additional
information which is written in the white space of a taxpayer's
return is not made available to the officer who carries out the
4. TAX CALCULATION
The tax calculation could be used as the entrance
exam for Mensa. The main reason for its difficulty is the illogicallity
of having different tax rates for certain types of income like
interest and dividends. These rates appear to have been introduced
for political reasons despite the impact on the tax calculation.
Again I would suggest that there is something fundamentally flawed
with a system that even well educated taxpayers find too difficult
5. LATE FILING
Far too many incorrect late filing penalty notices
have been issued because of the failure to log the receipt of
the return correctly. This is partly due to the substantial number
of returns that are filed in the last few days up to 31 January.
Issuing incorrect penalties causes distress and bad will towards
the Revenue and I would suggest that the issue of penalty notices
should be delayed until the Revenue are sure that all returns
have been logged and an individual check should be made before
the notice is issued.
6.1 I hear considerable anecdotal evidence
about lengthy delays in processing returns and dealing with post.
Following the transfer of work from one area to another over the
last year I have also heard of cases where the file has gone missing
or the tax return has been lost.
6.2 If an agent submits a tax return for
a client using sophisticated tax software it is unlikely that
the tax calculation will be incorrect. However if the Inland Revenue
incorrectly process that return they write to the client saying
that the return has been "corrected." The taxpayer assumes
that the Revenue must be right and this can cause friction between
the taxpayer and his agent.
Statements of account have been a complete disaster
areathey are virtually impossible for anyone to understand.
The statement received by an agent is not a true copy of the statement
received by the taxpayer.
One of the main issues here is that the decision
was made not to charge interest on interest. If the legislation
was changed so that interest was charged on interest it would
be possible for the taxpayer's statement to follow more closely
the Barclaycard type of statement that he or she is familiar with.
Many agents have reported problems with the
Electronic Lodgement service. Firms were required to put in considerable
time and effort into setting up a system without any real tangible
benefit in return. The Government's offer of a discount to taxpayers
who filed by internet merely added insult to injury.
In my view the way forward is to devote the
necessary resources to ensuring that FBI is sufficiently robust
to cope with all taxpayers' returns and to encourage agents to
use that route. However, given the previous experience with ELS
the Revenue are going to have to be sure that the problems have
been ironed out before they encourage agents to switch to FBI,
because if agents meet with initial difficulties they could be
turned off for the long term.
9. SA ENQUIRIES
The Inland Revenue and CIOT carried out a joint
survey into the conduct of enquiries. Subsequently a working party
comprising representatives of both the Inland Revenue and the
professions has been carrying out further work. This is an area
of potential conflict which could be helped by a series of workshops
carried out by Inspectors of Taxes for local agents explaining
how cases are risk assessed and the context for certain decisions
being made. I believe there is real scope for Inspectors to bring
agents into the risk assessment process, for example by warning
about concerns with a particular trade or a particular practice
(eg claims for use of home) and asking agents to devote particular
attention to their clients' affairs in the knowledge that the
Inspector will be carrying out a close review subsequently.
Generally I support the Inland Revenue's move
towards a more robust approach to debt collection, but the enabling
role means that the Revenue need to make a clear distinction between
those who won't pay as opposed to those who can't pay and who
need help. This area of Receivables Management was one where there
were inconsistent approaches across the country and it was important
that those involved in collection were reminded of the party line.
One area that requires ongoing attention is
in relation to those cases where an agent is acting. The agent/client
relationship can be damaged where the collector seeks to collect
tax which is not due in a case where the agent's file is more
up to date than the Collector's computer record because of a processing
delay in the tax office. Clearly there is an opportunity for the
Revenue to work in partnership more closely with agents in this
area of Receivables Management.
Richard Mannion FTII FCA
12 February 2002