Self Assessment - Not Satisfactory

The Select Committee on Public Accounts has been hearing about the operation of self assessment. Its conclusions were not altogether favourable, as ALLISON PLAGER reports.

MEMBERS OF PARLIAMENT in the Committee of Public Accounts have been scrutinising the income tax self-assessment system on the basis of the Comptroller's and National Audit Office's report, Inland Revenue: Income Tax Self Assessment, HC56 Session 2001-2002 (see 'Success Story?', Taxation, 19 July 2001 at pages 389 to 390). They reached three main conclusions:

• there is no firm estimate of the overall hidden economy;
• the Revenue's own management and information systems hinder its efforts to increase taxpayer compliance on self assessment;
• the Revenue must invent a system that is clear and simple so that most taxpayers can comply without having to pay for professional advice.

Targeted income

The committee discussed the sums at risk. These fell into two categories:

• the tax gap which is the difference between the actual amount of tax collected and that which would be collected if there was 100 per cent compliance;
• the hidden economy, i.e., payments from actions never declared to the public authorities.

In its evidence, the Revenue said that it was very difficult to estimate the overall tax gap, as this would require a lot of time and effort. However, it estimated that between £150 million and £300 million tax could be at risk as a result of returns not filed by six months after the statutory deadline. The committee referred also to the Grabiner report on the informal economy, in which Lord Grabiner concluded that it would impractical to provide a precise figure of the informal economy without a large investment of time and resources.

However, the Revenue is using its powers of random enquiries to 'refine' its risk indicators, and also analysis teams to identify where the highest risks lie, in order to target its resources better.

Tax returns received

The committee noted that while approximately 90 per cent of taxpayers submit their self assessment tax returns by the 31 January deadline, the percentage has 'deteriorated slightly' each year since self assessment was introduced. In answer to why this was, the Revenue said that it 'did not know', and that it had launched a 'Taxpayer filing initiative' to discover which group of taxpayers was most likely to file late, and why. It would then agree to a 'programme of initiatives to encourage early filing'. Existing measures included the contacting of all taxpayers who were previously late in submitting their returns before the January deadline. Further, after the deadline, the Revenue contacts those who should have filed a return, but had not. For instance, the receivables management business stream had sent letters to 600,000 people in March 2001, and by the end of April it had received 150,000 returns and £230 million tax. Responsibility for chasing returns has been transferred to 'telephone pursuit units', resulting in 23 per cent of the taxpayers contacted sending in their returns. With regard to long outstanding returns, the Revenue was 'having a blitz' on these, and had set a target of 40 per cent by 2002.

All these measures were hoped to increase compliance by 31 January to 94 or 95 per cent.

Incentives to file

The committee ran through the sanctions available to the Revenue 'to encourage the remaining ten per cent of taxpayers to file their returns in time'. The Revenue said that since the report, Inland Revenue: Income Tax Self Assessment which praised the effectiveness of daily penalties, it had run a trial which confirmed this point. It showed that when people were told that they were going to be charged daily penalties, 80 per cent sent in their returns before the case went to the Commissioners, and 16 per cent filed their returns after the case had gone to the Commissioners. As a result, the Revenue 'expected' daily penalties to be used more often.

Intelligence work

The report covered the findings of the aforementioned Comptroller's and National Audit Office report. However, the committee did ask the Revenue why the yield from its intelligence activities had fallen from £30.6 million in 1998-99 to £21.8 million in 1999-2000. The Revenue explained that it did 'not target yield as such', and was moving away from taking up cases only where there was likely to be financial result, and towards 'bringing people into the legitimate economy', and collecting thereby 'the right amount of tax from the right people'. In addition, risk and analysis teams were to measure the number of 'ghosts and moonlighters' who were brought into the tax system, and this would 'knock on into all sorts of different yields'.

So, while it did not target yield, the Revenue 'did forecast it and expected it to rise'.

Third party information

The Revenue often bases its intelligence on third party information. However, the Revenue's local project support system did not allow staff to share new approaches to intelligence work, which meant that a lot of time was wasted. Many offices collected and analysed information manually. However, the Revenue told the committee that the project support system was a short term solution, while the fully integrated mainframe system was being worked on. Sir Nicholas Montagu told the committee that the Revenue had set up a new database to record the outcomes of self-assessment enquiry work on a 'nationally consistent basis'.

The committee asked about housing benefit details, and whether all Revenue offices had access to the names of those who received this. The Revenue said that it was working towards a system for 'issuing standard notices to local authorities and handling the information received centrally'. Local authorities held their information in different formats, and so a suitable computer system was required to meet a standardised request.

Tax record enquiries

The Revenue said that it expected to make 'real inroads' into discovering the tax at risk from non-declaration of income and gains. It had 3,192 full time equivalent employees carrying out enquiries into self-assessment returns in 1999-2000 at a cost of £216.1 million. Quantitative and qualitative targets had been set for compliance work at national, regional and local level, and these targets had been refined to focus on 'more rounded measures of compliance activity'.

Help from overseas

The Revenue confirmed that it was keen to learn from other countries' experiences, and indeed that it had lifted its model of compliance on customer service directly from Australia. In addition the receivables management system was developed as part of a joint study with Australia, New Zealand, the United States, Canada and Japan.

Helping taxpayers

The report notes that it is the Revenue's objective to make it as simple as possible for taxpayers to meet their obligations, and the committee asked the Revenue what it was doing to carry out this objective. The Revenue said that it was trying to emphasise its role as an 'enabling as well as a regulating department', which meant giving more time to help people. For example, taxpayers could ring the Revenue helplines, or call in at the local Revenue office, leaflets were provided in ten languages, and access to people who could speak other languages was made.

The Revenue recognised that the self-assessment system was 'still not user friendly', and thought the greatest area of concern was understanding the forms and guidance. It was trying to improve the situation, using, for instance, taxpayers' feedback. The statement of account has been simplified, a marketing communications director has been appointed, and the Revenue was liaising with Citizens Advice Bureaux, the Low Income Tax Reform Group, the Institute of Chartered Accountants in England & Wales and The Chartered Institute of Taxation. It cited the Working Together initiative as one way in which it was working with the professional bodies to improve the system.

Turning to simplification of the tax system, the Revenue said that it was doing all it could in this respect. It had set up small business teams nation-wide working jointly with Customs to 'make it easier' to set up a small business. It had restructured its organisation into around 60 areas, as opposed to 600 diffuse offices, each with two directors, one looking at compliance, and the other at services.

According to the Revenue, it bends over backwards to make things straightforward, but still people complain of complexity. As an example, it said that it in devising the new share schemes in 2000, it had involved the private sector, trade unionists, practitioners, and yet these schemes are now criticised for their complexity, despite being what business wanted (according to the Revenue).

Added value?

This report is the latest investigation into the self-assessment system. Much of it repeats what has already been said, and it does not draw any brilliant conclusions as to how the Revenue might improve taxpayer compliance or simplify the tax system. Reading the minutes of evidence arising from the examination of the Revenue witnesses (Sir Nicholas Montagu KCB, chairman of the board of Inland Revenue, David Hartnett, director general for policy and technical issues, and Stephen Banyard, director of local services), does not fill one with confidence in the system either. The line of questioning does not run deep and the answers seem equally to scratch the surface.

The Revenue seems almost surprised that even the threat of daily penalties encouraged a substantial proportion of taxpayers to file their tax returns. This does not seem extraordinary to me. After all a £100 penalty potentially followed by a second £100 six months later is annoying, but affordable; but the idea of having to pay up to £60 a day is quite different.

The committee's conclusion that the Revenue should set up a system which is 'simple and clear' provides the overwhelming clue that most taxpayers will be more able and willing to comply when it becomes less complicated to do so.

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