An enquiry into the Revenue's self-assessment systems for individuals and companies carried out by the Treasury Committee was less than complimentary. ALLISON PLAGER reports.
An enquiry into the Revenue's self-assessment systems for individuals and companies carried out by the Treasury Committee was less than complimentary. ALLISON PLAGER reports.
EVERYONE, IT SEEMS, is getting in on the act of scrutinising one or other aspect of the operation of self assessment, and is generally concluding that it could be a whole lot better. The latest report is the result of an enquiry carried out by a sub-committee of the Treasury Committee which looked at the Inland Revenue's self-assessment systems for individual taxpayers and companies. The sub-committee heard evidence from the Revenue, The Chartered Institute of Taxation, the Institute of Chartered Accountants in England & Wales, TaxAid, the Low Incomes Tax Reform Group, the Federation of Small Businesses, and Dawn Primarolo.
Who receives returns?
The sub-committee noted that some nine million people out of approximately 26 million taxpayers have to complete an annual tax return. However, TaxAid said that it found that often when unrepresented taxpayers are sent self-assessment returns needlessly, they do not understand why a return has been issued. It suggested that the Revenue include somewhere on the form or notes an explanation of the circumstances and individuals to which self assessment applies. Then taxpayers would understand why they had to complete the return, 'or challenge its issue and return it uncompleted'.
The Revenue said that it was not possible to publish the criteria for issuing a self-assessment return because of the enormous number of situations 'which could bring people into self assessment'. However, it was considering how it could make it easier for people to understand whether they were in self assessment or not, as part of its review of ways of improving self assessment.
The sub-committee was singularly unimpressed with the Revenue's reason for not publishing the criteria for issuing self-assessment returns, saying that it was 'an unsatisfactory state of affairs' which arose from the complex tax system, and that it wanted 'to see the criteria for issuing' returns published 'in the interests of fairness to taxpayers'.
TaxAid pointed out that often when the Revenue realised that a taxpayer should not be sent a return, and stopped sending them, it failed to tell the taxpayer of what it was doing and why. This caused many taxpayers to worry unnecessarily, particularly given the publicity about the obligation to make a return. The sub-committee mentioned this to Dawn Primarolo, who agreed that taxpayers who had been in the self-assessment system, but no longer were, should be informed.
Pensioners
The particular difficulties faced by pensioners on relatively low incomes who received self-assessment returns were explained by the Low Incomes Tax Reform Group. The group said that 'computer-generated letters and forms used by self assessment' were not sympathetic to the needs of older people, and that before self assessment, they had a 'relatively straightforward time with their tax affairs'. A solution might be to raise the limit for coding out untaxed income from £2,500 to £5,000.
The Revenue told the sub-committee that it was very keen to help low income groups, either by removing them from self assessment altogether, or making it easier for them to understand. It was working with the Low Incomes Tax Reform Group in particular to see how this could be done, although it was 'not easy'.
The sub-committee was satisfied that the Revenue had recognised the problem existed, and that it expected the Revenue to 'make real progress' in achieving its aims over the next year.
Complexity
The complexity of the tax system was highlighted by the Institute of Chartered Accountants in England & Wales, which said that while self assessment made the administration of the tax system easier to understand than the previous system, 'the tax system was as complex as ever', and that 'having a tax system which is understandable to the intelligent layman should have been regarded as a pre-requisite for introducing self assessment'.
Likewise, John Whiting for The Chartered Institute of Taxation said that suggestions for simplifying the tax system tended not be accepted because of lack of space in the Finance Bill or because they 'would cost too much money'.
In connection with the 2002 Budget, Dawn Primarolo said that 'several changes' in the Budget would assist the self employed and companies, but said that it was 'very difficult' to clarify the system without making it more complex.
Overall, the sub-committee was 'disappointed that the Budget contained no measures specifically to simplify income tax self assessment', and supported the idea that 'there should be annual changes to the tax system aimed solely at simplification'. Furthermore, it recommended that this be included as one of the Revenue's 'key performance targets' against which it should report progress each year.
Late filing
The sub-committee was interested to know what incentives existed for taxpayers to file on time. The Revenue confirmed that none existed, but although it did not 'have a closed mind to incentives', the difficulty with, say, a cash incentive was that it would have to be paid to the 90 per cent of taxpayers who already file on time.
The Revenue said also that whatever deadline was set, there would always be a big peak of returns received immediately before it. The Chartered Institute of Taxation pointed out that there were perceived disadvantages to filing before the deadline, in particular that it gave the Revenue more time to open an enquiry into the return. Revenue assurances to the contrary did not persuade taxpayers otherwise, and indeed Revenue risk analysis showed that late filers are at greater risk of selection.
The sub-committee was not reassured by what it heard about late filing, and said that the Revenue should monitor closely the situation as to how it could encourage taxpayers to file on time. The misconception about filing early leading to greater chance of enquiry should also be addressed, with the Revenue considering the idea of changing the 'enquiry window to run for 12 months from the date the tax return is received, rather than 12 months from 31 January'.
Penalties
The sub-committee was 'very surprised' that some tax returns remained outstanding from 1996-97, and was concerned that the Revenue had not taken greater steps to correct the situation. It recommended that 'urgent action' be taken to resolve the matter.
Filing by Internet
The chequered history of the Revenue's filing by Internet service was examined by the sub-committee. It concluded that there were considerable potential benefits both to the Revenue and taxpayers from Internet filing, but that take-up of the service had been 'very disappointing and much lower than the Revenue had anticipated'. The sub-committee said that the Revenue's target of 50 per cent take-up by 2005 would only be achieved if it offered a 'reliable service that meets users' expectations'. The Revenue had to discover why one in five attempts to file online failed, and also had to make the service more attractive to users.
The reasons for the withdrawal of the online service at the end of May 2002 were then reviewed. The Revenue said that the reason for the problem was 'very complex', and seemed to involve one Internet service provider in particular. It chose not to reveal the name of that provider since many of the provider's services could be outsourced, and it would be unfair to name it. The Revenue admitted that, as a result of the incident, it had lessons to learn in respect of security, but said that it was encouraged by the number of taxpayers who had used the service since it had been reinstated.
The sub-committee said that it was 'very concerned that failings in the Revenue's Internet filing service allowed taxpayer confidentiality to be breached'. It was too soon to determine the impact on the level of Internet filing, but the sub-committee expected the Revenue to monitor the situation closely, and see how it could restore taxpayer confidence.
Tax payments
Both TaxAid and the Federation of Small Businesses said that many small businesses found it hard to pay their tax in two instalments, and suggested that it might be helpful if payments could be made on a more regular basis, say monthly or even weekly. The Federation of Small Businesses also said that it would be useful to be able to pay tax by credit card, and suggested that 'given the Inland Revenue's enthusiasm for e-commerce, one would have expected them to look at the greater use of plastic'.
The Revenue said that it had run a pilot 'budget payment plan' in the last three years, but that it was still evaluating the best way forward in this respect. The use of credit cards was under discussion, but the extra cost in allowing that facility would have to be justified.
The committee was concerned that the Revenue did not appear to have reached any conclusions with regard to monthly payments, particularly as the self employed and those starting a new business would find it useful. It therefore recommended that the Revenue made a decision on the trial 'as a matter of urgency'. Similarly, it was keen for the Revenue to explore more urgently alternative methods of payment, such as by credit card.
Corporation tax
Evidence about the introduction of self assessment for corporation tax was also heard by the committee. It accepted that corporation tax self assessment had been without any 'significant problems'.
However, both The Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales suggested that the unloved system whereby large companies have to pay their corporation tax in quarterly instalments, the first two based on estimates, be changed. As it is, the system caused 'unnecessary complication' and would be improved by basing the instalments on the previous year's figures with a balancing payment at the end. The committee concurred, and recommended that the Revenue 'examine and report on the costs and benefits of such a change'.
Less than laudatory
The Revenue is an easy target, and in many ways it does not help itself. For instance, why is it so difficult for it to reach a decision on operating a monthly payment scheme for the self employed who would like to take advantage of such a scheme? It cannot be that difficult to set up such arrangements on a nation-wide scale, considering that countless other companies, such as utility companies, already do so.
Furthermore, it is very patronising and high-handed to say that it is not possible to explain to people why they are or are not within the self-assessment system. The committee was right to censure the Revenue for this, and ask for transparency as a matter of fairness. The Revenue consulted widely before introducing self assessment, but ultimately the system is one that suits the Revenue. While the notion of simplified assessing was dealt an early blow, it seems that the pendulum has swung towards even greater complexity, with a substantial number of taxpayers not understanding what their obligations are.
