Income Tax Self Assessment

Transcription

1 Ilad Reveue Icome Tax Self Assessmet REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 56 Sessio : 5 July 2001

2 The Natioal Audit Office scrutiises public spedig o behalf of Parliamet. The Comptroller ad Auditor Geeral, Sir Joh Bour, is a Officer of the House of Commos. He is the head of the Natioal Audit Office, which employs some 750 staff. He, ad the Natioal Audit Office, are totally idepedet of Govermet. He certifies the accouts of all Govermet departmets ad a wide rage of other public sector bodies; ad he has statutory authority to report to Parliamet o the ecoomy, efficiecy ad effectiveess with which departmets ad other bodies have used their resources. Our work saves the taxpayer millios of pouds every year. At least 8 for every 1 spet ruig the Office.

3 Ilad Reveue Icome Tax Self Assessmet REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 56 Sessio : 5 July 2001 LONDON: The Statioery Office 0.00 Ordered by the House of Commos to be prited o 28 Jue 2001

4 This report has bee prepared uder Sectio 6 of the Natioal Audit Act 1983 for presetatio to the House of Commos i accordace with Sectio 9 of the Act. Joh Bour Natioal Audit Office Comptroller ad Auditor Geeral 29 May 2001 The Comptroller ad Auditor Geeral is the head of the Natioal Audit Office employig some 750 staff. He, ad the Natioal Audit Office, are totally idepedet of Govermet. He certifies the accouts of all Govermet departmets ad a wide rage of other public sector bodies; ad he has statutory authority to report to Parliamet o the ecoomy, efficiecy ad effectiveess with which departmets ad other bodies have used their resources. For further iformatio about the Natioal Audit Office please cotact: Natioal Audit Office Press Office Buckigham Palace Road Victoria Lodo SW1W 9SP Tel: equiries@ao.gsi.gov.uk Website address:

5 INLAND REVENUE INCOME TAX SELF-ASSESSMENT Cotets Executive summary 1 Itroductio 1 Mai fidigs ad coclusios 2 Idetifyig taxpayers ad gettig i tax returs 3 Coductig equiries ito tax returs 4 Part 1: Itroductio 5 Aims ad objectives 6 Scope ad methodology 6 Part 2: Idetifyig taxpayers 9 The idetificatio of taxpayers 9 Part 4: Equirig ito tax 17 returs The selectio of cases for equiry 17 Target settig 18 The coduct of equiry cases 20 Appedices 1 Self assessmet processes - aalysis of risks 21 2 Tax at risk 22 3 Self assessmet systems i other coutries 24 4 Methodology 28 5 Issues that have affected self assessmet 30 6 Glossary of terms 32 Part 3: Gettig tax returs i 13 The effectiveess of pealties 14 The effectiveess of determiatios 15 Pursuig outstadig returs 15

6 executive summary Itroductio 1 The Ilad Reveue itroduced self assessmet for icome tax ad capital gais tax i Self assessmet affects more tha 8 millio self employed ad higher-rate PAYE taxpayers, 700,000 parterships ad 300,000 trusts. I , these taxpayers paid more tha 55 billio icome tax, atioal isurace cotributios, ad capital gais tax, of which 40 billio was collected through PAYE ad other forms of deductio at source. 2 The scheme represeted oe of the largest chages i tax admiistratio for decades. Key chages icluded: tax liabilities beig assessed by the taxpayer or their aget rather tha by the Ilad Reveue i the majority of cases; a move from a "check ow/process later" approach to tax admiistratio to "process ow/check later"; the taxatio of all icome ad capital gais o a "curret year" basis; the cosolidatio of assessmets for all forms of icome ad capital gais ad ratioalisatio of paymet dates; ad the itroductio of a statutory right for the Ilad Reveue to equire ito ay tax retur. The Ilad Reveue delivered the 800 millio self assessmet project to time. The latest forecast idicated that the Departmet are o track to exceed the admiistrative savigs idetified at the plaig stage. executive summary 1

7 3 Uder Sectio 2 of the Exchequer ad Audit Departmets Act 1921, we examied the risks to the assessmet, collectio ad allocatio of tax uder self assessmet, whether the Ilad Reveue had established adequate regulatios ad procedure to address those risks, ad whether they worked i practice. We did ot udertake a review of how well self assessmet was implemeted as we had already covered this i our reports to the House of Commos o the Departmet's aual appropriatio accouts. 4 Figure 3 o page 7 shows the processes that make up the system ad summarises the mai risks to the assessmet, collectio ad allocatio of tax iheret i each process. Appedix 1 provides a more detailed aalysis of the risks ad mitigatig cotrols. We cocluded from this work that the Departmet had established a effective framework for maagig the risks. 5 There are recogised difficulties i attemptig to estimate the size of the hidde ecoomy ad tax gap. This meas that there are o precise estimates of the overall tax at risk. Based o available iformatio (Appedix 2), we focused our study o three areas where there may be sigificat fiacial exposure if the risks are ot maaged appropriately: the idetificatio of taxpayers, retur maagemet, ad the coduct of equiries. 6 We aalysed data from a umber of sources, icludig the Ilad Reveue's maagemet iformatio systems, ad also visited seve Ilad Reveue etwork offices. We also looked at self assessmet systems overseas to compare the Ilad Reveue's approach with other tax admiistratios (Appedix 3). Appedix 4 explais our methodology i detail. Mai fidigs ad coclusios 7 Our overall coclusio is that self assessmet has improved the admiistratio of icome ad capital gais tax. It has made assessmets more straightforward ad allowed a more focused approach to compliace work. 8 The Ilad Reveue's self assessmet compliace work idetified some 350 millio extra tax i Give the potetial amouts of tax at risk, we edorse Ilad Reveue measures to further stregthe their compliace activity by developig a more structured aalysis of risks, icludig the potetial fiacial impact from types of o-compliace, ad by assessig the success of specific compliace measures. To support this, the Departmet are takig actio to improve their maagemet iformatio, particularly o the effectiveess of: their itelligece work at atioal ad local levels, ad of specific iitiatives; pealties ad tax determiatios i esurig tax returs are filed o time; ad the various mechaisms used to select tax returs for detailed equiry, ad differet types of equiry. 2execuitve summary 9 Our other key coclusios ad recommedatios are set out opposite.

8 Idetifyig taxpayers ad gettig i tax returs 10 All taxpayers have a legal duty to otify the Ilad Reveue of taxable icome ad gais ad to pay ay tax arisig. However, some will fail to do so. The Departmet have a rage of systems ad cotrols i place to idetify taxpayers who should be usig self assessmet ad to esure that these taxpayers file tax returs o time. 11 The Ilad Reveue estimate that their itelligece work idetified at least 21.8 millio additioal yield i This icludes work focusig o the hidde ecoomy to idetify people ot registered for tax (ghosts) ad idividuals failig to declare casual work ad cash icome (moolighters) ad of other types of evasio. Ulike may other areas of activity, the Departmet have ot established quality assurace mechaisms or performace targets for this work. 12 The Ilad Reveue have reorgaised the way they approach itelligece work ad set up specialised teams i April 2001 to improve the focus of this activity. From Summer 2001, the Departmet pla to icrease the scope ad scale of automatic cross-checks betwee taxpayer declaratios ad third-party iformatio, such as iterest paid by baks ad buildig societies, ad they are curretly egotiatig with local authorities to secure cosistet ad complete iformatio for local offices o ladlords receivig housig beefit. They are also itroducig a database to record the results of their itelligece work at atioal ad local levels, ad of specific iitiatives. This will help them esure that the resources used are sufficiet ad well targeted, ad to set targets ad performace measures. 13 Over the last four years, aroud 90 per cet of self assessmet tax returs have bee received by the due date, demostratig the success of the curret framework. The Ilad Reveue estimate that the potetial tax at risk associated with late returs could be betwee 150 millio ad 300 millio a year ad they are carryig out research ito patters of taxpayer behaviour, ad the reasos why returs are ot filed o time. 14 We edorse this developmet ad recommed that the Ilad Reveue further improve their systems for gettig returs i o time by: reviewig the operatio ad effectiveess of their approach to eforcemet by: q q carryig out further work to assess the likely tax at risk from late filig; usig the results of their research ito taxpayer behaviour, ad the reasos why returs are ot filed o time, to validate their approach; ad q further developig their maagemet iformatio to moitor the use of fixed ad daily pealties, ad tax determiatios, ad their effectiveess i esurig that tax returs are filed. Without this iformatio, the Ilad Reveue caot assess whether these icetives are effective or that local offices are usig the arragemets properly; revisig their performace targets to iclude the legth of time a retur has bee outstadig. This would help esure that, oce they have cleared the curret backlog of log outstadig cases, they do ot allow ew cases to remai outstadig for a cosiderable time. executive summary 3

9 Coductig equiries ito tax returs 15 The Ilad Reveue have ew powers to equire ito tax returs uder the self assessmet system. They use these to deter ad detect o-compliace. The requiremet for local offices to prepare aual compliace plas ad select cases for equiry based upo a assessmet of the risk to tax has made the process more comprehesive ad structured. I additio, the itroductio of madatory reviews has itroduced a greater uiformity i approach to higher risk aspects of idividuals' tax affairs. 16 The Ilad Reveue have used their ew powers to equire ito a cetrally selected radom sample of tax returs. These arragemets provide valuable iformatio about the level ad patters of o-compliace i the taxpayer populatio as a whole. The results from the first two years' equiries suggest that substatial sums may be at risk from o-compliace, ad the Departmet are udertakig further equiries o returs to obtai a firmer view of the amouts ivolved. 17 The Ilad Reveue are cotiuig to develop their arragemets for equiries by: usig specialist teams to carry out risk assessmet work ad to select cases for equiry from April 2001; icreasig the use of third party iformatio i the risk assessmet process from Summer 2001; ad by aalysig data o the tax yield from completed equiries to idetify commo features which will form the focus of a cetrally selected sample of equiry cases i execuitve summary 18 We welcome these developmets ad recommed that the Departmet cotiue to use their "basket" of iteral performace idicators to maage the risk that the exteral performace target, which focuses o umbers of cases, may ecourage compliace staff to focus o quatity rather tha quality. The Departmet should also keep uder review the impact of the oe-year widow for opeig equiries o their ability to ivestigate potetial o-compliace.

10 Part 1 Itroductio 1.1 The Ilad Reveue itroduced self assessmet for icome ad capital gais tax o 6 April Self assessmet affects more tha 8 millio self employed ad higher-rate PAYE taxpayers, 700,000 parterships ad 300,000 trusts. The Departmet collected tax receipts of more tha 16.5 billio through the system i billio i icome tax ad atioal isurace cotributios ad 2.1 billio i capital gais tax. A further 40 billio was collected from self assessmet taxpayers through the PAYE system ad other forms of deductio at source. 1.2 The scheme represeted oe of the largest chages i tax admiistratio for decades. The key chages are show i Figure Despite these chages, self assessmet has may similarities with the previous system. For example, higher-rate PAYE taxpayers with relatively straightforward tax affairs, who submit their retur before 30 September for the Ilad Reveue to calculate their tax liability, would ot otice may chages, particularly where ay uderpaymet of tax is corrected by a adjustmet to their PAYE tax code. A glossary of terms is at Appedix 6. 1 Key chages uder self assessmet Before After Ilad Reveue Calculatio of tax Taxpayer 1 Check ow / process later Processig ad checkig Process ow / check later A mix of curret ad previous year Basis of assessmet Curret year basis o all sources of icomes ad gais Separate assessmets Assessmets for differet types of icome or gais Oe assessmet coverig all icomes ad gais Rage of dates for differet sources of icome or gais Due dates for paymet of tax Oe set of due dates o all sources of icome ad gais No automatic right Equiries ito returs Statutory right part oe Note: 1. The Departmet will cotiue to perform the calculatio, provided taxpayers sed i their retur by 30 September. 5

11 1.4 Figure 2 shows key dates i the self assessmet process. Aims ad objectives 1.5 The Ilad Reveue's aim is to admiister the tax system fairly ad efficietly ad make it as easy as possible for idividuals ad busiesses to uderstad ad comply with their obligatios. Their objectives for self assessmet are to icrease taxpayer uderstadig ad compliace, to maitai the flow of fuds to the Exchequer ad to produce cost ad resource savigs. 1.6 The Ilad Reveue moitor the project to esure that plaed beefits ad savigs are realised. They estimate that, over the 15-year period to , the itroductio of self assessmet should result i admiistrative savigs of 500 millio, ad that the project should break eve by Total lifecycle costs are curretly estimated to be 839 millio. Scope ad methodology 1.7 Uder Sectio 2 of the Exchequer ad Audit Departmets Act 1921, we examied whether the Ilad Reveue had established adequate regulatios ad procedure to maage risks associated with the assessmet, collectio ad allocatio of tax uder icome tax self assessmet ad whether the Departmet's cotrols were workig i practice. 1.8 Although they use risk aalysis techiques i their admiistratio of self assessmet, for example i the selectio of cases for equiry, the Departmet had ot produced a ed-to-ed risk aalysis of the system. We therefore drew up a model of the key processes that make up the system ad idetified the mai risks to the assessmet, collectio ad allocatio of tax iheret i each process (Figure 3). 2 Importat dates i the self assessmet cycle This diagram shows the key actio dates i the self assessmet cycle. Year / Moth / Date Required actios Tax Year Ja 31 Feb Mar No-PAYE taxpayers must make the first paymet o accout, based o previous year's tax liability. Year After Tax Year Apr 6 May Ju Jul 31 Aug Sep 30 Oct Nov Dec Ja 31 Feb Mar Ilad Reveue issue returs to kow taxpayers, soo after the ed of the tax year. No-PAYE taxpayers must make the secod paymet o accout, based o previous year's tax liability. Taxpayers who wat the Ilad Reveue to calculate their tax liability must submit returs. Taxpayers calculatig their ow liability must submit completed returs. All taxpayers must pay balace of liability. Taxpayers icur iterest ad surcharges for late paymet. The Ilad Reveue levy pealties of 100 for late filig. The Ilad Reveue have a period of 12 moths i which to ope a equiry. Source: Natioal Audit Office 6part oe

12 3 Self assessmet - outlie risk model This chart shows the mai processes i the self assessmet system ad our assessmet of the mai risks. Process Potetial risk Establishmet of regulatios ad procedure Legislatio does ot address tax risks Regulatios ad procedure ot i lie with legislatio Regulatios ad procedure uclear ad taxpayers ad staff do ot uderstad their resposibilities Idetificatio of taxpayers Taxpayers ot idetified Third Party Iformatio ot used effectively Retur maagemet Returs ot set to taxpayers Missig returs ot idetified ad pursued Pealties ot issued for o submissio Pealties issued icorrectly Idetificatio of taxable icome ad gais Declaratio by taxpayer icomplete or iaccurate Processig Taxpayer's assessmet of liability icorrect Submitted returs ot processed Returs processed icorrectly by Ilad Reveue Iaccurate figures accepted i excess of toleraces Provisioal figures ot adjusted to actuals Tax calculatios iaccurate Computer uable to cope Assessmet of tax liability Coduct of equiries ad idetificatio ad otificatio of additioal liabilities Failure to idetify icomplete or iaccurate declaratios by taxpayers because: q Case selectio criteria deficiet q Isufficiet cases examied q Quality of case workig iadequate q Issues ot idetified for ivestigatio Notificatio of liability Statemets ot issued to/received by taxpayers Statemets icorrect Debt maagemet Liability ot paid whe due ad ot pursued Receipt icorrectly allocated to taxpayer accout Iappropriate write off actio Iterest for o paymet ot charged Iterest charged icorrectly Repaymets made icorrectly Collectio of tax Sums brought to accout Receipts icorrectly recorded or allocated Diversio of fuds withi the Departmet Allocatio of tax Source: Natioal Audit Office assessmet part oe 7

13 1.9 We aalysed the ed-to-ed processes ivolved i self assessmet (Appedix 1) ad also compared them with similar systems i Australia, Caada, the Republic of Irelad, New Zealad ad the Uited States of America (Appedix 3). We cocluded from this work that the Departmet had established a effective framework for maagig the risks Appedix 2 explais the difficulties associated with estimatig the differece betwee tax collected ad the amout that might theoretically be collected with full compliace - the "tax gap". As part of our overall examiatio of the self assessmet system, we evertheless attempted to estimate, i the broadest terms, the amouts of potetial tax at risk at key stages i the process. We used this aalysis to focus our study o three higher risk areas. These were: 1.11 We did ot look at the implemetatio of self assessmet as we had already covered this i our reports to the House of Commos o the Ilad Reveue's aual appropriatio accouts. Appedix 5 outlies issues which have arise durig implemetatio of the project ad how the Departmet have addressed them. We pla to examie the itroductio of filig returs via the iteret i a separate study of the Departmet's use of e-busiess systems to streamlie tax admiistratio The Ilad Reveue have cofirmed the factual accuracy of the report isofar as it relates to the admiistratio of the icome tax self assessmet system i the Uited Kigdom. We have agreed the refereces to other coutries' self assessmet systems i Appedix 3 with the reveue authorities cocered. idetifyig taxpayers (Part 2) gettig tax returs i (Part 3) equirig ito tax returs (Part 4) Appedix 4 explais our methodology i more detail. 8part oe

14 Part 2 Idetifyig taxpayers 2.1 This part of our report examies the Ilad Reveue's procedures for idetifyig those liable to icome tax or capital gais tax uder the self assessmet system. Although there are o reliable estimates of the tax at risk from the o-idetificatio of potetial taxpayers, it is geerally ackowledged that this is a key area for reveue authorities. The idetificatio of taxpayers 2.2 The self assessmet arragemets apply to the taxpayers show i Figure 4. Taxpayers liable for self assessmet Self employed taxpayer Higher rate PAYE taxpayer Idetifyig compliat taxpayers 2.4 May existig taxpayers who should have bee icluded i the self assessmet system would have already bee kow to the Ilad Reveue, ad were declarig icome ad gais uder the previous system. The Ilad Reveue idetified potetial self assessmet taxpayers by searchig taxpayer records ad trasferrig their details to the ew system. 2.5 Over time, however, the taxpayer populatio chages. The Ilad Reveue search their database of employee records to detect those who have become higher-rate taxpayers durig the year, or who have other characteristics which brig them withi the scope of self assessmet. Idividuals have a legal obligatio to otify the Ilad Reveue of their chargeability to icome tax or capital gais tax. For the ewly self-employed, the arragemets were simplified ad stregtheed i Jauary 2001 ad idividuals ca ow telephoe the Departmet to register, with the risk of a 100 pealty if they do ot do so withi three moths. Subcotractors i the costructio idustry Trusts Parterships Ladlords, icludig those overseas Idetifyig o-compliat taxpayers 2.6 No-compliat taxpayers ofte operate i the "hidde" ecoomy, which covers tax evasio of all kids. This icludes the failure of idividuals to register for tax (ghosts), the o or uder-declaratio of casual work ad cash icome (moolightig), through to orgaised crime. 2.3 The key risk i implemetig the ew arragemets was that the Ilad Reveue would ot idetify existig taxpayers who should be subject to self assessmet. The key risk commo to both the previous ad ew arragemets is that potetial taxpayers may remai udetected. A graphical represetatio of the risks ad the cotrols which mitigate them is at Figure 5 overleaf. part two 9

15 5 Idetificatio of taxpayers ad taxable evets Audit trails Uauthorised deletios ot allowed by system Deletios of records ot allowed by system Tax evaded ad lost Reduced compliace Delays occur i dealig with affairs Records deliberately recorded as iactive Taxpayers complaits Credibility of SA system udermied Records accidetally recorded as iactive Desigated policy staff Field testig System does ot admiister tax efficietly Selectio process ot focussed o appropriate part of the taxpayer populatio Aalysis of taxpayer behaviour Project developmet cotrols Taxpayer fails to declare icome or gai arisig Local itelligece programmes Reveue uaware of a potetial tax liability Aalysis of iformatio supplied by third parties Sactio imposed for failure to make a retur Taxpayer educatio programmes CONTROL Iteral guidace IMPACT OF RISK Security checks Tax lost Cotravetio of Data Protectio Act Local research programmes KEY RISK Third party iformatio ot exploited or is used icorrectly Third party iformatio is ot obtaied to support itelligece No-compliat taxpayers remai uidetified ad outside the tax system Statutory requiremet o baks etc to provide iformatio Notificatio by the taxpayer of liability to taxatio is ot actioed correctly by the Ilad Reveue Tax delayed Quality moitorig procedures System does ot idetify relevat taxpayers Tax lost Maagemet supervisio Retal, tradig ad capital gais icome ot idetified Higher rate tax ot charged o ivestmet icome Desk istructios Local itelligece programmes Requiremet for self employed to register Iformatio o ew busiess formatios Aual review of IT database Source: Natioal Audit Office part two The Ilad Reveue seek to idetify such idividuals through itelligece work. This is geerally orgaised ito projects cocetratig o a particular trade or iformatio source, as illustrated i Figures 6 to 8 overleaf. 2.8 From a maual review of iformatio held o their Project Support System, the Departmet estimated that itelligece work led to a additioal tax yield of some 21.8 millio i , compared with 30.6 millio i the previous year. However, this figure may uderstate the impact of this work as it excludes: (i) cases referred to compliace uits for actio, such as those described i Figure 8 overleaf; (ii) the subsequet tax yield arisig from the fact that the taxpayer has bee brought withi the system; ad (iii) the compliace effect o other taxpayers. I additio, some local offices refer to itelligece activity as research ad developmet ad do ot record their results o the System. 2.9 The Ilad Reveue ofte base itelligece work o the aalysis of third party iformatio obtaied usig their statutory iformatio powers. The Departmet's Taxes Iformatio Distributio Uit obtais details of trasactios, for example bak ad buildig society iterest, routiely from more tha 12,000 sources, ad much of this iformatio is collated i a cetral data warehouse. Desigated staff are able to obtai iformatio relatig to idividuals i their area to support itelligece work.

16 6 Iformatio obtaied from other public sector agecies Usig iformatio obtaied from the District Valuer o multiple or frequet property trasactios, the Ilad Reveue udertook a compliace review cocetratig o repossessed properties, which are ofte sold quickly at a profit. They reviewed the tax records for the idividuals ivolved i these trasactios to idetify taxpayers who may have made capital gais or were ivolved i property dealig which they had ot declared The Ilad Reveue also obtai other iformatio i the public domai, for example property sales ad the disposals of assets through auctio houses, both routiely ad as a result of specific local iitiatives. This iformatio is collated by the Taxes Iformatio Distributio Uit o a cetral database ad is made available to itelligece staff i the local office etwork by CD-Rom supplied to Regioal Offices We foud that limited access to certai iteral ad third party iformatio sometimes hampered itelligece work. 7 8 From 175 cases examied i oe tax office, the Ilad Reveue settled 141 cases, idetifyig extra tax yield of 1.25 millio. This work has sice bee carried forward o a atioal basis. Iformatio obtaied from other sources Usig their statutory iformatio powers, the Ilad Reveue obtaied details of paymets made to people appearig as extras i programmes from a local televisio productio compay. Tax records for the idividuals listed were the traced to esure that the extras had declared these paymets. No additioal tax yield has bee idetified to date. Iformatio obtaied by direct observatio Ilad Reveue staff visited local restaurats at various times durig opeig hours, without idetifyig themselves, ad purchased meals as ordiary customers. Whilst i the restaurat, they oted the umber of waitig staff o duty, the till operatio ad cash hadlig arragemets, the umber of diers, the potetial capacity of the restaurat, ad the proportio of customers who paid their bills i cash. O completio of their meal, they settled their bill i cash, otig whether staff offered them a receipt ad, if so, whether it carried a idetifiable referece umber. Whe the returs coverig the observatio period were filed, the Ilad Reveue opeed equiries ito the returs ad used the iformatio obtaied durig the observatio visits to determie whether the restaurat was declarig its turover i full, ad whether the other iformatio supplied, for example o the umber of staff i attedace o particular days, was accurate. The Project Support System (paragraph 2.8) is a local system ad does ot allow staff to share ew approaches to itelligece activity or to track cases referred from oe office to aother. Staff therefore have to follow up referrals maually. This is a slow process ad staff waste time determiig whether actio has bee take or ay additioal tax idetified ad collected. Local office staff are collatig ad aalysig some iformatio maually, as they lack access to data collatio ad matchig facilities. Some tax offices have access to all paymet details held by local authorities o housig beefit, whereas others have access oly to details of amed persos. To improve the availability ad cosistecy of such data i the future, the Ilad Reveue are egotiatig with the umbrella orgaisatios for local authorities to agree protocols for the supply of iformatio. The iformatio would be processed ad collated i the cetral data warehouse ad staff would have access to it to iform their itelligece work The Ilad Reveue are cotiuig to develop their cetral data collatio ad matchig facilities. From Summer 2001, aggregated iformatio from the data warehouse will be trasferred to the self assessmet system where it will be matched automatically agaist taxpayer declaratios, for example, of iterest received. This will idetify potetial icosistecies for further equiry. I the loger term, their aim is to collate all third party iformatio o each idividual ad make it available to compliace staff ad to exted the rage of data collected to iclude iformatio such as housig beefit paymets made to ladlords. Of the 41 cases take up, the Ilad Reveue have settled 13 ad idetified extra tax yield of 700,000. They expect this to rise by a further 1.3 millio from cases awaitig settlemet. part two 11

17 2.13 Util recetly, the Ilad Reveue allowed local offices freedom to develop their ow systems for makig best use of the iformatio available, whilst ecouragig dissemiatio of best practice. Ulike other areas of work, such as processig ad debt recovery, they have ot set targets for itelligece work, or developed quality assurace mechaisms. While flexibility is eeded to allow local offices to respod to specific risks, the lack of cosistet iformatio o the success of local offices ad specific iitiatives has made it difficult for maagers to assess whether the resources they are allocatig to itelligece work are sufficiet ad well targeted The Ilad Reveue are takig a umber of steps which will help improve the effectiveess of itelligece work. As part of a reorgaisatio of the structure of the local office etwork, the Departmet set up specialised risk itelligece aalysis teams i April These teams are supported by a cetral uit, which is resposible for udertakig research ad for developig methodologies to idetify o-compliace. The Departmet have also developed a ew database which, from April 2001, will assist them i aalysig the results of itelligece work. part two 12

18 Part 3 Gettig tax returs i 3.1 The aual tax retur is the corerstoe of the self assessmet system. The Ilad Reveue eed to obtai a completed retur from each perso who has bee set oe, to check the amout of tax due, ad uless they have received a retur they caot ope a equiry ito a taxpayer's affairs. Figure 9 summarises the risks ad the mitigatig cotrols. 9 Retur maagemet Iteral istructios Maagemet supervisio over determiatios Source: Daily pealties levied after determiatio paid Determiatios icreased where cotiued o-compliace Tax evaded No-compliace will icrease Tax may remai outstadig CONTROL IMPACT OF RISK KEY RISK Testig ad developmet of pealty module Quality moitorig Review of taxpayers' complaits Taxpayers seek compesatio for icorrect charges System udermied Natioal Audit Office Determiatios are ot made or daily pealties imposed i the absece of completed returs Pealties for o-submissio are issued icorrectly Pealties ieffective Worklists detail outstadig pealty cases Determiatios are made ad paid, but retur is ot submitted Pealties charged are ot pursued Pealties Icome ot declared Tax lost or collectio delayed Taxpayer does ot submit completed retur Pealties for osubmissio are ot issued No-compliace with the filig requiremets Outstadig returs recociled agaist umber of pealty otices Writte or telephoe remiders Electroic Lodgemet Service iadequate to record receipt of retur Missig returs are ot idetified Pealties issued automatically by IT systems Taxpayer or aget complaits Retur data will be lost Returs are ot issued to idetified taxpayers Cotrols over developmet ad testig of Electroic Lodgemet Service ad Iterface with IT systems Dissatisfactio with system No-compliat delay submissio Pealties ot levied, leadig to o-compliace with the filig requiremets Recociliatio betwee returs issued, received, ad pealties Ad-hoc iterrogatio of IT systems Recociliatio processes EDS cotrols at priters premises Automatic IT process Work lists detail returs ot submitted part three 13

19 3.2 To ecourage the prompt filig of returs, the Ilad Reveue have developed extesive advertisig campaigs remidig taxpayers of the key filig deadlies. To deter late filig, the Departmet levy a automatic fixed pealty of 100 if a retur is late. A further 100 pealty is charged if a retur is more tha six moths late. If the retur is more tha a year late, the taxpayer may be charged a pealty of up to 100 per cet of the tax due o the retur, i additio to havig to pay the tax itself. The Ilad Reveue ca also seek the approval of the Geeral Commissioers to impose daily pealties of up to 60 per day i cases of persistet failure to submit a retur. 3.3 This framework has bee successful i achievig a filig rate of aroud 90 per cet by the 31 Jauary deadlie each year for the 35.7 millio returs despatched sice April 1997 (see Figure 10). 3.4 If the Ilad Reveue do ot receive returs, this will delay the tax assessmet ad the Departmet may ot collect the correct amout of tax. O the basis of a aalysis of a small sample of returs filed late, the Departmet estimated that betwee 150 millio ad 300 millio tax could be at risk from the 500,000 late returs which remaied outstadig at August 2000, six moths after the statutory filig date. There is, however, cosiderable ucertaity attached to the estimate as the sample ecessarily excluded cases where taxpayers had failed to file a retur. 3.5 If the taxpayer fails to file a retur, the Ilad Reveue ca issue a determiatio estimatig the amout of tax to be paid. The taxpayer has o right of appeal agaist a determiatio, ad must either pay the amout demaded or submit a completed retur showig why the estimated amout is icorrect. 3.6 Our examiatio idetified cocers over the effectiveess of pealties ad determiatios i ecouragig taxpayers to file their tax returs ad procedures for chasig up outstadig returs. The effectiveess of pealties 3.7 Betwee February 1998 ad August 2000, the Ilad Reveue issued 4.9 millio fixed pealty otices. They do ot moitor, either atioally or at local level, the success of these pealties i ecouragig the submissio of tax returs. 3.8 We foud that: Ilad Reveue statistics show that i 23 per cet of cases (1.1 millio) the fixed 100 pealties related to taxpayers with residual liabilities below 100. I these cases, the pealty is reduced to the level of the tax outstadig, ad therefore provides limited icetive for taxpayers to file their returs; the Ilad Reveue have had to issue 104,000 estimates of the tax due (determiatios) sice Jauary The system of determiatios was put i place at the start of self assessmet because it was always recogised that fixed 100 pealties might ot o their ow be a effective meas of ecouragig those with sigificat residual tax liabilities to file a retur; local tax offices are reluctat to levy daily pealties, of up to 60 per day, because of the complexity of the process ivolved (Figure 11 overleaf), a reluctace by local staff to take large umbers of cases to the Geeral Commissioers, ad cofusio as to whe these pealties should be applied. Six of the seve local offices visited had ot levied daily pealties; 10 Self assessmet tax returs - filig record Returs Millios % Millios % Millios % Millios % Set out Filed by 30 September Filed by 31 Jauary Outstadig at 31 Jauary part three Outstadig at 31 Jauary 2001 N/A N/A As above As above Notes: N/A: Figures ot available 14 Source: Ilad Reveue

20 11 the maagemet iformatio relatig to daily pealties did ot allow the Ilad Reveue to make a iformed assessmet of their effectiveess. This is because the Ilad Reveue have o cetral record of the umber of cases for which the Geeral Commissioers have approved daily pealty applicatios or the umber of cases where the issue of a statutory 14 day warig otice has led to the submissio of a retur; ad daily pealties appear to be a effective meas of ecouragig taxpayers to submit completed returs. Of 30 daily pealty otices issued by oe of the offices we visited, 23 had resulted i the submissio of completed returs prior to the levyig of pealties. Six of the remaiig seve taxpayers submitted their outstadig returs after daily pealties were levied. Stages ivolved i daily pealties Cosider case for daily pealties The Ilad Reveue are cosiderig procedural chages ad are settig up pilot schemes to test ways of makig greater use of daily pealties. The effectiveess of determiatios 3.9 Similarly, the Ilad Reveue do ot have routie iformatio o the use ad effectiveess of determiatios. As a special exercise, the Departmet extracted iformatio for us from their systems o the umber of determiatios issued ad the umber of returs received i respose. This showed that less tha 40 per cet of the 104,000 determiatios issued had led to the submissio of completed returs The Ilad Reveue's iformatio systems could ot provide the umber of cases where the taxpayer had paid the determiatio but ot submitted the retur. There is a risk that the amouts paid are below the amouts which would actually be due if the taxpayer had made a full declaratio of their liabilities. I such cases, the Ilad Reveue do ot have effective iformatio or icetives to esure that the taxpayer files the tax returs so that they ca idetify ay uderpaymets of tax. Warig issued to taxpayer that the Departmet ited to seek approval from the Geeral Commissioers for daily pealties After thirty days Apply to the Geeral Commissioers for leave to impose pealties Directio issued by Geeral Commissioers Letter to taxpayer issued to cofirm directio has bee obtaied ad pealties will be imposed i fourtee days Fourtee days allowed to submit retur Decide o the amout of daily pealty ad issue otice imposig pealties Thirty days appeal period agaist amout Pealty raised o taxpayer record by the Departmet ad recovery office otified for pursuit Warig issued to taxpayer of further pealties if retur ot received Pursuig outstadig returs 3.11 The Ilad Reveue have traditioally accorded higher priority to pursuig large debts tha outstadig returs ad, as a result, a backlog of cases has accumulated. They have set targets for the pursuit of outstadig returs ad require a proportio to be cleared withi a specified period. These targets do ot require staff to focus o the clearace of the oldest cases ad, as a result, some of the cases i the backlog could date back to , the first year of self assessmet To speed up the pursuit of outstadig returs the Ilad Reveue trasferred the resposibility for chasig returs for a small umber of offices to telephoe pursuit uits at their Accouts Offices at Shipley ad Cumberauld ad their Call Cetre at East Kilbride. These uits succeeded i persuadig 20 per cet of the taxpayers cotacted to sed i completed tax returs. The Ilad Reveue do ot kow, however, the additioal tax yield achieved from the submissio of these returs. Fourtee days allowed to submit retur Referred to seior maagemet i Departmet for further pealties part three 15

21 3.13 The Ilad Reveue established a separate Directorate of Receivables Maagemet i Jue 2000 ad i March 2001 trasferred ew retur cases ad certai debt maagemet work to a outboud call cetre. They are supportig their work to ecourage filig, by aalysig the reasos why taxpayers do ot complete their returs o time. The iitial results suggest that, i additio to a hard core of o-compliat taxpayers who eed to be chased for returs, there are four groups who ted to file late: ew self assessmet taxpayers; previous taxpayers with o curret liability; taxpayers who have ever filed returs; ad taxpayers with substatial liabilities i the previous year The Departmet are usig the results of this work to shape future workig practices for the uits pursuig outstadig tax returs. They are settig up special teams to moitor former "ghosts" to ecourage them to file returs o time for two years after they have registered as self employed. part three 16

22 Part 4 Equirig ito tax returs 4.1 This part of our report examies the Ilad Reveue's procedures for selectig ad coductig equiries ito tax returs ad moitorig the performace of this work agaist targets. 4.2 The Ilad Reveue ca ormally equire ito ay tax retur, provided they ope the equiry withi 12 moths of the statutory filig date. For returs filed late, the Departmet have up to 15 moths to ope a equiry. After this, the Departmet caot amed the tax assessmet, uless they have grouds for makig a "discovery" assessmet. This occurs where ew facts come to light, udisclosed i the tax retur, which show that isufficiet tax has bee charged. Figure 12 overleaf summarises the risks ad the cotrols i place to mitigate them. The selectio of cases for equiry 4.3 The Ilad Reveue require all local offices to produce a aual compliace pla. These plas set out their strategies for maagig the work ad for selectig suitable cases for equiry ad form the basis for moitorig the effectiveess of local compliace activities. 4.4 Compliace plas iclude cases selected i a umber of ways: 4.5 I additio to providig a deterret to o-compliace, radom equiries have provided, for the first time, valuable iformatio about the level ad types of ocompliace i the self assessmet taxpayer populatio as a whole, ad its fiacial impact. The results, for the first year of self assessmet, , idicated that, overall, 68 per cet of taxpayers were likely to be wholly compliat, with the proportio of equiries where the additioal tax yield exceeded 500 ragig from oe per cet i the case of pesioers to 27 per cet for busiesses. Extrapolatig the results across the self assessmet taxpayer populatio as a whole suggested that the level of o-compliace may have reduced potetial yield by aroud 3 billio. 4.6 However, results from the radom equiries work - although showig similar levels of ocompliace - idicated that, if it were practicable ad cost effective to achieve full compliace, the potetial yield would be aroud 1.8 billio. Give the large variatio betwee these two estimates, the Departmet cosider that they do ot produce a iheretly stable figure of tax at risk. Of the two, they cosider that is the more reliable, as was a trasitioal year. They will be able to form a clearer view whe they have ivestigated the differece i more detail ad have competed work o the radom equiries ito tax returs. radom equiries - the cetral selectio of oe i every thousad tax returs, which local staff must subject to a full equiry; madatory reviews - cases with specific features, for example capital gais arisig from the disposal of uquoted shares, which local offices must review, although ot ecessarily coduct a full equiry; ad risk assessmet - cases are assessed agaist pre-set criteria to produce a risk score. Local offices ca set the criteria i the light of local experiece, such as itelligece work. 4.7 The Ilad Reveue ca ope oly oe equiry ito a idividual's tax affairs i respect of ay tax year. It is therefore importat for staff to idetify all aspects of the retur that require ivestigatio before they ope the equiry. If they fail to do this, they may overlook a udeclared tax liability with a resultat loss to the Exchequer. A computerised risk assessmet facility ad risk scores, i additio to the aalysis of third party iformatio, assist i the idetificatio of aspects of the retur for equiry. The Departmet also take steps, through their traiig ad quality moitorig programmes, to esure that staff are able to idetify higher risk aspects ad that they dissemiate best practice. part four 17

23 12 Coduct of equiries Worklists produced ad reviewed by maagemet Compliace Quality Iitative Desk istructios Desk istructios Worklists produced ad reviewed by maagemet Performace moitorig No idepedet check of assumptio about taxpayer behaviour Evidece o uderlyig compliace of populatio geerally ot collected Radom cases are ot ivestigated Potetial o-compliace ot detected Madatory reviews ot carried out Isufficiet umber of cases are examied Compliace plas ad targets Deterret effect of compliace system udermied leadig to icreased icidece of o-compliace Statistical aalysis of the populatio Resource maagemet CONTROL IMPACT OF RISK KEY RISK Review of profilig results ad fie tuig Profilig developmet programme Higher risk cases are ot selected, thus loss of potetial tax yield Use of local kowledge Criteria for selectio of cases are mis-coceived or iappropriate Quality of case workig is iadequate to idetify udeclared icome or gais Icomplete or iaccurate declaratios will remai udiscovered, udermiig the compliace programme ad leadig to icreased o-compliace Potetial issues ot idetified for ivestigatio Additioal liabilities will ot be idetified leadig to loss to the Exchequer Aalysis of Compliace Quality Iitiative results Staff traiig ad experiece Profilig ad risk aalysis techiques Staff traiig ad experiece Use of team workig Compliace Quality Iitiative Source: Natioal Audit Office 4.8 Effective risk assessmet is depedet upo up to date iformatio o the taxpayer populatio. The Ilad Reveue's trade classificatio umbers that defie the idustry or sector ito which a tradig cocer falls were ureliable ad this has led to icomplete or iaccurate results. The Departmet are workig to resolve this problem, but are reliat to some extet o the iformatio supplied by taxpayers about the ature of their busiesses. Target settig 4.9 Compliace equiries fall ito oe of three categories: full busiess equiries which look at all areas of the retur, ad may require review of uderlyig records; busiess aspect equiries which look at selected parts of the retur; ad part four o-busiess equiries which look ito obusiess items o the retur. 18

24 13 Take up ad results of equiries ito self assessmet tax returs Equiry Type Target Actual % Yield Target Actual % Yield m m Busiess Full 36,322 35, ,145 44, Busiess Aspect 70,835 63, ,000 64, No Busiess 512, , , , Total 619, , , , Notes: The targets relate to the umber of equiries to be opeed each year. I the case of o-busiess equiries, the figures represeted forecasts of the umber of cases take up rather tha formal targets. The yield reported i , ad to a lesser extet i , reflects the fact that a sigificat proportio of cases opeed, particularly full busiess equiries, were ot settled by the year ed. As there were a sigificat umber of ucleared equiries at March 1999, the Departmet reduced the same take up targets for to provide headroom for improvig quality ad performace. The table relates to work carried out by Ilad Reveue's etwork of local offices ad excludes cases ivestigated by the Departmet's specialist offices. Source: Ilad Reveue The Ilad Reveue set quatitative ad qualitative targets for compliace work, at atioal, regioal ad local level. Figure 13 shows the umerical targets by type of equiry ad the additioal yield achieved from this work. The umerical targets for busiess equiries are icluded i the Departmet's formal performace targets agreed by Miisters From our work at regioal ad local level we oted that: iitial local office compliace plas ad targets were based o the resources ad abilities of their compliace staff. I the process of agreeig the atioal targets, local plas were adjusted to match the overall target; some regios have falle behid their plas part way through the year, for example because of skills ad resource shortages - particularly i Lodo. Where this has put the overall target at risk, the remaiig regios have icreased their take up targets to compesate; ad the umerical targets do ot take ito accout the size or complexity of cases ivestigated. The risk arisig from the focus o umerical targets is that local offices may cocetrate o opeig more straightforward cases at the expese of larger ad more difficult cases, which are likely to produce the highest yield, particularly where the target for the total umber of cases to be take up i the year is i ay doubt. Adjustmets to local targets may also impact o quality ad may lead to lower priority cases beig examied i regios with the capacity to take o additioal work The Ilad Reveue have recogised these risks ad have recetly developed more rouded measures of compliace activity termed the "basket of idicators". They produce these o a mothly basis, ad ow measure the data show i Figure 14 as well as the umber of cases take up. 14 Shows the performace measures used i the basket of idicators Strike rate - umber of cases where additioal yield recovered, aalysed betwee tax oly ad pealty cases Productivity - umber of cases take up ad yield per perso Average yield per case - aalysed by types of taxpayer Resource use - actual versus pla Duratio - time to complete differet case types Workflow - moth o moth chages i ucleared cases part four 19

25 4.12 The Ilad Reveue are makig chages to the orgaisatio of the local office etwork, ad i April 2001 established 60 specialist Area risk, itelligece ad aalysis teams to improve the focus of compliace work. These teams are ow resposible for plaig compliace work ad for the selectio of up to 90 per cet of cases for equiry. I additio, the Departmet have aalysed the results of the radom sample of equiries ito tax returs to produce profiles of higher risk cases. These, together with aalyses of other compliace work, will be used to geerate a cetrally selected sample of equiry cases, which will represet up to about 10 per cet of the total umber of equiries i The coduct of equiry cases 4.13 Oce the Ilad Reveue have selected cases for review, it is ecessary to esure that staff ivestigate these to a stadard sufficiet to esure that they idetify udeclared icome ad gais, ad assess the appropriate amout of tax due. The Departmet produce detailed guidace o the coduct of equiries i the self assessmet maual ad the equiry hadbook. The Ilad Reveue's traiig ad quality moitorig programmes support these procedures The Ilad Reveue moitor the quality of case selectio ad equiries through a process kow as the Compliace Quality Iitiative. All caseworkers have to record details of their ivestigatios, ad mark them for quality. Compliace maagers aggregate these scores to assess the quality of work udertake. Idepedet reviewers the examie a sample of cases to validate the results. I , this work idicated that 93 per cet of equiries had bee settled to a satisfactory or better stadard, compared with 85 per cet i the previous year The Ilad Reveue have recetly completed a review of how equiries have bee hadled, i cojuctio with the Chartered Istitute of Taxatio. The mai optios for chage were that: cosideratio should be give to devisig a meas for settlig mior queries, without opeig a formal equiry; cosideratio should be give to a proposal to disegage capital gais tax issues from the geeral icome tax issues; the "Faster Workig" provisios, where certai Ilad Reveue procedures were omitted to speed up the clearace of cases, should be abolished; the issue of requests for bak statemets should be cosidered further as tax agets ad Ilad Reveue staff have differed over whether such documets should be supplied as a matter of course; ad the procedures for equiries ito partership returs should be reviewed. I respose, the Ilad Reveue ited to develop ad improve their approach i some areas, for example, to opeig equiries ad requestig bak details, ad to seek chages i the legislatio o certai other poits idetified by the review. part four 20