House of Commons - Public Accounts

Select Committee on Public Accounts Thirty-First Report

INLAND REVENUE: EMPLOYER COMPLIANCE REVIEWS

THE PROMOTION OF VOLUNTARY COMPLIANCE

34. In addition to detecting non-compliance the Department aim to promote compliance through educating employers. Their programme of reviews also has the objective of deterring employers from being non-compliant. In March 1996, the Government announced that every new employer would be able to get free advice on their premises, before their first pay day. The Department anticipated making 8,750 educational visits to new employers in 1996-97.[31]

35. When asked what results had been achieved from this initiative,[32] the Department told us that there had not been the demand that they had expected and only 22.5 per cent of the employers contacted had accepted the offer of a visit. They said that they had come to the view that such visits were probably not a particularly cost-effective way of educating employers but they would still be available if wanted. However, in conjunction with the Contributions Agency, the Department had now appointed business advisers in all their local offices as the first point of contact for new employers. During the current year, 1997-98, they had concentrated on providing joint packs and national insurance seminars as the first help. They were responsive to employers' views on what they would find useful and were looking to develop tapes and compact discs to help educate employers. They also operated a joint employers helpline with Customs and Excise and the Contributions Agency which received one million calls a year.[33]

36. The Department were asked whether they had analysed the reasons for non-compliance so that they could target their educational efforts accordingly.[34] The Department told the Committee that they had not carried out a study into why employers did not comply with their tax obligations but were convinced that most employers were fundamentally honest. The main problem was ignorance of the regulations.[35] The Department had identified the areas which gave rise to the greatest number of irregularities and this was where they devoted their efforts in educating employers, in concert with the Contributions Agency. These areas included treatment of employees' part-time and casual earnings, overtime, bonuses and Christmas presents, home-to—work travelling expenses, directors emoluments and expenses, benefits in kind generally, and subsistence and expenses payments.

37. The Department can impose a penalty of up to 100 per cent of the tax and national insurance underpaid where it results from fraud or negligence by the employer. The Department can abate the penalty depending on the size and gravity of the matters involved, the extent of employer co-operation, and the level of employer disclosure of irregularities.[36]

38. In 1995-96, the Department imposed a penalty in one in 10 reviews where unpaid liabilities were found, at an average rate of 14.6 per cent of the maximum that could be levied. There was a considerable variation between the Department's Regional Executive Offices in the incidence and severity of penalties imposed. Local Employer Compliance Units in the Department's East Region were twice as likely to impose a penalty than those in Northern Ireland and South West Region, while Units in South West Region imposed an average penalty twice that in Scotland.[37]

39. The Committee asked the Department why these variations arose and what they were doing to secure greater consistency in the frequency and level of penalties imposed so that all employers are treated fairly.[38] The Department said that there would always be variations across regions because circumstances would differ from case to case. For example, a lot would depend on the extent to which the Department's powers to abate penalties reduced the sums involved to trivial amounts, so that the penalty was not worth imposing. Another factor was the type of review. In the majority of Schedule E reviews, the employer voluntarily paid the underpaid tax due from their employees.[39] Such settlements were more cost-effective for the Department and in return they did not impose a penalty.[40] By contrast, in the case of PAYE, employers were statutorily obliged to deduct and account for PAYE tax and, where there was negligence, they would always consider imposing a penalty.[41]

40. The Department added that they had taken a number of steps to secure greater consistency including issuing revised guidance to staff on abating penalties and providing additional training on penalty settlements.[42] As part of their compliance quality initiative, the Department planned to monitor whether appropriate penalties were being sought.[43] The results would be validated at regional level and, to fill the gap noted in the National Audit Office report, a small sample of cases would also be independently validated by another region.[44]

41. When asked how confident they were that these additional measures would provide consistency,[45] the Department said that if the compliance quality initiative identified inconsistencies they would address them by further guidance and training.[46] Their new training course would be updated to refocus it in the light of the results of the initiative. If what they were doing was not working they would consult with their regional directors and staff to see what more could be done.[47]

42. The Department were asked whether the frequency and level of penalties risked sending the wrong message to employers.[48] They explained that negligence or fraud had to be established before a penalty could be imposed.[49] In many cases a penalty would be inappropriate; they estimated that penalties were imposed in around one in four cases where it would have been appropriate. They also said that they did not want to measure the success of their compliance work simply by the number and level of penalties.[50] The Department's aim was to encourage voluntary compliance and to impose penalties as a punishment in those cases where their existence had not been a deterrent.

Conclusions

43. Educational visits to new employers by employer compliance staff have not proved cost-effective and the Department have now appointed local business advisers to be the first point of contact for such employers. The Committee welcomes the Department's initiatives to develop new approaches to providing advice in response to employers' views and looks to the Department to monitor the success of these arrangements and to take remedial action as necessary.

44. The Department have identified a number of areas where irregularities by employers are common. We look to the Department to focus their educational efforts on these areas and to monitor their impact on improving employer compliance.

45. In 1995-96, staff in the Department's East Region were more than twice as likely to impose a penalty than those in Northern Ireland, and staff in South West Region imposed a financial penalty twice that imposed by staff in Scotland. These variations in the frequency and level of penalties are disturbing. The Department are taking various initiatives to secure greater uniformity, including the issue of revised guidance to staff and the provision of additional training. The Committee expects the Department to monitor closely the impact of these measures and to take further action as necessary to secure consistency.

46. Penalties were imposed in only one in 10 reviews where unpaid liabilities were found, and the average rate of the penalty was only 14.6 per cent of the maximum that could be levied. The Committee is concerned that the infrequent use of penalties and their relatively low value may send the wrong signals to employers who fail to meet their tax obligations. We therefore look to the Department to take a consistent and strong approach to the imposition of penalties to encourage compliance.

31 C&AG's report (HC 51 of Session 1997-98), paras 1.2, 4.21 Back

32 Q71 Back

33 Q73 Back

34 Q23 Back

35 Q24 Back

36 C&AG's report (HC 51 of Session 1997-98) para 5.2 Back

37 C&AG's report (HC 51 of Session 1997-98) para 5.3 and Figure 11 Back

38 Q8 Back

39 Q25 Back

40 Q21 Back

41 Q25 Back

42 Q82 Back