INTRODUCTION AND
SUMMARY OF
CONCLUSIONS AND
RECOMMENDATIONS
1. HM Customs and Excise give particular priority
to auditing the tax throughput of large-traders. In 1996, they
had identified some 1,500 traders who represent a higher concentration
of risks to the revenue than do the general trader population.
In 1995-96, these 1,500 large-traders contributed £11.4 billion
of the total net VAT collected.[1]
The contribution from large-traders rose slightly in 1996-97 to
£11.6 billion.[2]
2. On the basis of a Report by the Comptroller and
Auditor General (C&AG), the Committee examined the contribution
of large-traders to VAT receipts, how effectively the Department
identify risks associated with large-traders and allocate resources
to them, and how well they conduct large-trader audit work.
3. In discussing the Department's progress, we sometimes
struggled to get a clear picture from the detailed explanations
we received. The administration of VAT is complex but, if public
accountability is to be maintained, a clear dialogue with the
Committee is essential. Straightforward performance measures and
targets, better explained and presented, would not only assist
Parliamentary scrutiny, but would also contribute to greater success
in administering the tax.
4. In our view clearer thinking is needed. It is
worrying to note that the Department seem not to have a tight
grip of the underlying reasons as to why receipts from large traders
have fallen from 38.5 per cent of net VAT collected in 1993-94
to only 32 per cent in 1996-97; that they are unsure of the extent
to which the decline may be linked to tax avoidance measures taken
by such traders; and that there have been weaknesses in the planning,
testing and recording of large trader audits.
5. Our specific conclusions and recommendations,
based on our enquiries, are as follows:
On the contribution of large-traders to VAT receipts
(i) It is worrying that additional tax
revenue of £333 million, discovered by the Department on
large-trader audits in 1996-97, remains below the 1992-93 level
of £350 million (at constant prices) and that large-traders
are contributing a declining proportion of total VAT receipts
each year. We note that tax planning by large-traders may have
contributed to these effects (paragraph 11).
(ii) The Department gave inconclusive reasons
for the fall in receipts from large traders, from 38.5 per cent
of net VAT collected in 1993-94 to only 32 per cent in 1996-97.
The Committee is not convinced that the Department have a sufficient
grasp yet of the underlying reasons for these revenue trends or,
therefore, that they are collecting the maximum amount of revenue
practicable. We wish to see further progress towards better estimation
of revenue flows, to provide a basis for more meaningful monitoring
and measurement of the Department's performance (paragraph 12).
(iii) Visiting Customs and Excise officers'
responsibilities in securing the flow of revenue range from educating
traders and combatting tax avoidance to identifying evasion. The
Committee believes that identifying additional tax, whether due
to errors or fraud, is a key element of their work. We urge the
Department to put sufficient effort into identifying errors by
traders (paragraph 13).
(iv) The contribution of large-traders to
overall VAT receipts, 32 per cent in 1996-97, makes them a very
significant part of the registered trader population. Yet, until
April 1997, the Department did not monitor separately the effectiveness
of their large-trader audit work. The Committee notes the steps
taken by the Department to reconcile the various databases which
record information about large-trader work, and endorses the planned
development of specific performance measures for the large-trader
population. We wish to see these performance measures independently
validated and published in the Department's annual report (paragraph
14).
On the identification of risks and the allocation of resources
(v) The Department's review of traders
with tax throughputs exceeding £7 million a year is estimated
to result in an additional annual revenue gain of between £5
million and £15 million. In view of the potential revenue
at stake in such cases. The Committee expects the Department to
ensure that local offices review the composition of their large-trader
populations annually (paragraph 21).
(vi) To improve Departmental performance,
local offices have been issued with revised criteria for the identification
of traders requiring enhanced control arrangements. To ensure
the early and continuing benefit from the use of such criteria,
we look to the Department to implement the revisions rapidly,
and to review the revised criteria regularly in order to ensure
that they remain appropriate to the needs of the revenue (paragraph
22).
(vii) We expect to see the early removal
of the previous, wide variations in resource use between different
local offices, following the Department's review of methods used
to relate resource deployment to risk (paragraph 23).
On the conduct of large-trader audit work
(viii) The Department plan to introduce
revised audit standards for this work from 1998. These new standards
should correct the shortcomings in planning, testing and recording
the results of large-trader audits identified by the National
Audit Office. The Department should take care that the new audit
standards are fully understood by all large-trader staff so as
to ensure that they are properly implemented (paragraph 32).
(ix) The Department estimate that £1
million of revenue, in respect of large-traders, where planned
work had been deferred, may possibly have been lost as a consequence
of new regulations limiting to three years the time over which
the Department can assess additional tax. The Committee believes
this highlights the importance of completing audit work to plan
at all times (paragraph 33).
(x) The Department have in place a number
of quality control arrangements for the conduct of large-trader
audit work and have taken steps to ensure some formality in those
arrangements at all local offices. We are concerned, however,
that some of these arrangements may not be sufficiently independent
of the staff carrying out the audits. We recommend that the Department
introduce fully independent quality control inspections (paragraph
34).
(xi) VAT is a not a simple tax, and it is
important that all large-trader audit staff are sufficiently well
trained to deal with its complexities. We note the steps taken
by the Department to develop the training available to such staff
and look to them to keep its topicality and relevance under regular
review, and to monitor its effectiveness (paragraph 35).
(xii) There has been some concentration
of large-trader audit resources into specialised units. The Committee
shares the Department's belief that this can lead to better results
through improved expertise and team working. We are not convinced
that geographical considerations need preclude further expansion
of the role of such units, and we expect the Department to extend
specialisation in the audit of large-traders to the greatest extent
practicable (paragraph 36).
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