HM CUSTOMS AND EXCISE: CHECKING LARGE-TRADERS'
VAT LIABILITY
THE CONDUCT
OF LARGE-TRADER
AUDIT WORK
24. The C&AG's Report noted several
weaknesses in planning, testing and recording the results of large-trader
audits.[18] The Committee
was concerned about the effects of such shortcomings on the scope,
quality and outcome of large-trader audits and the corrective
action that had been taken. In evidence, the Department stated
that they had developed a new audit standard which they had issued
to all local offices. The new standard addressed all the weaknesses
in large-trader audit identified by the National Audit Office,
including good practice guidance on the use of risk assessment
methodologies. In addition, the Department intended to introduce
a specific objective within their management plan that all large-trader
audits should be conducted in accordance with the audit standard.
This objective would be translated into performance agreements
made with individual local officers.[19]
25. When asked whether the introduction of a three-year
time limit on assessing VAT from traders had resulted in lost
revenue, where delays had been caused by such problems as those
noted by the National Audit Office, the Department said that it
was unlikely to be a serious problem with large-traders since
they were subject to continuous review. It was more likely to
be an issue with traders whom the Department visited less frequently.
The Department had calculated some £100 million per annum
as the total revenue effect of not being able to assess tax over
six years as before, but they estimated that the amount lost through
any delays with respect to large traders was probably no more
than £1 million.[20]
26. The C&AG's Report noted that groups of companies
could present increased opportunities for tax avoidance and an
increased risk of error if a large number of accounting systems
were used, and that there could be problems in ensuring that such
groups received sufficient audit coverage.[21]
In view of the significant sums of revenue that are at stake,
the Department were asked what they had done to ensure sufficient
audit of VAT groups. They said that they had now strengthened
their approach by formalising the arrangements between those staff
who had overall responsibility for seeing that audits of groups
were carried out as planned, and those responsible for the work.
In addition, to ensure that staff received acknowledgement for
their efforts, credit for identifying additional tax revenue would
now be given to those who did the work rather than to those responsible
for planning the audits as before.[22]
27. The C&AG's Report noted that, at the time
of the National Audit Office examination, nearly half of the Department's
local offices lacked formal quality control arrangements for large-trader
audit work.[23] The Committee
asked the Department what quality control arrangements they had
to ensure that audits were adequate. The Department said in evidence
that, following the C&AG's Report, they had reminded all local
offices of the need for formal, clearly documented, quality control
arrangements to be in place, though they recognised that different
arrangements might be appropriate in different places. For example,
some offices had adopted a system of peer group review, whereby
one large-trader team vetted the quality of work of another.[24]
28. When asked whether, and how often, large-trader
audit teams might expect to be inspected by external staff, the
Department stated that there was no formal programme of that sort.
Under current arrangements, large-trader audit teams could expect
to be examined by line managers on a regular basis. In addition,
large-trader audit work might also be examined by collection assurance
teams and by the Department's internal auditors. The Department
also said that, in recent years, problems of teams staying together
too long had not generally arisen, owing to the level of staff
movement arising partly as a matter of policy, and partly as a
result of various changes caused by reorganisations within the
Department.[25]
29. The C&AG's Report noted that the perception
of some trader representatives interviewed by the National Audit
Office was that some officers lacked all the necessary auditing
skills and were not sufficiently well versed in the law. The Report
also noted that staff interviewed believed that they needed a
variety of further training.[26]
The Committee asked what had been done to ensure that staff received
the training they required. The Department replied that they had
taken a number of steps to improve the training available to their
staff, partly in response to the fact that the tax was becoming
more difficult to manage, and partly in response to the concerns
that had been expressed.[27]
30. In addition to basic training, which was given
to all staff and was spread over nine months, the Department had
introduced large-trader accountancy and audit training in 1995.
They had also introduced VAT legal and technical training in 1997.
This training had been accredited by the Chartered Institute of
Taxation and would be given to all large-trader audit staff within
two years, as would revised computer audit training. Update training,
which included re-emphasising the audit standards, would be given
to all large-trader staff, irrespective of their experience, between
January 1998 and April 1999. In addition, the Department had accepted
a number of recommendations of an internal review about improving
the professionalism of staff in all their business areas.[28]
31. The C&AG's Report noted that the Department
had established some specialist regional offices to audit the
largest and most complex traders, including multi-registered,
multi-located businesses with annual turnovers in excess of £1
billion.[29] The Committee
asked how successful this approach had been and whether, in the
light of the weaknesses identified by the National Audit Office,
this degree of specialism should be extended. The Department said
that the three specialised regional large-trader control units
and ten large-trader single team units currently set up within
local offices had been a success. They had helped to develop expertise
and specialism within the large-trader population and had facilitated
the concentration of audit effort. The proportion of large-traders
audited by such units had increased from 16 per cent at the time
of the National Audit Office examination to 30 per cent. The Department
believed that, although geographical considerations had to be
taken into account, they obtained better results by concentrating
their resources into a critical mass of officers in a team or
teams. They were therefore looking increasingly to establish such
teams.[30]
Conclusions
32. 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.
33. 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.
34. 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.
35. 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.
36. There has been some concentration of large-trader
audit resources into specialised units. The Committee share 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.
18
C&AG's Report (HC 368 of Session 1996-97), paragraphs 3.10,
3.14, 3.20 Back
19
Qs 7, 68, 91 Back
20
Qs 8-10 Back
21
C&AG's Report (HC 368 of Session 1996-97), paragraphs 3.22-3.25 Back
22
Qs 11-12 Back
23
C&AG's Report (HC 368 of Session 1996-97), paragraph 3.30 Back
24
Qs 82-83 Back
25
Qs 84-86 Back
26
C&AG's Report (HC 368 of Session 1996-97), paragraphs 3.33,
3.35, Figure 14 Back
27
Qs 80-81 Back
28
Qs 42, 43, 80-81 Back
29
C&AG's Report (HC 368 of Session 1996-97), paragraph 1.8 Back
30
Q 13 Back
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