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Examination of Witnesses (Questions 1 - 19)
WEDNESDAY 6 MAY 1998
MR NICK MONTAGU, CB, MR BRIAN MACE, MR STEPHEN JONES
Chairman
1. Today the Committee is taking evidence
on the C&AG's Report on the Monitoring and Control of Tax
Exemptions for Charity. We have with us Mr Nick Montagu CB, Chairman
of the Board of the Inland Revenue. Welcome to all of you. Could
you perhaps start by introducing your colleagues for the benefit
of the Committee?
(Mr Montagu) Yes, thank you, Chairman.
On my right is Brian Mace who is the Director of our Savings &
Investment Division who have policy responsibility for tax reliefs
for charities. On my left is Stephen Jones who is the Director
of our Financial Intermediaries & Claims Office, which we
will be referring to as FICO, who operate the reliefs.
2. Thank you very much. We will go straight
into questions. I will start with paragraph 2.3 in the Report
in which I see you rely on the Charity Commission to determine
whether an organisation has charitable status and is, therefore,
entitled to tax exemptions. Given our concerns over the accuracy
of the Commission's register and the strength of their regulatory
work, have you had any discussions with them about the extent
to which you can rely on their work?
(Mr Montagu) Yes, we have. We have
a great deal of liaison with the Charity Commission and have stepped
it up increasingly in recent years. We have had, for example,
17 meetings so far this year alone. We discuss the reliability
of the register with them and also if we encounter activities
in the course of our investigation that we regard as questionable
in the light of the charitable status we will refer these to the
Charity Commission and we will discuss the issues with them. Mr
Jones has corrected me; I am sorry, Chairman, it is in the last
two years, the 17 meetings, rather than in the past year alone.
3. Thank you very much. I will move on,
others may want to pursue that later. Paragraph 2.6 states that
the Department do not have the records showing the number of organisations
self-certifying their entitlement to receive an investment income
without the deduction of tax or the value of the tax foregone.
How do you minimise the risk of such organisations claiming tax
exemptions to which they are not entitled?
(Mr Montagu) The reason we do not
have records for every organisation enjoying a payment of interest
gross is that it would impose an enormous burden on banks and
building societies. What we do is, when FICO do an audit of a
bank or building society, they will bring back wherever possible
a full schedule of the organisations receiving interest gross
or, if it is not possible, a sample schedule and will check that
to ensure that these are bona fide organisations.
4. I see, thank you. The Report raises a
number of concerns about your current approach to targeting tax
repayment claims for detailed checking, this is paragraph 3.10.
What action have you taken in response?
(Mr Montagu) We have revised and
refined the way in which we classify what we call recovery codes.
In other words, we are refining our classification of errors so
that we have got a better indication of what charities are at
risk. This should help us sharpen up our selection. In addition,
instead of receiving accounts, not always on a satisfactory basis,
we are now going to call for accounts using a risk index of those
charities that we regard as most likely to be at risk.
5. Ah, right. You may have picked up the
paragraph 3.18 point. Paragraph 3.18 states that you no longer
request accounts from charities which do not claim tax repayments,
even though they may receive other tax privileges such as the
receipt of income gross of tax, because you consider that the
greatest risks of non- compliance arise in cases involving repayment
claims. How have you come to this conclusion when Figures 2b and
2c on pages 12 and 13 show that you do not know how much these
other tax privileges are worth?
(Mr Montagu) Most of FICO's yield
from its compliance activities comes from work on cases where
tax repayments have been claimed, and that is why we say the Department
is at greatest risk in these cases. We obviously do accept that
there are risks in other cases. We are taking various steps to
measure that risk. For example, the work on common investment
funds, which is referred to elsewhere in the National Audit Office
Report, involves calling for accounts for known charities who
do not appear on our live charity repayment database and a number
of other measures.
6. Right. In paragraph 3.28 the Report suggests
that to be in a better position to target charities where there
is a risk of tax avoidance, FICO need to collate information held
on the incidence of avoidance and analyse it to identify areas
of risk and build a profile of the types of charities involved.
What progress have you made on that?
(Mr Montagu) We have made quite
a lot. We are informing both our audit selection and, as I indicated,
our accounts review selection by refining indicators of risk.
We will be feeding into these the results of previous years so
that we are constantly refining, and where there is a poor record
this can be used again as a further risk indicator. We are carrying
out a number of special projects. At the moment we have got project
work in six areas, with another two in mind, which are specifically
aimed at helping us understand the risks and types of tax avoidance
involving charities.
(Mr Jones) If I might add to that
reply, Chairman. From 1 May we have introduced a new uniform charity
classification in the office. This covers seven main types of
error embracing 57 error types. Our charity classification codes
identify sub-groups within the four main groups of charities.
We feel that we now have a sufficiently sophisticated analysis
of our results to inform future targeting of activity.
7. Good. Thank you. Figure 11 on page 48
says that taxation matters arising from the Charity Commission's
investigation work are not routinely passed to FICO. What are
you doing to reduce the risk to the Exchequer from failure to
exchange information?
(Mr Montagu) We are maximising the
exchange of information with the Charity Commission. As the Report
notes, we will now have on-line access to Charity Commission registers.
We have a large number of liaison meetings, as I have indicated,
and we are exchanging staff. I think it is fair to say that there
is now a climate of much freer exchange between the Revenue and
the Charity Commission than there was a few years ago. We will
also, for example, be heavily involved in the Charity Commission
review of their register and we will be feeding views into that.
In the last year we have had 66 referrals from us to the Charity
Commission of the kinds of cases where we thought there were questions
which they ought to consider.
8. Paragraph 5.10 notes that FICO Scotland
have received a Charter Mark for their customer service initiatives.
What are you doing to introduce these types of initiatives elsewhere
in the United Kingdom[1]?
(Mr Montagu) I think the first point
to make is that FICO Bootle was commended by the Charter Mark
assessors although it did not receive Charter Mark recognition.
9. FICO where?
(Mr Montagu) FICO at Bootle, the
main office. It will be putting in again for recognition. One
of the beneficial effects of the National Audit Office Report
has been to focus our attention on the importance of ensuring
that Scotland and Bootle are in line, wherever it makes sense
and wherever it is possible, with improved liaison between the
two. We have a lot of joint seminars, a lot of shadowing, and
a lot of sharing of best practice. One of the things that particularly
impressed the Charter Mark assessors in Scotland was their seminars.
That is certainly something which Bootle are doing actively, targeted
seminars for charities. Other aspects are, I think, less applicable.
In particular the tax doctor service which was particularly commended,
where FICO Scotland go out and provide essentially a mobile help
force to charities, is easier because they are dealing with smaller
charities for the most part concentrated in the Scottish central
belt. There is constant exchange, physical and about information
of best practice, between the two offices.
Chairman: Good. Thank you for a brisk
canter around the course first. No doubt others will want to raise
individual issues again with you.
Mr Love
10. Good afternoon, Mr Montagu. Having read
the Report it does seem to me that the clear lesson that comes
out from its pages is that what you need to do is better assessment
of and effective targeting of the risk of tax collection and that
can be achieved by better analysing and collation of the management
of information that you receive. Would you agree with that? How
do you intend to deal with that?
(Mr Montagu) Yes, I would indeed,
Mr Love, which is why we have evolved this risk assessment basis
for both accounts review, for repayments work and also for audit.
11. Can I take you on to a number of issues
that are broadly covered in that theme within the Report. First
if I can look at the administration of all tax exemptions. First
in relation to those tax exemptions other than repayment claims,
you do not seem to collate information in relation to them. Can
I ask you why?
(Mr Montagu) You are thinking, are
you, of things like Capital Gains Tax?
12. Yes, I am.
(Mr Montagu) The reason for that
is it would be extremely time consuming and expensive to obtain
and collate this information. We believe that Capital Gains Tax
is an issue mainly for the larger charitable foundations. As I
explained to the Chairman, where other tax relief, through payment
of interest gross, is concerned we adopt the checking and sampling
basis because we believe that it would be a considerable imposition
on the banks and building societies to have to remit to us information
on every case of interest paid gross.
13. But is there not a strong argument that
in those cases where Capital Gains Tax is being paid, and you
say it is a small number of charities, in those cases where there
are large amounts of interest in banks and building societies,
that information should be collated in an effort to try to ensure
that you are actually minimising risk in these areas?
(Mr Montagu) I think we would do
that if we believed that it was an area where tax was seriously
at risk and we do not.
14. Can I stop you there and ask you why
you do not believe it is at risk?
(Mr Montagu) Yes.
15. What studies have been done to show
that there is not a risk element here?
(Mr Montagu) We know that Capital
Gains Tax arises largely on the transactions that you get by the
large charitable foundations. It is not something that occurs
really with your typical small charity. We believe that with our
concentration, in line with the National Audit Office recommendations,
on the accounts of the large charities this is something that
we would pick up. We also believe that in general, and again this
is drawn directly from our experience, the larger charities, particularly
the big well-known national charities, tend to be less risky when
we audit them. When we look at their accounts they tend to be
well organised and clean. We will include in the recovery codes,
which Mr Jones referred to, our refined codes for assessment,
investment income and also accounts. There will be within those
two main headings a total of 19 sub-headings that we can then
play into our risk selection.
16. Can I take you on to targeting compliance.
It shows from the Report in the time covered that the yield fell
from £6.8 million in figure 4 on page 22 to £4.1 million.
It also shows in figure 5 that the proportions of charities from
which recoveries are made have fallen. Can you explain why?
(Mr Montagu) Yes, I think I can.
The reason why recoveries have fallen is essentially the same
as the reason why, as the Report notes, repayments have also fallen.
The basic rate of tax has fallen and also transitional relief
for charities is tapering down. There is less to be repaid and
consequently less to be recovered. There is a particular reason
for the fall in recoveries in figure 5 and that is the figures
fell appreciably during 1997-98 [2]
because in order to get, if you like, a clean base for the more
risk oriented system that I have described, we have consciously
tried to weed out unprofitable cases by focussing on this area
when we were undertaking the managers` reviews. What we are going
to do is to try to clear the decks for what we hope will be a
more effective selection basis.
17. Can I look at a number of these different
areas. First of all, under repayment checks, I notice that you
have several areas that you look at. You look at all claims above
a certain amount, for example. Do you then take a small sample
of other claims? There is no measure of the effectiveness of the
checks that you carry out in this area. What are you doing to
ensure that you are effective in the way that you are carrying
out these checks?
(Mr Jones) I think the answer to
that, Mr Love, is that now we are analysing the results of our
targeted risk selection for repayment checks. We look at the outcome
of the various kinds of checks, see how effective they are, and
we can then modify the basis on which we select cases for future
checking to home in on the areas of highest risk.
18. So that is being carried out now?
(Mr Jones) We have started to do
that recently.
19. Can I take you on then to charity audits,
paragraph 3.14. Again you give factors in relation to the assessment
of risk. Can you tell us whether you are analysing the results
in that area as well?
(Mr Montagu) Yes, we will indeed
be analysing the results of this. We are using new risk assessment
criteria from 1997-98 based on things like the size of claim,
the type of scheme, the type of charity and previous audit history.
What we will be doing is constantly revisiting these, seeing that
we have got the right factors, seeing what our recovery figures
are, what our error discovery figures are. It is essentially going
to be risk based and iterative with what we find feeding into
the refinement of our risk assessment.
(Mr Jones) If I might amplify that
answer, Mr Love. In 1997-98 we targeted audits more heavily concentrating
on size of case. We found as a result of our 1997-98 audits that
size was not such a good indicator of risk, so we have already
refined the selection for 1998-99 to pay less attention to size
and more to other factors.
1 Note: It was, in fact, FICO`s audit unit, which has
staff working from the Office`s Bootle, Nottingham and Worthing
sites, that was highly commended in the 1997 Charter Mark scheme. Back
2
Note by Witness: The year should, in fact, be 1996-97. Back
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