|
Examination of Witnesses (Questions 20 - 39)
WEDNESDAY 6 MAY 1998
MR NICK MONTAGU, CB, MR BRIAN MACE, MR STEPHEN JONES
20. Let us move on to accounts examined
and it is really the same question again. You were carrying out
examinations only for those accounts that were submitted to you
and there is lots of evidence that they are the most compliant
charities. What are you doing now to ensure that you are actually
examining the accounts of those organisations you think are the
highest risk?
(Mr Montagu) What we are doing is
we are telling charities to stop sending us accounts because,
as the National Audit Office noted, this was not necessarily an
effective way of conducting a scrutiny. Instead what we are doing
is, we are arranging to review a structured sample of the charity
accounts, organised again according to risk. Our selection process
will make full use of information from FICO's repayment database
and also from data made available on the Charity Commission's
records which I discussed briefly with the Chairman. What it means
is that we will be able to analyse and evaluate the charity accounts
using a formal risk assessment process.
21. Have you got any results from that?
Are you using an iterative, if I can use the word that you used,
process there to adapt the charities that you are targeting?
(Mr Montagu) Yes. Again, we will
be doing this. We will be feeding in the findings from the use
of error codes and so on. The recovery codes will, because they
will narrow down very sharply the sorts of errors that we discover,
feed into our selection methods for future years. We do not at
this stage have any findings simply because this is the first
year that we have operated the new scheme. It is the essence of
the new scheme that it is iterative risk based and because it
is iterative we feed in the lessons from year to year.
22. And finally, and I use that word advisedly,
with qualification, moving on to voluntary compliance. You do
not seem to analyse the results of your compliance activity to
see that it is giving the best results in terms of ensuring information
flows between you and the charities concerned. Are you beginning
to do that sort of work?
(Mr Montagu) Yes, we will be. Again,
it is early days yet. We do not yet have a formal programme of
the analysis of compliance results. Once we have got, say, 12
months` data I think we will be able to look at the results of
the new approach and look at where we are concentrating our information
and outreach activities and see if there is a correlation between
the two.
23. Generally your voluntary compliance
effort seems to be one of the better parts, certainly I think
the Report was more positive in those aspects. One of the areas
it did highlight was routine re-inspection to ensure that the
charities were actually complying with the inspection report.
Are you beginning to introduce the re- inspections?
(Mr Montagu) Yes. Again, if a particular
charity shows up badly on an accounts investigation it can expect
to have its accounts called for year after year until it improves.
Similarly in our selection of audit, a bad result on a previous
audit will be a risk factor that is fed in. I am grateful, if
I may say so, Mr Love, for your calling attention to the favourable
comments on voluntary compliance. It is, I think, an area where
we are strong but equally we are constantly seeking to get stronger
on it.
Mr Campbell
24. Mr Montagu, if I can follow up really
from the Chairman's first question. You talked about the flow
of information from the Charity Commission to yourselves and you
said that you have identified 66 referrals from FICO to the Charity
Commission. The Charity Commission have agreed also that they
will send you details of charities removed from their register.
Do they do that?
(Mr Montagu) Yes, they do. It has
been built fundamentally into their procedures. They send us details,
and also we have got direct access now on-line to their register
so that if a charity is removed it will show up when we perform
a check against charitable status. Once we hear from the Charity
Commission that a charity has been removed from the register we
will take a number of actions. For example, we will instantly
put into our own system a stop on any further repayments; we will
write to the ex-charity, if I may call it that, telling them what
the tax consequences of removal are; and we will notify the tax
district of the position so they can take over responsibility
for ensuring that tax liabilities are properly met.
25. Thank you, that answers question two
as well. Just further to that point, the NAO review in 1996 identified
22 charities that should be removed from the register and they
said that one of them was still on the tax repayment database.
This Committee has expressed concern in the past about the accuracy
of that register. If that five per cent figure, one out of 22,
is at all typical given the large amount of money available for
charities to reclaim through taxation one way or another, that
would add up to something like £30 million, would it not?
(Mr Montagu) It would. I have to
say, Mr Campbell, that we do not believe it is typical. We do
monitor our performance very carefully. We have looked at what
happened. I can offer no excuse for it, it was straight administrative
failure. It was a breakdown of communication, including a letter
which failed to be followed up. There is no suggestion, and we
have looked at this hard, that it is a systemic fault.
26. Thank you. Is there any way in which
you can estimate the total value of self-certifying tax exempt
status? Is it possible to put a figure on that?
(Mr Montagu) It is extraordinarily
difficult for the reason I have been discussing with the Chairman,
that we do not get details case by case. We have talked a lot
to our statisticians about the value of the treatment of interest
paid gross. If I give you £100 million as a figure, I need
to hedge it about with all kinds of provisos about being a very
rough estimate indeed.
27. Thank you. Further to that point, you
said that when you look, for example, at banks and building societies
that provides you with information about organisations that have
funds with banks and building societies, organisations that are
eligible for tax exemptions, and you said that you check they
are bona fide organisations. Does that mean that you keep a database
of organisations that are eligible for tax exemptions?
(Mr Montagu) Yes, in the sense that
the totality of the bodies who are eligible for tax exemptions
will be those who are on the Charity Commission's register and
on FICO's database. In practice FICO's database will include almost
all the charities which are registered, although there will be
some new registrations. We do not record all details of all charities,
but our own database will give us a pretty good fix on which bodies
are eligible for tax exemptions.
(Mr Jones) If I could just add to
that answer, Mr Campbell. We maintain a charity database which
includes charities which are currently claiming repayment and
charities which have claimed repayment in the past but are no
longer very active. What we do not do as a matter of routine is
record all details of all the charities which we check under the
arrangements where we review samples of cases where interest has
been paid gross.
28. Thank you. If we could move on slightly.
I heard what you said about the way in which you sample accounts
in various ways, some 3,000 charities available for tax exemptions
or other benefits. If you take 1996-97 only 28,000 organisations
which applied for tax exemptions actually bothered to send in
their accounts and only 6,000 of those were reviewed. Is there
any way in which that can be widened?
(Mr Montagu) We think that we are
doing it by our new method, Mr Campbell, by telling all charities
not to send us an account. It is a "do not call us, we will
call you" approach. We will then require charities to send
us their accounts when we have selected them, using our new risk
based assessment, for accounts review.
29. Are you confident that sends out a better
message as far as you are concerned than, for example, was being
sent out previously where organisations were not really being
hassled to send in their accounts if you like?
(Mr Montagu) Yes. I think I am satisfied
because it sends the message that we are targeting accounts and
we are targeting organisations. It sends a message that we are
more purposive about it. Stephen, you may want to add to that?
(Mr Jones) Yes, Chairman, if I might
add to that reply to Mr Campbell. Amongst the cases that we are
targeting for requesting accounts we concentrate heavily on large
cases plus the cases selected from the Charity Commission database
rather than our database. A charity with income or expenditure
of over half a million pounds will have a better than one in three
chance of being selected for accounts review by my office.
30. Thank you. Compliance is better, is
it not, if it is through education? If you make charities aware
of their obligations and help them to be in a position where they
are able to fulfil their obligations that is the best way, is
it not, of getting them to comply?
(Mr Montagu) Yes, and we always
prefer voluntary compliance which is, if you like, prevention,
rather than compliance in the strong sense which is cure.
31. Are you happy that you are doing enough
to facilitate that process?
(Mr Montagu) Yes, I think I am.
Obviously we have to balance our activities right across the Revenue,
it is not just unique to charities, between education and compliance.
As Mr Love noted, the NAO Report did comment favourably on FICO's
education work, outreach work, and we do believe that it is a
strength. FICO Scotland got their Charter Mark and FICO Bootle
hope to do so. We believe that we are concentrating efforts in
the most effective way towards educating charities, towards helping
them comply with their activities. If I might just add this postscript:
our co-operation in the Charity Commission is again extremely
important in this, because it does mean that if we collaborate
on leaflets and other bits of public information they are likely
to be maximally effective. Again, the seminars that we hold for
charities are an important element. In 1997-98 there were eight
organised by Bootle and four organised by Scotland. We have a
pretty active programme.
32. If you look at an organisation which
is part of your sample before you leave them you have left them,
have you, with the information that they need to comply?
(Mr Montagu) Absolutely. It is a
very important part of an audit, that there is a follow-up. The
Report noted that FICO Scotland did not always follow the practice
of FICO Bootle in sending a full report following an audit, but
that has now been brought into line. A very important aspect of
audit is educational. Most charities that go wrong do so through
ignorance and education is an extremely effective way, as you
implied, Mr Campbell, of achieving voluntary compliance.
Jane Griffiths
33. This has been alluded to before but
on page 16 of the NAO Report it says that it is impractical for
FICO to maintain a database of organisations which are eligible
for tax exemptions. Do you agree with that?
(Mr Montagu) Yes, I do agree with
that.
34. Why? Why is it impractical?
(Mr Montagu) Because there will
be an enormous number of small charities for whom it will not
be an issue. What FICO can and does do is when a charity wants
to apply for tax exemptions, then it will apply to FICO and then
of course we do have a record of it, but as Stephen Jones has
indicated our database is very closely linked to the charities
which claim repayments[3].
That is our business essentially, administering the tax exemptions.
The Charity Commission register has an enormous number of charities
which actually have no income.
35. Thank you. Paragraph 2.18: the Charity
Commission sends details of charities which have been removed
from the register. That has been alluded to before but does that
arrangement work?
(Mr Montagu) As far as we can tell,
yes. We have got a degree of double banking. They inform us and
we have direct access to the register. It is now part of the Charity
Commission's standing instructions. We will obviously be reviewing
this with the Charity Commission as part of our regular liaison
meetings but as far as we can tell this is a satisfactory arrangement.
(Mr Jones) If I might add to that
reply. We have reviewed all cases which were removed from the
register since 1995-96 because the organisations ceased to function
charitably, and we have found minimal loss of tax in those cases.
In the other cases which are removed from the register because
the charity ceases to exist, there were some 8,000 of those in
1996-97. What we are doing is to make a sample check of those
removals to see if there is any risk of tax loss. That sample
check is in progress at the moment. So far we are not finding
any major problem.
36. Okay. But it does seem to me from reading
the Report that the information that you receive about those charities
could possibly be used to provide intelligence, if you like, about
the likelihoods and the kinds of situations in which charities
might find themselves removed from the register. Would you agree
with that?
(Mr Montagu) I am sorry, Ms Griffiths,
I am not totally sure what you are getting at. Our concern once
the charity is removed from the register is to ensure that it
no longer enjoys tax exemptions because that is what our business
is. Are you thinking that we should go beyond that?
37. No, not quite. It seems that it may
be possible, and I would like your view on this, for you to take
some action in order to anticipate possibly the removal when you
become aware that a situation exists where a charity ought to
be removed but perhaps has not quite been removed yet.
(Mr Montagu) I am sorry, I did not
understand. In those circumstances we would deal with the Charity
Commission and, as I have indicated, we have referred 66 cases.
It is for the Charity Commission to decide whether activities
are compatible or incompatible with charitable status. I should
add that if the charity wished to discuss with us the reasons
that had led to the referral, in other words what it was in tax
terms they were doing that was unacceptable, we would be very
happy to help them to provide what information they needed and
to indicate to them what changes they might need to make in order
to comply with the requirements. The decision whether or not it
remains a charity rests with the Commission.
38. Thank you. Once eligibility for tax
exemptions has been approved there are not any routine checks,
are there, to determine whether those charities continue to be
eligible for tax exemptions? Have I understood that correctly?
(Mr Montagu) What is true is that
once a charity is on the Charity Commission's register we are
required by law to give it tax exemptions. What is also true is
that all the time in our compliance activities we are checking,
and again liaison with the Commission becomes important, that
the activities really are the ones that are compatible with charitable
status. I do not know if the Committee would find it helpful if
I outlined very briefly what it is that we are doing on this?
39. If it is very brief, yes.
(Mr Montagu) It is really brief.
When, for example, we conduct an accounts investigation we will
be looking for things like trading activities which are not obviously
in line with charitable status. When we conduct an audit we will
both be looking for things like the documentation supporting gift
aid and covenanting being in order and also we will be checking
whether the charity's objectives have changed. If things are wrong
then liaison with the Charity Commission becomes important.
3 Note by Witness: FICO`s database of charities in
England and Wales covers only those charities which have contacted
the Inland Revenue to establish an entitlement to claim tax repayments. Back
|
