Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 20 - 39)



  20. Are you saying "significant" in terms of the amount of income?
  (Mr Montagu) No. That is covered really by the higher rate taxpayers. If, for example, somebody, in addition to his or her earnings taxed through PAYE, had a lot of different sources of investment income—income from rents, would be a good example—then this would need to be covered by self-assessment. What we try to do, where possible, is where there is a small amount of, again, if I may put it that way, simple extra income we try, in the interests of simplicity for the taxpayer, to deal with this through a tax coding, but it is not always possible to do so.

  21. How do you find out what the other sources of income are? If I, as a young man just out of university, took on a job in some large multinational company, how would you find out whether I needed to do more than just pay under PAYE?
  (Mr Montagu) One of the things that we would do increasingly, again, is try to get over to young people information about the tax system, about their obligations, so that people are more generally educated about it. Also, typically, a lot of such income would come from banks and building societies and we get from them a multiplicity of what we call third party information passed to us which would enable us to see that this young woman or man had additional sources of income. We would check whether these were sources known to us and, if not, we would get in touch with them, explain what their obligations were and try to put them on the right course for the future.

  22. That 9.5 million must be a great many fewer than people who have some sort of small investment income, as you say, income from bank accounts, building societies or whatever. Have the others all been told at some point that they ought to be declaring this income?
  (Mr Montagu) Which others are we talking about, the ones outside self-assessment?

  23. The ones who are not within the 9.5 million who are doing self-assessment who are in the PAYE system because they have got perfectly normal employment but you find out from banks or building societies they also have perhaps some other fairly small amount of income.
  (Mr Montagu) Yes. Again, of course, a lot of bank and building society interest is itself paid net of tax at the basic rate[1].

  (Miss Chant) And from all banks and building societies, when they are sending the annual statement to the investor, you will see on your statement "Keep this certificate, you may need to submit it for income tax purposes. It has been paid net of tax". As Mr Montagu said, if you are getting income from another source other than as an employee, there is an onus on the person to declare this if they are working as self-employed as well as being employed. The moment you begin to come into contact with the legitimate economy, whether you are working for somebody or drawing investment from other sources or renting, and they are the most common sets of circumstances, there is quite a range of information and education that comes to you to point out where your obligations are. We ourselves do a lot in that general education field.

  (Mr Montagu) If I can just add to that, Mr Rendel, picking up Ann's point about the legitimate economy, a bank or a building society or a responsible investment house would actually alert somebody receiving income from them to the need to tell the Inland Revenue if they had not already done so. We work closely with the reputable institutions.

  24. The banks and building societies are paying what amount of tax now on investment income? How much is paid directly?
  (Miss Chant) The standard rate of income tax is deducted at source.

  25. At 20 pence or whatever it is in the pound?
  (Miss Chant) Whatever the standard rate is, yes.

  26. So those people are reclaiming it at the ten pence rate?
  (Miss Chant) Yes, there is the system of tax back claiming if you are only liable to ten per cent tax rate. Going back to your earlier point, along with that statement there is a very clear statement that says "This is going to be deducted at the standard rate[2]. If you are a higher rate taxpayer, you should declare this".

  27. And those who have dividend income?
  (Miss Chant) The same principles for many sources of such income on payment will be the statement about "this is likely to be taxable".

  28. So they are not paying tax at 20 per cent or whatever, they are paying only 10 per cent?
  (Miss Chant) So you are talking about somebody who is only at the ten per cent tax rate but is getting dividends[3]?

  29. No, I am talking about somebody at whatever rate they are getting dividend income.
  (Miss Chant) Yes. Depending on the source of their dividend payments. I would hesitate to give a blanket assurance on that. The paperwork surrounding all that is more than likely to provide a pointer to a taxpayer to say "This is likely to be declared income".

  30. I think I am right in saying at present the amount of tax that is netted off is ten per cent, is that correct?
  (Miss Chant) On dividend income? I am sorry, I do not know[4].

  (Mr Montagu) I think not, Mr Rendel. Again, tax would be netted off at the standard rate and the counterfoil accompanying the dividend would make clear that it is a document for tax purposes. So if either you were a lower rate taxpayer wanting to reclaim tax or a higher rate taxpayer needing to pay the difference between the rate at which tax had been deducted and the 40 per cent rate, it would alert you to that.

  31. There may be some people trying to fool the system but as far as possible you are assuming that everybody under the 9.5 million who are on self-assessment, if they are getting any other form of income that is only going to keep them within their normal standard rate? Because they have not declared anything else you are assuming that is the case. You do not do any checks on that, for example, do you?
  (Mr Montagu) The reason I frowned when you mentioned the standard rate is I said earlier on that small amounts of extra income might well be dealt with through the PAYE system by an adjustment to the tax code. That could apply to a range of people.

  32. So how many of those who are on PAYE have had their tax codes adjusted because you know that annually they have a certain amount of other income?
  (Mr Montagu) I am afraid I could not answer that question off-hand.

  33. Is it possible to get that figure?
  (Mr Montagu) I can certainly try[5].

  34. It would be interesting to see because I imagine there are quite a large number of those other people of the 20 million who are covered by PAYE who do have some form of other income?
  (Mr Montagu) Indeed.

  35. Can I go on from that to paragraph 3.11. You said that you are going to be contacting people who may have underpaid in June this year. Firstly, how many people is it? I see the estimates are £4 million underpaid and £22 million overpaid in that year 1997-98. How many people are involved in that?
  (Mr Montagu) What we are talking about here— I think it is important to be clear about the figures. We are contacting all the people included in that figure of 1.04 million that is in the Comptroller & Auditor General's Report. The majority of them will actually have paid the right amount of tax because we have done some sampling in one of our local offices to give us a fix for this and the indication from that is that 87 per cent of the people among the 1.04 million figure will actually have paid the right amount of tax. So we are only talking about the 13 per cent who have either paid too much or paid too little.
  (Mr Yard) Which is about 134,000.

  36. And you are not contacting then the other 0.36 million? You had 1.4 million cases where you had no records and you have cleared 1.04 of those.
  (Mr Montagu) I am sorry, Mr Rendel, could you—

  37. In paragraph 3.11 there were 1.4 million people where you originally had no records and you cleared automatically 1.04 million of those.
  (Mr Montagu) Yes. The 1.04 million were cleared automatically. The remainder were not cleared automatically, in other words through the machine, because these would be cases where we are currently taking clerical follow-up action. In other words, these would have been cases previously identified as suitable for clerical action.

  38. Are you saying that there is no need to contact them because you are still dealing with them?
  (Mr Montagu) I am saying we will already have done so. These will be cases that we are working.

  39. So you are contacting 1.04 million, you are going to contact them in June. How are you going to contact them?
  (Mr Montagu) By automatic issue of a letter from the computer.

1   Note by Witness: That is paid as the 20 per cent lower rate tax, rather than basic rate. Back

2   Note by Witness: That is the lower rate of tax at 20 per cent, not the basic rate. Back

3   Note by Witness: Dividends currently carry a tax credit of 10 per cent. This satisfies the tax liability of those below the higher rate threshold, who are liable at 10 per cent on their dividend income. Higher rate taxpayers are liable at 32.5 per cent on their dividend income and the 10 per cent tax credit can be offset against this. The 10 per cent credit does not represent tax netted off, so it cannot be claimed by non-taxpayers. Back

4   Note: See footnote 3 above. Back

5   Note: See Evidence, Appendix 1, page 14 (PAC 00-01/182). Back

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