Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 60 - 79)



  60. Thank you very much, that was a very full answer. Can I ask you about fixed penalty notices. You issue 4.9 million[2] of them each year but according to the National Audit Office Report you have not monitored hitherto the success of these penalties in encouraging tax returns. Has that changed at all? You said you are constantly trying to refine your methods of risk assessment earlier but do you now monitor the success of fixed penalty notices?

  (Sir Nicholas Montagu) No, not as such. Again, Stephen can confirm this. It will form part of our study of taxpayer behaviour to the extent that we are aware that a penalty has been levied and we will see how it then influences taxpayer behaviour. It is perfectly true, as Sir John's Report notes, that we do not have routine management information on the collection of fixed automatic penalties because we regard it as part of the overall self assessment debt. We have a target to collect 72.9 per cent of outstanding debt during the year to April of next year. I think we will either meet or possibly slightly exceed that. EDS, our strategic IT partner, carried out a special run for us to extract information from the self assessment system and we, in fact, raised in 1999-2000 just under £118.5 million in fixed penalties.

  61. Can I ask you about telephone pursuit. You mentioned in your earlier evidence that 600,000 letters were resulting in an extra 150,000 returns and another £230 million. The report mentions that telephone pursuit produced a 20 per cent return but said you had not had a chance to assess the impact on tax yields. I am just wondering have you had a chance to do further work on what that has done to tax yields?
  (Sir Nicholas Montagu) Again, I think it is probably a bit early. Stephen tells me it is 23 per cent effective.[3]

  62. Were you surprised by the low level? When I read that number I was surprised that telephone pursuit did not produce a higher figure. If you are getting 25 per cent from letters and only 23 per cent from phone calls, would that not be rather lower than you would have expected given the personal contact of someone actually phoning up?
  (Mr Banyard) What we are finding generally with debt collection is that from people who we have trained, and we have trained our people now using a private sector firm called The Lidbury Partnership, who are debt collection specialists, we are getting very good results now in getting money and returns in by using telephone calls. I think it is early days to be able to put an analysis on it and say "this method at this particular point is the best". What we need to do is to use the range of methods that we have got at our disposal.[4]

  63. Could I return to the question of complexity and costs and savings because the aim is to save something like £500 million over a period of 15 years.
  (Sir Nicholas Montagu) Which we will do, yes.

  64. Which you are planning to do. While you are at it could you say exactly what steps you have in place to assess how well those savings are going? How do you know that you are on track?
  (Sir Nicholas Montagu) Because we constantly and iteratively monitor the state of the savings. We are undertaking a tracking exercise and all the indications are that we will get payback by 2005. We had an independent post implementation review which said "Inland Revenue's robust approach to the staff savings, 3,800 of them have been realised as cash . . ." which I mentioned earlier ". . . has protected the financial viability of the business case". So this is something we keep track of the whole time.

  65. Do you have a concern that actually what you are doing is you are saving money but you are transferring the cost and the administrative burden effectively to the private sector and to members of the Chartered Institute of Taxation and to ACCA and effectively their clients are paying? It is not making things simpler, you are saving money yourselves and costing others more money.
  (Sir Nicholas Montagu) As I indicated, Mr Bacon, we are here to implement the policy of the Government and the legislation that Parliament has passed. What we do try to do, as I have also indicated, is to make it as simple as possible through things like working with individual taxpayers, the Working Together Initiative and so on for the tax agents and individuals to meet their obligations. We do have targets for reducing compliance costs. These are published targets in our Public Service Agreement and our Service Delivery Agreement. Again, if I may, I would quote Sir John, "self assessment has improved the administration of income and capital gains tax".

  66. One final question. I was very interested in what you were saying about the marketing and communications department of the Inland Revenue and how things have been progressing and taken forward there. Can you just say a little more about that and if there is not enough time in what remains of my questioning time perhaps you would let the Committee have a note on it.
  (Sir Nicholas Montagu) Yes, I will try to be very brief, if I can, Mr Bacon, I could happily take the whole of the rest of the Committee's time. Marketing and communications, it is about substance not spin. It is about finding out what our customers think of us, what they see as being their key needs, how they think they fall into segments, not how we do. It is not bureaucrats as the starting point. Students would be an obvious example of a group with particular needs. It is then about how we set out to meet those needs, it is about using techniques of customer relationship management. It is also about what are people's perceptions of tax. I think it was Mr Davies who mentioned that almost everybody has paid cash to a small tradesman and it is a sort of nudge, nudge, wink, wink operation.

Mr Davies

  67. Except me.
  (Sir Nicholas Montagu) All except Mr Davies. What I want is the person who does that being seen not as really rather clever but as not having paid their share of the special care baby unit that the hospital so desperately needs. So we are working with consultants to find out what would raise people's perceptions of tax paying, what would the drivers be and critically, at the same time, to work with our own people. We selected the consultants competitively who showed that they recognise the need for internal as well as external communications. So it is about improving our effectiveness by a better recognition of our customers' needs, a better recognition of what we need to do to raise the profile and the perception of tax and the drivers for paying it and to raise our own people's understanding of the business that we are in.

Mr Jenkins

  68. Sir Nick, could I say to start off, may I pass my thanks through you to all the staff who work in this system, whenever I have dealt with them I have found them very courteous and very helpful.
  (Sir Nicholas Montagu) Thank you very much indeed, Mr Jenkins. I will see that is passed on.

  69. One of the things that I did do, and have done continually since it was introduced, and you must remind us who introduced this system, I have found the cost was transferred from your officers on to me or, if I was in need, paying an accountant something like £400 a year. I would much rather pay an additional £100 a year tax, save £300 and let you work it out but it is self assessment so I have done it religiously from day one.
  (Sir Nicholas Montagu) I am delighted to hear it.

  70. If we cannot do it how do we expect people out there to do it. I find it difficult at times.
  (Sir Nicholas Montagu) We can of course do it for you, Mr Jenkins, if you get it to us by 30th September.

  71. If I can get the paperwork sorted out and in one place by 30th September, I will. What does surprise me, and maybe I have missed this along the way so remind me, we do not seem to have a figure for tax yield we would normally expect for an economy of our size. While we have got figures for savings in this country I should have thought that we would have a more accurate assessment as to what collection we would get as a nation?
  (Sir Nicholas Montagu) Again, this really goes back to the Lord Grabiner point. Without knowing what the size of the hidden economy is it is very difficult to know what the tax yield ought to be.

  72. Would not the money spent and savings in this country give us an indication of how large the hidden economy is?
  (Sir Nicholas Montagu) I am not sure that it would, Mr Jenkins. I am very far from being an economist but the size of the hidden economy has for a long time been the subject of pretty vocal academic debate and vocal disagreement. I think that if there were any simple formula of that sort there would be a greater measure of agreement than I think there is. What we are trying to do the whole time is a bottom up analysis of tax risk in the various sectors in the way that I have described. It is also, of course, true that not all the hidden economy is taxable. I think it is interesting that the OECD are on record as saying that they regard the size of the hidden economy as unmeasurable.

  73. I notice you have been very good at measuring things like the economy from restaurants. I notice on page 11, paragraph 8, you took up 41 cases and you have finalised 13 and the extra tax is £700,000. I think it works out at about £53,800 per establishment.
  (Sir Nicholas Montagu) Yes. It is a very good example of identifying a sector in which tax is at risk. We obviously work on our intelligence activities very closely with Customs and Excise on the VAT side and we set up, I think it was, five pilot joint shadow economy teams with them which were so successful that we have now rolled it out to a total of 20 from April of this year. What they are doing is they are identifying exactly the sort of businesses you draw attention to, Mr Jenkins, it is the small cash businesses where a lot of transactions can take place off the books. Going into the businesses is one source of intelligence, collecting other sorts of local intelligence, looking at what advertisements there are in the paper is another. If I may say so, I think you have identified a really good example of exactly the sort of approach that I have been trying to outline, bottom up feelers for where the risk lies.

  74. It is a big risk for us of course and it is a small risk for them because in essence most of these businesses can afford the tax and the fine. Do you ever recommend that someone found not to comply with legal duties is not a fit and proper person to have a business?
  (Sir Nicholas Montagu) I do not think we have that power. What we can of course do is to prosecute and in the serious cases we do prosecute. I think it is likely that we will be prosecuting more. We try to get publicity for the prosecutions but not invariably with success. When Mr Allen, and I do not often mention names in this Committee for obvious reasons but this is a matter of public record, went down for seven years with a confiscation order running into millions and the alternative of many years more, Mr Allen was a professional man and a professional tax fraud, we put out a press notice and it was carried as a minor item in a local paper. We are trying to get that publicity. We are trying to get over to people that the game is not worth the candle. I should of course point out that while what you say is true in the sense that if you are dodging tax and I come along and say "Come on, Mr Jenkins, game's up, let's have it", that might be the end of the story but in culpable cases we can actually take penalties up to 100 per cent of the tax due. In addition, of course we will charge interest on tax due. Dave, do you want to add to that?
  (Mr Hartnett) Just one thing, Mr Jenkins. It is very difficult and probably impossible for us to argue that someone running a business that is not incorporated is not a fit and proper person. What we have been doing over the last couple of years, where we prosecute, is also to seek confiscation of assets as well. That is relatively new but it is proving to be a very important tool in our armoury against tax fraud.

  75. I have seen advertising on the television, the fact that if I do not have a television licence they will come and find me and take my television away. It is a lot easier to identify a building than people within a building, I accept that. I have seen benefit fraud advertising trying to change the public's thinking but I have never seen any on income tax evasion.
  (Sir Nicholas Montagu) We advertise not so much on the income tax evasion side. What we do is we advertise to try to make people aware of their obligations to get the tax return in to make them aware that they will be liable to a penalty if they do not file on time. Hector, vile though he was in many ways, and I retired him without compunction, was very effective at getting home to people the due dates and the fact of the penalty for people who did not file, as indeed is Mrs Doyle in the current campaign.

  76. So if we have got a list, and we do have a list, of taxpayers, albeit it maybe late and maybe difficult to follow through what the liabilities are, we still have a situation where there are a number of people who to all extents and purposes do not exist until you go and find them.
  (Sir Nicholas Montagu) Exactly.

  77. The ghosts, as it were. We have got international comparisons and in particular New Zealand, which I like very much, it is on page 25, paragraph ten, itemises five different strategies, whistle blowers being one. Do we have a system for rewarding people who inform on others who are avoiding tax?
  (Mr Hartnett) There is statutory provision for rewards for informers but only in relation to criminal fraud.[5]

  78. So to give an example of another agency which tries to collect money, if I have got someone who does not live a million miles from me who has rather a large house and a new car in the drive but according to the CSA not enough income to keep a pet cat because his accountant shows his company has no profit, where do we come to an arrangement with regard to an obvious situation where the person's standard of living is far above his recorded income?
  (Sir Nicholas Montagu) Again, I have mentioned the risk, intelligence and analysis teams that we have, I repeat, in every area, so covering the entire United Kingdom. These are exactly the sorts of things that they would keep an eye open for. That is the great advantage of having a local team because they can keep their eyes and ears open, they can look at discrepancies between reported income and what looks to be evidence of much greater income. I should point out perhaps, Mr Jenkins, the examples that are listed in the annex, the international examples, paragraph ten on page 25 of the report, ghosts and moonlighters in New Zealand, we do all of that. Ghosts were one of the particular issues that I was talking about with our Australian colleagues in the small business district in St Leonard's in Sydney a couple of months ago. A lot of data is being swapped there.
  (Mr Hartnett) If I could just perhaps add that out of Lord Grabiner's proposals came a new statutory offence of knowingly failing to meet basic tax obligations, which is triable in the magistrate's court. That is another new weapon in our armoury which I think will be very effective.[6]

  79. Since you have got local intelligence have you envisaged conducting a pilot scheme where you totally cover a set location so you can actually determine in that location exactly the number of people who live there, the number who are registered as taxpayers, the tax intake, try to establish the black economy? If you are looking for an area to do this may I suggest a constituency like Croydon, and I know my colleague is exceptionally keen on this sort of approach, establishing the scale of the problem before you roll it out.
  (Sir Nicholas Montagu) Again, I will bring Dave in on this if I may and Stephen may want to add. I gather Mr Davies would support Croydon. He and I were present together at an admirable and very outward facing event staged a couple of weeks ago by our new South London area.

2   Note by witness: This figure is the cumulative total of penalty notices issued since the start of Self Assessment. Back

3   Note by witness: Correction-final figures are not yet available. Back

4   Note by witness: Letters are sent first, then followed up with telephone calls when no response is received. So the clearance figures are not comparable, because we are phoning people who have already resisted our written reminder. Back

5   Note by witness: A reward may be paid to any person who informs the Board of any offence against any Act relating to the Inland Revenue. Back

6   Note by witness: The precise nature of the statutory offence is being knowingly concerned in the fraudulent evasion of income tax. Back

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