Examination of Witnesses (Questions 120
- 139)
MONDAY 22 OCTOBER 2001
SIR NICHOLAS
MONTAGU KCB, MR
DAVID HARTNETT
AND MR
STEPHEN BANYARD
120. Paragraph 8 where it talks about the different
strategies adopted in the Australian jurisdiction. What I wanted
was your comment on whether you would welcome a closer link between
the tax and benefit system in this country as a means of enabling
you to improve compliance in line with Australia?
(Sir Nicholas Montagu) Mr Gardiner, I do not want
to be unhelpful but that really is a policy issue on which I do
not think the Committee would expect me to be drawn.
121. I did try.
(Sir Nicholas Montagu) You did it admirably in noise
time, if I may say so.
Mr Steinberg
122. Very quickly, when you come in late it
is difficult to find any questions to ask but I will return to
one or two old ones.
(Sir Nicholas Montagu) The old ones are the best,
Mr Steinberg.
123. Page 14, figure 10, we have talked about
since self assessment was introduced the percentage of tax returns
has declined from 7.87, the number who are non-compliant, to 10.2
per cent. Now you have told us you do not know why that figure
of non-compliance has increased. You have been a bit blasé
about it because you should know why, should you not, because
if you do not know why you do not know what to do to put it right?
(Sir Nicholas Montagu) I am not blasé about
it at all. The whole point of the risk intelligence and analysis
teams is actually finding out why people do not file, where the
risks lie. Similarly, with the leverage trials the aim of this
is a better understanding of taxpayers through the Taxpayer Filing
Initiative that I mentioned. This specifically aims—and
again Mr Gardiner will be pleased to hear it started in March
of this year for the same reason that I gave him—to establish
which groups are most prone to late filing and why, who gets a
return in the first place and to agree a programme of initiatives
to increase early filing. It has supported the current advertising
campaign by ensuring the publicity is targeted. It has recommended
a pre-emptive educational contact by the receivables telephone
centre which we have talked about, and is looking at the options
for using the penalty regime. It is not something that we are
at all blasé about, Mr Steinberg.
124. Could not there be a simple reason that,
in fact, people realise that the penalties are so small that you
might as well not bother?
(Sir Nicholas Montagu) The penalty, again, is of course
something set by Parliament.
125. We are always getting the blame. I thought
you were supposed to advise Ministers. If it is set by Parliament
and you do not think it is right, why do you not say to the Minister
that it is not right?
(Sir Nicholas Montagu) My job is to implement what
Ministers have decided and what Parliament has passed in the way
of legislation.
126. You do not give advice?
(Sir Nicholas Montagu) Of course we give advice.
127. Exactly.
(Sir Nicholas Montagu) Also the advice that we give
is not something that I discuss in front of this Committee. You
are expert at trying to draw me, Mr Steinberg, I wish I was equally
expert at not being drawn. Let us go back to penalties. Forget
penalties for the time being, we can come back to it.
128. I want to come back to penalties in a minute.
(Sir Nicholas Montagu) That is right. For a start
remember there is a penalty of £100 followed by another one
of £100 in July if we have still not got the return.
I am much more interested in getting those returns
in. I am interested in understanding far more about why people
do not file and what groups should we be targeting. I am interested
in the kind of pre-emptive work that I have described that goes
with the automatic letters that got in £230 million more
last April and that, as they say, ain't hay.
(Mr Hartnett) The penalties of £100 and £100
may seem small but, if I can introduce a horse racing analogy,
those are the hurdles. Leave it 12 months and you face a penalty
of 100 per cent of the tax.
129. Penalties are very ineffective because
in the report it says that 23 per cent of the cases had a £100
penalty which was more than the tax they owed and they got back
the difference. That is a good deal, is it not, "The penalty
is £100 but if you only owe £75 we are going to give
you £25 back"? That does not seem much of a deterrent
to me.
(Sir Nicholas Montagu) Mr Steinberg, we are not after
collecting penalties, we are after getting returns in and the
right amount of tax paid.[8]
130. Surely it is not a carrot and stick situation.
Admittedly you are not wanting to use penalties to compensate
for what you are not getting in, what you want is to use penalties
to ensure that people do pay.
(Sir Nicholas Montagu) Yes.
131. It is not a penalty because if you have
to pay £100 because you are late and you only owe £75
you get 25 quid back. If you said "It is £500 if you
do not put your form in on time and if you owe £75 we will
keep the £425", that would be more of a deterrent, would
it not?
(Sir Nicholas Montagu) I think on the quantum of penalties,
Mr Steinberg, I have to say good try. The point that I want to
make is penalties are one element only. What we are after is getting
those returns in and the right amount paid.
132. You are not answering the question.
(Sir Nicholas Montagu) That is because you are not
giving me time to answer.
133. You are missing the point. What I am trying
to say is that the penalty is not a deterrent and you are not
answering that question.
(Sir Nicholas Montagu) What I am saying is that penalties
are only one element. You said stick and carrot. Let me tell you
what I think is the most effective carrot. Send your form into
the Inland Revenue by 30 September and we will do the calculation
for you, that is a pretty good carrot. The penalties are one element
of the stick. I come back to the point I made to Mr Davies, that
in good time for the January filing date we will have contacted
every single person who filed late last year, who has got a return
and with whom we are not already in touch and who has not filed.
That is one thing. I have mentioned that we have got 150,000 returns,
£230 million in, from the automatic letter and the telephone.
The report talks about the other things in our armoury. We can
surcharge people. We can issue a determination.
134. Let us go to determinations.
(Sir Nicholas Montagu) Okay, let's.
135. Because that is totally ineffective, is
it not, because statistics indicate that where a determination
has been made the non-compliant would rather pay the determination
than pay the tax? Sixty per cent would rather pay the determination
because it is less than what the tax is. Again, that cannot be
very much of a deterrent.
(Sir Nicholas Montagu) Let me tell you about that.
I will get Stephen in on the detail of determination. The point
about determination is you are late and you do not send it in
and I say "Okay, Mr Steinberg, we have determined your tax
due at . . ." and we do have ways of doing it, as they say.
You pay the tax in the determination, that does not release you
from the obligation of getting a return in. Indeed, picking up
a very important theme in Sir John's Report, we would regard somebody
who just coughed up on the determination and still did not send
the return in as a prime candidate for daily penalties, uncapped,
£60 a day. Let me just tell you, if I may, that this is one
that Mr Gardiner will be glad to know because—
136. I would like to butt in because I agree
with you that the £60 a day penalty is the one that works
but you do not use it.
(Sir Nicholas Montagu) We are. I said how useful Sir
John's Report had been. This is something where I entirely say
it was useful in revealing our local offices were not using it.
Let me tell you that since the report, and it is a since, we have
carried out a trial, initially with 220 cases and our statisticians
say that is fine, expanding it to 400, and we have rung the people
to let them know usually and said "Okay, we are going for
daily penalties". In 80 per cent of those cases they have
sent in the return before we go to the Commissioners, leaving
20 per cent. In all but four of those 20, by the time we get to
the Commissioners they have sent in the return. In other words,
it is extremely effective. Only four per cent of people waited
to have the daily penalties imposed. Stephen will want to add
what we are doing. We will learn from that.
(Mr Banyard) It is making better use of daily penalties
that we want to do. If I can just go back to your point about
the fixed penalty. £100 is a lot of money for some people
who are sending in returns where there is a relatively small amount
due, it is absolutely nothing to people who have got a big amount
due. We then move to determinations. Fifty per cent of those,
on average, are effective in bringing in the return. What we now
want to do, and we are streamlining our procedures and setting
people up to do it, is we will move much more to the use of daily
penalties both for the reasons brought out in the report and the
reasons that Nick has just said.
137. £100 is a lot of money but not all
that much money if you get £75 back if you owe £25.
Let us just move on a little bit because I think your argument
has proved my point. The two penalties of the £100 and the
determination, which were the ones you were using, frankly were
not working and the one that did work was the daily penalty, which
you did not use. That is where I have to agree with Mr Gardiner
because, in fairness, you were not doing anything about this until
the National Audit Office came in.
(Sir Nicholas Montagu) I have accepted that. As always
we found the National Audit Office Report extremely useful.
138. Before Mr Gardiner brought this up I actually
wrote down that it seems to me that the Inland Revenue are very
lax when it comes to checking their systems. If you look at paragraph
3.9, which is on page 15, it says: " . . . the Inland Revenue
do not have routine information on the use and effectiveness of
determinations. As a special exercise, the Department extracted
information for us from their systems on the number of determinations
issued and the number of returns received in response". Before
the National Audit Office asked you about this you did not know
the effectiveness of determinations. I find that quite incredible.
Then at 3.8 it says that when you were asked how many cases had
been approved for daily penalties you did not know that either
until the National Audit Office asked you. I find it incredible
that here you were using three penalty systems but you did not
know the effectiveness of those systems and it was up to the National
Audit Office to point that out. That seems to me to be very lax,
Sir Nick.
(Sir Nicholas Montagu) I would certainly agree that
our management information systems have left something to be desired
and certainly the National Audit Office helped to focus our attention
on that. I do have to give you realistically, Mr Steinberg, the
same answer that I gave to Mr Gardiner. As Sir John's Report—
139. I am nicer than Mr Gardiner though, am
I not?
(Sir Nicholas Montagu) Are we talking recreation or
names now? Dead seriously, self assessment was the biggest change
to hit the Revenue since PAYE in 50 years. We did pretty well
and tax agents did pretty well but we could not do it all at once.
What we are now trying to do is to fill in behind what the NAO
recognises was, broadly speaking, a success. It was not perfection
and, as ever, the National Audit Office has helpfully pinpointed
areas where we do need to do more, and we are.
8 Note by witness: The taxpayer does not get
£25 back as such. If the tax payable is found to be less
than the £100 fixed penalty, the penalty is reduced to the
amount of that tax, but remains payable in addition to the tax.
So, in this case, if the tax liability is £75, the penalty
is reduced to £75, and the taxpayer has to pay £150
(tax liability + penalty). Ref Qs 285-287 and also Ev, Appendix
1, p32. Back
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