Government Response to the Eighth Report
from the Treasury Committee, Session 2001-02 Inland Revenue: Self
(a) People receiving Self Assessment tax returns
are not told why they are issued, even though once received they
are obliged by law to complete and return them. The Inland Revenue
do not publish the criteria for issuing Self Assessment tax returns
because of the enormous number of situations in which a return
is issued. We believe this to be an unsatisfactory state of affairs,
which stems from the complexity of the tax system. We note that
the Inland Revenue is examining how it can provide greater transparency
so that people have a clearer idea of whether they are covered
by Self Assessment or not. We wish to see the criteria for issuing
Self Assessment returns published in the interests of fairness
to taxpayers (paragraph 7).
The Department accepts there should be greater transparency
about the criteria for inclusion in Self Assessment (SA). They
are currently reviewing Self Assessment and are looking at ways
in which the criteria might best be publicised.
(b) We are concerned at the Revenue's failure
to inform taxpayers who need no longer submit Self Assessment
tax returns of this fact, causing unnecessary worry to taxpayers
waiting for tax returns that will not arrive. We therefore welcome
the Paymaster General's undertaking to the Committee that the
Revenue will now write to taxpayers when they are no longer required
to submit a return to inform them of this fact (paragraph 10).
The Department accepts that it would be helpful for
people to know when they are no longer required to complete a
Self Assessment tax return. They already write to some taxpayers
in this situation and are planning to make systems changes so
that a letter is issued to all taxpayers automatically where a
return is no longer required. They plan to do this as a package
of linked improvements (see the responses to recommendations (a),(c)
and (e)) as soon as practicable.
(c) The Revenue recognises that there are too
many people with low incomes, particularly pensioners, in Self
Assessment and is looking at ways of taking them out of the system
altogether or of making it easier for them to assess. We support
these aims and expect the Revenue to make real progress towards
achieving them over the next year (paragraph 13).
The Review of Self Assessment, which the Department
is currently conducting, suggests that it may be possible to take
taxpayers with straightforward affairs (including some pensioners)
out of Self Assessment. But further research is needed to ensure
that any taxpayers removed from Self Assessment will, as far as
possible, not be required subsequently to be reinstated on the
system as a result of minor changes in their income or circumstances.
Once that research is completed the Department will seek to implement
these changes as soon as it is able, subject to the constraints
of resources and other priorities.
(d) We are disappointed that the Budget contained
no measures specifically designed to simplify Income Tax Self
Assessment. Given the existing level of complexity, we support
the proposition that there should be annual changes to the tax
system aimed solely at simplification. We therefore recommend
that this be included as one of the Inland Revenue's key Performance
Targets against which the Revenue should report progress annually
There are a number of objectives for the tax system
including fairness, ease of compliance and simplicity. In this
context, the Department considers its current targets and reviews
provide a more suitable framework to find ways to make Income
Tax self assessment easier to use:
- the Department has an existing Public Service
Agreement target to reduce compliance costs for small businesses.
It also contributes to the Government's wider Regulatory reform
plan annually, to help reduce burdens on business and individuals
and to improve the support service offered to businesses.
- the Department is also undertaking a Review of
Self Assessment, which is focused on reducing complexity and making
further improvements to forms and guidance.
(e) We recognise that the tax return reflects
the complexity of the tax regime and the need to obtain sufficient
information to calculate their liability from taxpayers with different
circumstances. But we consider there is scope for a shorter and
simpler tax return, particularly for those with relatively straightforward
affairs. We therefore recommend that the Revenue continues its
efforts to develop a suitable form (paragraph 24).
The Department accepts the Committee's recommendation
and work is well under way on the development of a Short Tax Return
for people with straightforward financial affairs.
Consultation with representative bodies and usability
testing with taxpayers has begun and will be followed by a Short
Tax Return pilot commencing in April 2003.
Full implementation of a Short Tax Return will involve
significant change to the Self Assessment IT system. Funding and
resource to implement these changes will fall within the Department's
(f) We are concerned that, despite the marginal
improvement in the number of taxpayers that filed their tax return
on time last year, one in ten taxpayers had not filed by 31 January,
the due date. We expect the Revenue to monitor this position closely
and review what further steps it can take to encourage people
to file on time (paragraph 30).
The Department recognises the need to build on their
success in turning around a four-year decline in the proportion
of people filing on time. They are continuing to develop a programme
of initiatives to research the causes of late filing and encourage
people to file on time, and they are expanding this to cover 'payment'
as well as 'filing'.
The Department is evaluating last year's initiatives
to improve further the action this year: e.g. by sending earlier
written reminders and increasing the number of telephone reminders
to the most responsive groups.
(g) There is a misconception, which the Revenue
needs to address, that filing early increases the chance of being
selected for enquiry. In fact the reverse is the case. We recommend
that the Revenue takes steps to make this clear to agents and
taxpayers in its publicity. We also recommend, to encourage early
filing and spread filing peaks, that the Revenue considers the
possibility of changing the enquiry window to run for twelve months
from the date the tax return is received, rather than twelve months
from 31 January (paragraph 31).
The Department recognises the need to publicise the
fact that early filing does not increase the chances of being
selected for enquiry and will take steps to do so.
It may not be appropriate to change the 'enquiry
window' for early filers. The existing system enables all returns
filed up to the 31 January to be risk-assessed together, which
has benefits for compliance generally and for compliant taxpayers.
These benefits could be lost if the 'enquiry window' was changed,
but the Department will consider this as part of the Self Assessment
(h) We were very surprised to learn there were
tax returns outstanding from the start of Self Assessment in 1996-97
and for each of the following years. We are concerned that the
Revenue has not actioned these cases in a timely manner and recommend
action now be taken to resolve this matter (paragraph 35).
The Department accepts this recommendation. They
are prioritising available resources to pursue old outstanding
returns and stepping-up the use of 'daily penalties' to enforce
filing. They are also completing feasibility work on providing
IT support for pursuing Self Assessment returns and debts by bringing
them onto their Integrated Debt Management System.
(i) The potential benefits from Internet filing
to both taxpayers and the Revenue are considerable. But take-up
of the service in the first two years has been very disappointing
and much lower than the Revenue had anticipated. The Revenue will
only achieve its ambitious target of 50 per cent take-up by 2005
if it offers a reliable service that meets users' expectations.
In this context we are concerned that one in five attempts to
file on-line fail and we recommend a review to identify the causes
of these failures and remedies for those within the Revenue's
control. We also recommend that the Revenue examines what further
steps it can take to make its on-line service more attractive
to potential users (paragraph 41).
The Department is continually looking at ways of
enhancing and developing Self Assessment Online to make it easier
to use and more attractive to customers. From April 2002 additional
schedules were made available; some designatory fields were pre-populated
with data and improvements were made to the registration and log-on
process and on-line help.
The rate of take-up is encouraging and the submission
success rate continues to improve. The Department continues to
seek ways to make electronic service more attractive and also
monitors those forms where submissions were unsuccessful to help
identify further improvements.
(j) We are very concerned that failings in the
Revenue's Internet filing service allowed taxpayer confidentiality
to be breached and that the service had to be withdrawn for more
than a month while remedial action was taken. We note the Revenue's
admission that there are lessons to be drawn from this extremely
serious incident, including wider issues of Internet security,
and that it is working with the e-Envoy's office to ensure that
these are shared more widely. We expect the Revenue and the e-Envoy
to include in their work a review of the procedures used to test
the Revenue'' system before it was implemented, and to report
on the outcome of their deliberations on the lessons to be shared
The Department very much regrets that this problem
occurred. Independent Internet security specialists and the Office
of the e-Envoy were involved in the investigations and have verified
the actions the Department has taken.
A full investigation is currently being carried out
and key lessons will be shared with the Office of the e-Envoy.
(k) It is too soon to determine what impact this
incident has had on the level of Internet filing. We expect the
Revenue to monitor this closely, and to examine what additional
steps it can take to restore taxpayer confidence in the security
of the system should this be necessary (paragraph 47).
The Department carefully monitors take-up and is
encouraged by figures to date, which show an increase on the comparable
period last year despite a temporary loss of service.
(l) We note that the Revenue has been testing
a scheme to allow taxpayers to pay monthly instalments by direct
debit towards their Self Assessment liability. We believe that
many taxpayers, particularly the self-employed and those starting
a new business, would find such a facility useful. We are therefore
concerned that the trial appears to have reached no conclusions
after three years. We recommend that the Revenue evaluates and
reports on the results of this trial as a matter of urgency (paragraph
The direct debit trial was a small scale experiment,
which would require extensive new payment handling infrastructure
to support it on a national scale. So to get the best value from
investing in payment infrastructure the Department is systematically
examining the combinations of payment methods and channels that
are most convenient and cost effective. The Department recognises
the need to make effective progress soon.
(m) We agree with the Paymaster General that people
should be able to pay tax rapidly and conveniently in various
ways, but introducing new payment methods does not appear to be
a matter of priority to the Revenue. We recommend that the cost
to the Revenue of providing a facility to pay by credit card be
evaluated (paragraph 53).
The Department accepts this recommendation. It is
now looking at new payment methods, including payment by credit
card and through third parties.
(n) It appears from the evidence we have received
that Corporation Tax Self Assessment has been introduced without
any significant problems. We note the suggestion that the quarterly
instalments large companies are required to pay should be based
on prior year figures, rather than on estimates as at present,
with a final adjustment based on out-turn when known. We recommend
that the Revenue examine and report on the costs and benefits
of such a change (paragraph 57).
A major representative body has told the Department
that despite earlier doubts, companies are coping quite well with
estimating their quarterly instalment payments (QIPs).
Practical guidance on the instalment system, which
the Department published in June 2002, has addressed most of industry's
concerns. The guidance clarifies the underlying principles of
QIPs and provides examples to help companies operate the system
without excessive compliance costs. It was prepared jointly with
industry, representative bodies and advisers and has been well
The Department is in regular contact with representative
bodies and has arranged meetings with them to discuss the QIPs
system. As the main concerns of industry appear to have been met,
the Department does not consider a full report on the suggested
change would represent value for money although it will continue
to monitor the position