Select Committee on Treasury Minutes of Evidence

Memorandum submitted by The Institute of Chartered Accountants in England and Wales


  1.  The Tax Faculty is the focus within the Institute of Chartered Accountants in England and Wales for those Chartered Accountants working in the area of tax. It is a centre of excellence and the authoritative voice for the 120,000 members of the Institute on taxation matters. The Tax Faculty makes representations to Government and other authorities, and public pronouncements on major tax issues.


  2.  Whilst self-assessment is not a tax system but a method of administration, it is hard to differentiate the administration of a complex system from the system itself. Three years ago, the Tax Faculty began a campaign to simplify the UK tax system. As part of this campaign, we published "Towards a better tax system". This set out 10 principles (the 10 tenets) that we think should underlie all tax legislation. Simplification of the UK tax system is needed urgently and self-assessment needs to be judged within this context.


Self-assessment for individuals

  3.  Self-assessment is a big advance on the previous system where the Inland Revenue issued estimated liabilities and months, or even years, later the taxpayer substituted the correct figures for the Revenue's original estimates. It is a much more efficient and coherent system, at least in theory, although it has created major practical problems.

  4.  There was very extensive consultation on the structure of the system and the detail of the legislation. Unfortunately, there was then virtually no consultation on the operational procedures to be adopted by the Revenue to administer it. We think that many of the practical problems derive from this. We also believe that the practical operation of the system has resulted in significant additional costs for taxpayers and their agents.

Self-assessment for companies

  5.  Pay and File, introduced in 1993, was a form of self-assessment. We think it unfortunate that when self-assessment for individuals was introduced, the Revenue started afresh. The result is that when in 1998 they extended self-assessment to companies, the Revenue were faced with a dilemma as to what extent they should follow the by then familiar rules for Pay and File and to what extent those for self-assessment. We think that they made the correct decision to follow Pay and File in areas of conflict. But it is unfortunate that as a result instead of having a single self-assessment system, we have two separate systems; one for individuals and another for companies, with some of the rules identical and others not. This obviously makes the tax system harder for the small business to understand.

  6.  Difficulties remain, even for companies, with the system of process now, check later, arising inevitably from the plethora and complexity of UK tax law and accounting practice. In many cases, subjective opinion can leave a company open to high interest charges after the deadline for paying its tax has passed, because the Revenue have taken a different view on, for example, a transfer pricing issue or the application of accounting standards. The same issues can also arise in respect of self-assessment for individuals, but the problems are exacerbated for companies because the figures are of far greater magnitude.


Objectives of self-assessment

  7.  As far as we are aware, the then Government did not publish the objectives for self-assessment and it is therefore difficult to comment on whether they have been achieved. However, they did publish in 1991 their objectives for the simplification of the tax system. Self-assessment was a development of that proposal. We therefore assume that the objectives stated in the 1991 consultation document were the objectives behind self assessment. These were stated as being to:

    —  make the system easier for taxpayers to understand;

    —  make the system simpler and more efficient for both taxpayers and the Revenue to administer;

    —  make it possible for the Revenue normally to accept the return without further correspondence;

    —  make it possible for taxpayers normally to pay the right amount of tax at the right time without Revenue intervention; and

    —  open up the way for further reforms to simplify, unify and improve the system of personal taxation.

  8.  In order to achieve these objectives, the document recognised that the system for taxing the self-employed needed to be aligned more closely with the system for collecting tax from employees. The new system was originally referred to as "simplified assessing" but this ideal was later dropped in favour of what has turned out to be the somewhat misleading nomenclature of "self-assessment".

  9.  The extent to which the above objectives have been met varies considerably. Each is considered in detail below:

Has self-assessment made the system easier for taxpayers to understand?

  10.  Self-assessment made the administration of the tax system easier to understand than the previous system of meaningless estimated assessments. However, change in the administration of the system cannot of itself make the system more comprehensible. The tax system is as complex as ever, although certain administrative procedures are now easier to follow. It would be unfortunate if the administrative improvements were to be misunderstood as indicating that the tax system is in anyway more straightforward than it was before the changes introduced in 1997.

  11.  An indication of the administrative problems is that the then Government chose 1996-97 as the year to introduce simultaneously the two greatest changes to the UK tax system affecting the taxation of individuals for many years. The first of these was the current year basis for taxing the profits of self-employed individuals and partnerships; the second was the process of self-assessment. As these two changes both appeared under the self-assessment banner, there was considerable confusion between them for many taxpayers. Furthermore taxpayers had to cope with the transitional rules for the change to the current year basis at the same time as becoming familiar with self-assessment.

  12.  The current year basis is undoubtedly much easier for taxpayers to understand than the preceding year basis. This change did represent a simplification of the tax system. Indeed it was a prerequisite of a self-assessment tax system. It is, however, quite separate from the introduction of the new obligations imposed on taxpayers.

  13.  The term "self-assessment" is fast becoming a misnomer. When self-assessment was introduced the Revenue accepted that some taxpayers would be incapable of coping with it and they would have to compute the assessment for that category themselves. In recent years their advertising budget has been directed towards encouraging taxpayers not to self-assess but to submit their tax returns by 30 September, leaving the Revenue to make the assessment. It may be that the time has come for the Government to make up its mind as to whether or not it wants taxpayers to self-assess. If it does, it creates the wrong message for the Revenue to discourage this. If it does not, the first and third of the objectives will need to be abandoned. We suspect that if the personal tax system were to be reformed today the Revenue would advise against self-assessment as such, but would want to keep the remaining elements of the new system.

  14.  Having a tax system which is understandable to the intelligent layman should have been regarded as a pre-requisite for introducing self-assessment. Taxpayers are more likely to file their tax returns and make tax payments on time if they can easily complete the forms and understand the basis for the tax that they have to pay.

Has self-assessment made the system simpler and more efficient for both taxpayers and the Revenue to administer?

  15.  Few taxpayers appreciate that their tax return is no longer "checked" by the Inland Revenue. We believe that there is a common misconception that the Inland Revenue have "agreed" a taxpayer's return, until such time as an enquiry notice is received. Where, as is normally the case, no such notice is received, taxpayers assume that their tax affairs are in order. In fact, most are susceptible to a "discovery" assessment in future years even after the deadline for an enquiry notice for the year in question has passed.

  16.  A significant benefit promised to taxpayers under self-assessment was the concept of finality. Unfortunately, many taxpayers do not appreciate that they have received this benefit. A taxpayer has to wait until the anniversary of the filing deadline for the enquiry window to close, and this disguises the benefit of finality.

  17.  In practice, in the vast majority of cases, the Revenue do not take anything like 12 months to identify enquiry cases. We suggest that the enquiry window should be reduced to six or even three months. We do not think that would damage the Revenue's ability to identify enquiry cases but would emphasise to taxpayers the benefit of having achieved finality of their tax position.

  18.  To the extent that a single tax district now deals with a taxpayer's affairs, the administration of the self-assessment system ought to be both simpler and more efficient. Unfortunately, this has not happened in practice, as is set out in paragraph 27 onwards.

Has self-assessment made it possible for the Revenue normally to accept the return without further correspondence?

  19.  The vast majority of tax returns are processed on receipt, to be checked later without any need for further correspondence. The number of returns submitted on a timely basis enables the Inland Revenue to use statistics to decide which returns are most at risk of error and to target its resources accordingly.

  20.  The question ought to be asked though whether it is a laudable aim for the Revenue to accept tax returns without further correspondence. We do not know if test checking under self-assessment results in loss of tax that would not have been picked up under the previous system, under which there were far more enquiries but mainly of a less searching—and in some ways more targeted—nature. This is something that the National Audit Office might usefully look at.

Has self-assessment made it possible for taxpayers normally to pay the right amount of tax at the right time without Revenue intervention?

  21.  The short answer to this question is "Yes, in theory". The Revenue's computer always computes a taxpayer's liability even if that taxpayer has done it himself and inserted a figure on his return. However, the experience of our members is that there is a very large number of processing errors. We are obviously concerned that, if our members are picking up a lot of processing errors, then logically there are likely to be a similar amount of errors in the Revenue's calculation for unrepresented taxpayers. Many of these will not be picked up due to the taxpayer's lack of expertise. One welcome development is that, at last, the computer has stopped highlighting minor computational differences over a few pence.

  22.  The self-assessment process allows a taxpayer to choose between calculating his own tax liability (to be checked by the Revenue) or asking the Inland Revenue to perform the calculation. We doubt that a taxpayer who is forced to work through a 27 page booklet in order to calculate the tax payable is confident that he is paying the right amount of tax. It is difficult to imagine that this was the result envisaged by the original objective.

  23.  Whilst it is right to encourage filing of returns over the Internet, the system cannot cope with all types of returns. We doubt that it is much encouragement to taxpayers to file electronically, if, half-way through the return, the taxpayer realises that it cannot cope with his position and has to start again manually. If the Government wishes to encourage electronic filing, the system must be able to cope with the most complicated type of return. We are in favour of electronic filing as it does at least enable taxpayers to identify the right amount of tax to pay without the need for any Revenue intervention. It is, however, vital that taxpayers are encouraged and not compelled to file tax returns electronically. We are very concerned that the Government appears to have accepted the Carter proposals in respect of payroll/PAYE without question. These include a requirement that, from 2007, even an individual who employs a nanny will have to file all PAYE documents electronically.

  24.  Five years after the introduction of self assessment, there is still a significant number of taxpayers who do not file on time. Although we suspect that many of these do not have tax liabilities, some of them will do so, which contributes to tax not being paid on time.

Has self-assessment opened up the way for further reforms to simplify, unify and improve the system of personal taxation?

  25.  In principle, the answer is "yes". The move to a current year basis of assessment was an invaluable step in the right direction. However, much more needs to be done. Indeed, the introduction of the starting rate and the dividend rate have done more to complicate the system than self assessment did to simplify it. As mentioned, in paragraph 2 above, three years ago the Tax Faculty published our "10 tenets", against which all tax changes and new legislation should be judged. We were the first tax body to call publicly for simplification of the tax system, although we are pleased to note that other bodies (and indeed political parties) have taken up this theme. The important point to note is that tax simplification means more than merely rewriting the existing legislation in language which is easier to understand.

  26.  Further reform of the tax system as a whole can only work as part of a significant programme of simplification of the rules for identifying and computing taxable income, reliefs and allowances.

Operation of self-assessment

  27.  Self-assessment is a system overlaid on to the existing tax rules for determining taxable income and expenditure. This makes it difficult to look at self-assessment in isolation, and to differentiate those changes which are a direct result of self-assessment from those which have been brought about by the method chosen by the Inland Revenue to implement self-assessment. Many of the administrative changes introduced in recent years are not integral to self-assessment. Self-assessment has been used as an opportunity to make further changes to the administration of the tax system, building on the changing attitudes to compliance that self-assessment sought to bring about.

Relationship issues

  28.  The introduction of self-assessment has given rise to a significant deterioration in the relationships between the Inland Revenue, taxpayers and their advisers. However, we doubt that this is a necessary effect of self assessment, but rather derives from the operational decisions which were made at the time of its introduction. In addition, good relations have not been helped by the rigid application of time limits, together with the accompanying penalty regime. However, these are not the only factors.

  29.  The recurrent theme that comes to us in complaints is that there is no longer a specified individual within the Inland Revenue with responsibility for a particular case. As a result, taxpayers and their agents do not know whom to approach and considerable amounts of time are wasted re-re-explaining details of particular cases to a succession of Revenue staff. The growth in the use of telephony, and in particular call centres, has contributed to this problem. Staff do not have access to files and cannot deal with queries. Too often, the only way to contact a Tax Office is through such a centre.

  30.  Since the introduction of self assessment, the Revenue has published most of its internal manuals. This obviously helps to improve relationships but too often Head Office instructions are not followed correctly, resulting in more time wasted by taxpayers and agents. The operation of the enquiry process is a good example. The Revenue's manual says that the Revenue should not normally intrude into the taxpayers personal affairs in the opening letter and, if they think it essential to do so in a particular case, they should explain why it is necessary. In practice, they invariably ask for personal information in the opening letter and rarely explain why they regard this as relevant. We understand that the Revenue is re-emphasising their instructions to staff on this point.

Design of forms

  31.  It is our understanding that the Inland Revenue's self-assessment computer system was programmed before the supporting forms were designed. The result is that the design of many of the forms is to support the computer system rather than to make the form readily understandable. We think that this was an unfortunate decision. We also cannot understand why a form cannot be designed independently of the computer, with the computer reordering the information to reflect the way it has been programmed. As a result, the forms continue to cause widespread confusion and waste considerable time for taxpayers, agents and Inland Revenue staff. Insufficient resources have subsequently been made available for adequate improvement. Because of the very high cost of redesigning forms, it appears that major redesigns have been ruled out as impractical. We think, however, that money ought to be found to enable this to be done. For example, the tax return form requires dividends received to be split into five or six categories. It could be radically simplified by abolishing the split as following the abolition of repayable tax credits there is no longer any major difference between the tax treatment of these different types of dividends.

  32.  It is a fact of human nature that individuals put off doing tasks that are difficult or unpalatable. Collecting together the necessary information and then completing a tax return falls into this category. The Inland Revenue is supplied with a considerable amount of data about an individual's taxable income long before the tax return needs to be issued, for example employment income, benefits, bank interest and so on. Issuing a tax return which already has this data filled in would help the taxpayer by reducing his need to provide information. Furthermore, the Inland Revenue would not need to re-key the data, reducing the potential for error. This would require the issue of returns to be delayed until perhaps September but that would still leave ample time for a return to be completed by the following 31 January.

Statements of account

  33.  It is disappointing that every high street bank, energy supplier and credit card statement is set out in a more comprehensible form than the taxpayer statement of account, particularly following the Revenue's early publicity that the statement would be like a credit card statement. It has always been the case that taxpayers will pay bills that they understand more readily than those which they do not understand. The format of the statement of account should be radically changed, not merely reviewed, as a matter of urgency.

  34.  We realise that a particular problem is that interest on overdue tax is simple interest whereas on credit cards it is compounded. However, with the current state of computer technology, we would not have thought it necessary for the layout of the statement to replicate the computer processes. It is clear from our members' queries that the allocation by the Revenue of payments against specific tax, interest and surcharge liabilities causes recurring problems, which appear to be getting worse. This is compounded by the fact that the computer sets payments against the earliest outstanding liabilities, some of which may be incorrect, even where a payment is specifically stated to be in respect of a specific liability.


  35.  One of the major problem areas is with Revenue enquiries. The Revenue frequently do not explain what concerns them but require the submission of a great deal of information, much of which is often not readily available. Even where the reason for the Revenue's concern becomes apparent in the course of the enquiry, and the agent can identify a cheaper way to satisfy that concern, the Revenue are unwilling to consider that alternative. Pre self-assessment, the Revenue practice was to inform agents of the reasons for their concerns and discuss these with the agents so that an efficient method of alleviating those concerns could be mutually agreed. We think it disappointing that the Revenue scrapped this system. We do not see any compelling reason why that previous system could not have continued under self-assessment.

  36.  The Inland Revenue appear to favour a concept of coercion rather than co-operation. A good illustration is "Faster Working". This was an Inland Revenue concept to agree with the main Professional Bodies dealing with tax a method of dealing with enquiries. The process had two objectives: to ensure continued co-operation between professional advisers and Inland Revenue staff and to speed up handling of enquiry cases. It was supposed to be offered in all enquiry cases.

  37.  In practice, "Faster Working" was offered in very few cases. The procedure has now been formally withdrawn by the Revenue and replaced by a different procedure. Happily the new procedure retains most of the co-operative elements of working together. This suggests that the change reflects a resistance by many within the Revenue to working with the Professional Bodies, although there was an acceptance that the agreed procedure itself was desirable in principle.

  38.  There remains widespread confusion as to the difference between full and aspect enquiries. We think the time has come to differentiate between the two. We do, however, recognise that there are problems with this. We would not want an aspect enquiry to be used as a fishing expedition as a precursor to opening a full enquiry but at the same time we accept that circumstances can occur when an aspect enquiry will need to develop into a full enquiry.


  39.  Self-assessment has had many successes:

    —  Speeding up the submission of tax returns;

    —  For most taxpayers, quicker finalisation of the tax payable for a tax year;

    —  Allowing all of an individual's tax affairs to be dealt with by one tax office;

    —  Faster collection of tax.

  40.  There are some further areas which are arguably achievements:

    —  Faster processing of repayments. This is largely attributable to the Inland Revenue's system of "repay now, check later". However, this has also resulted in a large number of incorrect and inappropriate repayments.

    —  A reduction in the number of Inland Revenue staff needed to operate the tax system. However much of this saving has been at the expense of switching work from the Revenue to taxpayers, rather than eliminating the need for the work to be done. Imposing this additional burden on taxpayers has caused a great deal of resentment, particularly as it has been reinforced by a system of penalising those who find it hard to cope, and damaged further the relationships described earlier.


  41.  Self-assessment for companies was built on the back of Pay and File, and much of the underlying rules reflect that already established system. In addition, the Inland Revenue have been prepared to allow greater flexibility for companies, such as filing of group tax returns and group relief claims. Pay and File has always been more successful than self-assessment for individuals because companies have had to be more disciplined because of the Companies Act requirements, so self-assessment was relatively painless for companies because it built on what they had to do already for the Companies Act.

  42.  To a greater extent than for individuals, the system of self-assessment for companies has enabled them to pay their tax on time. However, as noted further in paragraph 45 below, this becomes more difficult where a company is required to pay its tax by quarterly instalments. It is impossible to judge what this should be with certainty, and interest will always be in point.


  43.  The operation of corporation tax self-assessment will always be hindered by the complexity of the underlying tax rules.

  44.  A particular problem is an increasing propensity on the part of the Revenue to challenge accounting principles. Such challenges almost inevitably are timing differences that over time will not increase the tax yield, but increase the problems of self-assessment as the Revenue is in effect challenging the underlying principles upon which the assessment is based. There is a serious risk that the system will break down if self-assessment means that companies become vulnerable to penalties because they take a different view on matters of opinion than the Revenue do when they look at the position a year later.

  45.  Large companies are required to pay their corporation tax in quarterly instalments. As the first two of these are due before the company's accounting period has ended these must be based on estimates, so interest will always be in point. This is an unnecessary complication, which could be avoided if instalments were based on, for example, the previous year's figures with a balancing payment at the end to reflect the final liability for the year. The position is complicated by the fact that, unlike with interim payments for individuals, companies are expected to include capital gains in their estimates even though by their nature capital gains are both non-recurrent (and therefore very hard to estimate) and in most cases substantial in comparison with income.

The Chartered Institute of Accountants for England and Wales

22 February 2002

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