Select Committee on Treasury Minutes of Evidence

Memorandum submitted by the Low Incomes Tax Reform Group (LITRG) of the Chartered Institute of Taxation

  The LITRG is pleased to be able to contribute to the Sub-committee's deliberations on Self-assessment.

  2.  The constituency that we seek to represent consists of those people on low incomes who cannot afford to pay for tax advice. This is a wide band of people, many of whom must interact with the Self-assessment (SA) system.

  3.  For our submission we are, however, concentrating exclusively upon one segment of our constituency, namely those pensioners who, by reference to some Government measures, would be described as being "in poverty".

  4.  It may at first glance appear to the layman that there must be some mistake if such an individual falls into the clutches of the 8-page form and an explanatory booklet of 30 pages of fine print. Regrettably this is not so.

  5.  If one examines Inland Revenue (IR) pronouncements on the subject you could also be forgiven for thinking that there is some misunderstanding. For example:

    —  The IR primary guide to SA (SA/BK8) states that the category of pensioner who might be within SA is confined to pensioners with "more complex tax affairs".

    —  In evidence to the NAO the IR stated that "Self-assessment applies to various groups notably the self-employed, trusts, partnerships, subcontractors, landlords and the higher rate taxpayer".

  6.  Below we go on to explain how it is that a system conceived to deal with the complex, in fact extends to the simple and, in so doing, turns the simple into a potential nightmare.


  7.  We are taking it as read that the completion of an SA return is not a straightforward matter especially having to understand the notes and ensure that all sources of taxable income are returned and placed in the correct boxes. During a year we interact with hundreds of pensioners with tax concerns and through this experience we can observe that:

    —  Pensioners worry a great deal about whether they are getting their tax right.

    —  Many have failing sight and the SA form is not produced in large print.

    —  Many have hearing difficulties and find the SA Helpline inaccessible.

    —  Many have mobility problems and find themselves unable to have a face to face conversation about their worries.

    —  Many may receive their first SA tax return in retirement.

    —  Most have predictable incomes.

  8.  The IR has in recent months been grappling with help for people with such concerns. The IR's new "enabling" agenda with its focus on the needs of different customer groups is to be commended, as is its willingness to consult. However, we worry as to whether sufficient resources are being made available to the IR in order for them to carry through many of the initiatives which will benefit the constituency we represent. We believe that those who are poor and excluded from professional tax help deserve and should expect the IR to "go that extra mile" to help them.


  9.  We take below three examples of pensioners who receive SA returns:

    —  Jessie is a widow of 85 resident in a care home. For the last tax year she had the following sources of income:

          —  State retirement pension £3,523.

          —  National Savings Pensioner Bonds £2,525.

        Jessie is asked to complete a SA form even through she is not a taxpayer.

    —  Helen is a single lady now aged 87, she has sight and mobility difficulties and her tax office is 400 miles from her home. For the last tax year she had the following sources of income:

          —  State retirement pension £4,150.

          —  National Savings Pensioner Bonds £3,100.

          —  Occupational pension £1,000.

        Helen's occupational pension is taxed under PAYE. The IR know of her untaxed interest from Pensioner Bonds and make an adjustment to her coding so that the will pay the right amount of tax in the year. Helen is still asked to complete an SA return at the end of the year. Her distant tax office has arranged (at the request of LITRG) for her local office to send two IR officers round to her house. These officers will help her put the figures in the right boxes on her return. The return is then taken away and processed and will show an overpayment or underpayment of a few pence.

    —  Ron is aged 74 and a widower. For the last tax year he had the following sources of income:

          —  State retirement pension £4,800.

          —  Dividends £200.

          —  National Savings Income Bonds £1,400.

        Ron is asked to complete an SA form in order to collect the small underpayment of tax arising from his Income Bonds.

  10.  Prior to the introduction of SA all three of these pensioners would have had a relatively straightforward time with their tax affairs and simple forms would have been used in conjunction with a simple assessing procedure. The computer generated letters and forms used by SA are not sympathetic to the needs of this group of IR customers and generate unnecessary paperwork and worry.


  11.  The IR is aware of these issues and is very sympathetic to the needs of this constituency. We have had a helpful and constructive dialogue and we appreciate the constraints of the IT systems, but feel that some innovative solutions are now required.

Recommendation 1

  12.  The Paymaster General announced in July 1999 that she was raising the trigger point for a SA return to be issued due to untaxed income from £500 to £2,500 (IR Press Release 128/99). For the pensioner population on low incomes who have invested their life savings in Government sponsored investments, such as National Savings, the limit is too low. We suggest it be raised for pensioners to £5,000. This would take Jessie and Helen out of the SA net with no loss of income to the IR but at the same time provide significant manpower savings.

  13.  This would enable the PMG to repeat her quote from 1999:

  Paymaster General Dawn Primarolo said:

    "This change will cut down on red tape and bureaucracy, and will especially benefit those pensioners who will no longer have to fill out SA forms. The Revenue is committed to improving all its procedures where necessary, and today's announcement will help simplify the tax affairs of many people."

Recommendation 2

  14.  Raising the trigger point to £5,000 does not help Ron as he has tax to pay and the IR has the problem of how to collect the tax he owes (he is not within PAYE).

  15.  We offer three solutions to this problem:

    —  By statute reinstate the IR's powers to raise assessments outside the SA structure when it is for the better management of the tax system and the taxpayer agrees. We can have an extremely simple exchange of correspondence between the taxpayer and the IR to achieve the correct tax payable. Pensioners' incomes at the low end of the income range are remarkably stable.

    —  Require in these limited cases that the DWP operate PAYE on the State pension so that the liability can be collected through monthly deductions. The DWP already operate PAYE on some other welfare benefits.

    —  Keep Ron within SA but design a single page form to gather details of his three income sources and dispense with the "all things to all men" standard SA return. We would accept the challenge of sitting down with the IR to achieve the end of having a Pensioner's Simplified SA Return.


  16.  We recommend that SA returns for issue in April to pensioners should be accompanied by a note explaining that if the return falls outside the criteria set down by the PMG in 1999 then that return can be regarded as issued in error and returned to the tax office uncompleted. With the significant fall in interest rates, someone who was within the SA rules in 2000-01 could well be below the PMG's parameters for 2001-02, but the number of older people on low incomes who know of these rules can be numbered on the fingers of one hand. So proactive IR guidance is essential.

  17.  LITRG is also concerned at the level of processing errors occurring on SA returns. Many older taxpayers on low incomes assume that the Inland Revenue will automatically get it right and many are unable to understand the complexities of the tax calculations issued to them. The result is that those least able to work with the system may be suffering unnecessary liabilities as a result of incorrect processing. Taking more pensioners out of the SA would be likely to reduce mistakes, as our alternative recommendations are less prone to error, both by the taxpayer and the IR.

  18.  For pensioners, the prospect of an Inland Revenue enquiry, albeit random, is extremely daunting. The older taxpayer is more likely to consider that they have done something wrong rather than accept that the selection is entirely arbitrary. For a pensioner with the standard 3 to 4 entries on the tax return such types of enquiry are generally irrelevant and distressing. The NAO report on Income Tax Self Assessment mentions that "the Inland Revenue intend to increase the scope and scale of automatic cross checks between taxpayer declarations and third party information such as interest paid by banks and building societies". Since most of the income received by pensioners can be cross-checked in this manner LITRG recommend a reduction or elimination of this type of random enquiry for low-income pensioners and more use of third party checking where this is feasible.


  19.  There is still some way to go before the SA system meets the aspirations of older people on low incomes. There are some very positive signs that the IR recognises the problem and we are ready to work with them to assist in finding practical solutions.

Low Incomes Tax Reform Group

22 February 2002

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