House of Commons - Treasury

Select Committee on Treasury Eighth Report

Filing

25. Self Assessment introduced a timetable for submitting tax returns and making tax payments. The filing date of 31 January after the end of the tax year gives taxpayers some 10 months to assemble information and submit their returns. If a tax return is sent in by 30 September, the Revenue will calculate the tax due in order for payment to be made on 31 January. After 30 September the Revenue will still calculate tax, but it does not guarantee to do it in time for a calculation to go out to the taxpayer for the payment date of 31 January.[35] As the table below shows, since the introduction of Self Assessment taxpayers have consistently sent in around 90 per cent of tax returns by the 31 January deadline.

Table 1: Self Assessment tax returns filed by the deadline

Year to which returns relate
Number of returns issued
(million)

Number of returns received at 30 September
(million)

Per cent received
Number of returns received at 31 January
(million)

Per cent received

1996-97
8.540
4.422
51.8
7.874
92.2

1997-98
9.018
4.433
49.1
8.198
90.9

1998-99
9.088
4.511
49.6
8.211
90.3

1999-2000
9.080
4.400
48.6
8.131
89.5

2000-01
9.171
4.278
46.6
8.253
90.0

Source: Inland Revenue (Ev 11)

LATE FILING

26. In March 2001, in the light of the slight but persistent reduction in the percentage of returns filed before 31 January each year, the Inland Revenue introduced an initiative to establish which groups of people were prone to late filing and to carry out a programme of initiatives to try to encourage them to file sooner. The Revenue told us that late filers are generally people who have just started in business; people who have ceased in business the previous year; and people with substantial income for the year before. As a result of the review of late filers, the Revenue took a number of measures aimed at the groups it thought were at risk including retargeting its advertising; adding reminders to mailshots and making 200,000 telephone reminders to people to file on time; and working with agents to encourage their clients to file on time. The Revenue attributed the small upturn in the percentage of returns for 2000-01 filed by 31 January 2002, which reversed a four-year downward trend in the figures, to these efforts.[36]

27. We asked the Inland Revenue about peaks in filing and what incentives there were for taxpayers to file on time. The Revenue told us that the experience of Self Assessment filing dates around the world was that there is a big peak before whatever deadline was set. The Revenue noted that "what we have been able to do, with our 30 September date [for those wishing the Revenue to calculate their tax liability], is pretty nearly split [the peak] in two and bring in about a half of the Self Assessment returns four months forward."[37] Although the Revenue said it did not have a closed mind to incentives, it considered that the difficulty with a cash incentive to file was that you would have to pay it to the overwhelming majority of people who already do file on time.[38]

28. The Chartered Institute of Taxation told us that if a tax practitioner is asked by a client whether it makes sense to file earlier than the filing date they may draw attention to various disincentives that are perceived to exist. Prime among these is the perception that earlier filing gives the Inland Revenue a longer period of time (the 'enquiry window') in which to open an enquiry into the accuracy and veracity of the return and indeed that it increases the chances of the return being selected for enquiry. Despite Inland Revenue assurances that this is not the case, many practitioners simply decide not to take the risk - or in many cases their clients insist they do not.[39] One suggestion put to us by witnesses to help address this problem was to change the enquiry window to run for 12 months from the date the return was filed rather than as at present the 12 months from the filing date of 31 January.[40]

29. The Revenue accepted that there was a common misconception that by filing early people had a greater chance of being selected for enquiry. The Revenue told us that it had put out a note through the professional associations and would do so again, confirming that this was not the case. In fact, the Revenue's risk analysis shows that people who file late have a greater chance of filing inaccurately, and the Revenue has reflected this in the risk score it uses in selecting cases for enquiry.

30. 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.

31. 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.

PENALTIES

32. There are automatic penalties on those who do not file their returns on time. The first penalty takes effect after the 31 January filing deadline and the second penalty takes effect six months later. Each penalty is £100, but they are capped at the amount of tax ultimately due if that figure is less. About 90 per cent of people file at 31 January and another 5 per cent file after the issue of the first automatic penalty before the issue of the second penalty on 31 July. Late payments of tax incur interest and surcharge. The Revenue charges interest on all Self Assessment liabilities (except on interest itself) from the date on which the liability should be paid until the liability is paid. Surcharge is imposed in two stages: an initial surcharge on any tax unpaid more than 29 days after it is due, and an additional surcharge on any tax still unpaid more than six months after the due date. Both initial and additional surcharges are for 5% of the tax due. The Revenue sends taxpayers a formal notice of surcharge against which they have 30 days to appeal.[41]

33. If the Revenue does not receive a return it can issue a 'determination' of the amount of tax due. Taxpayers must pay the amount determined or send in their return. If taxpayers do not make a Self Assessment return to overturn the determination the Revenue can use enforcement procedures, such as court action, to collect the tax due as determined.[42]

34. Since the start of Self Assessment, the Revenue has issued 210,000 determinations of which 105,000 (50%) have resulted in the submission of the return. The Revenue told us that it recognised a need to step up the use of its powers, such as the imposition of daily penalties, in appropriate cases to get in outstanding returns and admitted that it had "a decreasing number [of tax returns not sent in] for each of the years of Self Assessment. We have a very few cases from 1996-97. We have a target at the moment to get in 40 per cent of all the old returns this year, and we are looking to see whether we can get most of the remaining ones in next year. I think it is fair to say, ... that this is an area where we think we can do better, and we have reviewed the processes and we are using our penalty regime more effectively now..."[43]

35. We were very surprised to learn that there are 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 urgent action now be taken to resolve this matter.

ELECTRONIC FILING

36. The facility to file Income Tax Self Assessment tax returns over the Internet was introduced on 3 July 2000. It allows most individual taxpayers to send their own tax return to the Revenue over the Internet. Electronic filing offers a number of advantages over the traditional paper tax return:

taxpayers get an on-line acknowledgement when their return is received;

there is automatic calculation of the tax as the return is completed so that taxpayers do not have to self calculate;

repayments of tax to taxpayers are dealt with more quickly; and

Internet returns are processed faster and there is no keying of data by staff, eliminating the scope for keying errors.[44]

37. The Revenue's Internet service has evolved in the light of experience and technology developments. In the first year of the service (2000-01) it required the issue of a CD-Rom which presented some problems: any 'bugs' in the product could only be addressed by sending updated CD-Roms, and some computers, for example Apple Macs, could not be used. In the second year (2001-02) the service was founded on an Internet-based form on-line, but restricted to the three main schedules. It was extended in August 2001 so that agents could file individual clients' returns on their behalf.[45]

38. The service this year (2002-03) encompasses the main schedules covering some 90 per cent of the Self Assessment population not represented by agents. The service now includes:

a question and answer approach so that only relevant questions are displayed;
a facility to store a part-completed return;
on-line help including, for example, pop-up tables to record interest from different accounts;
automatic calculation; and
item by item validation so that incorrect entries can be flagged back to the taxpayer.[46]

39. The Revenue informed us that 38,981 individuals filed their tax returns over the Internet in the first filing period to 31 January 2001, and that this number increased by 94 per cent to 75,449 for the equivalent filing period to 31 January 2002.[47] This compared to projections of 315,000 and 200,000 respectively for these periods.[48] The Revenue recognised that this was a slow start but considered that "customer inertia is a phenomenon experienced by many organisations in the early years of persuading customers to move to conducting transactions electronically."[49] The Revenue told us that the take-up of Internet services was notoriously difficult to predict and its projections of take-up had been the best it could make. While a target for the next year had not been finalised, the Revenue considered that a conservative target would be some 150,000, double the existing take-up.[50] The Revenue also told us that it has a target of 50 per cent take-up of its electronic services by 2005, which if achieved, would result in savings of some 1,300 staff.[51]

40. In the first year of Internet filing the Revenue gave individuals a £10 incentive to use the Internet service. However, the Revenue's customer research of users indicated that "their priority was not for an incentive, they wanted a system that was easier to use, and we have put our effort into doing that."[52] The Paymaster General noted that the Internet service was improving. In the peak period of January 2002, around 80 per cent of attempts to file on-line had succeeded.[53]

41. 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.

42. The Revenue's on-line service was withdrawn at the end of May 2002 following a security incident when four people contacted the Revenue to report seeing information on another person's tax return while using the on-line Self Assessment service. People could also add to or overwrite information on that other person's return. Subsequently a further nine contacts were received from people, making 13 in total. The Revenue told us that it "takes taxpayer confidentiality very seriously and once the service was withdrawn an immediate investigation was started, involving the department's strategic partners EDS, the e-Envoy's Office, and an independent specialist Internet company. It was quickly established that the systems were not 'hacked' into."[54]

43. The Revenue told us that the reason for the problem turned out to be "very complex."[55] The investigation found that the Revenue's system had been vulnerable to someone outside its control storing information which should not have been stored. This had resulted in a situation whereby two different people could share an on-line 'session' because the system thought they were the same person, and as a result of this, some people had been able to see another's information. In nearly all cases, the problem had manifested itself through customers of one Internet Service Provider. But as Internet Service Providers out-source or subcontract many of their services including information, the Revenue considered it would be unfair to single out one for blame. Following a number of changes to the system designed to ensure that this would not happen again, the Revenue's on-line system was restored on 28 June 2002.[56] We intend to visit the Revenue to see the system in operation.

44. The Revenue took steps to establish how many people might have had their details seen by someone else. According to the Revenue, 27,967 taxpayers had used the system without their details being seen by anyone else. There were 47 cases where the tax returns could have been seen by someone else, and a further 665 cases where the Revenue could not be certain that someone's tax return had not been seen by another person, but there was no reason to believe that it had been. The Revenue told us that it had written to all the taxpayers who were or could have been affected, or their representatives, and that the response from them had been "remarkably positive."[57]

45. The Revenue noted that there were lessons to be drawn from this incident, including wider issues of Internet security, and that it was working with the e-Envoy's office to ensure that these were shared more widely.[58] The Revenue also told us that since the service had been restored, take-up volumes, shown in the figure below, were approaching the peak levels experienced last September. The Revenue considered that this was "an encouraging sign that the speed with which the department reacted to the problem and the thoroughness of its examination has paid dividends."[59]

Figure 1: Take-up of the Internet filing for Self Assessment

Source: Inland Revenue (Ev 101)

46. 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's system before it was implemented, and to report on the outcome of their deliberations on the lessons to be shared.

47. 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.

Payment

48. TaxAid told us that "a substantial part of our advice work is in relation to tax debt. Small self-employed businesses struggle to keep money aside to pay their Self Assessment liabilities. Often they have tried to save, and want to pay their tax in full at the due date, but some more pressing need means that they cannot do so. Currently, payments on account are required only six-monthly, and the smallest businesses do not make them. A scheme for those within Self Assessment to make more frequent and regular payments on account throughout the year has been proposed in the past, and is periodically revisited in discussions with the Revenue. Little progress has been made in translating it into practice. ... The facility to make regular payments on a monthly or weekly basis to the Revenue could enable many small self-employed taxpayers to keep abreast of their tax liabilities."[60]

49. Similarly, the Federation of Small Businesses told us that "a major problem for business taxpayers is that at the second 31 January after commencement of business they have to find the first year's tax in full plus the first instalment of the second year, so paying 150 per cent of a year's tax all at once .. this problem could be tempered by a facility to pay income tax by direct debit in monthly instalments."[61] The Federation noted that "it would also be useful to have alternative methods of payment, such as by credit card. This method is not currently available even when paying over the Internet. Given the Inland Revenue's enthusiasm for e-commerce one would have expected them to look to the greater use of plastic."[62]

50. The Inland Revenue told us that it had introduced a small scale Budget Payment Plan three years ago to test whether Self Assessment taxpayers found paying by direct debit attractive. A sample of taxpayers around the Revenue's Newcastle office were contacted and offered the choice of paying monthly instalments towards their Self Assessment liability providing they had no previous unpaid liabilities. More than 400 people joined the scheme, paying nearly £100,000 each month.[63] The Revenue also told us that it was now taking forward recommendations made in two reviews of payment methods "by establishing the convenience and cost of the payment channels and payment methods people use to pay us ... to identify preferred combinations that are convenient for people in different circumstances to use and are cost effective for us. Those are the combinations that we will develop and promote."[64]

51. The Revenue has a national facility for accepting Self Assessment payments by debit card by telephone to its Debit Card Line, which is charged at local rates.[65] The Paymaster General told us that the Revenue needed to ensure that people can pay rapidly and conveniently in various ways.[66] The use of credit cards had not been ruled out, but "we need to look very carefully at whether the extra cost is justified in providing that facility .."[67]

52. 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 this 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.

53. 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 Revenue pursues this matter with more urgency than hitherto displayed. We also recommend that the cost to the Revenue of providing a facility to pay by credit card be evaluated.

35 Ev 3, para 15, Ev5, para 31 Back

36 Qq35, 104 Back

37 Q37 Back

38 Q38 Back

39 Ev 29, para 4.4 Back

40 Ev 86, para 1.1 Back

41 Qq80,81, Ev 2, paras 11, 13, 14 Back

42 Ev 4, para 20 Back

43 Qq89-91, Ev 4, para 22 Back

44 Ev 5, paras 26, 27 Back

45 Ev 5, para 26, Ev 100, para 3 Back

46 Ev 100, para 3 Back