Memorandum submitted by The Institute
of Chartered Accountants of Scotland
SELF-ASSESSMENT FOR INDIVIDUALS AND COMPANIESOBJECTIVES,
OPERATION AND ACHIEVEMENTS
The Institute of Chartered Accountants of Scotland
recall words written by Adam Smith (1723-1790): "The tax
which each individual is bound to pay ought to be certain. The
time of payment, the manner of payment, the quantity to be paid,
ought all the be clear and plain to the contributor, and to every
1.1 Self-assessment was introduced as a
clearer and more straightforward way of working out and paying
tax. A perceived objective was to shift the burden of tax compliance
from the Revenue to taxpayers. In parallel with this, another
stated objective was to simplify tax.
1.2 Income Tax Self-Assessment (ITSA) began
in 1996-97, so it has now operated for five years. Corporation
Tax Self-Assessment (CTSA) started on 1 July 1999, and has applied
to individual companies for two or three years, depending on their
1.3 A massive shift in the burden of compliance
has been achieved by self-assessment, without any accompanying
simplification; the volume of tax legislation continues to increase.
The result has been to over-burden businesses with expensive administrative
pressures, and to swamp individual taxpayers with onerous compliance
requirements that many fail to understand. This has created an
unhealthy sense of confrontation between the Revenue and taxpayers.
1.4 We believe the compliance obligations
imposed by CTSA and ITSA should be modified so that they are fair,
simple and easy to understand.
1.5 Following are two Executive Summaries
of our recommendations, relating to CTSA and ITSA respectively,
followed by our more detailed observations.
The following is a summary of our observations
and recommendations with regard to CTSA:
2.1 The Need for Early Amendments to CTSA
The Government seems reluctant to make changes
to CTSA until the system has been in place for several years and
the Inland Revenue and companies have gained more experience of
the new system in practice. However, we recommend that alterations
should be made now, to lift unreasonable compliance burdens and
remove other factors that might discourage businesses from operating
in the UK.
2.2 Quarterly Instalment Payments
As forecast in representations made before CTSA
was introduced, many large companies that are required to pay
corporation tax by quarterly instalments face enormous difficulties
and high compliance costs simply in estimating their tax liabilities
based on current year profits. Many events occurring late in a
company's accounting period can produce quite significant shifts
in profits, invalidating earlier estimates. To avoid these problems,
large companies should be required to base their tax instalments
on the profits of the immediately preceding accounting period.
Like personal taxpayers, they should be allowed to postpone tax
if they have reason to believe that current year profits will
be lower than those of the previous year.
2.3 Group Payment Arrangements
The stringent contractual conditions that the
Revenue have imposed on Group Payment Arrangements should be relaxed,
so that the administration of such arrangements would become easier
for all parties involved.
2.4 Transfer Pricing
Under CTSA, the transfer pricing regime places
unfair burdens on all businesses. It creates a serious deterrent
to many medium-sized and smaller UK businesses that wish to expand
their operations globally, and it may also discourage inward investment
from overseas. The approach to transfer pricing should be reconsidered
to see whether the information rules could be relaxed. The Revenue
should co-operate in making advance pricing agreements easier
to obtain, particularly at the smaller end.
2.5 Controlled Foreign Companies
The CTSA rules relating to controlled foreign
companies are difficult even for large companies to comply with,
and they give some smaller companies impossible compliance difficulties.
The CFC compliance obligations should be simplified.
The following is a summary of our observations
and recommendations, based on the first five years' experience
3.1 The Need for "Working Together"
by the Inland Revenue and Taxpayers
The ITSA penalty and surcharge regime causes
acute distress to many innocent taxpayers. The Revenue should
aim to assess and collect tax without threats and confrontation.
The Revenue, by "working together" with taxpayers, should
help them to meet their compliance obligations.
3.2 Penalties for Late Filing of Personal
Incentives should be offered for early compliance.
Penalties should be reserved for serious cases of default, and
mitigated where previously defaulting taxpayers bring their returns
up to date. Penalties not currently restricted (to the amount
of tax outstanding) should be so limited.
3.3 The Administrative Tangle of Fixed Penalty
The issue of fixed penalty notices and subsequent
cancellation of many of them cause distress and confusionespecially
among people with limited means and no easy access to professional
advice. The penalty legislation should be amended so that notices
would not be issued at such an early stage. Taxpayers should be
given more helpful guidance on the penalty regime.
3.4 Surcharges on Personal Tax Paid Late
Parliament never intended surcharges to be imposed
on taxpayers who make innocent errors and later correct them.
The Revenue should levy surcharges on a more selective basis.
3.5 Interest on Personal Tax Payable and Repayable
Interest rates on income tax and capital gains
tax (and CTSA from the normal due date) should be the same as
for CTSA quarterly instalments, reflecting commercial rates for
the time value of money, as intended by Parliament. The interest
rules can operate unfairly where part of a taxpayer's income arises
under the Construction Industry Scheme, and should be changed.
3.6 Selection of ITSA Returns for Inland Revenue
The Revenue should publish guidelines explaining
their method of selecting cases for enquiry.
3.7 The Low Take-up of Electronic Filing
The Revenue should seek to improve the take-up
of e-filing by offering positive incentives. Cost savings from
ITSA should be shared with taxpayers. A customer-orientated approach
requires a fundamental change in attitude by the Revenue.
3.8 Tax Return Forms, Tax Calculations and
More constructive help should be given to taxpayers.
The Tax Return Guide should state that all supplementary pages
and notes can be downloaded from the Revenue's website. The tax
rate structure and the calculation procedures should be simplified
considerably. Steps should be taken to reduce the bottleneck caused
by the 31 January filing date.
4. DETAILED OBSERVATIONSCORPORATION
4.1 The Need for Early Amendments to CTSA
While the Inland Revenue continues to have useful
discussions with representatives of business and the professions
through its Self-Assessment Consultative Committee (Corporation
Tax), it is apparent that the Government is reluctant to make
changes to CTSA until the system has been in place for several
years and the Inland Revenue and companies have gained more experience
of the new system in practice. However, for many businesses the
need for change is urgent. We recommend that some alterations
should be made without delay, to lift unreasonable compliance
burdens and remove other factors that might discourage businesses
from operating in the UK.
4.2 Quarterly Instalment Payments
4.2.1 It is fundamentally unsound that any
company should be obliged to prepare an accurate estimate of its
corporation tax liability for the current year, at a time when
this liability can be affected significantly by transactions and
other events that have not yet taken place.
4.2.2 The requirement on a "large"
company to estimate taxable profits for an accounting year as
early as half way through that year is onerous in the extreme.
By contrast to this stringent "current year basis" of
calculation, individuals can pay tax to account based on their
income of the previous year, with the ability to postpone tax
if they can show that the current year's income is likely to be
4.2.3 In some large companies with a steady
pattern of business, and tightly controlled budgeting and management
accounting systems, the information needed to estimate quarterly
taxable profits is fairly readily available. However, this is
not typical of all large companies. Many businesses are subject
to marked seasonal fluctuations in trading, substantial capital
disposals that cannot be predicted, or the impact of external
factors outside their control. It is often simply not feasible
to prepare quarterly estimates of taxable profits for the whole
accounting period with any degree of accuracy. Events occurring
late in a company's accounting period can produce quite significant
shifts in profits, invalidating earlier estimatesfor example,
capital gains or losses, foreign exchange movements, bad debts,
or factors relating to controlled foreign companies. Companieseven
some that until recently were relatively confident about the accuracy
of their forward estimates of profitshave found their forecasting
proven wrong as a result of external events, notably the terrorist
outrages of 11 September 2001 and the subsequent sharp downturns
in the US and global economies.
4.2.4 Before CTSA was introduced, the Revenue
received many representations stating that companies would face
difficulties in estimating accurately their current year corporation
tax liabilities. The difficulties now being faced by many large
companies are precisely those that were forecast in those representations.
4.2.5 When the present transitional period
expires, the final quarterly instalment due only three months
after the accounting date ought to complete a large company's
payment of corporation tax for the accounting period. With the
pressures already involved in preparing year-end accounts, we
think that, within the required timescale, many large companies
will be unable to estimate their corporation tax liabilities sufficiently
accurately for this purpose.
4.2.6 The Corporation Tax (Instalment Payments)
Regulations 1998 (SI 1998/3175) require each large company to
be able to demonstrate to the Inland Revenue that the amount of
each instalment payment was consistent with the quality and quantity
of information available to the company, at the time the payment
was due, regarding its total liability for that period. Guidance
published by the Revenue on 8 June 1999 outlines the circumstances
in which the Revenue may seek penalties on the grounds that a
company may have deliberately or recklessly failed to comply with
its payment obligations. The requirements thus placed on companies
apply grossly unfairly to many types of business that have difficulties
in predicting future transactions that may affect their tax liabilities.
Unduly onerous pressures are placed on such companies, and they
face excessively costly and non-productive procedures in their
attempts to guard against exhaustive Revenue enquiries and potential
4.2.7 We recommend that the legislation
be amended so that large companies would base their quarterly
instalment payments on the profits of the immediately preceding
accounting period, to avoid the high compliance costs otherwise
involved in estimating current year profits. Like personal taxpayers,
they should be allowed to postpone tax if they have reason to
believe that current year profits will be lower than those of
the previous year.
4.3 Group Payment Arrangements
4.3.1 Group payment arrangements for large
companies were enabled by section 36 Finance Act 1998 and introduced
by Inland Revenue guidance issued on 26 February 1999. Initially
the contractual arrangements required were somewhat cumbersome,
and proved inflexible in practice. For example, although there
is no need for all companies within a group to participate in
a group payment arrangement, the removal of an existing group
company from such an arrangement has been found to be fraught
4.3.2 Given that the Revenue has now gained
valuable experience of group payment arrangements in practice,
we recommend that the stringent contractual conditions imposed
on such arrangements should be relaxed, so that their administration
would become easier for all parties involved.
4.4 Transfer Pricing
4.4.1 Transfer pricing has long been a significant
tax issue for companies operating across national frontiers. A
small number of large multinationals, who account for the major
proportion (by value) of total UK corporation tax receipts, are
accustomed to anticipating the possibility of transfer pricing
challenges by the Inland Revenue, and taking steps (albeit often
tiresome and expensive steps) to avoid or contain the costs of
resultant enquiries. They and their advisers have developed expertise
in this field, and some have taken advantage of section 85 Finance
Act 1999 to negotiate advance pricing agreements with the Inland
4.4.2 The transfer pricing legislation creates
potential traps for not only the small minority of unscrupulous
businesses seeking to manipulate cross-border prices, but also
the much greater number of honest but less aware companies venturing
into the international trading arena for the first time. Although
companies in this latter group may account collectively for only
a small proportion of total UK corporation tax receipts, they
create substantial employment opportunities and their prosperity
is crucial for the long-term well-being of the UK economy. Their
development of international business frequently brings substantial
benefits to the UK, and should be nurtured rather than discouraged.
The transfer pricing regime is a serious barrier to their successful
4.4.3 Business conditions, financial expertise
and language should make the UK an ideal choice as a location
for investors from outside the European Union to establish EU
holding companies or centres of operations. However, the stringency
of the transfer pricing regime is one of a number of factors that
can make the UK unattractive to foreign investors, and persuade
them to base their activities in other EU countries instead.
4.4.4 We appreciate that the Revenue has
a duty to police transfer pricing and seek tax adjustments as
appropriate, and we are aware that the number of transfer pricing
investigations has multiplied in recent years. However, the imposition
of the transfer pricing regime on a self-assessed basis places
unfair burdens and risks on smaller businesses that may have relatively
small exposure to transfer pricing and little or no expertise
in this field. The proprietors and managers of such businesses
often fail to understand the importance of the tax rules when
determining transfer prices, let alone the importance of the stringent
requirements to maintain documentary evidence to support such
prices. When the true implications are understood, it is frequently
impracticable for such businesses to meet the requirements of
the Revenue guidance at reasonable cost, and the transfer pricing
rules can then become a serious deterrent to UK companies wishing
to operate globally.
4.4.5 We note from the Inland Revenue Statement
of Practice 3/99 that an advanced pricing agreement may be declined
where it appears to involve an "inefficient use of resources".
It is greatly to be regretted that, where the Revenue feels obliged
to conserve resources in this way, the outcome is likely to be
a much greater expenditure of resources by companies who are denied
the benefits of such agreements. There is a need for the transfer
pricing regime to be relaxedparticularly to reduce the
threats it may pose to smaller businesses.
4.4.6 Now that the Revenue has gained some
experience of CTSA in practice, we urge that the approach to transfer
pricing be reconsidered to see whether there is scope for reducing
existing compliance obligations that may operate as unduly onerous
deterrents to international business.
4.5 Controlled Foreign Companies
4.5.1 Like the transfer pricing regime,
the rules relating to controlled foreign companies are difficult
even for large companies to comply with. They present some smaller
companies with compliance responsibilities that cannot be met
without excessive costs. The CFC compliance obligations ought
to be reconsidered in the light of CTSA experience to date, to
see whether they can be simplified.
5. DETAILED OBSERVATIONSINCOME
5.1 The Need for "Working Together"
by the Inland Revenue and Taxpayers
5.1.1 We are gravely concerned at the distress
caused to individual taxpayers by the penalties and surcharges
levied under income tax self-assessment. The personal tax self-assessment
penalty and surcharge regime appears to have the effect of an
arbitrary tax on disorganised people, levied in a manner that
seems designed to cause maximum worry and distress to many of
the weakest members of our community. This impression has been
reinforced by discussions we have had with the charity TaxAid.
5.1.2 We believe it is very important that
the Inland Revenue should alter their approach towards the vast
majority of taxpayers who are honest, law-abiding citizens, and
should learn how to assess and collect tax from such people without
resorting to threats and confrontation. It is unfortunate that
individuals or their agents no longer find it easy to seek informal
Revenue advice on points of doubt in relation to their tax returns.
The genuine fostering of a spirit of "working together"
could have a major impact by encouraging taxpayers to meet their
compliance obligations. The converse is undoubtedly true also,
as evidenced by the current frustrations of many taxpayers.
5.1.3 The complexities of the existing personal
tax regime demand that a lenient view be taken of individuals
who encounter difficulties in understanding their compliance obligations.
Any other approach would seem hypocritical when it is clear that
even the Revenue has difficulty in fulfilling its duties and obligations.
Examples of recent failures by the Revenue have included: (a)
widespread errors in the PAYE coding notices issued to incorporate
new company car benefits, in spite of the fact that representations
regarding that new regime had expressed fears that it would be
unworkable in practice; and (b) the issue of many incorrect late-filing
5.2 Penalties for Late Filing of Personal
5.2.1 Income tax is a progressive tax that
is related to the means of those who suffer it. It is difficult
to find fault with the principle that those with higher incomes
should pay more tax. In a similar vein, many would support the
concept that incentives for prompt compliance with the tax law,
or penalties for failing to comply, should be related to the ability
to pay and therefore reflect (in most cases) the relative impact
on the Exchequer.
5.2.2 By contrast, the existing penalties
are regressive. On the one hand, a £100 penalty for late
filing is of little consequence to many an individual with high
income, and is therefore ineffective as a deterrent to such people.
On the other hand, the experience of our members and our discussions
with the charity TaxAid show that demands for £100 fixed
penalties are of the greatest moment to many of those to whom
they are sentoften inappropriately. The existing flat rate
penalty has no equitable impact on those trying to avoid or defer
payment of tax, but causes frustration, resentment and anger among
5.2.3 The penalty provisions do not currently
operate in a fair and reasonable manner. Many of those who receive
penalty notices do not realise that the fixed penalty ought not
to exceed the tax outstanding at 31 January, or that the penalty
may be waived if a reasonable excuse is proffered. Those who quite
properly seek to have incorrect penalties reduced or cancelled
frequently find the Revenue reluctant to comply. We fear that
the aggressive approach taken by the Revenue results in many taxpayers
failing to appeal against incorrect penalties, but simply paying
them either because of ignorance or to avoid undue hassle. Where
penalties have been charged in excess of the tax due, the Revenue
are in possession of sufficient information to enable them to
repay excess penalties automatically, but we believe they do not
do so. The Revenue should now conduct a review of all penalties
paid since the commencement of ITSA, ensuring that any penalties
over-assessed and paid are refunded with interest.
5.2.4 The widely but imperfectly publicised
penalty regime causes worry and concern even to people who do
not need to submit tax returns. Other people become confused and
distressed, thinking that they will be charged penalties for failing
to meet the other widely publicised "deadline" of 30
5.2.5 There is a substantial group of non-filers,
many of them self-employed, who neither complete returns nor pay
tax because these tasks are simply beyond them. Their reasons
may include matters as diverse as personal difficulties, financial
problems, illness, absence of reliable advice, language barriers,
lack of education, and phobias about completing forms. Many of
them need help but cannot afford it or do not know how to find
it. The threat of penalties simply magnifies their predicament,
and alienates them from the Revenue.
5.2.6 We are not convinced that the television
and radio advertising campaign featuring "Mrs Doyle"
was necessarily well targeted or effective. It is possible that
the simple nature of the character portrayed may have added to
the fears and misunderstandings caused by ITSA. We recommend that
the effectiveness of this and other initiatives should be monitored
to ensure that future initiatives to improve ITSA compliance are
5.2.7 There appears to be a hard core of
persistent non-filers, on whom the existing penalty regime has
little impact. We believe the Revenue's plans to invoke higher
(tax-geared and daily) penalties may be effective in encouraging
such people to comply, but we would emphasise the importance of
ensuring that such a move is accurately targeted. The existing
administration of the penalty procedures gives us no confidence
in the Revenue's ability to achieve such targeting.
5.2.8 The penalty system should be altered
so that penalties are levied only in cases where taxpayers have
deliberately or negligently failed to comply. The Revenue should
be encouraged to exercise much greater discretion to reduce or
waive penalties where previously defaulting taxpayers have brought
their returns up to date. The legislation should be changed so
that penalties not currently restricted (to no more than the tax
outstanding) are so limited; this would include daily penalties
under section 93(3) Taxes Management Act 1970, and fixed and daily
penalties for partnership returns under section 93A of the same
5.2.9 A positive and supportive approach
is needed, instead of antagonism. We strongly urge the Government
to replace the existing "stick" of penalties with a
corresponding "carrot" of incentives, which we believe
could encourage early and willing compliance. This has succeeded
in the US and Australia, where tax repayments are commonplace
and, at relatively modest cost, the promise of early repayment
has succeeded in encouraging prompt electronic filing.
5.2.10 There are precedents in the UK for
paying incentives to influence taxpayers' compliance behaviourthe
£10 payment offered to individuals e-filing their 1999-2000
returns on the Internet, and the £50 one-off payment now
on offer to businesses e-filing their VAT returns. An offer of
"something for nothing", perhaps in the form of a modest
automatic tax rebate to those who file by 30 September, could
have a much more positive impact on compliance than any confrontational
penalty regime. An alternative form of incentive might be the
offer of a more lenient interest regime to those who had filed
their tax returns by (say) 31 July; perhaps they could be forgiven
interest of up to (say) £30 if their tax payment due by the
following 31 January was slightly late.
5.2.11 Currently the Revenue fails to offer
even the most elementary incentivean early repayment when
a return is lodged promptly. Many individuals lodging their returns
during April 2001 had to wait several months, without interest,
for tax repayments that were due to them.
5.3 The Administrative Tangle of Fixed Penalty
5.3.1 In a written answer on 6 February
2002, Paymaster General Dawn Primarolo reported that the number
of "first fixed penalty" notices issued under section
93(2) Taxes Management Act 1970 for the fiscal year 1998-99 was
744,000, and that approximately 40 per cent of these penalty notices
were later cancelled. Similarly, the number of 'second fixed penalty'
notices issued under section 93(4) for 1998-99 was 378,000, and
of these more than 13 per cent were later cancelled.
5.3.2 Over the three fiscal years 1996-97,
1997-98 and 1998-99, more than 800,000 fixed penalty notices were
issued and later cancelled. In addition, it is reasonable to assume
that a significant number of those notices that were issued and
not cancelled were subsequently reduced, under the provisions
of section 93(7) Taxes Management Act 1970, to the level of tax
ultimately payable. It is also realistic to assume that many incorrect
notices issued will have been paid unnecessarily as a result of
taxpayers' fears or ignorance.
5.3.3 So far as we are aware, there are
three main reasons why fixed penalty notices, once issued, might
be cancelled. The penalty might be reduced to nil under section
93(7) Taxes Management Act 1970 because there was no tax payable,
or the taxpayer might establish for the purposes of section 93(8)(a)
of the same Act that there was a reasonable excuse for not delivering
the return, or the penalty notice might be found to have been
issued as a result of an administrative error. There have been
many reported cases where penalty notices were issued erroneously
after timeous submission of tax returns.
5.3.4 There can be no doubt that the system
of issuing fixed penalty notices, and subsequently cancelling
many of them, is causing a high level of confusion and distress,
particularly among people with limited means and inadequate access
to professional advice.
5.3.5 The legislation should be amended
to ensure that penalty notices are no longer issued prematurely
as a blunt instrument to threaten large numbers of taxpayers,
but are used to penalise only those ultimately found to have defaulted.
The Revenue should be obliged to issue widespread guidance explaining
clearly the exact circumstances in which such penalties may become
due, and the ways in which they may be reduced or cancelled.
5.4 Surcharges on Personal Tax Paid Late
5.4.1 When the provisions of section 59C
Taxes Management Act 1970 were enacted in February 1994, to impose
surcharges on unpaid income tax or capital gains tax, the circumstances
in which surcharges would be levied were the subject of detailed
discussion in the Finance Bill debates.
5.4.2 Stephen Dorrell, then Financial Secretary
to the Treasury, referred to the proposed statutory wording "An
officer of the Board may impose a surcharge" in clause 59C(5)
and explained the provision as follows: "When a taxpayer,
as a result of a bona fide mistake, misjudgement and so on, makes
a wrong declaration which he corrects after the due date, that
person should not be subject to a surcharge. Indeed, he will not
be subject to it. . ." and ". . . provided that the
taxpayer volunteers the information and pays the amount promptly,
a surcharge would not be imposed by the Board."
5.4.3 By contrast, the Revenue's internal
Self-Assessment Manual states clearly: "Where a taxpayer
fails to make payment by the surcharge trigger date, the SA computer
will automatically impose a surcharge."
5.4.4 It is clear from the assurances that
were given in Parliament that the surcharge would be imposed with
a light touch, so that taxpayers who make innocent errors and
later correct them should not be surcharged. However, as with
the fixed penalties, the Revenue's procedures involve the automatic
imposition of surcharge notices, causing confusion and distress
to many taxpayers who should not be surcharged.
5.4.5 As with the rules for fixed penalties,
the legislation on surcharges should be amended to ensure that
surcharge notices are no longer issued prematurely, but are used
to penalise only those ultimately found to have defaulted. The
Revenue should be obliged to issue widespread guidance explaining
clearly the exact circumstances in which such surcharges may become
due, and the ways in which they may be reduced or cancelled.
5.5 Interest on Personal Tax Payable and Repayable
5.5.1 Stephen Dorrell stated in the 1994
Finance Bill debates: "I wish to align the Government with
(the) proposition that if a taxpayer has an outstanding obligation
which is paid late as a result of a bona fide mistake on a self-assessment
which that person later corrects, he or she is due interest because
of the time value of the money. . ."
5.5.2 There is an excessive differential
between the interest rate charged by the Revenue on unpaid tax
(currently 6.5 per cent) and the rate paid by the Revenue on overpaid
tax (currently 2.5 per cent). These differential rates clearly
do more than simply allow for the time value of money, as referred
to in this Parliamentary assurance; the high differential imposes
an element of penalty that Parliament never intended.
5.5.3 A joint Inland Revenue and H M Customs
and Excise Press Release (REV/CE2) issued on Budget Day 2000 reflected
the same sentiment. It announced that interest rates for large
company CTSA quarterly instalment payments up to the normal due
date would be "brought more closely into line with commercial
rates" on the pretext of "making the tax system easier
and cheaper to comply with". The subsequent Inland Revenue
Press Release 72/00 on 29 March 2000 brought this into effect
by reducing the differential between the relevant interest rates
(currently 5.0 per cent and 3.75 per cent).
5.5.4 The interest rates applicable to income
tax and capital gains tax (and indeed also those applicable to
CTSA from the normal due date) should be brought into line with
those used for CTSA quarterly instalments, so that they too reflect
commercial rates with no element of penalty.
5.5.5 Where part of a taxpayer's income
is received gross and part suffers tax by deduction under the
Construction Industry Scheme, interest can be charged unfairly.
If such a taxpayer estimates his current year's income and tax
position to the best of his ability and uses that estimate as
grounds for reducing his payments to account that were based on
his previous year's position, he may be charged interest on a
residual tax liability even though the total tax he has suffered
exceeds the original payments to account requested. The rules
should be changed to remove this inequitable result.
5.6 Selection of ITSA Returns for Inland Revenue
5.6.1 We have concerns about the methods
used for selecting ITSA tax returns for detailed enquiry by the
Revenue. Before ITSA was introduced, enquiries were raised on
individual cases where Inspectors of Taxes, based on their skills
and judgement, had reason to believe that questions needed to
be raised. Under ITSA, enquiries seem to be initiated on the basis
of target enquiry levels dictated by general Revenue policy, and
this suggests that honest and conscientious taxpayers may find
themselves facing the costs and inconvenience of in-depth enquiries
without just cause. We recommend that the Revenue publish clear
guidelines explaining their method of selecting cases for enquiry,
and any related performance targets.
5.7 The Low Take-up of Electronic Filing
5.7.1 In the National Audit Office report
"e-Revenue" dated 14 February 2002, the Comptroller
and Auditor General reports the slow take-up of electronic filing
of personal tax returns. Of some 9 million personal tax returns
anticipated for the year 1999-2000, the Revenue expected to receive
only 315,000 (ie 3.5 per cent) over the Internet, but the actual
number e-filed was in fact only 39,000 (ie 12.3 per cent of those
expected). Of these returns that were e-filed, 4 out of 5 attempted
submissions did not succeed first time. Any commercial concern
reporting such results would find it hard to remain in business.
5.7.2 The National Audit Office states that
future take-up depends upon taxpayers (or, we would add, the agents
of represented taxpayers) "finding for themselves" some
clear benefit in e-filing. On the contrary, we believe that enthusiastic
take-up will only occur if the Revenue, as the provider of this
e-filing facility, changes its attitude and strives to find or
create such a benefit to offer as a visible incentive. This has
not been achieved to date because the Government has chosen to
retain the whole of the substantial cost savings realised by ITSA,
rather than allowing the Revenue to share the benefit with those
they like to regard as "customers".
5.7.3 To promote e-services, the Revenue
has been encouraged to adopt a more customer-orientated approach.
This would require a fundamental change in attitude across the
whole range of its interface with the public; it is unrealistic
to expect taxpayers to feel like valued customers when they are
fearful of penalties and surcharges being applied in an unreasonable
and aggressive manner.
5.8 Tax Return Forms, Tax Calculations and
5.8.1 The Tax Calculation Guide (even in
its simplified version) is a confusing document that can baffle
the most experienced professional tax specialists. The plethora
of tax rates applied to different types of income makes the computations
incomprehensible to most taxpayers. To make self-assessment more
acceptable, the number of rates should be reduced and the calculation
procedures generally simplified.
5.8.2 An individual with complex tax affairs
may wish to start and complete his self-assessment tax return
in a single session. However, if supplementary pages are needed,
the Tax Return Guide advises that they should be ordered by phone,
and they can take up to a week to arrive. The delays in obtaining
these extra pages cause some returns to be filed late. Although
the tax return form makes a passing reference to the availability
of supplementary pages and their accompanying notes for immediate
download from the Revenue's website, no mention of this is made
in the Tax Return Guide. This guide should be amended so that
more taxpayers are made aware of the download facility.
5.8.3 The concentration of tax return filing
in January creates serious administrative problems for the Revenue
and tax practitioners, especially following so closely after the
Christmas and New Year holiday season. Effective incentives should
be offered for early filing to relieve this bottleneck.
Institute of Chartered Accountants of Scotland
22 February 2002