Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 100-119)

Wednesday 31 March 2004

Mr Mike Eland, Mr Mike Wells, and Mr Richard Summersgill

  Q100 Mr Davidson: Could I just ask, first of all, whether or not there is any evidence that the level of tax of VAT affects the level of fraud? If VAT was increased by 3% is there any evidence that would affect fraud?

  Mr Eland: I think the VAT rate has been stable for quite a time, so we do not have any recent evidence of that. Certainly my recollection is that when it did go up, back in the late 70s early 80s that did lead to an increase in more avoidance after that because it is obviously more lucrative at a higher rate.

  Q101 Mr Davidson: In terms of international comparisons is there much more fraud in countries where it is 20%?

  Mr Eland: It depends on the nature of the society and the economy as well as just the rate of VAT I think. In the high rate tax areas of the Scandinavian countries they by and large do not have quite the scale of fraud that we have but they do have some serious frauds and they are worried about the missing trader fraud.

  Q102 Mr Davidson: Can I turn to the paragraph 2.2 where there is mention made there of one in three businesses underpaying or making mistakes. When mistakes are discovered can you tell me what percentage of mistakes are mistakes where the trader has paid too much in VAT? If these are things like arithmetical errors would you expect them to be evenly balanced?

  Mr Summersgill: The exercise which is described in 2.2 is our compliance testing which shows about 31% errors. I believe it does break down to 28% under declare and 3% over declare.

  Q103 Mr Davidson: That is what I thought. Can you just clarify for me what the value is for refunds that you have given in these circumstances? If you discover an error has been made in your favour rather than in the company's do you give the money back?

  Mr Eland: If our visit establishes that they have overpaid we would pay it back, yes.

  Q104 Mr Davidson: Can you give me any indication of the scale of over-payment?

  Mr Summersgill: I do not have that figure, I can send you a note on it.[6]

  Q105 Mr Davidson: That would be helpful to set things in context. For the large business group presumably they have accountants and professionals doing all this and they are still making errors at this sort of level. It seems to me these are not errors but this is fraud, deliberate fraud done by accountants and the like, can you clarify for me why in those circumstances there are no prosecutions of professionals?

  Mr Eland: If we felt we had evidence of criminal intent and we could prove beyond all reasonable doubt then we would prosecute no matter what the size of the company, but you do have to have the evidence to do so. It is perfectly possible in the complexity of a large business to genuinely make an error but it then does obviously have quite a large consequence.

  Q106 Mr Davidson: If these errors are overwhelmingly on one side rather than the other they do raise questions about the professional competence of accountants and others who are doing the books, have there been any examples of action being taken by professional associations of such accountants?

  Mr Eland: I do not have any examples of that. We certainly do talk to the associations about the extent to which their own self-policing activity could help us if we felt some accountants were being particularly slapdash.

  Q107 Mr Davidson: Let me be clear, somebody is presumably getting paid a substantial sum of money in a large company and they make consistent errors, all of which favour the company, over VAT payment and you say you do not report that person to the professional association and no action is taken at all.

  Mr Eland: If we felt there was a clear case that there was somebody who was either incompetent or who we felt was complicit in some cheating of the Revenue then of course we would be prepared to report that person. I do not think it is quite like that in this area we are talking about, the large business area.

  Q108 Mr Davidson: Presumably large businesses are entitled to receive a first-class service from professional employees or the agencies they employ to do their audit and if they are consistently making mistakes which favour the company rather than tax, either it is fraud or an issue of professional competence. I am seeking to clarify whether or not there is a mechanism by which you draw this to the attention of the professional association. If you discover arithmetical or other errors what action do you take in relation to the professional association?

  Mr Eland: What we would do when we found these errors is take action within the company. Whether the company have used an outside accountant or their own in-house team in constructing the VAT accounts I do not know, that would obviously vary. They will have some external auditors but they would not necessarily be looking at the VAT position and checking whether the tax law had been exactly complied with, they would be carrying out an audit of the whole company's accounts. If we felt unhappy about the quality of the finance division of a large company then we would certainly take that up and we would take it up at board level, if need be, and say that we really did think that they needed to take internal action on it.

  Q109 Mr Davidson: How many times have you done it?

  Mr Eland: I know of one case in the last six months.

  Q110 Mr Davidson: One case. It is said in the Report that one in three businesses underpay. I understand the difficulty about prosecution but you are saying that there is only one case where you have sought to pursue the question of the professional competence of the people doing the sums?

  Mr Eland: In one case in the large business area known personally to me. I do not have figures in relation to the activity throughout the whole of that operation.

  Mr Summersgill: In terms of the one in three figure that comes from our compliance testing programme which tests about 4,000 businesses, which is a statistical sample, the majority of those businesses will be sole proprietors and various small businesses. It is likely that errors have been made by the person themselves or by their bookkeeper. We will often be looking at those records, certainly in the case of the larger businesses, before they have been audited even.

  Q111 Mr Davidson: What is the figure for the large business group if it is not one in three? What is the figure?

  Mr Summersgill: I do not think we have that with us.

  Q112 Mr Davidson: Is it higher rather than lower?

  Mr Eland: I think there were one billion pounds of under declarations found in the large business area.

  Q113 Mr Davidson: There seems to be a huge amount of money sloshing about.

  Mr Eland: Our large business group covers the top 1,000 businesses.

  Q114 Mr Davidson: Right. Okay. Can I just ask about spend to save, I am struck by paragraph 2.6 "a good return of £18.90 for every £1 spent". What approaches have you made to the Government on the basis of spend to save and how were these proceeded with?

  Mr Eland: The original VAT strategy consisted of about 1,000 additional staff for an additional two billion and the Chancellor announced in the Pre Budget Report a further spend to save initiative

  Mr Summersgill: In the Pre Budget Report we were awarded effectively another 450 posts to put in to further effort to tackle the gap. We are putting about 150 of those into various kinds of debt management and the remainder into tackling high risk areas within that general non-compliance gap.

  Q115 Mr Davidson: Can I clarify whether or not the additional money has returned resources along the lines of £18.90 per £1 spent or has it been greater or less than that or is to too early to say?

  Mr Summersgill: I think it is too early to say.

  Q116 Mr Davidson: I will not do that again.

  Mr Eland: It is a very significant rate of return we are looking for in this area. We do feel we can provide good value for money.

  Q117 Mr Davidson: Can I just come back to the point some of my colleagues touched on and that is the question of penalties, the penalty of 20%, or so, does seem to me to be incredibly worth the risk, there is a gamble but if you do not get caught you get away with it and if you get caught it is only 15% on top of it. I am not clear how the 15% to 20% was decided, is that an internal decision by you or is it in legislation?

  Mr Wells: This is a series of graduated penalties before we get to the criminal route which range from a maximum of 100% penalty down to 15% in a mis-declaration situation. The mitigation is down to 20% from a potential maximum of 100% in cases where there is full co-operation, a potential incentive is used in certain cases. There is a potential penalty of 100%.

  Q118 Mr Davidson: How do you decide the bonus for co-operation? The penalty was brought down to 15%, why did you reach the 15%?

  Mr Eland: The 15% is a separate thing. The 20% is the mitigation of the 100%. The 15% is in statute or in secondary legislation. That was part of the penalty regime which was brought in following the Keith Report. That is applied more widely than just the civil evasion cases.

  Q119 Mr Davidson: Why did you decide on 20% rather than 25%, 15% or any other figure?

  Mr Wells: We did a variety of research in this area, we worked with the Inland Revenue with their Hansard Process, which is a similar sort of approach which provides incentive and greater cooperation, we tested this and we believed it would get more money in quicker, with fewer appeals, and indeed that is what has happened. With these cases what we are finding is we are getting in 75% of the revenue.

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