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HM Revenue and Customs collects £16 billion a year from Income Tax Self Assessment and sends Income Tax Self Assessment forms to around 10 million taxpayers. The Department achieved its Public Service Agreement target of 90.6% of 2003-04 tax returns filed on time by the 31 January 2005 deadline. It has a target to increase this to 93% by January 2008.
As at July 2004 some £1.1 billion of income tax was outstanding from 1.1 million overdue returns. Similarly in July 2005 around 1.1 million returns were overdue, some 240,000 taxpayers had two or more tax returns outstanding, and 10,000 had six returns outstanding.
The Committee last examined Income Tax Self Assessment in 2002.[1] It recommended improvements in the way the Department uses, and assesses the effectiveness of, its sanctions to encourage filing on time. The Committee also recommended that the Department should complete its research into the scale of non-compliance and the amounts of tax lost. The Department accepts that it still needs better information to assess the effectiveness of penalties in changing taxpayer behaviour.
Tax returns are sent out in April, before most taxpayers can complete them, and they are increasingly filing the returns later each year despite the Department's advertising campaigns. The Department has removed the need to file a return for around a million taxpayers. It has also simplified the format of the main return and introduced a shorter tax return for around a million taxpayers with simpler financial affairs. But 60% of those that file late each year have no tax to pay or are due a repayment.
Around 30% of completed tax returns contain errors and around £2.8 billion of revenue may be lost through inaccurate returns. The Department has provided guidance and advice on its website and through help lines but its staff often lack the knowledge to deal with enquiries. Callers have also experienced difficulties in getting through to the Department's help lines at peak times.
The Department made errors in processing nearly 500,000 returns, leading to £65 million of undercharges and £30 million overcharges of taxpayers. It also made two million Pay As You Earn coding errors with an accuracy rate of 73% in setting codes. It wrongfully imposed automatic penalties for late filing on 30,000 taxpayers, 3% of the 950,000 penalties issued, but does not try to detect such errors or identify those affected. The Department is developing better IT which it expects to remove a third of its coding errors; improving the management of its processes to reduce its error rate; improving systems to log in returns; and clearing taxpayers from its database who are no longer self employed. However, the Department does not know how much compensation it has paid to those affected by its errors and cannot provide any estimate of this figure.
Operating the Income Tax Self Assessment filing process costs £220 million a year. Some 8,000 staff years are needed to process self assessment tax returns and a further 1,800 staff years to chase returns and for debt management. The Department expects to achieve efficiency savings of between 200-300 staff years from 2005-06 by applying the practices of the most efficient offices.
Processing can be made more efficient by encouraging greater use of e-filing. In 2004-05, over 1.6 million taxpayers filed online or by an electronic service used by their agents. But the service did not operate properly in January 2005 when a large number of people tried to file online. Although the Department has improved the capacity of its e-service, it may still not be sufficient at peak times.
Taxpayers are increasingly filing tax returns later each year which causes a major peak in workload at the Department and higher risks of official error. Getting returns in earlier could spread the workload and give the Department more time to set tax codes for the following tax year. The ongoing Lord Carter review of e-filing is considering the options for increasing e-filing and changing filing dates.
On the basis of a report by the Comptroller and Auditor General,[2] the Committee examined HM Revenue and Customs on getting accurate tax returns in on time, reducing the errors made by the Department and improving efficiency in dealing with tax returns.
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