Examination of Witnesses (Questions 40-59)
HM REVENUE AND
CUSTOMS
1 MARCH 2006
Q40 Angela Browning: If the random
inquiries bring in a mean of £7,200, which is quoted in the
Report, what is the actual cost then of these random inquiries?
Mr Banyard: The cost of a random
inquiry will be roughly the same as the average cost for a full
inquiry.
Q41 Angela Browning: So between £3,600
and £9,800.
Mr Banyard: Yes, an average of
£5,600.
Q42 Angela Browning: So all these
random inquiries that you are doing could actually cost you more
than you are actually recovering.
Sir David Varney: May I go back
to what I was saying? We are trying to prove that our risk selection
for the 90% is accurate and if we do not invest that money, we
will never know. We have a dilemma.
Q43 Angela Browning: You do have
a dilemma.
Sir David Varney: Yes. HMRC is
a bag of dilemmas. The issue is that if on the other hand we were
finding a big yield on our random inquiries, bigger than we were
finding on our directed inquiries, it would raise serious questions
about our risk management.
Q44 Angela Browning: So that 10%
is a sort of control exercise?
Sir David Varney: Yes, and it
is part of trying to find out more about what Mr Mitchell asked
about which was the tax gap, trying to inform what is the nature
of the underpayment opportunities that corporates are exploring.
Q45 Angela Browning: May I turn now
to the so-called burden on business? If we could just look at
page 16, figure 5, we see the figures here under figure five for
the 2004-05 Report "Proportion of enquiries with no change
in outcome" and we see that just 19% are full inquiries,
it does not seem too bad on the face of it. What I want to know
is what it actually costs those businesses where you do not get
a result? For example, if you get it wrong and your inquiry shows
that actually there is nothing extra to pay, there is no case
to answer, what does it actually cost that proportion of businesses
in order to deal with or respond to a full inquiry?
Sir David Varney: All this says
is that there is no change in the outcome of corporation tax.
There may be other changes. In terms of the burden on corporates,
what the Chancellor announced in the budget and the PBR last year
was that we were going to focus on small- and medium-sized enterprises.
So we have been doing work on the administrative burden on small-
and medium-sized enterprises and the Chancellor is obviously considering
where the work is and what he wishes to do with it. We have had
some discussion with the medium-sized enterprises. I think I am
quite right in saying that actually corporation tax itself and
the burden, was not the key issue.
Q46 Angela Browning: But the inquiry
itself was?
Mr Tweddle: No, it was other areas
of the taxation system which were creating the burden. Corporation
tax itself was not.
Q47 Angela Browning: May I ask you
about the decision that the Chancellor has now made to bring into
the fold companies with profits of under £10,000 in the next
financial year, 2006-07? I do not quite equate why they should
now be brought into the fold for potential investigation when
in fact you are trying to remove the burden from the smaller sector
of businesses.
Sir David Varney: Our job is obviously
to implement the policy which the Treasury decides and the Treasury
would be better able to give you their thinking. As I understand
it, we were seeing a large number of incorporations which were
being motivated by this zero rate return and when the Chancellor
made his announcement, there was broadly support for what he was
doing.
Q48 Angela Browning: From your perspective,
in terms of the job you have to do for recovery of corporation
tax, surely if you are serious about fishing in the right pools,
you are not going to get much return in that group, are you? Are
you going to ignore them or are they going to become part of the—
Sir David Varney: No, they are
part of the risk. Clearly, we have seen a large number of incorporations
of companies, much larger than could have been expected from the
economic activity. We shall have to work out what the risks are.
Q49 Angela Browning: But the figures
show that two thirds of companies have tax liability of less than
£1,000. In terms of return for the investment you put in,
are you saying, for example, that whatever category of investigation
you make into them the return on the staff costs and the costs
of the inquiry equates in terms of getting good value for money?
I just come back to my original observation that you seem to be
fishing in the wrong pool.
Sir David Varney: Let me just
say again that we have halved the number of inquiries and increased
the yield by 42%, so we may be fishing in the wrong pools, but
we are successfully raising money whilst being selective in the
fishing. We have looked at yield. Our yield has increased in both
full inquiries and aspect inquiries over the last five years and
the numbers are in the Report. We have been lowering the number
we do and been getting the yield up and we ourselves are neurotic
in a sense about whether we are fishing in the right pools, that
is why we do the random programme.
Q50 Angela Browning: You said that
you are going to try to improve this area, but what actually in
practice are you doing?
Sir David Varney: We are investing
in trying to use better computer risk analysis, better databases
for targeting. We are also trying to bring together expertise
across HMRC. We have, separate to this area network, a large business
service which deals with the 800 largest groups in the country
who between them have 30,000 companies and whose affairs are incredibly
complicated, but that is also to help with better risk management.
We are looking at more strategic focus in terms of where we have
the expertise and we are doing more team working to use the scarce
resources of senior tax inspectors in the most productive way
that we can.
Q51 Angela Browning: I realise this
is an incomplete process, that you still have more work to do,
but as you look at it at the moment, where do you think the answer
is most likely to come from. Is it going to be, as far as business
is concerned, sectoral or is it actually regional in terms of
where you have the expertise and where the hubs of business are
based?
Mr Tweddle: The answer is that
it will be sectoral. What we want to do is actually build up to
the best practice where the risks are and then to focus that in
a national way. So it will not really matter where the business
is based; we shall actually be having a national assessment of
the risk and making a proportionate response with our intervention
resources to meet that risk.
Q52 Angela Browning: The reason I
am interested in that is because very often, not just in relation
to corporation tax but in terms of the Inland Revenue and taxation
generally, there is sometimes a view that there are disparities
regionally between tax inspectors' interpretation of the law.
I just wonder how much of a weakness that is in what you are trying
to do.
Mr Tweddle: If you turn the clock
back a number of years, the tax inspector was the lord of the
tax in the area they were and they had quite a strong influence
over deciding the risks and what should be investigated and inquired
into and what not. Over time, we are recognising, while we still
want to get that local input and local knowledge, that we need
to have a more national approach. We have had too many cases where
somebody has had a particular idea that this is a risk area so
let us do that, not taking cognizance at all that other parts
of the country have already studied that and done that and got
expertise in it. As we develop our national risk picture and we
develop a more centralised approach, we shall actually get a better
balance of local initiative and central and national direction.
Q53 Angela Browning: That is encouraging
and I hope that works because clearly it is quite unfair to certain
individual companies and to certain companies in certain regions,
if you have this disparity around the country as to how they are
treated by the Inland Revenue, which actually should be presenting
a national standard uniformly as far as the business sector is
concerned. I just wonder whether you have any idea at all of what
the cost to business is from that grouping which actually does
come under your investigation but where there is no case to answer.
Sir David Varney: People are much
quicker nowadays to give us feedback if we have these disparities;
so we are working on that and the sector approach. The other thing
is that there are different segments of the corporate world which
have different levels of profitability as sectors and we have
obviously got to move and concentrate on those which are likely
to be tax paying.
Q54 Angela Browning: Perhaps I could
just conclude by saying, as Mr Clark made reference to it, that
I am married to a retired accountant who always spoke very highly
of his dealings with the Inland Revenue.
Sir David Varney: Good man.
Q55 Mr Bacon: I must say that I did
have an inquiry with the Inland Revenue about what you do about
selling property and I have to say they were very helpful when
I spoke to them on the phone and got to the right person. Thank
you for that. I want to start with questions about electronic
filing. The Report says that fewer than 2% of returns are filed
electronically. Could you say how many of the 2% of returns are
from among the 900 Large Business Service groups of companies
and how many are from the other much smaller companies?
Sir David Varney: We think 2%
is local compliance, but we shall check the answer. It is companies
within the realm of this Report.
Q56 Mr Bacon: What I am referring
to is the distinction referred to right at the beginning on page
1. There are 900 groups of companies dealt with by the Large Business
Service; 900 companies which pay £18 billion. I am just wondering
how many of those are included in this 2% figure in paragraph
3.9 as filing electronically and, correspondingly, how many of
the 1.1 million companies also referred to on page one are filing
electronically.
Mr Banyard: Most of the companies
that are filing electronically at the moment are the small companies.[3]
Q57 Mr Bacon: Really?
Mr Banyard: The electronic service
at the moment does not accept the accounts and the associated
tax computations. The tax return itself is sufficient for us to
make a corporation tax self-assessment. To do a risk assessment,
we need to see the tax computation and the accounts and we allow
companies to submit them in a free format. We have developed,
along with other groups, a computer language, to which Sir David
has referred, the extensible business Reporting language, which
allows companies to submit their accounts and computations in
their own format, but the data is tagged and will therefore go
into our systems. We have just introduced that.
Q58 Mr Bacon: Was that in November
2005?
Mr Banyard: It has come in recently,
yes. It started in February.
Sir David Varney: In the Report
it said November, but it took more time to get the taxonomy. May
I be clear with you, because there is a very important difference?
What we can receive at the moment is input electronically, but
we cannot read it electronically.
Q59 Mr Bacon: Indeed. The Report
says "Companies have to save the accounts and computation
in a `pdf' . . . format and submit them with the electronic return.
As such, external stakeholders told us that this provided few
advantages over paper submission, except that the electronic return
had in-built checks to help correct and it provided an immediate
acknowledgement". The Report goes on to say that your new
facility ". . . will avoid the need for submitting documents
in pdf format". Presumably the ideal solution is where they
submit their data and you receive it and then can immediately
read it electronically, rather in the same way you just e-mail
somebody an XL spreadsheet, they are able to read that instantly
and we are all familiar with that. You are saying that you cannot
do that at the moment.
Sir David Varney: What we needed
to do was develop a taxonomy of what each bit of data means. What
we have had to do is take a tax return, think about the vast array
of companies we deal with, what goes in those returns and then
how uniquely electronically to identify the taxonomy. So when
they say they are going to give us a number 100 and that is stock
work in progress, we receive it as 100 stock work in process and
then we can start to analyse.
3 Note by witness: Around 7000 company tax
returns were filed electronically during the year ended 5 April
2005. During the period 6 April 2005 to 6 March 2006, around 21,000,
approximately 2%, of company tax returns were filed electronically.
As Mr Banyard said, most of the companies that are filing electronically
at the moment are the small companies. The numbers of LBS companies
filing electronically, as a percentage of the whole, are so small
that they do not affect the 2% figure. Back
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