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HM Revenue and Customs (the Department) collected around £33 billion in Corporation Tax in 2004-05, and expects receipts to increase to £42 billion in 2005-06. The Department's Large Business Service deals with the tax affairs of the largest businesses operating in the UK. Its network of 68 Areas deal with the rest - over a million companies - at a cost of around £220 million a year. These companies paid £15 billion in Corporation Tax in 2004-05.
Companies are liable for Corporation Tax on their profits, and are required to submit tax returns each year along with any tax due. Areas check the returns and undertake detailed enquiries on around 4% of returns. This work resulted in additional tax, interest and penalties of £602 million in 2004-05 where companies had not complied with their obligations. Since 1999, when Corporation Tax became a self-assessed tax, Areas have increased by 42% the extra tax yield they secure. Over the same period they have halved the number of enquiries, while making greater use of risk assessment techniques to guide their work.
The Department has no estimate of the overall tax at risk from company non-compliance. But its research indicates that around 40% of tax returns contain errors which if undetected would result in a tax loss. Yet only 60% of Areas' enquiries produce additional revenue.
The performance of Areas on enquiries varies markedly: in 2004-05 the coverage ranged from 2% of returns to 9%; the yield secured in some Areas was five times more than in others, differences not explained by economic factors; and some Area costs were two or three times more than others to secure similar yields. A major reason for these differences was a significant mismatch of staff to workloads. There were also differences in the use of risk-assessment databases and risk-profiling projects to select cases for enquiry. The Department is planning to rationalise the network into fewer but larger Areas, providing the opportunity to improve the efficiency and effectiveness of its work on Corporation Tax and other taxes.
Enquiries take many months to complete, even those that produce no additional tax yield. The Department has piloted in one Area a new internet based system for sharing information with companies during enquiries, which has reduced the time taken to complete enquiries by 20%.
There is little research on the administrative burden on companies of Corporation Tax. The Department has however been mapping the requirements of this and other business taxes to set a baseline for tracking and reducing the costs of compliance and it has now set a target for reducing the burden. The complexity of the tax is a particular concern to companies and appears to contribute to the level of errors in tax returns. The Department's consultations with the business community have led to some reforms to the structure of the Tax but cost or lack of consensus have impeded other proposals.
Electronic filing of Corporation Tax returns should bring a number of benefits. It would be more convenient for many companies. It should reduce the Department's costs and errors from keying-in data; and facilitate better risk assessment by enabling the Department to analyse electronically a greater volume of data from returns. But so far only 2% of companies have filed their returns electronically. The Department expects to increase take-up by introducing a new system in summer 2006. Following Lord Carter of Cole's review of on-line services, the Department has decided that all companies will be required to file their returns electronically from 2010.
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