Conclusions and recommendations
1. In spite of
a 40% error rate in returns, Areas conduct enquiries on only
4% of returns. Yet only 60% of these enquiries succeeded in
increasing the tax or profit assessment. The Department needs
to improve the targeting of enquiries, and thereby increase the
tax yield. It should strengthen the use of risk assessment techniques,
particularly in those Areas which do not make full use of available
databases and those with the lowest enquiry success rate.
2. 70% of the additional revenue secured from
the Department's random enquiries was attributable to 5% of the
companies examined. The Department should
use its random enquiry programme to identify the types
of company which are most likely to be guilty of serious abuse
and those that are making genuine errors. It should use the results
to focus enquiry work on areas of greater risk and target education
campaigns on companies that need help in understanding their obligations.
3. 'Aspect' enquiries achieve a pay-back four
times better than 'full' enquiries because they are much less
costly, but a higher proportion achieve no additional tax yield.
Most of the enquiries the Department undertake
are 'aspect' enquiries, which focus on one or more feature of
the tax assessment, but it also undertakes 'full' enquiries which
examine the entire business. To improve the pay-back from its
enquiry work, the Department should identify those types of enquiries
which achieve no additional tax yield.
4. The Department decides the mix of Areas'
full and aspect enquiries, and of Corporation Tax and other tax
enquiries, but without a full understanding of their relative
marginal effectiveness. It is developing
a risk strategy for its compliance work, looking across business
taxes. It should establish the marginal pay-back of the different
elements of that work to focus on areas of greatest potential
return. It should also set a target to increase the current level
of 9% of Corporation Tax full enquiries that also cover other
taxes.
5. The Department imposed penalties for negligently
inaccurate returns in half of the full enquiries which produced
additional tax yield in 2004-05, but it applied penalties in only
5% of aspect enquiries. Aspect enquiries
often involve questions of interpretation of accounting and tax
rules. To show whether Areas are applying penalties consistently
and effectively, the Department should analyse the types of cases
that are penalised and those that are not, and the scale of abatements
applied.
6. Over the last five years, the Department
has referred only five agents or advisers to their professional
bodies for breach of professional ethics or conduct.
Despite assurances to our predecessors in 2004, there appears
to be little progress in increasing the number of referrals. As
part of its current 'modernising powers, deterrents and safeguards'
review, the Department should include proposals for dealing more
effectively with non-compliance that results from poor professional
advice.
7. The wide variations in Areas' enquiry coverage,
results and efficiency indicate scope for higher yields and cost
savings. If all Areas had achieved the national average in 2004-05,
yields could have been £60 to £100 million more.
The Department is using the National Audit Office's benchmarking
analysis to develop its management of Area performance. In so
doing, it should track Areas' relative efficiency in securing
additional tax yield compared with the size of their local company
caseload. It should also apply a similar approach in managing
other locally-administered taxes.
8. The variation in enquiry coverage - from
2% in some Areas to 9% in others - means that companies of a similar
risk are more likely to be subject to an enquiry in some Areas
than in others. This uneven coverage stems
from imbalances across Areas in the number and experience of staff
compared with the size and complexity of the Areas' caseloads.
The Department should reassign more work between Areas to even
out coverage and workloads.
9. Varying results and efficiency of enquiry
work across Areas reflect this mismatch of resources to risk,
and differences in risk assessment skills between Areas.
The Department's plans to restructure the local office network
provide an opportunity to address these factors. In a new network
structure, the Department should provide offices of sufficient
size to achieve efficient processing and enquiry work, applying
the full range of risk-assessment skills. It should also redesign
its compliance work to match the risks posed by different business
sectors.
10. The Department's shared work-space project
has shown promising results in speeding up enquiries, which often
last for a year or more. Subject to the
successful extension of the project to London offices during 2006,
the Department should extend it to all local offices thereafter.
It should also extend to all offices its new system of team working
where staff specialise in specific enquiry tasks. The aim should
be to achieve at least the 20% reduction in the time taken to
complete enquiries that has been achieved in the shared work-space
pilot Area.
11. Electronic filing offers many benefits
for the Department and companies, but only 2% of companies are
filing their Corporation Tax returns on-line.
The Department aims to introduce by Summer 2006 a system for companies
to submit their accounts, as well as their returns, in a form
that feeds directly into the Department's computers. It plans
to require all companies to file their returns on-line by 2010.
The Department has a corresponding responsibility to make the
new system reliable and easy to use, so that companies are not
forced into a process which imposes substantial costs on them.
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